"Every Major U.S. Bank Was Profitable Last Year"

John Berry says we shouldn't feel too sorry for banks, or worry that credit is about to dry up and ruin the economy [Update: After today's events, I'll be curious to see if John Berry, who has been more bullish (or at least less bearish) than many other commentators, changes his tune at all.]:

Every Major U.S. Bank Was Profitable Last Year, by John M. Berry, Bloomberg: With all the large writedowns and losses announced for the fourth quarter, hardly any attention is being paid to just how profitable U.S. banks really are.

That inattention has raised unnecessary concerns that the banks may be so crippled by losses that they will cut lending to the point it might undermine the U.S. economy.

Some commentators have said the banks are in the worst shape since the Great Depression. That isn't close to being correct.

Other analysts have raised the specter of the stagnant Japanese economy of the 1990s, when banks there were crippled by huge losses when a real estate price bubble burst... This comparison also is off base.

Even Citigroup Inc., by far the hardest hit of the big U.S. banks by subprime-related problems, earned $3.62 billion last year. That was with a $9.83 billion fourth-quarter net loss and more than $22 billion in writedowns and additions to loan-loss reserves.

For JPMorgan Chase & Co., the third-biggest U.S. bank, the focus was on the 34 percent drop in fourth-quarter profits from a year earlier. Its full-year $15.4 billion profit, a record, was largely ignored. ...

Economist Robert E. Litan, a senior fellow at the Brookings Institution who has done numerous studies of the U.S. financial system, said the banks are in far better shape than the dire assessments suggest.

''Strip out the losses and Citi could make close to $10 billion a quarter,'' Litan said. Noting how quickly the bank has been able ... to replace the capital depleted by losses, he added, ''Why would anybody buy stock if they thought Citi was going down the tubes?''

''And this is nothing like the Japanese situation,'' Litan said. ... The story is largely the same at Merrill Lynch & Co., the world's largest brokerage, though the losses are greater relative to its size. ...

Credit isn't as readily available as it was for several reasons, including a less favorable economic outlook, tighter lending standards, particularly for mortgages, and a lack of a secondary market for some types of loans such as jumbo mortgages.

On the other hand, the interest rates many borrowers are paying have dropped. The bank prime rate, to which many loans are linked, is 7.25 percent, the lowest since January 2006.

As of Jan. 17, the average interest rate on 30-year fixed- rate mortgages dropped to 5.69 percent, the lowest level since June 2005.

In the two weeks ended Jan. 18, corporate borrowers sold $50 billion worth of investment-grade bonds at the lowest interest rates since April 2007.

The credit well hasn't run dry and it's not about to. And the nation's banks will be supplying a large share of it.

Comments

[dd]

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3-1/2 percent.
http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm

[dd]

"Bank of America Corp.'s fourth-quarter net income fell 95% as the company recorded a higher-than-expected $5.28 billion in collateralized debt obligation write-downs and said credit costs soared." WSJ 1/22/08

Berry might want to rethink his math and factor in CDOs and CDS.

[reason]

Yes,
but isn't this besides the point. At some stage people are not going to want anymore credit, regardless of price and availability.

[save_the_rustbelt]

True maybe, but if the cash flow dries up, the working capital ratio gets out of whack and the balance sheet tilts too far last year's profits are going to be irrelevant.

Time will tell.

[bullbust]

Uncle Ben just proved whose lackey he is. A day of market declines which not even add up to 5% and the Fed cuts 0.75%.

What better proof is needed that the Fed is Wall Streets bitch?

[anne]

What is important, always important, more important than all else, is to shopw how hateful we can be to women to make a point. Remember, there is no language beyond language that is degrading to women. Sort of makes me proud.

[hari]

The market expected 50bp cut some few weeks back. However it became obvious thereafter that market psychology demanded some thing more - and I guess 75bp was it!

I said so, not too long ago last week! Which proves to me, as a novice, forex market is on top of the curve!

The real damage done to the financial institutions was the so-called cabal which invented (!) the subprime magic for sale!

If Fed can't identify and punish them and make them accountable, I doubt the market is going to avoid another repeat. AG said, as you can recall, it's not easy to find the culprits who're responsible because of the nature of the subprime instrument. Yet, it's Feds legal responsibility to monitor and call the shots when something goes wrong.

