GOLDMAN SACHS PRESIDENT: 'I Feel Bad For JPMorgan And What They're Going Through'

Gary Cohn, the President & COO of Goldman Sachs, was on Bloomberg Television this afternoon speaking with Stephanie Ruhle.

Ruhle asked Cohn what he thought about the massive multibillion settlements that banking competitor JP Morgan is currently being forced to pay.

"Look, I feel bad for JPMorgan and what they're going through," said Cohn. "We've been there. We've been there ourselves. We know what it feels like.

Indeed, Goldman has been no stranger to lawsuits and public outrage in the wake of the financial crisis.

"I know that Jamie and his team are doing everything they possibly can to put this behind them," Cohn continued. "They've got a great franchise. They've got a great business. They've got a great management team. They'll get through this and they'll be a very, very strong competitor."

Those are some kind words coming from a competitor.

Here are some more highlights from the interview, courtesy of Bloomberg Television:

Cohn on how the Fed's decision to not taper has affected Goldman Sachs:

"For Goldman it meant sort of business as usual. There's not tapering is the world that we've been in for the last year. So what it meant is people continued to migrate to riskier assets. People continued to migrate or migrated back to the equity markets. Some people that had gotten out of the fixed-income markets because they believed that the Fed was going to taper had to rethink about their fixed-income portfolio, and we have seen some more migration into the fixed-income space. So in many respects, it's similar to what we've been doing for the last year."

On Larry Fink saying that investors should be 100% in equities and who is now investing in fixed income as a part of the migration into the space:

"Well I agree with Larry. Larry and I have been saying for a couple years equities, equities, equities because we believe that the return on equities is going to outstrip the return of the fixed-income asset class. But for those investors that need a long term, long duration, diversified portfolio, they need to have a fixed-income position. Many of them migrated out or rotated out of fixed income when they thought the Fed was going to change monetary policy and go into a more tapering environment. Now that that's up in the air - and I think that's up in the air for a longer period of time…The tapering is up in the air, whether the Fed is going to taper or not or when they're going to taper."

On whether the Fed should taper:

"If you look at where we are economically versus where we were a year ago, we're virtually in the exact same place. So if quantitative easing made sense a year ago, it probably still makes sense today. The only thing that you might point to that's different is the actual headline unemployment rate has dropped down 7.2 percent, but we could get into why it's dropped. And the participation rate is at basically 35-year lows, so we really haven't created real jobs. So if you look at the economy of the United States and you look at the world economy today and you look at 1.3 percent inflation in the United States and you look at GDP, we basically have the same ingredients that we had a year ago. So if you were a proponent or advocate of quantitative easing a year ago, you probably still are today. So that's why I tend to think that the Fed is in a tough position. They're in a position where they know they can't quantitatively ease forever. They know they're building a bigger and bigger balance sheet, but their number-one objective is to try and grow the US economy. And they're stuck in a dilemma of what to do here. They know the economy's not growing."

"So look, I do believe eventually they will taper. Eventually can be a very long time. I don't believe it's soon. And I - and I do believe that when Janet Yellen gets in there she understands that the dilemma that she's in and she's faced with a very tough position."

"On your second question, you asked me a question about does it matter. And you said Wall Street's doing well. I think it's hard to differentiate between Wall Street and Main Street. Wall Street and Main Street at the same street. They are the same street…Our ultimate client, or the client of our client, is Main Street. You referred to our aims conference in here. We've got 500 CIOs. Many of them run public pensions. Many of them run private pensions. They run union pensions. They run pensions for teachers and firemen and policemen and that's their ultimate client. They're managing stock, they're managing bonds for Main Street to make sure that their pension and their retirement money is intact."

On Main Street being the largest shareholders of financial institutions and whether they realize that when banks are punished--like JPM's fine of $13 billion--it will impact them:

"I don't know. I don't know. But ultimately - and look, I'm sympathetic to Main Street. I'm very sympathetic to Main Street. One of our big initiatives, as you know, has been 10,000 small businesses. We're trying to help entrepreneurs grow their companies and hire people and grow the economy. So we're very sympathetic to what's going on on Main Street. I don't know if Main Street understands that ultimately their retirement savings and their savings that's being outsourced to be professionally managed is in the financial markets."

On whether he's concerned that interest rates are going to rise:

"We're not concerned. Our business thrives in growing economies. If interest rates are rising because we've got a growing economy and world GDP increasing, you have to get very excited about our business because the - the thing that's missing the most from our business right now is a lack of economic growth in the world."

On emerging markets:

"Again, they're called emerging markets. Why are they called emerging markets? Emerging/growing, more volatile, stops and starts. They are called emerging markets because they're more volatile than G-7 markets, than developed markets that are more predicable. We're seeing a natural cycle in the emerging markets. Overall, we still are very bullish on the emerging markets. The emerging markets overall are still outgrowing the G-7 markets. We talk about China and slowing down. A slowdown in China is 7 or 8 percent. We would thrive for that slowdown in the United States of 7 or 8 percent. So it's still an interesting place where we need to be for the long term. We are investing for a long-term cycle. Our clients need to be there for a long-term cycle, and we are excited about the opportunities in emerging markets. If the industry's made a mistake or we at Goldman have made a mistake in emerging markets, it is we've tended to contract our business at the bottom of the cycle when in essence you should be expanding your business because the bottom of the cycle only leads to the top of the cycle and you need to invest at the bottom of the cycle to be ready for the top of the cycle."

On Goldman's fixed income business and its tough last quarter:

"We're very confident in our fixed-income business. We did have a tough quarter. We acknowledged that we had a tough quarter….We don't know precisely why we had a tough

quarter, but the results are in. And I can tell you we had a tough quarter in fixed income. We're very committed. We're going to redouble or triple our efforts in fixed income. We believe ourselves to be a very powerful, a very dominant top-tier fixed-income shop. And we're doing what we need to continue to grow that business."

