Neil Hennesey: 10-Year Bull Market Has Begun

and Dow will double, for sure.

Looking at this headline at Yahoo Finance, I thought to myself: OK, this is as most diametrically opposed to my fundamental outlook as can be, SO I'D BETTER WATCH THE VIDEO.

The interviewer looks just as incredulous as anyone who's gone through the market since September 2008. The interviewee is Neil Hennesey, Chief Investment Officer of long-only Hennesey Funds.

Let's examine his thesis. He says there is nowhere else for the money (he cites "the sideline money" of $9.5 TRILLION) go to. Investors got burned by leveraged investments, and yields on long-term Treasury notes and bonds are low (3% for 10-year note, 4% for 30-year bond). Companies are slashing employment, increasing productivity, and will have a better bottom line.

So, his call is partly based on improved bottom line due to cost cutting, and mostly on the assumption that there is nowhere else for the investors to go but the stock market to get a decent return.

(How about gold?)

For the first day of October 2009 (and in a 10-year bull market according to Mr. Hennesey), Dow is down 172 points (1.75%) to 9540 at 1:25 PM EST. Auspicious start. (But then, September started with 181-point dump on Dow. What do I know at this point?)

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John Paulson (IndyMac + CIT )= FDIC Disaster

Let's do some arithmetic.

Add this:

FDIC is backstopping the mortgage losses at IndyMac Bank (now OneWest Bank), and IndyMac Bank is hell-bent on foreclosing the properties, as in:
Is FDIC Killing Short Sales? (Active Rain, September 09)

To this:

Creditors of CIT Group is mulling the merger of CIT with IndyMac Bank, as in:
John Paulson mulls CIT and IndyMac merger: report (9/29/09, Reuters via Yahoo Finance)

Then multiply it by the common denominator:

John Paulson, a hedge fund billionaire

And the product is:

Potential huge profit for Paulson and his co-investors in IndyMac and CIT, and potential huge loss to taxpayers (because FDIC is already broke).

John Paulson's firm is one of the large creditors to CIT Group; it is also one of the private investors who are behind OneWest Bank that bought IndyMac from FDIC back in April this year. IndyMac Bank's press release lists the following entities as OneWest Bank investors:

Steven Mnuchin (former Goldman Sachs exec)
entities advised by

• J.C. Flowers & Co. LLC,
• Paulson & Co.,
• MSD Capital, L.P.,
• Stone Point Capital LLC,
• SSP Offshore LLC and
• SILAR MCF-I LLC

OneWest bank president Terry Laughlin is a former Merrill-Lynch, Fleetboston, and Mellon Bank executive.

IndyMac-CIT merger talk is simply a rumor at this point, may or may not be true. CIT share jumped on the news on Tuesday, surging 31% to close at $2.20. Then, this news broke after hours, and the stock took a nose-dive on Wednesday, plunging 45% to $1.16:

CIT near plan to turn over co to bondholders: sources
(9/29/09 Reuters via Yahoo Finance)

"NEW YORK (Reuters) - CIT Group Inc (NYSE:CIT - News) is nearing a plan that likely would hand the commercial lender over to its bondholders, sources familiar with the matter said on Tuesday.

"CIT was preparing an exchange offer that would eliminate up to 40 percent of its more than $30 billion in outstanding debt, said the sources, who did not wish to be identified because they were not authorized to make public comments about the deal.

"The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company, one source said.

"If not enough bondholders agreed to the plan, the company could seek to restructure in bankruptcy court, the source said. This would result in one of the largest Chapter 11 bankruptcy-court filings in U.S. history."

As structured, the current offer will practically hand over the entire company to the bondholders. I have a feeling that the bond holders will refuse, and force the company to go through Chapter 11 so that they can pick apart CIT's assets. Then, the bondholders, including John Paulson, will discuss the merger of thus restructured CIT and IndyMac (now OneWest), combining troubled mortgages and troubled commercial loans to create a potent money making machine for them. Fully backstopped by FDIC (i.e. taxpayers).

The Treasury Department, FDIC, and the Federal Reserve have all refused to help CIT, the largest lender in the United States that lends to small and mid-sized businesses for more than 100 years. Like they've done many times since last March when Bear Stearns went down, they are picking who's to survive and who's to die.

October 1st is the deadline for CIT to present a restructuring plan to its lenders.

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Japan's Tankan Improves, Nikkei Drops Below 10,000

because recent yen surge wasn't priced in ...

