From the February 01, 2010 issue of Futures Magazine • Subscribe!

Tops & bottoms of 2009

TOPS

ECONOMIC SURVIVAL

There has been some debate as to whether The Federal Reserve and Treasury Department deserve praise or condemnation for their handling of the credit crisis. A lot may depend on how close you believe we were — and possibly still are — to a total economic collapse of Great Depression type magnitude. There is quite a bit of evidence that this nightmare scenario was possible, that it didn’t occur is
a top.

EQUITY MARKETS

When is a bottom a top? A bottom is a top when it occurs in the markets. While no one can say for certain that a long-term bottom hit in March 2009 for equities and in November for the dollar, the reversals have been dramatic.

WELCOME HEADLINE

Judge rejects SEC/Bank of America settlement: In a surprise, Judge Jed Rakoff refused to sign off on a $33 million deal between the Securities and Exchange Commission (SEC) and Bank of America based on SEC allegations that BofA lied to its shareholders regarding $5.8 billion in bonuses paid out to Merrill executives prior to the close of the merger of the two banks.

For years we have been reading stories about big firms or big traders accepting multi-million dollar penalties from regulators, while maintaining their innocence and basically being free to carry on with their activity.

Judge Rakoff laid bare this folly in rejecting a consent judgment he calls, “neither fair, nor reasonable, nor adequate.” He points out, “It does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the bank’s alleged misconduct now pay the penalty for that misconduct,” and he noted the SEC did not pursue charges against bank management or the lawyers allegedly responsible.

He added the judgment left the impression it “was a contrivance designed to provide the SEC with the façade of enforcement and management of the bank with a quick resolution…The proposed consent judgment in this case suggests a rather cynical relationship between the parties.”

Where would we be if that logic was applied across the board to the financial crisis of the last few years?

BOTTOMS

AT WHAT COST?

While an economic catastrophe may very well have been averted, the means of achieving that has been the same problematic policies that got us in the predicament in the first place: Over spending and maintaining low interest rates for extended periods of time. This is a recipe for inflation, perhaps even hyper inflation that some economists had predicted when deficits were measured in the mere hundreds of billions not in the trillions.

UNEMPLOYMENT UP

The unemployment rate grew to 10% in 2009 and the economy is still shedding jobs, albeit at a slower rate than a year ago.

The more we hear, the less we know

The decisions made regarding TARP and the ongoing bailout of the financial sector will be debated for decades, but it is becoming apparent that neither we, nor the folks allocating our money, knew all of the details.

Goldman Sachs bonanza

• Traders at Goldman Sachs recorded only one daily loss in the third quarter, according to the FT. GS made more than $100 million on 36 of 65 days.

• Goldman was to be paid $1 billion, while U.S. taxpayers lost $2.3 billion if commercial lender CIT failed (it did).

• Goldman Sachs and other banks continued handing out huge bonuses.

Perhaps the government should be officially outsourced to GS to run. Maybe then the U.S. government could operate with a profit.

Here is something for everyone to remember, particularly congressmen, presidents and journalists: While emergencies may require quick action, they also require more due diligence not less, (i.e., The Patriot Act, TARP).

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