Money, Power & Wall Street - The Limericks

The tale of financial collapse
Is ever-enthralling, perhaps
Because of the way
The reckoning day
Has evaded those gluttonous chaps.

Thus, a crisis with hardly an equal
Has an ending that doesn't quite speak well,
Like a Hollywood thriller
Whose psychopath killer
Escapes to return in the sequel.

On Monday evening it seemed as though the whole of the financial Twittersphere was glued to, and tweeting about, the PBS Frontline documentary "Money, Power & Wall Street". Although we all know the story by heart, it seems that we cannot tear ourselves away; perhaps because, four years later, so little has changed in the financial landscape and no-one has been brought to justice for wrecking the global economy. It's really as if "the killer is still free." Some of the evening's most memorable tweets reflected this foreboding sentiment, from the earnest:

Truly, how can people watch this and still say we should repeal financial regulation and go back to the old status quo? #frontline

— Austan Goolsbee (@Austan_Goolsbee) April 25, 2012

To the angry:

Derivatives STILL remain exempt from Insurance regulations, have no reserve requirements $AIG $BAC $C $LEH $BSCwashingtonpost.com/business/credi… $$

— Barry Ritholtz (@ritholtz) April 25, 2012

To the snarky:

Obama: "I'm gonna change everything on Wall Street, right after I take this meeting with Robert Rubin..." #frontline

— Downtown Josh Brown (@ReformedBroker) April 25, 2012

What's your take on the crisis and the documentary?

Die Eine Drei

Of the euro zone countries today,
Only one truly rates triple-A;
We needn't say who,
But, to give you a clue,
They're north of the Appian way.

The answer to whose credit is best in the euro zone is the same as whose cooking is Wurst. Aside from Germany, only three other EU members still enjoy AAA ratings: Finland, Luxembourg and the Netherlands. Most knowledgeable and objective observers agree, however, that it's only a matter of time before the latter three are knocked from the top rating level.

First to go may be the Netherlands, whose minority coalition government resigned on Monday amid an impasse over budget negotiations. Long a fierce advocate of euro fiscal discipline, the Dutch could not agree on how to get their national deficit within the required limit of 3% of GDP, as opposed to the currently projected 4.6%. Discussions broke down after the right-wing Freedom Party, headed by the flamboyant Geerd Wilders, pulled out of talks with the center-right liberal party of Prime Minister Mark Rutte. Ratcheting up the tension, Moody's warned that a "weaker commitment to fiscal discipline" in the Netherlands could put "downward pressure" on the country's triple-A rating. It may soon be einsam at the top for Germany.

Lulled by Fuld?

Said the Lehman bankruptcy inspector
Of the repo transactions that wrecked 'er:
"The Feds, who were looking
At books that were cooking,
Had fraud, but could never detect 'er."

In a rare attempt to explain the financial crisis to the average American, CBS's 60 Minutes brought "The Case Against Lehman Brothers" on Sunday evening. Steve Kroft interviewed Anton Valukas, the Chicago attorney appointed by the federal bankruptcy court to determine what led to Lehman Brothers' collapse. Mr. Valukas found that "there was enough evidence for a prosecutor to bring a case against top Lehman officials and one of the nation's top accounting firms for misleading government regulators and investors."

One of the most damning pieces of evidence was the letter written by Matthew Lee, the firm's top internal accountant, to senior management. Mr. Lee refused to sign off on Lehman's 2007 fiscal year end balance sheet, citing "possibly unethical and unlawful" conduct in their preparation. The so-called "repo 105" transactions were employed to make Lehman's balance sheet appear $50 billion lighter on reporting dates, and thus mask the extent of its over-leveraging. Mr. Lee was let go for his trouble, and the SEC, which was on the premises while repo 105 trades were occurring, has never brought charges against CEO Richard Fuld or others. Why didn't they catch the fraud? Says attorney Valukas: "They were getting the material. Whether they understood it is another question."

The entire interview is embedded below for your viewing pleasure, outrage and incredulity.

Student Loan Blues

"Though college, I felt, was a sure thing,
As of now, unless gold I'm unearthing,
To pay off my loan,
I'll have to postpone
My homebuying, wedding and birthing."

An entire generation is blocked from building a life while in the thrall of its towering college debts, writes Sue Shellenbarger in The Wall Street Journal. Student loans, which reached $1 trillion last year according to the Consumer Financial Protection Bureau, may ofter eat up half of a young graduate's income, particularly if they have had to settle for a lower-paying job than they expected. Like the killer who won't die in a horror film, student loans can not only prevent one's qualifying for a home mortgage or car loan, but cannot be extinguished in a bankruptcy.