Japan Tankan Sentiment Rises for Second Quarter
(9/30/09 Bloomberg)

"Oct. 1 (Bloomberg) -- Confidence among Japan’s largest manufacturers rose for a second straight quarter as global government stimulus spending rekindled exports.

"The Tankan index of sentiment among large makers of cars, electronics and other goods climbed to minus 33 from minus 48 in June and a record low of minus 58 in March, the Bank of Japan said in Tokyo today. A negative number means pessimists outnumber optimists."

Now the Tankan sentiment has recovered to the level of 2001 recession, according to Bloomberg. Although the numbers improved, companies continue to slash inventories and slash/withhold capital investment. Capacity utilization also remain low. 1/3 of Toyota's factories will remain unused, and the company will reduce capital investment by 36%.

The Tankan result is weighing heavily on Nikkei, which dropped 143 points to dip below 10,000 at the close of the morning session. Currently (at 1:18 PM Japan Standard Time) it is down 165 points to 9,967. The reason?

Japanese yen.

Companies surveyed in the Bank of Japan's Tankan based their business outlook on Yen/Dollar exchange rate at 94.50 yen/dollar, according to Japan's Nikkei article (in Japanese). Yen is currently trading in Japan at 89.79-89.82. Most exporters have priced in yen fairly stable at mid 90s. If the pace of appreciation of the currency is gradual and over time, stronger companies can still adjust, without abandoning their manufacturing base within Japan. However, rapid appreciation in short time to mid to lower 80s could finally kill off manufacturing in Japan.

It would then have little choice but to become like the U.S.: consumer-driven economy with majority of employment in the service sector, and with increasing government share in the economy.

According to the stock market commentary at Nikkei Net, the market does not like the uncertainty of the new Hatoyama administration, which is yet to clearly define its policies.

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Politico: Grayson Calls Health Care Crisis 'Holocaust'

As much as I respect Representative Alan Grayson (D, Florida) on his stance vis-a-vis the Federal Reserve and his tough questioning of the Fed officials in the House Financial Services Committee, this is going a bit overboard, isn't it? To raise a spectre of 'holocaust' against the opponents who include not just Congressional Republicans but a wide swathe of citizens in the U.S. as evidenced by town hall meetings across the country this summer?

Grayson calls health care crisis 'holocaust' (Ben Smith, 9/30/09 Politico)

"Florida Rep. Alan Grayson, under fire for conservatives for describing the gist of their health care plans as "die quickly," is not exactly backing down from claims he's crossed a line of civility.

"Just now on the floor, he called on members of the House to pass health care reform in the most extreme terms possible:

""I apologize to the dead and Fltheir families athat we haven't voted sooner to end this holocaust in America," Grayson said."

Politico's page has the video of Grayson making the "die quickly" remark.

And this is the video from C-SPAN of Grayson calling the health care crisis 'holocaust':

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Bank vs Credit Union

Video from Bankerspank.com, fashioned after the Apple/PC commercial.

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...And Fed Is Back to Accommodative Stance

A Fed board member and two presidents of regional Federal Reserve banks have spoken about the need for the Federal Reserve to tighten the monetary policy (i.e. raising the Fed funds rate) aggressively even without the overt sign of inflation (for that matter, without overt sign of recovery).

This morning, the Fed trotted out the Federal Reserve Atlanta's president Dennis Lockhart, who said there is no rush for the Fed to begin to tighten the monetary policy.

No rush to tighten, Atlanta Fed's Lockhart says (9/30/09 MarketWatch)

"WASHINGTON (MarketWatch) -- There is no rush for the Federal Reserve to begin to tighten monetary policy, said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, on Wednesday.

""I think it may well be some time before a comprehensive exit need be under way," Lockhart said in a speech in Mobile, Ala.

"There has been much speculation in financial markets and economic circles about the U.S. central bank's so-called "exit strategy" -- when and how it will start winding down the stimulus and liquidity measures implemented to battle the financial crisis that took hold a year ago."

Well, that speculation has been fueled by none other than the Fed officials. First, it was last week's FOMC meeting (September 22/23): the Fed said it would continue to keep the rate low for a long time to assist the recovery. Then on Friday last week, Kevin Warsh, a Fed board member and former Morgan Stanley banker who worked in the President's Working Group on Financial Markets (aka Plunge Protection Team), wrote an Op-Ed piece on Wall Street Journal strongly indicating that the Fed would move aggressively even if the signs of inflation were not evident. Then came Richard Fisher, president of the Dallas Fed yesterday, basically saying the same thing as Warsh in a plainer English. He was joined by the Philadelphia Fed president Charles Plosser, who delivered the speech in Pennsylvania saying "The Fed will need courage. I believe we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels."