[anne]

The Federal Reserve did precisely what was needed to bring the Funds rate decisively below the long-term Treasury rate, and show that there will be a steady and sustained re-building of bank assets from here. Precisely the course followed from 1990.

[save_the_rustbelt]

Wall Street seems to be applying an interesting form of extortion, using CNBC as a megaphone.

"If there are not enough tax cuts the market will crash."

"If there are not enough interest rate cuts the market will crash."

[Cynthia]

So John Berry is now singing the catchy tune of "don't worry, be happy!"

Wow, all I can figure is that his Kool-aid has been spiked with a new (and improved) opioid derivative!

[anne]

http://krugman.blogs.nytimes.com/2008/01/22/preemptive-easing/

January 22, 2008

Preemptive Easing
By Paul Krugman

Wow. First the markets, now the Fed’s reaction.

What you probably should know is that Ben Bernanke, in his capacity as a professional economist, spent a lot of time worrying about Japan’s experience in the 1990s. (So did I.) * What was so disturbing about Japan was the way monetary policy became ineffective; by the later 1990s the short-term interest rate was up against the ZLB — the “zero lower bound.” This is alternatively known as the “liquidity trap.” And once you’re there, conventional monetary policy can do no more, because interest rates can’t go below zero.

There was a lot of discussion of various unconventional monetary things you could do. But the best answer was not to get there in the first place. A 2004 paper ** co-authored by Bernanke argued that the ZLB could and should be avoided by “maintaining a sufficient inflation buffer and easing preemptively as necessary”.
And here we go.

* http://web.mit.edu/krugman/www/jpage.html

** http://www.federalreserve.gov/Pubs/FEDS/2004/200448/200448pap.pdf

[anne]

The question is not catering to investors, but trying to understand what happened in Japan in 1994, which few analysts properly noticed, which was the delay in using monetary policy decisively from 1990 led to persisting deflation and a liquidity trap. I remember being in Tokyo, and having a friend explain a television announcement that people in a market were listening to which was that, say, there had been 20 or 25 or 30 straight months of falling prices.

[anne]

What protected the Japanese middle class was years of massive New Deal infrastructura development, that was widely ridiculed in Britain and America but was just what was needed when monetary policy proved no longer effective.

[anne]

Paul Krugman was the only analyst I am aware of who understood and favored the Japanese infrastructure spending to protect the middle class, but I knew from close experience how necessary the spending was and how effective.

[gc]

Mr. Berry refers to the banks as profitable. The Fed action seems to have taken the comments offtrack. I wonder with regard to Mr. Berry's attention to banks, is he really looking at their important quality? Calculated Risk continues to discuss pier loans from last year and the year before's LBO's. Where are the numbers that assess the banking industry's ability to make new loans found? If their capital requirements limit them from making new loans, is the report of past profitability really that important?

[bullbust]

http://bigpicture.typepad.com/comments/2008/01/a-whiff-of-pani.html

1) Why Cut today? What was the motivation for today’s cut? Would waiting 7 days have done anything. other than allowing some of the excesses to get wrung out of the system?

) Equity Market Disfunction? Is it that the equity markets are not working properly? Likely not. Are rates too high? I doubt that's the reason for any of our economic woes. Then what is it – are lowered equity prices a problem?

3) TANSTAAFL: The free lunch crowd (a/k/a Long & Wrong) has been chanting for Fed cuts. However, these are not with0out consequences, as Inflation remains a pernicious threat.

4) How Independent is the Fed? The Fed is supposed to be an independent entity, whose mission is a) price stability (inflation) and b) maximizing employment (growth).

However, today’s action reveals an apparent third obligatory goal – protecting investors and market prices. I had no idea that back-stopping speculators and hedge funds was part of their mandate... [emphasis bullbust's;
not Barry R's]
.....

[hari]

Seriously guys! The Fed is trying to avoid a market crash which started Mon thru all Asian markets and continued today. Indian market fell more than 12% today! Yes, they're all moving above their historical averages and gaining still more leverage as foreign buyers moved in...

European markets strangely became target for real discount trade!

