Wednesday, May 30, 2012

Color Commentary

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

            Encounters with a young Alan Greenspan have floated around the Internet lately. Why do they matter? Most importantly, because what is being said is how Greenspan was known in the 1960s. Before quoting Michael Hudson and Pierre Rinfret, a comment on why this matters today:

The following is rechoreographed from a talk by Frederick J. Sheehan to the Committee for Monetary Research and Education dinner at the Union League Club in New York on May 17, 2012:

"It is timely to talk about the consequences of Alan Greenspan tonight. Not so much the man as the degradation in our halls of leadership. At the top, he was, first - welcomed, then - venerated. He personifies many characteristics that befoul the United States today: cutting corners, shirking responsibility, deflecting blame, outwitting the legal system - in general, our lack of discipline, our lack of will.

"The unwillingness of leaders to address our perilous conditions - today - runs part-and-parcel with sanctifying an errand boy who deflected attention from America's social and economic corrosion. Greenspan wormed his way to the top - but then, so did our current political, academic, and celebrity leaders who have done so well for themselves specifically because first - Greenspan, and now - Ben S. Bernanke, have furloughed leaders from responsibility."

Back to the past: Michael Hudson, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, quoted on

"When I was on Wall Street, Greenspan was hired as part of a study I was doing on the balance of payments of the Oil Industry. And one day my boss, John Deaver came into my office and said he really worried about Greenspan being a part of this report because he was known as a hack that always gave ...his clients what they wanted instead of something actual. [From Panderer to Power, p.4: "[Martin] Mayer would later discuss Greenspan's technique at greater length: 'the book on [Greenspan] in that capacity was you could order the opinion you needed'." -FJS]

"So he [John Deaver] gave me Greenspan's figures on depreciation of oil producing refinery assets in Europe and asked me to find out where the faking is. He said he couldn't believe that Greenspan by himself wouldn't have just faked the figures and it took me about a week to figure out where the faking of the figures came out (from) and that was Greenspan had simply picked up depreciation rates relative to output for the United States and projected them onto Europe.

So I went over and talked to his assistant Lucille Woo and she said 'it's all implicit, all implicit' and I confronted her with it and she said 'Yes that's what we did'!

And so, Greenspan was indeed 'talked off the study' and we met... John Deaver, David Rockefeller and myself and I was told...Greenspan was such a little bastard that if they fired him, he'd hold a grudge against Chase Manhattan for years and they told me to be the guy to give him the news that we couldn't use his (laughs) statistics on it and I was a 25-year-old economist at the time and he hardly new me at all, so I was the guy that...subsequently became known as 'the man who fired Alan Greenspan'."

Recollection #2: Pierre Rinfret (1924-2006) was a New York economist and unelectable politician. He was outspoken and was quoted on page 102 of
Panderer to Power. Following is a longer version of the same. Longer still can be read on Jesse's Café Américain, May 10, 2012 "Pierre Rinfret and Michael Hudson: The Myth of Alan Greenspan.":


"I first met Alan Greenspan in 1948 when we both attended the New York University School of Commerce, Accounts and Finance. At that time I was the senior fellow in the Economics Department. The run in was a forerunner of his behavior throughout his entire life. But I am not going to bore you with the gruesome details. I have, therefore, known Dr. Greenspan for more than 50 years and I must say that he has always underwhelmed me! I was in the class of NYU before him and our paths crossed innumerable times in our professional careers.

"I debated him on many an occasion, we shared many speaking platforms together, we both worked for Richard Nixon in the 1968 and 1972 campaigns as well as in between, we both graduated from NYU undergraduate school and Graduate School and we both ran our own economic and financial consulting businesses. In addition we played golf together more than once with mutual friends.

"One of the absolute lies about him is that he retired from his consulting business a wealthy man. Absolutely and totally untrue. When he closed down his economic consulting business to go on the Board of the Federal Reserve [1987 - FJS] he did so because he had no clients left and the business was going under. We even went so far as to try and hire some of his former employees only to find out he had none for the 6 months prior to his closing. When he closed down he did not have a single client left on a retainer basis....I once called him a political hack in a speech before the Chamber of Commerce in Chicago and I did not retract that statement then or now."

            Rinfret was not the only interested party. When Greenspan headed to the Fed, a friend was asked by one of his clients to value Townsend-Greenspan. He found the same: the only assets to value were the desks and the chairs. Nothing else was left. It was as hollow as the new Federal Reserve chairman.