Then today the Atlanta Fed president is sounding like a voice of reason by saying "Assuming stable inflation, I would like to see more evidence of private activity in the economy before advocating change in the Fed's overall monetary-policy stance."

Is the Federal Reserve playing "bad cop, good cop" routine?

The stock market doesn't seem to know what to think of these utterances by the Federal Reserve officials. Chicago PMI number registered a fall instead of expected increase, and that overwhelmed the good news of 2nd quarter GDP (final reading) revised to decreasing only by 0.7% (annualized) instead of -1.1% consensus.

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Fed Is Back to Threatening with Rate Hike

On Friday last week, a Fed Board member Kevin Warsh wrote a please-read-carefully-between-the-lines-and-between-the-words Op-Ed piece on Wall Street Journal.

Today, Federal Reserve Dallas president Richard Fisher spoke in a plainer English.

Official: Fed will need to boost rates quickly
(9/29/09, AP via Yahoo Finance)

"WASHINGTON (AP) -- To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the U.S. economy is back on firmer footing, a Fed official warned Tuesday.

""I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity" to when the Fed was slashing rates to battle the recession and the financial crisis, said Richard Fisher, president of the Federal Reserve Bank of Dallas.

"Although Fisher has a reputation for being one of the Fed's toughest inflation fighters, it marked the second such warning by a central bank official in recent days. Fed member Kevin Warsh on Friday said the central bank will need to move swiftly when the time comes to raise rates.

"It's all part of a high-wire act that the Fed has to perform as the economy transitions from recession to recovery."

I guess you could say that. You could also say that the Fed is empowered to make or break the economy. As you see in this comment in the article from a monetary policy expert at University of California Santa Cruz (I didn't even know they have the economics department):

"When the decision is made to boost rates, they will need to be "increased aggressively," argued Carl Walsh, a professor of economics at the University of California, Santa Cruz, and an expert on monetary policy. "Committing to a gradual increase in the policy rate is not justified."" [emphasis is mine]

Not justified?? And "aggressive increase" is justified, then? Why? By who (or what)? The expert continues:

"Consumers, businesses and investors must feel more confident that prices won't spiral higher in the future, so their inflation expectations don't become "unanchored," Walsh said last month."

Is this based on any kind of historical observations, or is it solely his conviction of how consumers, businesses and investor should feel when they see the interest rate being jacked up suddenly and aggressively?

I have this nagging feeling that it's the latter, because it is consistent with other policies having been floated, particularly since the current administration took over. Key word is "should". Policy decisions are to be made on how things "should be", as perceived and determined by the policy makers, whether they are legislators or industry lobbyists or administration officials or the Fed officials. It is normative, as opposed to positive.

It is not new; an unnamed aide to the previous administration said they were not working in the reality-based community. It's just that the current government has turned up the heat on the proverbial pot very aggressively and rapidly. They are not slow-boiling the proverbial frog anymore, and the frog now knows something bad is up and getting rapidly uncomfortable.

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FDIC Admits It Is Broke

Zero Hedge's Tyler Durden reports that FDIC now admits its DIF (deposit insurance fund) is negative as of September 30. FDIC is insolvent.

FDIC Discloses Deposit Insurance Fund Is Now Negative
(9/29/09 Zero Hedge)

"In an unprecedented disclosure, the FDIC has highlighted that it expects the DIF reserve ratio to be negative as of September 30. As there are a whopping 48 hours before that deadline, one can safely assume that the DIF is now well into negative territory: as of today depositors have no insurance courtesy of a banking system that has leeched out all the capital of the Federal Deposit Insurance Corporation. Let's pray there is no run on the bank soon."

For FDIC to announce something like that is indeed extremely unusual. They are not known for timely disclosure. Their Quarterly Banking Profile Report, for example, is not filed until after nearly 2 months after a quarter ends.

In this case, it is also highly deceptive. It was just last month, August, when the chairman Sheila Bair said in the press conference when FDIC (finally) released the Quarterly Banking Profile for the 2nd quarter that she was not planning on doing anything about DIF anytime soon, and that FDIC had enough money. "Our resources are strong. Your insured deposits are safe," she repeated. Uh-huh.