On what doubling or tripling efforts means:

"To the extent we can hire good people, we're always hiring people. So yes, we're hiring people…We're looking for seasoned traders. We're replenishing our trading supply. We're looked for seasoned salespeople, salespeople that have real client relationships and can come in and help us manage our client relationships. Those people are vital to our franchise and you can never have too many great people in any of our businesses."

On how much of a growth opportunity is if the back can't take real risk and what the difference is between a Goldman trading effort and a Jeffries trading effort:

"I think we can take the risk that's necessary to facilitate our clients. We haven't stopped taking risk clients. We've got balance sheet capital to commit to our business, to facilitate our client business. And we believe by having a bigger footprint, having more salespeople, more distribution and better traders, we'll be able to facilitate…It is more overhead, but it's more revenue. We believe with hiring the additional people we will increase the revenue pool and we'll increase the profitability."

On what bonuses will look like at Goldman this year:

"Well our comp ratio is not down. Our comp ratio, if you look at what we've ended up paying end of last year, we're in line to a little bit higher year-over-year. And bonuses at Wall Street are going to depend on where the fourth quarter comes out. To the extent that firms have decent fourth quarters, I think bonuses will be somewhat in line with last year. And I know at Goldman Sachs if we don't have a fourth quarter bonuses will be down. Because the one thing we have done and we've committed to our shareholders is that our bonus payments will be directly correlated to our revenue."

On what kind of fourth quarter Goldman will have:

"I'm cautiously optimistic."

On whether he likes his job and wants to stay in it:

"Of course."

On what Mike Evans' departure means for him and how long will it take for him to get the CEO job:

"Mike Evans has been a great partner of mine for 20 years. Mike and I have run businesses together. We've co-headed businesses. We've worked together. And for me personally it's a loss to see Mike Evans leave the firm. That said, we still have one of the deepest management teams around. Lloyd and I have been here, as you said, for eight years. We're one of the very few firms that's had stability at the top of a firm through the financial crisis, and we continue to have a really deep bench."

On whether someone will get promoted and take Mike's seat:

"I don't know if we'll see someone get promoted, but Mike's growth market seat, as we talked about before, is very important to us. Someone coordinating what we're doing in the various growth markets around the world is important, and we will ultimately fill that seat with somebody."

On whether he's exhausted by the regulatory environment:

"No. Look, the regulatory environment is just part of what we need to deal with and it's part of our business. In a business like ours where we're in so many countries and we've got so many moving parts, you're always dealing with the regulatory community. You're always dealing with legislative community. You're dealing with different people. But the other side of our business is we've got a huge client base and I'm able to interact with our client base on a regular fashion. I see 400 CEOs a year. It's an interesting seat to be able to see 400 CEOs a year."

On JPMorgan's $13 billion settlement:

"Look, I feel bad for JPMorgan and what they're going through. We've been there. We've been there ourselves. We know what it feels like. I know that Jamie and his team are doing everything they possibly can to put this behind them. They've got a great franchise. They've got a great business. They've got a great management team. They'll get through this and they'll be a very, very strong competitor."

On whether he's going to exit the commodities business if there's a massive capital charge:

"I'd have to see what the capital charge is. We believe that being in the commodity business is essential for our client base. Our clients hedge interest rates, they hedge currencies, they can hedge credit spreads, and they hedge commodities. If you go through the S&P 500 and see how many of those companies have direct commodity risk, it's a substantial number of companies. They need to hedge that in the same way they need to hedge the other risks in their business. And we believe we need to be here for them to allow them to hedge with a credit-worthy counterparty based in the United States."

On whether Goldman will buy JPMorgan's portfolio:

"We're not looking at their portfolio. Some of our clients are looking at their portfolio and some of our clients can potentially ask us for help on looking at some of the long-dated derivatives. We're more than happy to help facilitate our clients, but we're not going to buy the business directly from JPMorgan."

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Stagflation of the 2000s

90,609,000: Americans Not in Labor Force Climbs to Another Record ... The number of Americans who are 16 years or older and who have decided not to participate in the nation's labor force has climbed to a record 90,609,000 in September, according to data released today by the Bureau of Labor Statistics. The BLS counts a person as participating in the labor force if they are 16 years or older and either have a job or have actively sought a job in the last four weeks. – CNS

Dominant Social Theme: The recession is ending and people are working.

Free-Market Analysis: There has been criticism aimed at the free-market economic paradigm over the past few years. But as far as we can see, it's been correct.

In fact, as we can see from this excerpt, the only model that makes any sense these days is the one that has predicted for decades that money printing can exist with sluggish price inflation and stubborn unemployment.
That model was first enunciated by the Misesian crowd back in the 1970s (when they really could fit into a phone booth), and proved uncannily accurate. It went by the name "stagflation."

Before the 1970s, Keynesian house economists even denied that such a thing was possible. You see, the economy was a lot like a fancy car. You simply had to know which gear to shift it into and how far down to press the accelerator. Of course, you had to fill it up with high-octane super-money, but once that had taken place, well ... no problem! Off you would go.

Only Western economies didn't go very far or very fast in the 1970s. In fact, exactly the same scenario played out then as now. The stock market crashed (several times) and the money pumped into Western central banks didn't do anything but increase price inflation while having a minimal effect on stimulating employment.

And these days, headlines pour out of Washington on a regular basis announcing yet more unemployment. Of course, we don't believe these figures but we do believe in the trend. Here's more:

A person is not participating in the labor force if they are 16 or older and have not sought a job in the last four weeks. In from July to August, according to BLS, Americans not participating in the labor force climbed from 89,957,000 to 90,473,000, pushing past 90,000,000 for the first time, with a one month increase of 516,000. In September, it climbed again to 90,609,000, an increase of 136,000 during the month.