Monday, May 21, 2012

The Age of Information

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

"Working at my desk today was somewhat surreal. Global risk markets were closing out a dreadful week.  Newswires were full of disconcerting articles - J.P. Morgan, Greece, Spain, Italy, China, etc. Meanwhile, CNBC was in the midst of blanket coverage of Facebook's initial public offering. Mark Zuckerberg rang the bell to open Nasdaq trading, while helicopters provided live video of the employee gathering at Facebook's Menlo Park headquarters. Insiders are now worth billions, the "average" employee millions. Even U2's Bono pocketed $1.2bn (with a "B"). I noted above how I see J.P. Morgan's current predicament as a microcosm of global financial woes.  Well, it is difficult for me today not to see Facebook as emblematic of the incredible transfer of wealth associated with Credit Bubbles. It's almost as if this historic Bubble has been waiting to end with just such an exclamation point."
-Doug Noland, Credit Bubble Bulletin, May 18, 2012

A label used by promoters of the Internet bubble was "The Age of Information." Information itself is worthless unless the recipient knows how to employ it.

            The Zero Hedge website displayed a chart of Facebook's opening trades on May 18. Trading opened at 9:30. At 9:30.32, the price shot straight up to £50,000 a share. Zero Hedge calculated that Facebook, for a few milliseconds, was a $100 trillion (with a "T") stock.

            Was this glaring, electronic trading blunder mentioned on Bubble TV?

            Probably not. TV stars who hyperventilate over Facebook's IPO do not possess the "knowledge" - a refinement of "information" - to explain the flaws of electronic trading and the corruption of high frequency trading (HFT). Also, it is not in Bubble's interest to scare its remaining viewers from the markets. These non-SEC-investigated distortions happen with great frequency. The individual shareholder seems to have somehow inferred this, since individual shareholders account for only 10% to 20% of daily trading. This, too, is probably not publicized on Bubble.
            Nonsense that surrounded Facebook's IPO was an expression of the media's giddy and abiding adulation of technology as well as its faith in an evolutionary determinism towards the perfection of mass electronic communication. "Power to the People" or "Facebook will free us all." Some gooey and meaningless phrase of that sort. (Bill King The King Report wrote that when Facebook shares fell from $45 to $40, "we were worried about mass financial media suicides.")

            All this, despite the astounding amount of money spent on the electronic trading structure for Facebook shares or Greek government credit default swaps, is a calamity of error.

The financial media's idolatry for the common stock of a company that is in the business of people-to-people electronic communication is sacrosanct even as the electronic communications systems on which those shares trade are flawed, corrupt, unstable, and cryptic to a degree that was never true when all shares were bought and sold on the floor of the (then) non-publicly-traded New York Stock Exchange.  

Wednesday, May 16, 2012

No, None of This Makes Any Sense

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

Frederick Sheehan will speak at the Committee for Monetary Research and Education (CMRE) dinner on Thursday, May 17, 2012. It will be held at The Union League Club in New York. He will discuss "How We Got Here."
            After the financial crisis in 2008, "Too-Big-To-Fail" banks had to go. In 2006, the four largest banks - J.P. Morgan Chase, Bank of America, Citigroup, and Wells Fargo - held 33% of U.S. bank assets. Now, they hold 41% of U.S. bank assets and grow by the minute.

The Federal Reserve is, at least on paper, the country's leading bank regulator. Instead, it behaves like the TBTF banks' turbocharger. Federal Reserve Chairman Ben S. Bernanke is full of talk, and nothing else:

"First, is that 'viewed too big to fail' is a very, very serious problem, and one that was much bigger than expected. And I think that if there is only one thing we do in financial reform, it is to get rid of that problem."

-Federal Reserve Chairman Ben S. Bernanke, November 17, 2009, testifying before the Financial Crisis Inquiry Commission.

            A cause of the 2008 financial crisis was the failure of bank-risk models. Those who understood the Value at Risk model (VaR: the standard) knew it would fail. It is designed to fail in a financial crisis. The same model failed at Long-Term Capital Management and Enron. Yet, the Value at Risk model is still the primary model used to limit risk at financial institutions.

A financial crisis develops once in a blue moon. Therefore, there is less than a one percent chance of a meltdown, as defined by the model. The VaR model captures 95% (or 99%) of possible scenarios, as defined by banks and, supposedly, in conjunction with regulators and rating agencies. ("House prices never go down nationally.") J.P. Morgan invests within the 99% of scenarios as modeled by VaR.

If the VaR model were to include that one percent ("tail risk," in the argot) in its measurement of likely losses, J.P. Morgan would only hold Treasury bills. That assumes J.P. Morgan thinks the risk-free rate is defined by Treasuries. The Bank of Bernanke is doing its all to terminate this academic benchmark.

Ben Bernanke did not discuss VaR models before the Financial Crisis Inquiry Commission in 2009. He is a vague sort of fellow, so et cetera-ed himself from the burden of learning anything about banking before his appearance:

"To avoid another financial crisis, we need to identify "the macroeconomic context, evolution in the types of businesses, and their risk management, et cetera."