Zero Hedge has the FDIC document discussing the negative DIF embedded in the article, and also has this choice words for the situation:

"First Mary Schapiro [SEC chairman] has failed at her task of "regulating" anything on Wall Street, and now Sheila Bair presides over a newly insolvent institution. Chalk one up to Washington's success at "containing" the crisis. Zero Hedge wishes Ms. Bair all the luck in the world in returning the DIF to its statutory minimum requirement of 1.15% of all insured deposits (a shortfall of a mere hundred billion or so). Maybe she can convert the FDIC to a REIT and have Merrill Lynch do a concurrent IPO and follow-on offering (while Goldman raises it to a Conviction Buy which incorporates the firm's expectations for 10% GDP growth in 2010 coupled with projections for $1,000 per barrel of crude)?"

Haha. One more thing: Goldman Sachs will short the hell out while putting it on their Conviction Buy list and recommending it to their clients (not the ones in the 'huddle', who will short alongside Goldman's trading desk).

DIF reserve ratio dropped below the statutory minimum in the 2nd quarter of 2008 (see my post). Sheila Bair was appointed the chairman at FDIC in June 2006 for a five-year term. She could have raised the fund to replenish DIP, well before the financial crisis hit in full force in September 2008. She either decided to sit on her hands or was told to; I don't know which. Incompetency (or appearance of it) is highly rewarded in Washington D.C., it seems. She is still the head of FDIC.

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Mercury Retrograde Ends Tomorrow

In case you haven't noticed.

You probably didn't think about Mercury Retrograde, because the stock market went UP, instead of downs in so many M. Retrograde periods before.

I don't trade on astrology, but I hear that some Wall Street traders do pay attention to Mercury Retrograde. (And that's the only reason I follow it.)

From what I understand, Planet Mercury is in charge of communication, and when it goes retrograde, communication, or information exchange, goes awry. The stock market, in a sense, is all about communication: sellers and buyers each trying to assess the value of a company and exchange that information through stock pricing in an open market, and each making their own decisions based on that communication.

Here's how the stock market behaved in the past several Retrogrades.

• 10/11 - 11/1, 2007: Dow Jones Industrial went from 14198, all-time high, to 13568. 11/1 happens to be one day after Nasdaq registered the high for the year. The market made a series of jerky movements in both directions, until it finally started to go down, down, and down in late December. (Now we know what the market top looks and feels like, don't we?)
• 1/28 - 2/19, 2008: DJI went from 12386 to 12337. This was right after the relentless January down days. (And we thought the worst was over.)
• 5/26 - 6/19, 2008: DJI went from 12573 to 12063. In retrospect, I think this was the first swoon that ended up in a spectacular crash later in September/October. The market never regained the May high.
• 9/24 - 10/15, 2008: How could we ever forget this Retrograde?
  DJI went from 10928 to 8578. (And we thought the worst was really over.)
• 1/11 - 2/1, 2009: DJI went from 8603 to 7937, including 343-pt drop on 1/20, largest ever drop on the inauguration day. Then the market accelerated the descent, and kept going down for almost entire month of February. Dow hit the lowest on March 6, at 6470.
• 5/6 - 5/30, 2009: DJI went from 8512 to 8500. In other words, DEAD FLAT.
  
  
• 9/7 - 9/29, 2009: DJI went from 9511 to 9789 as of 9/28 close. One more day left.
  
  If the gain holds, it will be the first Mercury Retrograde in which the stock market will have gone UP since 2007 market top. (Now the astrologically-inclined market bulls will say "It's a new bull market!")

Here are future dates of Mercury Retrograde:

• 12/26/2009- 1/15/2010 (Capricorn)
• 4/18/10 - 5/11/10 (Taurus)
• 8/20/10 - 9/12/10 (Virgo)
• 12/10/10 - 12/30/10 (Capricorn-Sagittarius)

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Fed Considers Reverse Repo with Money Market Funds

Your 401K and IRA may get stuffed with bonds no one wants.

Last week the Financial Times reported that the Federal Reserve was considering the use of reverse repurchase agreements (aka 'repos') as a way to reduce its balance sheet ("Fed turns to mutual funds to stave off inflation", 9/24/09 Financial Times). The twist is two-fold: that the Fed wants to do it with large money market funds and not with Primary Dealers, and that the Fed wants to do it with agency bonds and agency-backed MBS, and not Treasuries as they normally do.