If something like 1929 crash is looking reasonable then Fed has done the right thing to try and forestall a stampede...to the door!

Mark should know the limits of monetary policy in this type of environment - changing so dastardly on daily basis - and remember the stagflation of Japan which lasted forever!

[Winslow R.]

Anne as insightful as usual.

Given the falling long bond rate, it doesn't look like this is near over.

[Winslow R.]

Mark wrote: "John Berry says we shouldn't feel too sorry for banks, or worry that credit is about to dry up and ruin the economy"

Bernanke is more worried about this than the supply shocks hitting the world economy. Time to leave Iraq and find a 'real' long term solution to our supply problems.

[anne]

The assurance in the Federal Reserve move is in bringing short term interest rates decisively below long term showing that banks are to be allowed to borrow short and lend long and increase profits quickly as an asset cushion. Turmoil in investment markets simply guided the Fed in acting. There is a need to limit asset price volatility, but more so a need to show that banks profits will be there.

[Winslow R.]

Despite what John Berry says, banks are a broken gear in the monetary mechanism that tilts real wealth towards a small sector of society.

The sooner mainstream academic economists admit this publicly, and offer meaningful solutions to remove the tilt domestically and globally, the better.

[Winslow R.]

Anne wrote: "There is a need to limit asset price volatility, but more so a need to show that banks profits will be there."

See how our system works? We must make banks profitable or else our system collapses. We must make sure they run the SWF's. We must bail them out when they make terrible choices.

We must?

Banks are squeezing our ...... levers of power.

[anne]

http://krugman.blogs.nytimes.com/2008/01/22/deep-maybe-long-probably/

January 22, 2008

Deep? Maybe. Long? Probably.
By Paul Krugman

I still keep reading articles asserting that the last two recessions were brief and shallow. Formally, that’s true. But both were followed by prolonged “jobless recoveries” that felt like continuing recessions. Below is the employment-population ratio since 1989, with shading showing the official recessions. In both cases the employment slump went on for a long time after the recession was supposedly over.

There’s every reason to think that the same thing will happen this time. There’s a huge overhang of excess housing inventory; it will probably take several years before housing prices fall to realistic levels; and it’s not at all clear what will fill the gap left by weak housing and consumer spending.

There’s still the question of how deep the slump will be. I can see the case for arguing that it will be nasty. The 1990-91 recession was brought on by a credit crunch, the 2001 recession by overinvestment; this time we’ve got both. I guess we’ll see. In any case, whatever happens will probably last quite a while.

[Chart.]

[ScentOfViolets]

Try this as a hypothesis: if Bernanke is really beholden to Wall Street, might it be that he is unwillingly beholden? That is, he knows this is not what should really be done, but he has no choice but to cave, and cave repeatedly in the most face-saving way to his masters.

So maybe we have to run through all the Chicago School's toolbox of panaceas before we can actually get down to the nitty-gritty of putting things right. In which case, Bernanke might not be able to control what bad policies are implemented, but he can do so in the least damaging order. For example, a permanent tax cut could be followed by interest rate deductions relatively easily as received policy, I would imagine, but the reverse order would be much harder to justify. If that's the case, what are the bad policy tools at the Chairman's current disposal, and what would be a) the least damaging order to try them, and b) the most damaging order?

[anne]

While Paul Krugman was startled by the slow recovery of Japan from the mild recessions from 1964, Joseph Stiglitz noticed that something was wrong here following the mild rescssion of 1990. Corporate profits recovered quickly, but where was domestic investment and with investment relatively weak so was the recovery in way I do not understand. Krugman now reminds us that recovery was quite slow following recession in 1990.

Why should near record and record domestic profits, not have spurred more investment since 2001?

[Winslow R.]

SOV"If that's the case, what are the bad policy tools at the Chairman's current disposal, and what would be a) the least damaging order to try them, and b) the most damaging order?"

Perhaps if you had $15,000 for a speech you could get Krugman to talk about real nuts and bolts.

"at $30,000 a speech, he says, nearly double Krugman's speaking fees. "

http://www.pkarchive.org/others/thurow.html

[anne]

Recovery slowness from 1990, from my supposition, could be attributed to an absence of subsequent domestic infrastruture emphasis and I would suggest the same following 2001. Infrastrucuture development being lasting if not immediate in impact and spurring investment. But, this is among my reasons for turning increasingly to a New Deal development model.