In January 2009, when President Barack Obama took office, there were 80,507,000 Americans not in the labor force. Thus, the number of Americans not in the labor force has increased by 10,102,000 during Obama's presidency. The labor force participation rate, which is the percentage of the non-institutionalized population 16 years or older who either have a job or actively sought one in the last four weeks, was 63.2 percent in September. That was unchanged from August.

... One reason for the increasing number of people not in the labor force is the aging of the Baby Boom generation, whose members have begun retiring--and are not being replaced by an equal number of young people entering the labor force. Another reason is that female participation in the labor force has been declining. In January 2009, the female labor force participation rate was 59.4 percent. In September 2013, it was 57.1 percent.

This last graf is especially interesting because it just shows us once more how inaccurate these articles can be. We've read in other places that people are retiring later and later and continuing to work part-time after their so-called retirement. This is because they can't retire. Their savings were wiped out long ago and the interest on what's left is just a trickle.

Here's an article on this that appeared about a week ago over at the AP newswire:

Americans retiring later, poll shows ... Some 82 per cent of working people over 50 say they're likely to work in retirement ... Stung by a recession that sapped investments and home values, but expressing widespread job satisfaction, older Americans appear to have accepted the reality of a retirement that comes later in life and no longer represents a complete exit from the workforce.
Some 82 per cent of working Americans over 50 say it is at least somewhat likely they will work for pay in retirement, according to a poll released Monday by the Associated Press-NORC Center for Public Affairs Research. The survey found 47 per cent of working survey respondents now expect to retire later than they previously thought and, on average, plan to call it quits at about 66, or nearly three years later than their estimate when they were 40. Men, racial minorities, parents of minor children, those earning less than $50,000 a year and those without health insurance were more likely to put off their plans.

"Many people had experienced a big downward movement in their 401(k) plans, so they're trying to make up for that period of time when they lost money," said Olivia Mitchell, a retirement expert who teaches at the University of Pennsylvania.

So ... where did that retirement go? We're still waiting, some five years now, for the mainstream media to examine the investment "pornography" that was prevalent for the past quarter-century. So many articles, books, theses and even whole television channels dedicated to "investing." Didn't do much good.

The obviousness of what is occurring is still not being presented. The free-market analysis that proved so accurate in the 1970s is still absent from the mainstream stage.

We hear that such analysis is inaccurate because so much money printing should have produced more price inflation, but that is a matter easily dealt with. Prices rise when more money circulates. Since the economy is stagnant, since foreign central banks stash dollars and since the Fed is paying banks not to circulate aggressively, price inflation is still subdued compared to where it will be eventually.

And since much of the West's adult population is either out of work or working off-the-books (maybe via barter), the circulation of money still remains relatively slow despite the tens of trillions that have been pumped into the banking establishment around the world.

All this money has done approximately what it is supposed to do from the elite's perspective, however, which is to create yet another asset bubble. Stock markets are up, housing markets in Germany and Britain – in posh areas, anyway – are positively zooming.

Those reading The Daily Bell may have the financial and intellectual resources to take advantage of this final blow-off, but for many people it won't matter. No matter how high real estate prices go and no matter what valuations blue chip stocks achieve, they will sit out this one out in the cold.

The media will make their situation worse by explaining it is the fault of those who can't or won't take advantage. They didn't handle their money correctly, or their careers or their family life. But given the complexity of society and the intertwining dominant social themes, it is no wonder that even now people don't understand.

They know something has gone terribly wrong but they just don't know what.

It's simple enough. Free-market Misesian analysis got it right, just as it did in the 1970s. Central banks printed too much money, caused a crash and are now busily reflating again via their network of commercial firms and banks.

The process is as controlled as ever and, frankly, just as cruel. It is designed to leave people unemployed while protecting the current bankrupts that populate the "financial system." These may be made whole in a coming stock boom, but they will be as inefficient and bloated as ever. And when the bust comes their bottom lines will wither once more.

Conclusion 

Call it the stagflation of the 2000s.

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Another One Trillion Dollars ($1,000,000,000,000) In Debt

Did you know that the U.S. national debt has increased by more than a trillion dollars in just over 12 months?  On September 30th, 2012 the U.S. national debt was sitting at $16,066,241,407,385.89.  Today, it is up to $17,075,590,107,963.57.  These numbers come directly from official U.S. government websites and can easily be verified.  For a long time the national debt was stuck at just less than 16.7 trillion dollars because of the debt ceiling fight, but now that the debt ceiling crisis has been delayed for a few months the national debt is soaring once again.  In fact, just one day after the deal in Congress was reached, the U.S. national debt rose by an astounding 328 billion dollars.  In the blink of an eye we shattered the 17 trillion dollar mark with no end in sight.  We are stealing about $100,000,000 from our children and our grandchildren every single hour of every single day.  This goes on 24 hours a day, month after month, year after year without any interruption.

Over the past five years, the U.S. government has been on the greatest debt binge in history.  Unfortunately, most Americans don't realize just how bad things have gotten because the true budget deficit numbers are not reported on the news.  The following is where the U.S. national debt has been on September 30th during the five years previous to this one...

09/30/2012: $16,066,241,407,385.89

09/30/2011: $14,790,340,328,557.15

09/30/2010: $13,561,623,030,891.79

09/30/2009: $ 11,909,829,003,511.75

09/30/2008: $10,024,724,896,912.49

The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined.

Of course all of the blame can't be placed at the feet of Obama.  During the last two elections the American people have given the Republicans a solid majority in the U.S. House of Representatives, and the government cannot spent a single penny without their approval.

Unfortunately, House Speaker John Boehner and the Republicans that are allied with him have repeatedly turned their backs on the people that gave the Republicans the majority and they have authorized trillions of dollars of new debt which will be passed on to future generations of Americans...

Since John Boehner became speaker of the U.S. House of Representatives on Jan. 5, 2011, the debt of the federal government has increased by $3,064,063,380,067.72. That is more than the total federal debt accumulated in the first 200 years of the U.S. Congress--during the terms of the first 48 speakers of the House.