The Federal Reserve has used 'repos' with Primary Dealers, and never with any other financial entity. I simply do not know if their charter allows them to deal with money market funds. The reason for the Fed's wanting to deal with money market funds is their sheer size: $2.5 trillion. According to the FT article, the Fed thinks Primary Dealers do not have big enough balance sheets to absorb the Fed's collateral (agency, MBS). By the Fed's estimate, Primary Dealers would have $100 billion that they can spare to accommodate the Fed.

Thus the Fed targets the $2.5 trillion money market funds, where the investors very large and miniscule alike park their unused funds, in 401K, in IRA. And the Federal Reserve wants to stuff them with securities that hardly anyone in the world wants to hold at this point.

Repos and reverse repos are used by the Federal Reserve to temporarily increase (repo) or decrease (reverse repo) the bank reserves. In repos, the Fed temporarily buys Treasury securities from Primary Dealers, thus adding to the bank reserves. In reverse repos, the Fed temporarily sells Treasury securities to Primary Dealers, draining the bank reserves. Repo and reverse repo agreements are usually overnight; though it can be as long as 65 business days it is rarely longer than 14 days (in other words, not very long). [information from Federal Reserve Bank of New York]

Now, if the Fed wants to do reverse repos with money market funds by selling them agency bonds and agency-backed MBS, my questions are:

At what price?
Currently the Fed carries these bonds at FACE VALUE on their balance sheet. Many believe agency bonds and agency-backed MBS trades well below their face values. I don't see why the Fed, in reverse repo, would mark them to market. So the Fed would sell these bonds that hardly anyone in the world wants at this point to money market funds at face value. A dollar for a dollar.

How to account?
Since money market funds are not Primary Dealers, they are not banks and they are not even the Federal Reserve members, where would the reverse repos be accounted for on the Fed's balance sheet?

The Fed sells agency bonds/MBS, which decreases their asset balance temporarily. It receives money for the sale, which then increases the asset balance. So on the asset side of the balance sheet it is basically a wash.

On the liability side, the Fed records 'reverse repo', thus increasing the liability. Since the asset side is a wash, the liability side has to be a wash, too. But since the money market funds are not Primary Dealers and not even the Fed member banks, the Fed cannot reduce the bank reserves as they normally do with regular 'reverse repos' using Treasury securities. So they will have to create a new line item on the liability side of the balance sheet that would offset the 'reverse repo' amount, or create a new line item on the asset side that would somehow account for the reverse repo not being offset on the liability side. How they do it I haven't a clue. But the book has to balance somehow.

Is the Fed allowed to do this?
Money market funds are not Primary Dealers, they are not banks, and not the Federal Reserve member banks. Unless the monstrocity which is the financial system overhaul as envisioned by the administration passes and gives the Fed power to do just about anything (it already does just about anything, with its charter gets amended constantly) on any industry that it declares is related to "finance" (thus any on-going business entity would be the fair target), the Fed has no authority over them.

Financial Times notes,

"Fed officials believe that there may be appetite among money funds to lend the money, since these funds are under pressure from investors and regulators to stick to risk-free and highly liquid business."

Risk-free? Agency bonds and MBS risk-free? Now who is going to be the bag holder?

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How Many Marched in DC on 9/12? Close to 2 Million

according to Zac Moilanen of Indiana University.

New York Times said "thousands" marched.

Washington Post said "tens of thousands".

Japan's Nikkei said "one hundred thousand".

UK's Mail Online said "up to 2 million".

(Please see my original post on September 12 for more details.)

And the winner is.....

U.K.'s Mail Online. The author of the article below says it was somewhere between 1.78 million and 1.98 million.

If the author of the study is anywhere near correct, that was the largest-ever crowd descended on Washington D.C.

It goes without saying that the author and his paper are dissed thoroughly by Democratic supporters of the administration in the blogsphere (here's one). Mainstream Media (MSM) outlets either openly deride or simply ignore the "teabaggers".

I personally don't understand why being against the government's policies should be labeled "right-wing" or Republican. Liberals, conservatives, moderates, Dems, Republicans, libertarians, any citizen, should be against any wasteful use of their tax dollars by the government, and vigilant against any attempt to curtail personal liberty.

Critics seem to have latched on to Republican politicians and a conservative TV show host as if they were the chief instigators, instead of thinking of them as piggybacking on the movement that already exists and which has no apparent central organizing body. They want to find the bogeyman.