[Patricia Shannon]

http://www.msnbc.msn.com/id/22764445/

Highly skilled and out of work
Long-term joblessness spreads in the middle class
By Michael A. Fletcher
updated 3:53 a.m. ET, Mon., Jan. 21, 2008

WASHINGTON - An unusually large share of workers have been out a job for more than six months even as overall unemployment has remained low, a little-noted weakness in the labor market that analysts said threatens to intensify the impact of the unfolding economic downturn.

In November, nearly 1.4 million people -- almost one in five of those unemployed -- had been jobless for at least 27 weeks, the juncture when unemployment insurance benefits end for most recipients. That is about twice the level of long-term unemployment before the 2001 recession.

The problem is ensnaring a broader swath of workers than before. Once concentrated among manufacturing workers and those with little work history, education or skills, long-term unemployment is growing most rapidly among white-collar and college-educated workers with long work experience, studies have found, making the problem difficult for policymakers to address even as it grows more urgent.

"What has happened is a polarization of the labor market. It was very strong at the very top and very strong until recently at the bottom," said Lawrence F. Katz, a labor economist at Harvard University. "But in the recent weak recovery, and now recession, demand has been very weak" for jobs in the middle.
...
The growth in long-term unemployment has occurred even as displaced workers have taken bigger pay cuts to reenter the job market. A 2004 study found that workers who lost a job in 2001 to 2003 took an average pay cut of 17 percent in their new jobs, more than double the average cut of those displaced in the late 1990s.

"When people are losing good jobs these days, they have a very hard time getting back to the type of job they had before," said Andrew Stettner, deputy director of the National Employment Law Project, an advocacy group that presses for more generous unemployment benefits.

While strong corporate profits, low inflation and record manufacturing output characterized the extended recovery that followed the 2001 recession, some economists call that period of expansion a "CEO's recovery." Real wages were mostly flat, poverty ticked upward and an unusual number of people had a hard time finding work -- a fact masked by relatively low overall unemployment rates.

"This tells you that this has not been as good an economy as the overall unemployment rate would make it seem," said John Schmitt, a senior economist at the Center for Economic and Policy Research. "This dynamic causes anxiety among people even if they still have a job. It is very important to understanding the level of anxiety that the work force feels as a whole."

[donna]

I'm a little tired of ensuring profits for STUPID banks.

My credit union hasn't been making dumb loans and they are doing just fine, thanks.

[ScentOfViolets]

It's interesting that you should mention that; I'm a member of our local credit union myself for what I suspect are a lot of the same reasons - "It's a Wonderful Life" redux and all that.

Are there any other posters who belong to the same type of organization? Are their odds of riding it out better than average, or worse?

[Winslow R.]

A new deal is fine and dandy if we want to follow Japan's path into government spending while leaving wealth consolidation where it stands. In fact it will relieve political pressure to change the system core.

'Fixing' the global and domestic monetary system offers the possibility of revitalizing the real economy while allowing market forces to redistribute wealth towards productive people. Economists willing back a 'big bank' monopoly, a rot that will eventually (next thousand years) be removed.

A combination of fiscal and monetary policy reform would be optimal right now.

Fiscal policy rework - yes.
Monetary policy rework - yes. TAFs were only a first step enabling small banks to compete one equal footing with big banks. TAF's made big banks less stable while making small banks more stable.

[robertdfeinman]

Two points:
The basic premise of the article makes sense. The banks probably had their largest write-offs last year. Let's assume that their income falls this year by 20-30%. Even so they will end up showing a big gain in profit over 2007. Stock prices are based upon future earnings expectations and, especially, on the rate of growth. So we can see, say, a 50% rise in earnings this year followed by another growth the year following as the balance between borrowing demand and lending adjusts.

I think this means those holding bank stocks have nothing to fear, but they will have to be patient (not a word heard often on Wall Street).