In fact, if all of that debt had been given directly to the American people, every household in America would have been able to buy a new truck...

The $26,722 in new debt per household accumulated under Speaker Boehner would have been more than enough to buy every household in the United States a minivan or pickup truck--or to pay three years of in-state tuition (not counting room and board) at the typical state college.

Sometimes we forget just how much money a trillion dollars is.  In a previous article, I included some illustrations that I believe are helpful...

-If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.

-If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

We are doing the exact same thing that Greece did, only on a much larger scale.  What we are doing is not even close to sustainable, and it will inevitably end very, very badly.  The following is what Michael Pento, the president of Pento Portfolio Strategies, told RT the other day...

"That $17 trillion everybody says its 107 percent of GDP, that’s true. But who really cares about the percentage of GDP? It’s the percentage of the debt as a percentage of the revenue – its 700 percent of our revenue. Deficits are growing at 30 percent of our revenue every year added to the deficits we have already. So it’s unsustainable. What is going to happen eventually – a currency and bond market collapse! And it’s not going out 20 years, as I also heard someone mention. In 2016 we’ll probably be spending 40 percent of all of our revenue just to service our debt. That is what the interest payments will equal."

The U.S. debt situation is so bad that even the Prime Minister of Cyprus is scolding us...

"The U.S. has been fortunate in the sense that it’s like a bank, it prints the money that other people accept. So you can live beyond your means over an extended period of time without being punished by the market."

Unfortunately, we will not be able to live way beyond our means forever.  Reality is going to catch up with us at some point.

Right now, the rest of the world is lending us giant mountains of money at interest rates that are far below the real rate of inflation.  This is extremely irrational behavior, and this state of affairs will probably not last too much longer.

But if interest rates go up, it will absolutely cripple the U.S. economy.  For much more on this, please see this article.

And what would make things much, much worse is if the rest of the globe starts moving away from using the U.S. dollar.  At the moment, the U.S. dollar is the de facto reserve currency of the planet and this creates a tremendous demand for U.S. dollars and U.S. debt.

If that changes, it will be absolutely catastrophic for the United States, and unfortunately there are already lots of signs that this is already starting to happen.  I wrote about this in my recent article entitled "9 Signs That China Is Making A Move Against The U.S. Dollar".

But don't just take my word for it.  Just a couple of days ago a major U.K. newspaper came to the same conclusions...

China has overtaken the US as the world’s largest oil importer and goods trading nation. Over the next five years, it will surpass the rest of the world combined in its consumption of base metals. 

Given the scale of the country’s consumption of fossil fuels and raw materials, it is only a matter of time before the renminbi replaces the dollar as the primary currency for trading commodities and resources such as crude oil and iron ore. 

The debt ceiling farce in Washington and China’s growing reluctance to continue underwriting the US economy by buying up its bonds and adding to America’s near $17 trillion (£10.5 trillion) debt mountain suggests that this tectonic shift in the global trade system could be just around the corner.

So what will happen when the rest of the world decides that they don't need to use our dollars or buy our debt any longer?

At that point the consequences of decades of incredibly foolish decisions will result in an avalanche of economic pain that the American people are not prepared for.

Earlier today, I came across a photograph that perfectly captures what America is heading for.  The following photo of Mt. Rushmore crying has not been photoshopped.  It was taken by Megan Ahrens and it was posted on the Tea Party Command Center.  If George Washington was alive today, this is probably exactly how he would feel about the nation that he helped establish...

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So How Big a Deal is the Pending “$13 Billion” JP Morgan Settlement?

One of the big news stories of the weekend is that JP Morgan and the Department of Justice, brokering a settlement of liability across multiple Federal agencies, have reached a tentative $13 billion settlement on the bank’s mortgage-related conduct in the run-up to the crisis. The terms have not been finalized because a big open item is that JP Morgan will make an admission of some sort, and the deal could still founder over that.

While the media is all agog over the prospect of the “biggest settlement evah” with a single company, concentration has risen greatly in a lot of industries, particularly banking, so bigger companies and even mild inflation means settlements should get larger over time. So size is not a metric of accomplishment. The question is what was the actual liability and is the settlement an adequate remedy? We have the same problem here as with the mortgage settlement: save for a couple of types of bad conduct, it looks as if not enough discovery was done to know the extent of the conduct and hence what an appropriate remedy would be.

And the American public’s instinct, that even a really big-sounding number isn’t adequate given all the damage done in the financial crisis, has been confirmed, at least on a general basis, by one of the most highly respected economists in the world, Andrew Haldane, the executive director of the financial stability at the Bank of England. Haldane ascertained that no fine was big enough because the banks couldn’t begin to pay for the damage they’d done. The alternative, in that case, is prohibition and other forms of aggressive regulation. Needless to say, we haven’t seen anything like that either.

In a March 2010 paper Haldane compared the banking industry to the auto industry, since both produced pollutants: for cars, exhaust fumes; for bank, systemic risk. I’ve cited Haldane’s estimate of the world wide costs before because it is critically important:

….these losses are multiples of the static costs, lying anywhere between one and
five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description. 

It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.

Yves here. A banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive. Even though we have described its activities as looting (as in paying themselves so much that they bankrupt the business), the wider consequences are vastly worse than in textbook looting.
Now keeping that in mind, let’s look at what we know about the settlement:

Focus on the cash component, which is $9 billion. $4 billion is in the form of “relief to homeowners”. In the recent mortgage settlements, the non-cash component has had PR value and has been generally meaningless in economic terms. It’s certainly not a real punishment. The company gets credit for activities that are either in its financial interest (like modifying mortgages on its balance sheet to viable borrowers) , or it would have done anyhow (giving homes to cities to be bulldozed), or it should have been doing all along (short sales). These items are mainly chits that give the bank cover to write down inflated assets on their books. Oh, and the New York Times indicates that many of the borrower relief items will be tax deductible.