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Entire Hearing on H.R. 1207 in House Finance Committee

on September 25, 2009. Historic, as Barney Frank says.

Here's the link to yesterday's entire full-committee hearing of H.R. 1207 in House Financial Services Committee.

http://www.house.gov/apps/list/hearing/financialsvcs_dem/fchr_092509.shtml

I was impressed with the disciplined way that Chairman Barney Frank ran his committee when I was watching part of the hearing, but I now have some respect for him (which it hardly existed in me before) after hearing his opening remark. I missed it yesterday, as I caught only the last hour or so of the hearing.

Barney Frank started off by saying "This is a historic hearing." He noted that Ron Paul first filed this bill for the first time in 1983, and 12 years that the Republican Party control the agenda of the Committee they found no time for the hearing . He was pleased, in the show of bipartisanship, to be the one to give this important piece of legislation its first hearing ever.

Frank went on to state that the openness and transparency issue with the Federal Reserve was a bipartisan issue, and was not new; in fact, under Chairman Gonzales in 1983, the Committee succeeded in making the Federal Reserve more open. At that time, the meetings of FOMC were kept secret. The Federal Reserve denied even the existence of the minutes of the meetings, which happened to be found later in a drawer, Frank remarked.

Also (and that's where he gained my respect), he said in 2003 Ron Paul had been slated to be the chairman of the Domestic Monetary Policy Subcommittee, and that subcommittee immediately disappeared. It was merged into the International Monetary Policy Subcommittee. "There were people who wanted to shield the Federal Reserve from Mr. Paul's influence," Frank said.

Before he yielded to Ron Paul for his opening remarks, Frank expressed his concerns in proceeding with the legislation, which he had already expressed previously; that he didn't want to make the disclosure of the audit results interfere with the market in any way, and wouldn't want to allow any party from profiting from the Fed's moves (buying and selling in the financial market).

Well, many think that's been happening already anyway for quite a long time. He doesn't need to worry about that aspect, because that's what many large, influential financial institutions have already been successful in anticipating the Fed's moves and profiting from it, with or without insider knowledge.

I would love to know (on top of my head, for no particular order):

• Where did the money go and how much, and how was it used, in foreign currency swaps;
• Fed's relationship with primary dealers in stock, bond, and commodity markets
• Detailed accounting for the TARP money that the Fed administered
• What exactly is in the Maiden Lane portfolio and how they are valued
• Physical gold audit (why is it priced at $42, anyway?)
• Mark to market value of its assets (agency bonds, MBS, and all the "assets" that the Fed got in exchange for the various loans)
• What are the "Other assets" on their balance sheet
• Why they stopped disclosing M3
• Detailed accounting of the ownership of the Fed (who exactly are the shareholders?)

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Buy Health Insurance or Face a Jail Term

up to one year or $25,000 fine. Which would you like?

Politico's Live Pulse - Breaking news on health care fights has this juicy article:

Ensign receives handwritten confirmation
(Carrie Budoff Brown, 9/25/09 Politico Live Pulse)

"This doesn't happen often enough.

"Sen. John Ensign (R-Nev.) received a handwritten note Thursday from Joint Committee on Taxation Chief of Staff Tom Barthold confirming the penalty for failing to pay the up to $1,900 fee for not buying health insurance.

"Violators could be charged with a misdemeanor and could face up to a year in jail or a $25,000 penalty, Barthold wrote on JCT letterhead. He signed it "Sincerely, Thomas A. Barthold."

"The note was a follow-up to Ensign's questioning at the markup."

The handwritten note says this:

"Section 7203 of the Code provides that if there is a willful failure to file, pay, maintain appropriate record and the like, the taxpayer may be charged with misdemeaner with a penalty of up to $25000 or not more than one year in jail."

The "Code" the note refers to is Internal Revenue Code. Section 7203 is about "Willful failure to file return, supply information, or pay tax".

President Obama has said the penalty for not having an insurance is not a tax. Then why is his health care "reform" setting IRS, tax collecter, to hunt down the "violators"?

Pants on fire, Mr. President?

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Bank Closures in September 2009

Georgian Bank in Atlanta, Georgia was closed by FDIC today, bringing the September bank closures to 11. This year, 95 banks have failed so far, compared to 29 in 2008.

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Audit the Fed Hearing: Alan Grayson

"Has the Fed tried to manipulate the stock market?"

Rep. Grayson made the Fed general counsel very uncomfortable in today's historic hearing.