Second, if I can be permitted a bit of immodesty, I predicted a crash three years ago.
Coming Crash

My analysis was that the crash would be caused by the imbalance in the US from excessive militarism and the corresponding decline in infrastructure and human capital investment. Couple this with living on borrowed money and the resulting crash was inevitable. When there are no places to invest in real endeavors the money flows to speculation instead.

It just so happened that the bulk of the speculation was in housing this time, rather than in tulips or dot com companies. The fact that all the regulations which would have prevented highly leveraged transactions have been removed or gutted only added to the size of the Ponzi scheme.

There is no way out of a Ponzi scheme without people losing money.

[billy]

Despite what John Berry says, banks are a broken gear in the monetary mechanism that tilts real wealth towards a small sector of society.

The sooner mainstream academic economists admit this publicly, and offer meaningful solutions to remove the tilt domestically and globally, the better.

Now, that, my friend will be anathema. At this critical point, economists are supposed to circle the wagon and protect their own, the costs and truth be damned.

A Fed post is like the papal throne for economists, who are more concerned about their hierarchy - and its hold on power through the Fed - than any search for truth, enlightenment and learning

[billy]

There is a need to limit asset price volatility, but more so a need to show that banks profits will be there.

Yeah, right. When Asset prices go up 20-25% per annum, its not volatility. When they fall 10%, its a crisis.

You are all about looking up your delusional gains.

Hopefully, the next generation will not take your overpriced assets off your hand.

Who wants to bail out the hedge funds and boomers by buying their overpriced assets? The sooner the next generation abandon investing in 401Ks, the better it is.

[Lafayette]

reason: At some stage people are not going to want anymore credit, regardless of price and availability.

Highly unlikely outcome. The US has become a credit economy.

Credit is so ingrained as a way of life that one cannot shop-till-you-drop without it.

In fact, credit has permitted the US to become the Model Economy of the Future. Most countries WILL tend towards the US Consumer-Credit model.

Whether they will be able to do so without incurring a chronic deficit is another question.

[Lafayette]

rdf: Even so they will end up showing a big gain in profit over 2007.

Gotcha, Coming and Going

Goldman Sachs bonus pool had another glorious year. Wanna know how they did it?

The made their money in two ways: (1) Betting on hedgefunds that were making money hand over fist on SIVs and (2) advising banks on how to make a profit from the sub-prime mess. Different groups in the bank were obviously involved in both businesses.

[Bruce Wilder]

rdf: "There is no way out of a Ponzi scheme without people losing money."

The thing about a Ponzi scheme is that Ponzi has generally left town before anyone realizes that the money is gone.

Banks, over the last ten years, became very profitable, low-risk businesses, by becoming factories of fee-generation, with the classic problems of managing risk, when one borrows short and lends long, just an unpleasant memory.

Evidently, the financial "innovation" which was supposed to insulate the banks from the risks of lending long was largely illusion.

As the SIVs come back to the balance sheet, the credit default swaps and bond insurance unravel, the CDOs melt down, the illusion evaporates, and we will see how well the banks were managing risks and assets that they were pretending not to have. I don't think the banks can completely re-write their balance sheets without going back and revising the income statements. But, we shall see, I guess.

Certainly, the Arab Solution -- paying 11% for first-tier capital when the prime rate rate is around 7% or less, is not a good formula for a bank, even Citigroup, going forward.

[robertdfeinman]

BW:
FIrst of all Ponzi went to jail (more than once). I don't see any bankers being led off in chains.

Second, unless I misunderstand the Citigroup deal they are being the clever ones. They get money at 11% for two years. Then the preferred are converted to common stock. All that they need to do is to segregate 22% of the investment and use it to pay back the Arab investors (with their own money). Then after the two years they get to keep the rest of the capital and give the investors a piece of paper with no inherent value in return.

As Felix Rohatyn said in the Times today these people aren't looking at the monetary worth of their investments, they are buying future influence. What people don't realize is that (strong) sovereign states can change the rules anytime they wish. So, for example, during WWII the US nationalized German-owned firms in the US (I used to track the story of Agfa-Ansco) and then sold them off to shareholders later on.

If foreign governments gain too much control over "vital" US firms similar things could happen in the future. Even a big drop in the dollar might cause these investors to bail. Apparently the Chinese aren't doing to well with their Blackstone investment.

