The Market Ticker

Here we go with the energy restrictions:

“Six months from now, the nation could be a fundamentally different place where we’re living in a carbon-constrained society,” said Roger Martella, general counsel at the EPA under Bush. “It’s going to be a new challenge that industry has not had to address before.”

While the court case concerned new cars and trucks, the Clean Air Act directs the EPA to limit emissions from other sources such as power plants if a finding is made that greenhouse gases pose a danger, said Bookbinder.

Here's the problem, bluntly:

• The science is not settled on whether CO₂ is in fact responsible for climate change, and if so, to what degree.
• CO₂ is inherently a product of energy production that results from combustion of any chemically-stored form of solar energy that involves the carbon atom.

People think of this as "fossil fuels" but in fact those fuels are nothing more or less than the capture of solar energy over time.  It is entirely possible to capture that energy over a shorter period of time (e.g. biodiesel, ethanol, burning of wood cut and seasoned, charcoal in your grill, etc.)

In fact all we are really talking about is cycle time when it comes to so-called "fossil fuels", which are better called "carbon-based energy storage."

The problem with regulating "greenhouse gases" is that you produce them.  You exhale CO₂.  So does your dog, your cat, and your fish.

The cow in the field that makes milk emits greenhouse gases - they fart.  Really.  And methane is several times as potent as a greenhouse gas as is CO₂.  What's the "cow tax" going to be?  And what's the tax on that bowl of chili I want to eat - you know what comes next, right?

CO₂ is in fact essential for life on earth.  The paradox is that without CO₂ there would be no free O₂ - that is, oxygen - for you to breathe.  Green things - from algae to your lawn to trees in the back yard - in fact respire, taking in CO₂ and emitting O₂.  The second paradox is that the higher the atmospheric CO₂ content the faster those plants grow.

So if you're going to tax me for emitting CO₂ from my tailpipe, then you must also credit me for having nearly 3/4 of an acre of lawn.  See, that grass sequesters approximately 3 tons of CO₂ per acre per year, according to the same scientists.

Of course you're not going to see the EPA promulgate regulations forcing the government to cut me a check for my personal carbon sequestration, but they'll sure as hell tax me for my carbon fuel use.

Its funny how science and fact never get in the way of a bad idea to play hell with the economy and markets.

Yet another shot across the bow of The Obama Administration came out from Joseph Stiglitz yesterday:

April 17 (Bloomberg) -- The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

Yep.

And what's his prescription?  Right here:

Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.

On 9/30/2008 I released the following:

Once 1-3 are put in place then send in the OTS and OCC examiners and look at every financial institution in the United States. All who are insolvent and unable to raise private capital immediately are forced through receivership where the debt is converted to equity and existing equity is wiped out.

With the CDS monster caged the systemic risk is removed, the bondholders provide the cushion for recapitalization (as it should be) and the restructured firm emerges with no debt while the former bondholders are now the owners (of the equity) in the resulting firm.

Ding ding ding.

Indeed, if you go back to my Tickers in through 2007 and 2008, you will see this as a recurring theme - we already have the means to solve this and have since this crisis began.

It is called bankruptcy and the process inherently includes cramdowns of the equity structure.  That's what bankruptcy does!

What Mr. Stiglitz hasn't elucidated is why we have to do this way (and unfortunately we will, whether we do it earlier or later, with the only question being one of how much destruction our government will level on the broader economy first.)  That is, he gets the "why we're not" (regulatory capture and/or incompetence) but he's not talking about the mathematical necessity of doing the right thing.

The simple fact is that the overriding millstone around our necks as a nation is our debt-to-GDP ratio at all levels - in households, in businesses and in government.  The math makes sustainable recovery impossible until that ratio comes back into line with reason.  The longer we refuse to force the cramdowns and therefore extinguish that excessive debt, the longer this economic malaise and trouble will last.

Any recovery that government tries to manufacture through "allowing" balance sheet games and other forms of accounting trickery (which I consider to be nothing other than "looking the other way" fraud upon the public and investors) in the broader economy and capital markets will be fleeting and weak, simply setting up yet another leg downward in both.