The FDIC might eat as much as $3.5 billion of that total, reducing the cash component to $5.5 billion. From Huffington Post:

JPMorgan Chase & Co’s possible $11 billion settlement of government mortgage probes has been complicated by a dispute with the Federal Deposit Insurance Corp over responsibility for losses at the former Washington Mutual Inc, said people familiar with the matter [...] 

JPMorgan, which acquired Washington Mutual from the FDIC for $1.9 billion at the height of the financial crisis, has disputed its responsibility to cover losses incurred by investors on the failed thrift’s mortgage securities [...] 

Some fear the FDIC, under pressure from the Justice Department to join a global settlement, might agree to assume liability, a move that would effectively force another government agency to absorb billions of dollars in losses [...] 

“If the FDIC were to indemnify JPM as part of the government deal, it would likely reduce the rumored $11 billion by about $3.5 billion,” said Joshua Rosner, managing director of Graham Fisher, an independent research consultancy. “That would be an absurd outcome.”

The Administration is taking credit for a settlement that is in large measure due to the stubbornness of one of its favorite whipping boys, Ed DeMarco of the FHFA. Obama has been moving heaven and earth to try to dislodge DeMarco, and one of the reasons was the 17 suits that he had filed against banks for putback liability on mortgage backed securities (the claim that the reason was his refusal to permit Fannie and Freddie to provide principal modification was trumped up charges; the attack on DeMarco was to divert attention from its failure to take any action on that front). FHFA secured a $4 billion settlement Thursday; the DoJ suddenly cut a deal with JP Morgan so it could include the FHFA settlement in the total leaked over the weekend.

As Dave Dayen wrote:

Even if you accept this fine on its own terms as punitive, you have to thank the FHFA for that outcome. And that’s where the “liberal” housing groups who have been savaging Ed DeMarco for years look particularly shameful. There’s no question that DeMarco’s stubbornness against principal reduction has been misguided, but you have to look at the whole picture. As a conservator for Fannie and Freddie, what fits his job title most perfectly is for him to recoup money from banks who swindled the GSEs with their mortgage bonds. And the 2011 lawsuit against 17 banks has quietly yielded fruit. In the past week, Citi paid $395 million to Freddie Mac and Wells Fargo paid Freddie $869 million. Those are over direct mortgage purchases, but it’s on top of several other settlements, both on mortgages and mortgage securities, worth several billion over the years. Even the Justice Department’s civil lawsuit against Bank of America, seen as the first between the government and a mega-bank over what caused the financial crisis, is about mortgages purchased by Fannie and Freddie. The GSEs are profitable now because of their dominance over the mortgage market. But these successful putback cases relieved taxpayers as well. 

And while I don’t think much of the $4 billion in mortgage relief in this settlement, if you take it at face value, that’s over twice as much as the benefit to homeowners if DeMarco allowed principal reduction over his preferred option of principal forbearance.

While the one criminal case against JP Morgan executives is carved out, don’t hold your breath. But JP Morgan has agreed to cooperate with the Department of Justice in prosecuting former JP Morgan executives. That would include Bear Stearns officers like Tom Morano and Mike Nierenberg accused of double dipping in a suit by mortgage guarantor Ambac against Bear and JP Morgan.

While a criminal case launched just last month against JP Morgan (and note this is the bank proper, not via Bear or WaMu, which it also acquired during the crisis), this part of the negotiations, as reported by the New York Times, does not sound promising:

While the deal would put those civil cases to rest, it would not save JPMorgan from a parallel criminal inquiry from federal prosecutors in California…The preliminary deal materialized late on Friday after Mr. Holder spoke on the phone to the bank’s top executives, including Mr. Dimon, and the general counsel, Stephen M. Cutler, one person said. Mr. Holder told Mr. Dimon that he could not shut down the criminal investigation, reiterating an argument he made when the two met last month in Washington.

Hhhm. Wonder how damaging this case might be? The public reports so far are sketchy. For instance, this account is from Reuters on September 23:

The U.S. Justice Department is preparing to sue JPMorgan Chase & Co over mortgage bonds it sold in the run-up to the financial crisis, a sign the bank’s legal troubles are not yet over. 

A lawsuit, first reported by Reuters, could come as early as Tuesday, people familiar with the matter said on Monday… 

It was not immediately clear whether the new charges would be civil, criminal or both. 

A source familiar with the cases earlier told Reuters that the probes in the Eastern District of California involve mortgage bonds offered by JPMorgan itself and not those by companies it bought during the crisis such as Washington Mutual or Bear Stearns.

Notice the timeline. The case was to be filed “as early as Tuesday”. That’s September 24. Dimon met with Holder in person, an absolutely unheard-of concession, on September 26. And that ready-to-go case has apparently NOT been filed. So Dimon’s special pleading if nothing else appears to have delayed the filing of a civil, and given the way it is now being described in the media, probably a criminal case. This confirms that the appearances of cronyism are indeed valid. As Georgetown law professor Adam Levitin wrote:

I’m floored that Attorney General Eric Holder was willing to take a private meeting with JPMorgan Chase CEO Jaimie Dimon while the bank is under criminal investigation and negotiating an enormous civil (and possibly criminal) settlement. I can’t recall something like this meeting happening before. There’s not anything illegal about such a meeting, but the optics are really bad and underscore the privileged position of the too-big-to-fail banks. 

Yes, perhaps the AG should have some level of involvement in a multi-billion dollar settlement, but I would be quite surprised if he was very hands on with it, and meeting personally with Dimon certainly adds a explicit political flavor to the settlement discussions. And it shows the special solicitious treatment and access that Dimon and JPM and other too-big-to-fail banks receive in DC.

Dimon appears to be riding it out…so far. Dimon has created the perception that he is indispensable, in part by making that so by virtue of refusing to have a successor lined up. But as Clemenceau famously said, “The graveyards are full of indispensable men.” It’s proof that JP Morgan’s board is captured that they’ve allowed him to get away with that. Every systemically important institution should have a succession plan.