Remember international laws are only as strong as the body enforcing them. Oh, right, there is no such body...

[joj]

Those of you advocating punishment and retribuion ( to insolvency?) to the malfeasers in the banking system....

Imagine a world without them? Barter, anyone?

A highly disprportionate amount of the profit growth of the domestic economy has from from financial services since '82. Who else will step up to employ the special children of Gen Y going forward?

I do finance in an operating company that borrows money. It's worse than you think, and the Fed after 10 months of dithering has finally figured it out. I hope its not too late to avoid the Big One

[mik]

Once concentrated among manufacturing workers and those with little work history, education or skills, long-term unemployment is growing most rapidly among white-collar and college-educated workers with long work experience, studies have found, making the problem difficult for policymakers to address even as it grows more urgent.

As all Prez hopefuls from D and R parties tell you, education is a key.

How true. Retraining 50 year old MSEE or MSME into Medical Assitant or Dental Hygenist is a very promising public policy.

A rapid outsourcing of middle class jobs to China and India is very promising public policy also.

[Winslow R.]

joj wrote "Those of you advocating punishment and retribuion ( to insolvency?) to the malfeasers in the banking system....

Imagine a world without them? Barter, anyone?"

Not sure how an 'evolutionary change' would get you from banks to barter.

says...

Scent of Violets asked: ...I'm a member of our local credit union myself...Are there any other posters who belong to the same type of organization?

Yep, its credit unions all the way for me.

Never again will I have an account in a "real" bank. Over the past 35 years I had two or three accounts in a bank, and found the hours and the service and the overall attention to my benefit to be unsatisfying.

I opened a business account at a bank in 1992, because the bank in question had a branch a couple blocks from the store, and they were open on Saturdays.

After a couple of months however, they stopped opening on Saturdays. In addition, they charged a fee for making change. After a few months, I closed that bank account and would visit a laundromat on weekends to get change.

By comparison, my credit union has happily given me a mortgage, car loans, and hosted my retirement savings plan over the years, and given me consistently professional and friendly service.

In my home province of Manitoba, the credit unions are flourishing and expanding and growing like anything. They have always done well here, but over the past 15 or 20 years they have done extraordinarily well.

Noni

[Noni Mausa]

Sorry, that was me.

Noni

[Francois]

anne asked:
"Why should near record and record domestic profits, not have spurred more investment since 2001?"

Goldman Sachs wrote the answer no later than Jan-Feb 2003. [I am paraphrasing here since I can't get a hold of the document right now]
an above-average (by historical standards) proportion of corporate profits since 2001 comes at the expense of workers' share of the fruits of economic activity."

In other words, corporations have captured a larger share of the GDP at workers' expense. The same pattern can be seen in the slashing of pension palns for ordinary workers, while executive packages are growing bigger and bigger in size and depth, to the point that certain pension plans could not meet their obligations to workers BECAUSE of the promises made to executives (WSJ)

If this sounds like a "liberal pinko-commie" statement, well, I guess facts are a "liberal pinko-commie" thing. Must be why some in the current Administration preemptively derided the "reality-based" crowd.

Now, why is the USA trying so darn hard to emulate socioeconomic models with ever growing inequities like Mexico, Russia or Brazil is beyond me.

[Lafayette]

rdf: The thing about a Ponzi scheme is that Ponzi has generally left town before anyone realizes that the money is gone.

Rags to riches to rags

Hmmmmn, I wonder.

If you look at the history of Carlo or Charles Ponzi, in fact, Ponzi was quite successful for quite a while before his scheme was uncovered as a fraud. He even owned a Boston bank.

When people came to claim their money, he paid them off, which quieted them for a while.

It took a Massachusetts state investigation to finally out his scheme, and then Ponzi scrambled. But, he as inevitably caught, served time, and died a pauper at the age of 66 in Brazil. (Rags to riches to rags.)

Let us not underestimate the cupidity of people seeking easy riches. The greed is almost overwhelming.

In fact, let's not underestimate the power of cupidity at all. It is THE powering element behind Income Inequality, of Income Iniquity as I prefer to call it.

It is a very prevalent, highly communicable virus of our times, typically triggered by "low cost money" that is inexpensive for far too longer than necessary. How do we know when that happens?