The government attempted exactly what we're doing now in the 2000-03 recession and produced what "looked like" a strong economy for four years.  It was not; it was a chimera, a fraud and a scam, as everyone in America now can see; all we did was made the inevitable "bust" far worse than it would have been in 2000 if we had forced the debt out into the open and defaulted it then.

We have followed the same "prescription" since the late 1980s and it has failed.  I keep coming back to one of my favorite sayings:

Insanity: Doing the same thing over and over again but expecting a different result - Albert Einstein

Gee, if there's a "banking crisis" and all these "unusual and exigent" circumstances exist, how come this happened?

April 17 (Bloomberg) -- Citigroup Inc., the U.S. bank rescued by $45 billion in U.S. taxpayer funds, ended a five- quarter losing streak with a $1.6 billion profit on trading gains and an accounting benefit for companies in distress.

Or this?

“Amid a continued weak economy, we’re performing well and our backlog remains strong,” Chief Executive Officer Jeffrey Immelt said in the statement. GE rose 32 cents, or 2.7 percent, to $12.60 at 7:37 a.m., before the regular open of New York Stock Exchange composite trading. The company has lost about 67 percent of its market value in the year since Immelt surprised investors with a first- quarter 2008 profit decline and lowered annual forecast.

The Law is that The Fed can only have these programs open with "unusual and exigent circumstances."

Recessions are neither unusual or exigent, and bank after bank has been reporting positive earnings - which is what one would expect as "usual" and "not exigent."

Time to shut it down Ben!

Really folks, that's only half tongue-in-cheek.

I haven't gone through the quarterlies for these firms yet, although I will.  But I probably won't have to write about it separately, because in all probability the same thing is going on here that is going on in these other banks: the "profits" are really a matter of shifted loss reserves, shifted "asset" buckets and other sorts of balance-sheet machination.

Is this "illegal"?  No.  But does it mean that the cash flow is coming in and happy days have returned?

Lookie here:

While the bank cut compensation costs and took fewer writedowns, it couldn’t halt rising delinquencies on home and credit-card loans. Citigroup benefited from higher fixed-income trading revenue that also bolstered earnings at Goldman Sachs Group Inc. and JPMorgan Chase & Co.

In other words, the banks are gambling with the free money we the taxpayers have given them, along with boosting our costs.  Between the two even though credit quality is going through the floor they're managing to siphon off even more money for their executives, and because this sort of thing makes stock prices go up the government likes it.

Don't get me wrong - I like rising stock prices too.  But I like them to rise due to real business conditions being favorable, because (1) that's sustainable and (2) that means I don't have to keep looking for the magical disappearing floor, and can actually invest.

Neither (1) or (2) is true here.

Oh by the way, here's another reason that Citigroup posted these numbers:

Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain. The rule reflects the possibility that a company could buy back its own debt at a discount, which under traditional accounting methods would result in a profit.

If you want to talk about obscene, that is obscene balance sheet game-playing.  What this means is that a firm that has its credit quality decrease, and therefore the trading price of its bonds go down (meaning the market thinks the firm is more likely to default) is able to claim that change as a profit!

Why?  Because the firm could "buy back its own debt" at a discount.

Note carefully - the firm doesn't actually have to buy it back (that would be reasonable - book the profit from an actual realized gain) but because it could it gets to book that as a paper "profit" on its financials.

This is the sort of outright  in "accounting" that makes market analysts and investors like me grab for the blood-pressure cuff to see if we're about to have a CVA.  See, a firm that is in distress like this is extremely unlikely to buy back its own debt because the reason it is in distress is that the market believes it lacks sufficient cash earnings power to cover its liabilities! That is, the market is discounting the probability of bankruptcy by trading its debt at a significant discount - and this gets counted as a profit?

This sort of nonsense isn't new; in point of fact the banks have been doing this all through this downturn!  But this is a particularly-egregious example, so here's the white-hot spotlight Mr. Pandit.

Hope you've got some SPF-200 suntan lotion handy.