Page 1 of 2 The gods, too, are taxed
By Julian Delasantellis
When the flag-draped coffins started returning by the hundreds from Vietnam to
urban cores and small farm towns, Americans started to question their leaders
as to just how much more of their treasure and progeny would be called upon to
fall in the long, agonizing fight in that far-off Asian country. True, this was
a generation steeled by the Great Depression and World War II to realize that
earthly paradises don't come cheap. But, by 1967, with hundreds of young men
falling every week, many just didn't see much of a point in it anymore.
America's leaders knew that the country needed some spiritual replenishment.
The military commander in Vietnam, General William Westmoreland, returned home
in the autumn of 1967 to rally flagging homefront morale. In a speech before
Press Club, he opined that "With 1968 a new phase is starting ... we have
reached an important point where the end begins to come into view." Later,
apparently not at all concerned with the terrible wrath of history's gods of
irony, he said that he could ascertain a "light at the end of the tunnel" in
the struggle, not knowing or caring that the former French military commander
in Indochina, General Henry Navarre, essentially said the same thing prior to
the disastrous French paratroop offensive at Dien Bien Phu that resulted in the
ejection of the French and their colonialist dream from Southeast Asia.
Two months following Westmoreland's happy bromides came the Tet offensive,
which then had many Americans interpreting that light at the end of the tunnel
as the headlamp of an oncoming rushing freight train.
In the present day and regarding a different struggle, many voices, especially
in the popular media and in a Barack Obama administration desperate for public
relations victories to solidify support from a public who apparently did not
know what change meant when on election day they said they wanted it, are
saying they see the light at the end of the tunnel. Maybe they do. But there
are many other eminent voices out there, perhaps including those in the US
Federal Reserve Board, who don't see upcoming bright skies and green fields at
all. Their money's on the train.
"Grandpa, tell me a story about the bad old days," a young tyke might ask on
the family patriarch's lap. Grandad may comply, and spin a tale of desperate,
unhappy times, of when nothing seemed to be going right, when prospects and
dreams for the future seemed to be at their absolute bleakest-in other words,
of just about six weeks ago.
On March 6, the Dow Jones Industrial Average set the lows for the year to date
at 6,640, down 25% since the start of 2009 and 54% since the top of the market
in October, 2007. Other world stock markets also bottomed around then, the
India Sensex and German XETRA DAX on March 9, and then, like the Dow, began
What had made this start to the rally so surprising were the events of the
preceding weeks. February was not a good time for those who believe in
unfettered free-market capitalism; highlighting the misery was the deafening
thud heard around the world upon the release of the bare bones of US Treasury
Secretary Geithner's toxic assets purchase plan in the middle of the month.
Critics on the left, and, amazingly enough, more than a few on the political
right, claimed that only the daring step of full government nationalization of
the banks holding the toxic securities would solve the problem, and the Barack
Obama administration's failure to take this step was only making the White
House look weak and/or insufficiently determined to fully address the
Stockmarkets sold off hard on the uncertainty, and even though Americans kept
telling pollsters that they only played the market to fund long-term needs such
as retirement, when President Barack Obama told the country to cool it and just
focus on the market's ability to fund precisely those long-term needs they were
outraged - how dare their leader delegitimize the guiding fantasy of the
American dream to make as much money as soon as possible.
Then, a funny thing happened. Something seemed to be applying some brake
pressure to the capitalist world's bottom-over-teakettle careen down the
mountain of prosperity towards depression.
It started on March 10, with the financial media's equivalent of the proverbial
man-bites-dog story. Citigroup chief executive Vikram Pandit announcing that
his banking conglomerate was actually making money this first quarter of 2009,
and, when the quarter ended in three weeks time, he expected to be able to
report a quarterly profit on ongoing business ( which, in fact, it didn't).
How on earth was that possible? After all, the previous month had been consumed
by the question of just what to do with Citi's rotten carcass - either chop it
up into much smaller community banks and see if any of them survived, or maybe
just throw the whole dammed overstuffed edifice on the fire. Now, on the pain
of Pandit being on the biting end of severe corporate reporting sanctions from
the US Securities and Exchange Commission, there appeared to be a few bucks
left in the till at the end of the day?
Citi's surprise announcement effectively put the floor under the Dow at 6,640.
That day, Citi's stock was up 36%, the BIX banking index gained 16%, the Dow
strengthened by just under 6%. Was this finally the breaking of the dawn from a
very long and painful night, or was this just the proverbial "dead cat bounce"
named after the some long gone Wall Street sage who once keenly observed that
"even a dead cat will bounce if you throw it off the Empire State Building?"
This sentiment overwhelmingly expected the rally to fail, and the downtrend to
But the rally continued. Beware slavishly following Wall Street's analyst- and
pundit-generated consensuses at market turns.
Following Citi's announcement, US durable goods and home sales numbers both
came in surprisingly strong. Some banks, meanwhile, were chafing under the
limits on executive pay that came with assistance under the Troubled Assets
Relief Program (TARP). They were also horrified by the degrading and
nightmarish spectacle of AIG executives, those masters of the credit default
swaps universe, actually having to prostrate themselves before the grubby mobs'
baying jackals in Congress. That was enough to persuade those banks to announce
that they were gathering their loose change and breaking their piggy banks to
pay the US government back its TARP largesse. The market interpreted positively
that they had the funds to do so and also took a positive view of the implied
thumb in the eye of a government that had had the effrontery to dictate what
should be in the pay packets of the overlords of the finance world. The rally
continued, the Dow charging back to and beyond 7,000 and towards 8000.