Dimon’s inattentiveness to regulatory niceties may finally have cost the bank enough both financially and in bad press to rouse its recumbent board into insisting on basic prudent corporate governance steps, like grooming possible replacements and separating the CEO/chairman role. The Financial Times tallies the potential damage:

JPMorgan last week enumerated its litigation reserves – an enormous $23bn – for the first time and said that “reasonable possible losses” on top of that amount were $5.7bn. If that entire sum were paid, it would wipe out the last six quarters of profit.

The New York Times points out:

While a settlement will go a ways toward wrapping up a number of JPMorgan’s mortgage-related issues, the bank is still weathering a broad wave of scrutiny. With the bank’s legal woes escalating — at least seven federal agencies, several state regulators and two foreign countries are investigating the bank — JPMorgan announced this month that it would have to allot $9.2 billion to cover legal expenses alone. The huge legal bill led the bank to report its first quarterly loss under Mr. Dimon’s leadership.

While some commentators have hailed this settlement as a new “get tough” posture on the part of the Administration, it’s so out of character that it’s just not credible, particularly since Obama is not that far away from needing donors for his Presidential library.

There have been signs for some time that even by the standards of Wall Street arrogance and overweening entitlement, that Dimon was in a class by himself. That had been tolerated because he had successfully promoted the myth of his fortress balance sheet. But as banking expert Chris Whalen has pointed out repeatedly, that’s utterly misleading. JP Morgan is a $2.4 trillion bank attached to a $75 trillion derivatives clearing operation. Where do you think the real risks lie? And do you think the balance sheet of the bank tells you much about whether its derivatives operation is adequately capitalized?

But Dimon has been behaving erratically for some time. He’s blown up at least three times at central bankers, once at Bernanke, once at Mark Carney (when he was the head of the Bank of Canada) and I’m told at a meeting at the New York Fed. Dimon and others were told the New York Fed didn’t like certain thuggish behavior relative to state and municipal privatizations it had heard the banks were engaging in. Dimon basically screamed at them that it was none of their business (I haven’t gotten enough details of the meeting to report it, otherwise I would have written it up, but I’ve gotten two separate second-hand accounts, so I’m highly confident it did happen).

So it appeared that Dimon was fully aware of his TBTF status, not just in general, but in particular as being at the helm of the biggest bank involved in tri-party repo (Bank of New York Mellon is the other large player) and has been getting too big for even his very large britches. JP Morgan is impossible to resolve and Dimon knows that. My gut is that the officialdom has become concerned about Dimon’s stewardship. He’s become (until recently) even more dismissive towards regulators. He withheld information from the OCC during the London Whale fiasco, told egregious lies to shareholders, and then dialed in his Senate testimony. The Whale trade aftermath revealed glaring deficiencies in the bank’s risk controls (appallingly short of well-understood industry basics). That was followed by the publication of Josh Rosner’s “rap sheet” that showed that the bank was in a class of its own in the number and seriousness of regulatory violations across the bank (most other banks were up to their eyeballs in mortgage-related violations but largely clean otherwise).

With that record of mismanagement, any normal board would be looking for Dimon’s head. The regulators may be trying to apply external pressure to get Dimon out on an orderly timetable, say end of 2014. I doubt that will happen based on the events thus far. The myth of Dimon’s utility persists in the media and the analyst community despite the mounting regulatory and legal costs.

But there are other shoes to drop that may change that picture. If the DoJ does file criminal charges in California, and they look to be serious, that will keep JP Morgan in the spotlight. But my money is still on the prosecution of chief investment office trader Javier Martin-Artajo. Martin-Artajo was senior enough that he was engaged in a turf war with the head of the CIO, Ina Drew, trying to wrestle authority from her. He’s thus also senior enough to speak with knowledge and authority about the CIOs practices. The DoJ may be happy to take his scalp. But good prosecutorial practice is to see if you can cut a plea bargain and go after someone more senior. If Martin-Artajo has information that implicates Ina Drew or the bank generally (which means Dimon, since he was closely involved in the CIO’s operations), Dimon’s days may indeed be numbered. We can only hope.

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33 Stats That Prove That SOMETHING Desperately Needs To Be Done About The National Debt

The U.S. national debt is 36 times larger than it was just 40 years ago.  That is not a misprint.  That is actually the truth.  We are literally destroying the future of America, but most Americans don’t really seem to care.  In fact, the most hated politicians in America are the Tea Party politicians that recently tried to take a stand against the out of control borrowing that the federal government has been doing.  Pew Research has just released a new survey that shows that the popularity of the Tea Party is at an all-time low.  So while many Americans may say that they theoretically want something to be done about the national debt, when push comes to shove they don’t actually mean that.  You see, the reality of the matter is that about 128 million Americans get money from the federal government every month.  That accounts for the majority of all government spending.  Anyone who tries to take those goodies away is going to be hated.  So we are going to continue down this crazy path until the system completely crashes someday.

The “deal” that was just made in Congress does nothing to reduce our spending or control the growth of our debt.  It just kicks the decisions about government spending and the debt ceiling down the road for a few months.

In fact, the agreement on the debt ceiling did not actually place any limits on how much the federal government can borrow over the next few months.  It just temporarily suspended enforcement of the debt ceiling.  So the federal government could technically go out and borrow trillions of dollars during the next few months and nobody could do anything about it.

Let’s hope that does not happen.

And of course the “debt deal” contained all kinds of pork that will benefit certain politicians that were instrumental in putting together the deal.

When are the American people finally going to get sick and tired of this kind of thing?

Meanwhile, our debt problem continues to get even worse.  The following are 33 stats that prove that SOMETHING desperately needs to be done about the national debt…

#1 The U.S. national debt is on pace to more than double during Obama’s eight years in the White House.  In other words, under Barack Obama the United States will accumulate more debt than it did under all of the other presidents in U.S. history combined.