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WSJ: Gore-Backed Car Firm Gets Large U.S. Loan

(Crony) Capitalism is alive and well.

Gore-Backed Car Firm Gets Large U.S. Loan
(9/25/09 Wall Street Journal)

"WASHINGTON -- A tiny car company backed by former Vice President Al Gore has just gotten a $529 million U.S. government loan to help build a hybrid sports car in Finland that will sell for about $89,000.

"The award this week to California startup Fisker Automotive Inc. follows a $465 million government loan to Tesla Motors Inc., purveyors of a $109,000 British-built electric Roadster. Tesla, like Fisker, is a California startup focusing on high-end hybrids, with a number of celebrity endorsements that is backed by investors that have contributed to Democratic campaigns.

"The awards to Fisker and Tesla have prompted concern from companies that have had their bids for loans rejected, and criticism from groups that question why vehicles aimed at the wealthiest customers are getting loans subsidized by taxpayers."

And the reason (or excuse) for giving $529 million taxpayers' money to a company who is going to make a high-end sports car in Finland?

"Matt Rogers, who oversees the department's loan programs as a senior adviser to Energy Secretary Steven Chu, said Fisker was awarded the loan after a "detailed technical review" that concluded the company could eventually deliver a highly fuel-efficient hybrid car to a mass audience. Fisker said most of its DOE loan will be used to finance U.S. production of a $40,000 family sedan that has yet to be designed." [emphasis is mine]

Yet to be designed family sedan. Also note the word "could". Money is fungible, Mr. Rogers. Or will the money given to the company refuse to be money unless it is spent for this yet-to-be-designed car?

For the rest of the article, please click on the link.

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Audit the Fed Hearing Note (2)

(Latest at the top)

Hearing over. But Mr. Woods, that microphone is still live.

Rep. Royce: We're compounding the boom-bust cycle.

Mr. Woods: The Federal Reserve creates "moral hazard" because it can create money as much as they want. Why equity ratio is so low in the financial industry? Because they have the lender of last resort [the Federal Reserve].

Rep. Royce is citing the Richmond Fed's study that 40% of bad assets is backed by the Fed (?), and mentions "moral hazard".

Rep. Brad Sherman is asking about the loans that the Fed has extended and which the Fed hasn't disclosed the detail of the loans. Handing out risky loans on the concessionary term and tell the public "don't worry" doesn't seem like a good way.

Rep. Michele Bachmann is for tightening the scope of the Fed operation.

Someone was showing a U.S. dollar bill right behind Mr. Woods, and Rep. Watt and Chairman Frank told him to stop.

Chairman Frank is asking if the [audit] information should be made public instantaneously.

Rep. Ron Paul again.

Rep. Melvin Watt is insisting if Mr. Woods distinguish between the policy audit and the audit (opening the book), and saying the discussion is not of any substance.

Thomas Woods: we don't support any watered-down version of the bill. It would be the dignified way for the Fed if they simply accept the audit. Otherwise, people would increasingly wonder what the Fed may be hiding.

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Audit the Fed Hearing Note (1)

(Latest at the top)

Thomas Woods of Ludwig von Mises Institute is the other witness.

Mr. Alvarez is done. The other witness is taking the seat.

Rep. Donald Manzullo is asking whether the Fed is monetizing money for helping companies like AIG.

Rep. Adam Putnam is listing off the items NOT disclosed about the Fed's operations and asking why.

Oh my goodness. This Californian Congressman (Rep. Edward Royce) cites Ludwig von Mises! [First I ever heard anyone other than Ron Paul cite von Mises.] The general counsel was saved by the Chairman Frank from answering the questions and embarrassing himself.

Rep. Alan Grayson made Mr. Alvarez, general counsel of the Board of Governors of the Fed, squirm, insisting to know whether the Fed has been manipulating the stock market and who specifically has been doing it.

Rep. Ron Paul asked about the potential Fed's manipulation in the gold market, and currency swaps with foreign central banks.

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Audit the Fed

Ron Paul's H.R. 1207 is being heard in the House Committee on Financial Services, thanks to Barney Frank. It's a historical day, regardless of whether the bill will pass. 96 years after the Federal Reserve System came into being, Congress is finally debating whether to audit the institution that wields enormous power over the nation's financial and economic policies. It's about time.

You can watch the hearings on the Committee's website.

(By the way, the member of the Federal Reserve Board, who wrote the op-ed piece for Wall Street Journal to coincide with this occasion, was a member of the Working Group on Financial Markets , aka the Plunge Protection Team.)