Both New York University's famed Dr Doom, Nouriel Roubini, and CNBC's Jim
Cramer, announced that they saw hopeful economic signs ahead. This was not all
that surprising for Cramer, whose peripatetic style has had him call at least
six of the last three downturns, and 20 of the past eight upturns. But for
Roubini, whom the gods of economic misfortune have plucked from the yawning
horror of academic obscurity and placed right onto Manhattan's celebrity "A"
list with his call of the financial system's collapse, the decision to stake
his new reputation on calling a turn was significant.
Best Buy, the big-box electronic retailer, reported stronger than expected
sales. These were undoubtedly spurred on by the demise and liquidation of its
competitor, Circuit City, but with up to 40% of the US working population
fearing layoffs one would not have expected consumers to be so evidently
committed to continue charging their credit cards as they go down.
The US trade deficit narrowed - not all that surprising in a recession, but,
still, an inherent assist in funding the huge capital account deficit caused by
the gargantuan government borrowing being employed to fight the financial
Two big homebuilders, Pulte and Centex, merged. Perhaps, someday, another new
house actually will be built in America. GE announced that it's banking/finance
operations are in the black, as did Wells Fargo, Since the early March lows, GE
stock is up 93%, Wells Fargo up 151%, and Citi is up a whopping 213%. The Dow
Jones Industrial Average, with a 22% rally, has just had its best four-week
period since 1933.
On a March 15 interview on the CBS network newsmagazine "60 Minutes", Federal
Reserve chairman Ben Bernanke said that he was beginning to see "green shoots"
appear in different markets; in early April, Obama's chief economic advisor,
Lawrence Summers, opined that he was seeing "shoots of green" in the economy.
And there it was - the lexicographers could finally pin it down. What we were
seeing since the Citigroup announcement was the "green shoots" recovery.
Confirm this view, Obama said on April 14 said his stimulus packages and bank
rescue plans were starting to "generate signs of economic progress".
But is it really spring, or just an interruption from winter's gales (reduced
by Obama in his April 14 comments to "pitfalls"), soon to be followed by
another killing frost? Since this whole thing started with the miracle of the
bank results, it is worthwhile to examine just exactly what is going on there.
At its core, banking is a business, and the rules for success in business are
simplicity itself. Find a product that you can sell for more than you paid for
These days, the banking deck is stacked to make the rules even simpler; the
banks don't have to get their product - money - cheap, the government is
getting it for them. The operative result of over a year of unending and
unprecedented US government and Federal Reserve support for the financial
sector is that the bank and financial sector's cost of capital is just about
And are they lending out at zero percent? Hardly. The expansion of two key
gauges - the time yield curve and the credit curve - has risen to almost
historic highs. The time yield curve is the difference between the short-term
rates the banks use to fund their loans and the long-term rates they charge for
the loans. The credit curve deals with what the banks can borrow at, using the
implied guarantee of the government they are now operating with, versus what
private borrowers are charged to borrow. Borrowing at near zero and lending out
at a 4%, 7%, and up to 30% for credit-card balances, well, it's hard not to see
how you couldn't make money on that.
In addition to big fat yield spreads, it now appears that the credit crisis is,
in fact, helping banks. The withdrawal of credit from so many once perfectly
creditworthy borrowers means that the places that still are lending, those
where the desperate can get the operating capital necessary to run their
businesses, certainly have the borrowers well spread over the barrel. Besides,
rates, fees and other bank "charges" are heading higher as well, providing pure
gravy to the banks' bottom line.
"But," you might be asking in protest, "What about all the bad loans, the toxic
securities, the MBS and CDO and CDS and the entire alphabet soup of recent
financial folly? Aren't they dragging down the banks' bottom line?"
To which, the banks are asking, what bad loans?
Many observers of the healthy bank results are smelling something pretty fishy
here, and it's not new operating capital being provided to the guys on the
Alaska crab trawlers on the Discovery Channel's Deadliest Catch. Could
there be a conspiracy, a conspiracy that includes the Timothy Geithner Treasury
as a full and knowing participant, that is making the banks' results what they
are, and in so doing their fitness for them, making them look a lot healthier
than they really are? In an article on the Huffington Post, Ryan Grim and Julie
Satow observe that:
Wall Street has long viewed quarterly earnings
skeptically, but this season may be one of the least realistic in recent
memory. That's because banks are doing everything they can to wring out a
profit and gain that most valued of commodities - investor confidence.
"Banks are doing everything and anything in their power right now to get their
earnings as high as possible," Paul Larson, an equities strategist at research
firm Morningstar, said.
"I have been in the business 25 years and earnings have always been an ongoing
mystery, but it has gotten worse and worse," said James Paulsen, the chief
investment strategist at Wells Capital Management.
Last week, Wells Fargo reported projected earnings of $3 billion, more than
double what the Street had predicted. In Wells Fargo's case, it reported that
its losses on loans and other assets had improved despite the collapse of the
real estate market and growing foreclosures. Either Wells Fargo found an
amazingly disproportionate number of folks who are making mortgage payments, or
some accounting gimmickry is at play."
In his New York Times
blog, Floyd Norris notes that a major factor in Goldman Sachs' blowout
first-quarter earnings of $1.81 billion