When corporate profits start skyrocketing, feeding a privileged class of corporate ownership, and returns-to-labor stagnate -- which is what has been happening.

What does sub-prime have to do with Ponzi-schemes? The sub-prime mess was ignited when unsecured, high-risk debt was transacted and then repackaged and resold as "secure debt backed by realty values", which was hardly the case as housing prices started to nosedive.

The resemblance between the two was the promise of unreal future earnings that was based upon a dubious assumption -- that realty prices surely would continue to rise. Which prompted the expectation that people could "flip a condo" and walk away with a bundle of money.

In the end, it was a variant on the Ponzi scheme, but not the same. The income from New Buyers was not employed to pay hallucinatory returns to Old Buyers.

The courts are going to have a merry time finger pointing the blame. But, when a financial sector is hyper-active and under-regulated, that is the price to be paid.

I see perp-walks on the media horizon. Don't you?

PS: Cupidity is the seductive handmaiden of ambition. It happens when people refuse to set moral bounds to their ambitions. When they transgress a moral limit, they become cupidinous. Which has nothing to do with love, but all about self-love.

[prostratedragon]

How we are defeated by our small obsessions!

''Strip out the losses and Citi could make close to $10 billion a quarter,'' Litan said.

This stopped me cold.

[anne]

Francois:

"Goldman Sachs wrote the answer no later than Jan-Feb 2003. [I am paraphrasing here since I can't get a hold of the document right now] "an above-average (by historical standards) proportion of corporate profits since 2001 comes at the expense of workers' share of the fruits of economic activity."

Thank you, Francois....

The possibility of increased gains by corporate managers and owners at the expense of ordinary employees was discussed initially by Warren Buffett in 1999 and the reality was monitored from 2001 through the recovery from recession, however as Joseph Stiglitz quickly understood this does not explain the relative weakness of investment from 2001.

[anne]

Francois makes a critical point about a declining share of national income by workers, but we are left with the problem of relatively weak domestic investment after the recession of 1990 for a limited period and after 2001 for an extended period.

[Real Person from the Real World]

Patricia Shannon cites this:
Long-term joblessness spreads in the middle class
By Michael A. Fletcher
"This tells you that this has not been as good an economy as the overall unemployment rate would make it seem," said John Schmitt, a senior economist at the Center for Economic and Policy Research. "This dynamic causes anxiety among people even if they still have a job. It is very important to understanding the level of anxiety that the work force feels as a whole."

>> The administration has been touting job creation all along, but what kind? When I look around all I see are SALES JOBS, that pay minimum, but promise big commissions, pie-in-the-sky.

Robert Feinman states:
"My analysis was that the crash would be caused by the imbalance in the US from excessive militarism and the corresponding decline in infrastructure and human capital investment. Couple this with living on borrowed money and the resulting crash was inevitable. When there are no places to invest in real endeavors the money flows to speculation instead."

>> When you have to close the sale to live, you do a lot of things wrong. When the guy at the buying end cannot pay for what he got talked into, then the chickens come home to roost.

Bruce Wilder says:
"Banks, over the last ten years, became very profitable, low-risk businesses, by becoming factories of fee-generation, with the classic problems of managing risk, when one borrows short and lends long, just an unpleasant memory.
Evidently, the financial "innovation" which was supposed to insulate the banks from the risks of lending long was largely illusion."

>> Again, all part of the sales chain. All those mortgages were encouraged by strapped people needing money, investors wanting big returns, and money people looking for a way to hide the risks, and keep the game going.

Mik comments:
"As all Prez hopefuls from D and R parties tell you, education is a key.
How true. Retraining 50 year old MSEE or MSME into Medical Assitant or Dental Hygenist is a very promising public policy.
A rapid outsourcing of middle class jobs to China and India is very promising public policy also."

>> Our businesses and corporations have few entry level jobs, believe they screen to fail and weed out people, and pay their management big salaries while encouraging contracting that has lured thousands of foreign middle men who make money, but do little then match visa serfs and the few US citizens, up to a job, then cut a fee.

Lafayette moralizes:
"Cupidity is the seductive handmaiden of ambition. It happens when people refuse to set moral bounds to their ambitions. When they transgress a moral limit, they become cupidinous. Which has nothing to do with love, but all about self-love."