#2 During fiscal year 2013, the U.S. Treasury paid off $7,546,726,000,000 in maturing U.S. government debt and issued $8,323,949,000,000 in new debt.  In fiscal year 2014 those numbers will be even larger.

#3 In September, the average rate of interest on the government’s marketable debt was 1.981 percent.  In January 2000, the average rate of interest on the government’s marketable debt was 6.620 percent.  If we got back to that level today, it would collapse our entire financial system.

#4 Between 2008 and 2012, the ratio of government debt to government income increased from 4.0 to 6.6.

#5 Between 2008 and 2012, U.S. government debt grew by 60.7 percent, but U.S. GDP only grew by a total of about 8.5 percent during that entire time period.

#6 Since 2007, the U.S. debt to GDP ratio has increased from 66.6 percent to 101.6 percent.

#7 A revised IMF policy paper entitled “An Analysis of U.S. Fiscal and Generational Imbalances: Who Will Pay and How?” projects that U.S. government debt will rise to about 400 percent of GDP by the year 2050.

#8 At this point, the federal government hands out money to approximately 128 million Americans every single month.  In case you were wondering, that is about 41.3 percent of the population of the entire country.

#9 Back in 1980, the U.S. national debt was less than one trillion dollars.  Today, it is rapidly approaching 17 trillion dollars.

#10 Since the year 2000, the size of the U.S. national debt has grown by more than 11 trillion dollars.

#11 During Barack Obama’s first four years in the White House, the amount of new debt accumulated by the federal government breaks down to approximately $50,521 for every single household in the United States.

#12 The United States already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain.

#13 At this point, the United States government is responsible for about a third of all the government debt in the entire world.

#14 According to the U.S. Treasury, foreigners hold approximately 5.6 trillion dollars of our debt.

#15 The amount of U.S. government debt held by foreigners is about 5 times larger than it was just a decade ago.

#16 If the federal government used GAAP accounting standards like publicly traded corporations do, the real federal budget deficit for 2011 would have been 5 trillion dollars instead of 1.3 trillion dollars.

#17 As I noted recently, if the U.S. national debt was reduced to a stack of one dollar bills it would circle the earth at the equator 45 times.

#18 How much money is one trillion dollars?  If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.

#19 If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.

#20 If you started paying off just the new debt that the U.S. has accumulated during the Obama administration at the rate of one dollar per second, it would take more than 189,000 years to pay it off.

#21 The U.S. national debt is now more than 5000 times larger than it was when the Federal Reserve was first established in 1913.

#22 If Bill Gates gave every single penny of his entire fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.

#23 The federal government is stealing close to 100 million dollars from our children and our grandchildren every single hour of every single day.

#24 Historically, the interest rate on 10 year U.S. Treasuries has averaged 6.68 percent.  If the average interest rate on U.S. government debt rose to that level today, the U.S. government would find itself spending more than a trillion dollars per year just on interest on the national debt.

#25 Federal spending on entitlement programs has been increasing six times faster than population growth has.

#26 Overall, the federal government runs nearly 80 different “means-tested welfare programs“, and almost all of them are experiencing explosive growth.

#27 According to a Government Accountability Office report that was released earlier this year, Obamacare is going to cause the federal debt to rise by $6.2 trillion.

#28 If you can believe it, today more than 70 million Americans are on Medicaid, and it is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls.

#29 As I have written about previously, the number of Americans on Medicare is projected to grow from a little bit more than 50 million today to 73.2 million in 2025.

#30 Medicare is facing unfunded liabilities of more than 38 trillion dollars over the next 75 years.  That comes to approximately $328,404 for each and every household in the United States.

#31 It is being projected that the number of Americans on Social Security will rise from about 62 million today to more than 100 million in 25 years.

#32 Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years.

#33 Boston University economist Laurence Kotlikoff is warning that the U.S. government is facing a gigantic tsunami of unfunded liabilities in the coming years that we are counting on our children and our grandchildren to pay.  Kotlikoff speaks of a “fiscal gap” which he defines as “the present value difference between projected future spending and revenue”.  His calculations have led him to the conclusion that the federal government is facing a fiscal gap of 222 trillion dollars in the years ahead.

Our financial situation is clearly not even close to sustainable.  We are heading for an inevitable collapse, but in the aftermath of the “deal” in Congress, Barack Obama declared that all Americans “need to stop focusing on the lobbyists, and the bloggers, and the talking heads on radio”.  Apparently he does not want you reading articles like this or listening to radio programs that are warning about the dangers of our national debt.

At the same time, the U.S. government continues to waste money in some of the most bizarre ways imaginable.  It is almost as if they don’t even care that they are destroying the future of our children and our grandchildren with their incredibly reckless spending.

And of course the mainstream media is very much on the side of the big spenders.  In recent weeks, those that identify themselves with the Tea Party have been endlessly called names on the big mainstream news networks even though they are just about the only ones that are trying to pull us back from the path to self-destruction that we are on.

The big mainstream news networks have portrayed those that identify with the Tea Party as idiots and morons, but the truth is that studies have found that Tea Partiers are better educated, more scientifically literate and have higher incomes than the general population.

The real idiots and morons are the ones that want us to continue down this road to financial oblivion.  We have accumulated the largest mountain of debt in the history of the world, and unless something dramatic is done, America is not going to have any kind of a future.

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Why the U.S. should be downgraded

The world has lost its faith in the U.S. It no longer deserves to be a Triple-A credit.

This was encapsulated in the nods of agreement that were seen in a packed auditorium at a Washington conference of international bankers on Friday when a visibly angry BlackRock Inc. /quotes/zigman/249424/quotes/nls/blk BLK +0.54%   CEO Laurence Fink told the audience that the U.S. is not a “principled nation.”