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Curious Op-Ed Piece by a Board Member of Federal Reserve

Why now? Inquiring mind wants to know.

Kevin M. Warsh is a 39-year-old former VP of Morgan Stanley and a current member of the Board of Governors of the Federal Reserve. He wrote an op-ed piece for Wall Street Journal, which was posted on September 24 for September 25 publication.

It is hard to believe he is 39 years old, for he writes as enigmatically as 83-year-old Alan Greenspan speaks (or used to speak).

The Fed's Job Is Only Half Over
(Kevin M. Warsh, 9/25/09 Wall Street Journal)

"Recent media stories have chronicled in great detail the events of the last couple of years. A pair of conclusions might be fairly drawn from these early drafts of history. One is that the financial-market turmoil of the last year proved to be of significant consequence to the economy. The second is that the Federal Reserve distinguished itself from historical analogues by taking extraordinary actions to address risks to the economy. Commentators, however, tend to disagree as to whether the extraordinary actions undertaken were to the good or the detriment of the U.S. economy in the long-run."

With this not so attention-grabbing opening, he drools on about how the Federal Reserve has done a good job but that this is no time to "declare victory". And I'm thinking "OK, what is your point?"

Then, he delivers, sort of, one of the points [emphasis is mine]:

"It is unwise to prejudge the Federal Reserve's policy strategy—or to declare the victor or the vanquished—by the split time, however notable it might be. We are at a critical transition period, of still unknown duration, and we must prepare diligently for an uneven road race ahead. If policy is not implemented with skill and force and some sense of proportionality, the success of the overall endeavor could suffer."

He seems to me to be saying, in crude language, "Don't ask questions. Leave it us, or you will suffer a consequence of your meddling."

Then he mentions "policy makers". At first, I thought he means legislators. But as I read the article, I now think he means "policy makers" at the Federal Reserve, because he starts to talk in first person.

"It also means that policy makers should acknowledge the heightened costs of policy error. The stakes are high, in part, because the policy accommodation that requires timely removal as the economy rebounds is substantial. And our policy judgments will ultimately prove worthy of the accolades, and tender the ultimate rejoinder to our critics, if we rise to meet this heightened responsibility. I am confident we will."

Tender the ultimate rejoinder to our critics? (He talks like Edward IV or his brother Richard III, last king of the House of York.) Is he challenging the supporters of H.R. 1207 (audit the Fed), which is slated to be introduced in the House Financial Services Committee on September 25?

A curious part comes in the last three paragraphs:

"In this environment, market participants and policy makers alike should steer clear of ironclad policy prescriptions. Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities."

Is he saying that the Fed will drain the liquidity sooner and faster than it becomes necessary? Even if that could threaten the market crash and economic crash? (Maybe that's why he, in the preceding paragraphs, cites history full of unintended and unfortunate policy errors?)

""Whatever it takes" is said by some to be the maxim that marked the battle of the last year. But, it cannot be an asymmetric mantra, trotted out only during times of deep economic and financial distress, and discarded when the cycle turns. If "whatever it takes" was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Federal Reserve's institutional credibility. The asymmetric application of policy ultimately could cause the innovative policy approaches introduced in the past couple of years to lose their standing as valuable additions in the arsenal of central bankers."

This to me is the most curious remark. The Fed would do "whatever it takes" at a recovery stage "to ensure the Federal Reserve's institutional credibility". The Fed would do it, not that it is necessary or it would help the recovery, but to ensure its credibility. Also the next sentence is interesting. He seems to be saying that if the Fed doesn't do "whatever it takes" in the recovery stage, it would lose those valuable weapons - various lending programs, buying securities that are not allowed by the Fed's charter (i.e. agency bonds and MBS), owning stakes in a private business (AIG), creating SIVs (Maiden Lane LLCs), "whatever it took".

"For those of us at the Federal Reserve, the task ahead involves longer days, but, in all likelihood, fewer weekends. While the undertaking is as challenging as any we faced in the preceding period, it is exceptionally well suited to the Federal Reserve's comparative advantages of deliberation, dispassion, and a determination to make judgments based on the long-term interests of the U.S. economy."

In 1913 when the Federal Reserve System was born, one ounce of gold was US$18.92. Today, one ounce of gold is $996. US dollar's purchasing power as measured by gold has dropped 95% since the Fed came into being. And that is the long-term interest of the U.S. economy?

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