>> Everyone loves wagging a finger at someone else, but tell me, what kind of ambitions do sales people have? Greed is the one requirement and motivating factor for the job.

[Icarus]

Perhaps the push to offshore work is related to the lack of investment within the US.

Companies across the Fortune 100 have build campuses in developing societies, such as India. The globalization of production and services has redirected the investment once expected within the industrial west, to areas more amenable for quick growth and cheap labour.

As well, I think there's a general fear about investing in the US (this is based on anecdotal information, from speaking to corporate heads)...the labour costs continue to increase despite stagnant wages, due to health care premiums. And, given that global corporations are moving their supply chains to developing societies, US companies feel that they must do the same.

Perhaps the global supply chain which currently is expanding represents a paradigm shift in terms of our expectations of investment locally.

[anne]

While it is quite possible that international investment opportunites, especially opportunities in developing country, have been found increasingly attractive than American since 2001, the same does not appear have been the case for western Europe or Canada or Australia. * Also, short term capital has readily flowed to America from abroad through these years. How then to foster domestic investment in any case.

* I wonder about the recent record of Japanese domestic investment.

[anne]

Also, beyond valuing military investment as such, why has the massive increase in military spending from 2001 had so little of a domestic stimulus or domestic investment effect? Why has military spending not added more to economic growth? Surely, at the least, military spending is coming at the expense of alternative programs that could have had significant investment impacts. Why are we not looking to the economic impact of military spending increase from 2001, since the peace dividend in reduced military spending in the 1990s may have had a profound investment impact. What is wrong, now?

[anne]

Hundreds of billions of dollars are spent on the military, with hundreds of billions spent entirely on war and occupation but we refuse to notice the spending effects. What has a $2 trillion war and occupation meant for America in economic terms?

[Icarus]

Well, the Aerospace and Defense industry is doing quite well (although, they're poising themselves for a significant slowdown in 08-09)...the Engineering and Construction Management, and Energy industries are doing well also.

These are the prime beneficiaries of DOD and Pentagon spending.

And (this is an assumption)...aren't European companies equally invested in off-shoring work to developing countries? Companies like Capgemini and SAP and Deutsche Telekom are all building offshore competency centers, and aligning their supply chain accordingly.

[Lafayette]

RP: Everyone loves wagging a finger at someone else, but tell me, what kind of ambitions do sales people have? Greed is the one requirement and motivating factor for the job.

Sales has nothing to do with Greed and everything to do with achievement.

Learn the difference. Ask a SalesPerson if they are trying to meet their Sales Goal or just being Greedy. Then run like hell ... ;^)

[piglet]

"With all the large writedowns and losses announced for the fourth quarter, hardly any attention is being paid to just how profitable U.S. banks really are."

I have to agree. After raking in totally indecent profits for so many years, they now (successfully) cry for tax breaks in order to lighten the burden of losses they have to endure. Boohuhoo. Poor banks. Shouldn't we all feel sorry for them?

[Lafayette]

piglet: Poor banks. Shouldn't we all feel sorry for them?

The bonus pool of Goldman Sachs (Investment Bank) has been at the multi-billion dollar level for quite some time.

I doubt the Golden Boys will be hurting even this year. Come bonus time, later in the year, we'll be able to hear the Mega-buck Manna dropping all the way from Wall Street to St. Tropez and back.

How I love to walk the quay in St. Tropez to watch all those glimmering yachts tethered side by side at dusk - serving to hosts and guests chilled C&C (Champagne & Caviar). It gives me a renewed faith in Capitalism. ;^)

[Lafayette]

Ic: the Aerospace and Defense industry is doing quite well

Yes, of course, Ic, what we really need are more toys-for-our-boys.

If you think that war is good for business, you should invest your son. Or, like lead-head, perhaps you prefer your daughters to stay close to home?

[Xerxes]

Unfortunately, despite the positive comments..we will see two major banks fall this year and a few more major hedge funds collapse which will in turn affect the market negatively..We have some hard times ahead and hopefully all will come back in gear in a few yrs..Also a few countries are considering dropping the us dollar as a currency.