When men and women who control tens of trillions of dollars in U.S. investments are indicating they’ve lost their faith in America, it goes to the very question of whether the U.S. deserves to be at the center of world finance. So, whether or not Fitch Ratings follows through on the “Negative Watch” status that it placed on its top-notch U.S. rating Tuesday, it’s clear now that the dysfunctional American political system no longer justifies a Triple-A rating from anyone.

It matters not whether the U.S. is actually forced into a devastating default–still an extremely unlikely event. Triple-A credits do not behave like this. 

The seemingly endless rounds of political brinkmanship are bad enough. What makes it worse is that gross government debt stands at an uncomfortably high 109% of GDP, according to International Monetary Fund estimates, while the Congressional Budget Office forecasts that Social Security and Medicare obligations will grow exponentially over the next few decades.

With so much at stake, the U.S. can’t depend on foreign investors to keep rolling over its debts just because the dollar’s reserve-currency status locks them into that trade. It’s no coincidence that Chinese news agency Xinhua ran an op-ed Monday calling for a “de-Americanized world.” 

Ratings are relative concepts. America’s can only be considered against those of other countries. And if you look at the 15 or so sovereign Triple-A ratings from Standard & Poor’s Ratings, Moody’s Investors Service or Fitch, you find political systems and debt management programs that engender far more confidence than that of the U.S. In many, it comes down to a political structure that inoculates long-term government debts from politics. Read how a U.S. default could pay off for bond investors.

In Australia, for example, where the IMF estimates that gross public debt stands at just 27.6% of GDP, mandated employer and employer contributions have built up $1.5 trillion in privately held retirement assets–the fourth-largest such stockpile in the world behind the far bigger U.S., Japanese and British economies. Just to be sure, though, an independently run Australian Government Future Fund ensures that civil servants’ pension claims are fully funded into the future. Meanwhile, the country’s government-funded universal health care program has kept per-capita medical costs at less than half that of the United States, leaving it in far better financial shape than Medicare.

Then there’s Norway, which has no debt, only assets — $785 billion of them to be precise, more than 150% of GDP. That money, which is derived from the country’s giant oil reserves, is invested by an independently managed sovereign wealth fund whose far-sighted rules force it to invest for the long term and impose strict limits on how it can spend its profits.

And in Germany, politicians are giving Americans a lesson on how to compromise. Though newly re-elected Chancellor Angela Merkel will have to grant some policy concessions to the opposition Social Democratic Party, no one doubts that her Christian Democratic Union will be able to form a stable and well-functioning grand coalition government with its arch-rival.

The counterpoint to this is an argument put forward by Canadian ratings agency DBRS Inc.’s top sovereign analyst, Fergus McCormick. Although DBRS preceded Fitch in putting the U.S. on review for downgrade last week, McCormick argues that the deeply “institutionalized” nature of the U.S. financial system–the centrality of the dollar in the world system, the depth of its capital markets–ultimately justifies its Triple-A rating. As such, McCormick believes the U.S. should, for now, only be downgraded in the event of an actual default on debt securities.

Fitch is thinking differently — and, in my mind, correctly. Here’s the key paragraph in its statement Tuesday: The “prolonged negotiations over raising the debt ceiling…risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This ‘faith’ is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.” Fitch believes the U.S. might deserve a downgrade, even if it ends up paying its debts–simply because it can no longer be trusted.

Faith in the U.S. is waning. It doesn’t deserve to be Triple-A. 

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213 Years Of Sovereign Yields And Defaults

As Jim Grant recently recently noted, America's default is inevitable, as he confronts the implied message of the Federal Reserve’s pro-inflation policy: We will default in the future, though no lawyer will call it “default.” However, a glance back at the last 213 years of global history shows it is not that unusual for major sovereign nations to rapidly crumble and enter a state of default. As Global Financial Data's Ralph Dillon points out, all of this fear and rhetoric over a US default had him thinking about history and defaults. How have other countries that have defaulted faired over history? Some good and some bad for sure, but for the developed markets and global economic powerhouses, those that did default are still here alive and kicking. In fact, some have defaulted 8 times and are still a major player on the world stage.

Via Global Financial Data's Ralph Dillon,

With a couple days to Armageddon, it appears that we will be going right down to the wire once again for yet another politically generated debt crisis. More nonsense and political posturing from our elected officials has had a  dramatic effect on the equity and bond markets and its movements. With every talk and whisper, the markets will react and quite possibly, over react.

While default is nothing new for many countries, it is for the United States. Many economists have said that a US default would have catastrophic consequences for the global community. Borrowing costs would essentially sky rocket, global equity prices would be leveled, dollars status as a benchmark questioned and most importantly, a reversal into another deeper and darker world recession.

All of this fear and rhetoric had me thinking about history and defaults. How have other countries that have defaulted faired over history? Some good and some bad for sure, but for the developed markets and global economic powerhouses, those that did default are still here alive and kicking. In fact, some have defaulted 8 times and are still a major player on the world stage.

So the question is, would a default really be that bad for us and is this an opportunity to get our own fiscal issues in order? Should we use a default to wake us up from this debt induced binge? Would it help us to address the bigger issues we face like debt and entitlements? One can only speculate and I guess we shall find out when we cross that bridge. But for the time being, it is being played out on the world stage by our inept and ignorant elected officials who are undoubtedly responsible for getting us into this mess in the first place. Without them, we would not be even talking about a debt crisis.

Here we take a look at historical 10yr bond yields to 1800.

(click image for large legible version)

With it, is a list of countries that have defaulted and when.

1.   United States 2013?
2.   Germany 1938,1948
3.   Japan 1942, 1946-1952
4.   France 8 times between 1558-1788. Last one in 1812
5.   Italy 1940. Almost daily speculation of another default since 2008
6.   Spain 1809, 1820, 1931, 1834, 1851, 1867, 1872, 1882 and 1936-1939. Since 2008, Spanish yields spiked considerably and have been volatile on the back of another default
7.   Austria 1938, 1940, 1945

8.   United Kingdom 1822, 1834, 1888, 1932

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