What can young people do to avoid such an unhappy fate? There are no panaceas, but some sensible suggestions would include:

• Approaching college with the goal of building valuable, employable skills by which to enable one to pay the loans down faster; 
• Taking price into account while shopping for schools, with a willingness to consider the lowest priced option;
• Accepting federal or state loans (preferably subsidized) before private ones.

A Moving Target

Said Monti: "I honestly never knew,
When to balance the books I endeavored too,
How austerity tends
To lower the trends
Of output and government revenue."

Italy announced that it would not meet the 2013 balanced budget pledge that it made as part of the EU fiscal stability pact. It's not that the "technocratic" government of Prime Minister Mario Monti isn't committed to cutbacks; more so that a downwardly revised GDP forecast is undercutting the revenue side of the balance. The Italian economy, which had been forecast to shrink by 0.5% next year, now has a revised GDP growth outlook of -1.2%. Thus, a projected balanced budget has turned into a deficit equal to -0.5% of GDP. Unfortunately, by tightening fiscal policy in a recession, the government is making things worse. However, they are operating under constraints set by the European Union, and thus had no choice in the matter.

Unrepentant

The enablers of fraudulent crises,
Reluctant to give up their vices,
Periodically line up
For pols who will sign up
To learn what their fiscal advice is.

In a scathing guest post in the Big Picture blog, financial fraud expert Bill Black despairs that so many economic advisors with track records of enabling "green slime" in the banking sector are unrepentantly pushing the same policy prescriptions. "Romney's lead economist urges policies that will cause the next financial crisis" is Mr. Black's headline. He singles out Mitt Romney's lead economic advisor (and George W. Bush's erstwhile lead economic advisor), Greg Mankiw, for special criticism. Prof. Mankiw's latest New York Times column extolls the virtues of governmental competition in the regulatory sphere, when there is ample history to show that such competition devolves to a "race to the bottom" leading to a lax regulatory environment that invites criminality. The most famous example is of course the savings & loan crisis of the 80's.

Full disclosure: Prof. Mankiw and his famous graduate student Jodi Beggs gave Dr. Goose his first big break in economic show business.

One Bond to Ring Them All

A Eurobond's needed because
It's one of the euro zone's flaws
That investment was hot
Where the wanting was not
And decidedly cool where it was.

In his latest blog post on saving the euro zone, Reuters' Felix Salmon gets to the heart of the matter:

The solution to this problem is eurobonds. If all the eurozone countries funded themselves jointly and severally, then the yields on European government debt would be very low, and there would be no fiscal crisis in Spain.

As it is, the combination of a single currency and separate fiscal authorities encourages the flow of of government bond investment in the wrong place at the wrong time, if European stability is the desired outcome. Thus, says Felix, "Fund managers at French and German banks were busily moving funds into Spanish and Greek bonds a number of years ago in search of higher yields, and Spanish and Portuguese fund managers are now buying German and Dutch government bonds for added safety, all without incurring foreign exchange risk." It's as if the United States had no Treasury bonds, and all the public debt issue were at the state and local level. The question is: how long before Europe bows to the inevitable, and decides to go joint and several?

Secretly Serviced

Secret Servicemen, caught out with whores,
Sent a shock through the diplomat corps.
(It's a precept of theirs
That "foreign affairs
Are more in our purview than yours.")

Members of the US Secret Service assigned to prepare for President Barack Obama's arrival in Cartagena were accused of hosting prostitutes for overnight visits in their hotel rooms. This potentially critical lapse in security cast a pall over the President's arrival at the important Summit of the Americas in Colombia on Friday. However, it did not derail one key accomplishment: the implementation of the new US-Colombian free trade pact.

No More Fed Action?

"The economy's growing respectably,"
Said economists surveyed collectively,
"So a Fed funds regime
At a low-rate extreme
Is an outlook we look upon skeptic'ly."

The Wall Street Journal has reported the results of its latest survey of US economists, and, while not especially pretty, they do not paint an ugly picture either. Writes the Journal's Phil Izzo, "More economists are convinced the Federal Reserve won't take further action to spur growth this year, as the economy appears to be on firmer footing." The "respectable" 2.2% first quarter growth rate is forecast to bump up to an annual 2.7% GDP increase by year end. As a result, 36 of the 51 economists surveyed expect the Fed to refrain from any additional large-scale bond-buying. Interest rates? The consensus is that they've gone about as low as they can go, and the mean forecast for the June 2014 Fed funds rate is 1%. Come to think of it, that is a rather mean forecast, but it's better than nothing.