-Federal Reserve Chairman Ben S. Bernanke, November 17, 2009, testifying before the Financial Crisis Inquiry Commission.

On the very same day when J.P. Morgan Chairman Jamie Dimon announced his bank had lost a few billion dollars due to a haywire VaR model, Simple Ben told a congregation of central banking enthusiasts in Chicago what a swell job he is doing as the United States' leading bank regulator. The speech is a piñata of false claims poised to scatter around the global village. The final blow could strike at any time. Possibly, at a bank with a $71 trillion derivative book (i.e., J.P. Morgan):    


"A number of key systemic risk measures that evaluate the potential performance of firms during times of financial market stress have improved in recent months. These indicators of systemic risk are now well below their levels in the crisis, and, overall, they present a picture of a banking system that has become healthier and more resilient. ....Such measures include the conditional value at risk, or CoVaR, which is an estimate of the extent to which a bank's distress would be associated with an increase in the downside risk to the financial system."


-Federal Reserve Chairman Ben S. Bernanke, "Banks and Bank Lending: The State of Play," conference on Bank Structure and Competition, Chicago, Illinois, May 10, 2012

The Fed chairman probably thought he would impress the audience when one of his footmen wrote"CoVaR" rather than "VaR" in his speech. At least, does not rate CoVaR any better than VaR at controlling that good-for-nothing tail risk:


CoVaR: Conditional Value at Risk was created to be an extension of Value at Risk (VaR). The VaR model does allow managers to limit the likelihood of incurring losses caused by certain types of risk - but not all risks. The problem with relying solely on the VaR model is that the scope of risk assessed is limited, since the tail end of the distribution of loss is not typically assessed. Therefore, if losses are incurred, the amount of the losses will be substantial in value. 

            Possibly reading more into the story below than is true, it appears J.P. Morgan announced it was junking CoVaR, and readopting its plain, old VaR model, at the moment (one hopes) Ben S. Bernanke was extolling CoVaR's qualities in Chicago:

Front-page headline story in the following day's Wall Street Journal, May 11, 2012:


"Fears Deepen Over Risk Model" Financial Times, May 14 2012:  

"It is one more failing in the history of shortcomings for the model. Last week, JP Morgan Chase revealed a major defect in one of its key risk management tools. Instead of helping to predict the surprise $2 billion trading loss announced by the bank, Value-at-Risk had helped disguise the riskiness of JP Morgan's portfolio."


"Trading Desks Face Tighter Regulations," Financial Times, May 14, 2012:


J.P. Morgan "said it was reverting to an older version of its VAR metric after having switched to a new model earlier in the year."

From the same story: "'How can a hedging strategy turn into a huge trading loss? It doesn't make any sense,' the regulator said."


This is not going to end well. 

Thursday, May 10, 2012

The European Subtext

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)
Frederick Sheehan will speak at the Committee for Monetary Research and Education (CMRE) dinner on Thursday, May 17, 2012. It will be held at The Union League Club in New York. He will discuss "How We Got Here."
Various interpretations of recent European elections have been put forward, one of which gets short shrift. The voters have, for the first time, been given the opportunity to approve or disapprove of the euro. They are voting nein. There is a parallel in the United States.

            Before the euro was launched, both Eurocrats and national governments prevented the people from voting for (or against) the single currency (and its appendages, such as the EU's ECB). There were at least two reasons for this. First, the desk clerks knew the commoners were not sophisticated enough to throw their allegiance behind an acronym. Second, the sophisticates did not care what the people thought, since the transfer of power to Brussels and Strasbourg isolated the masters from their help. (There have been referendums in a handful of countries over the years. Some have voted in favor, some against. In countries that voted nein, the commoners were subjected to more referendums until they understood what was best for them.)

            The most important question today is whether that power is shifting. The potential shift of power was not a theme in newspaper interpretations of the French, Greek, and German elections held this past Sunday (May 6, 2012). The post-op reports followed conventional formulas, all of which fall under the heading of a vote against austerity.

            One note on austerity: it has barely begun. According to James Aitken (Aitken Advisers L.L.P,), Italy has only implemented 10% of government-approved spending reductions or tax increases. Spain has barely started.
            A second note on austerity: no matter who is in charge, austerity will be much larger than is generally understood. It will cross the Atlantic. There is no point guessing when that may be.

Many of last weekend's voters surely believe tossing Sarkozy into the Seine will restore their eight-hour work week. They are wrong. Others understood they were voting to restore national sovereignty. Such a Eurocrat as Italian Prime Minister Mario Monti (European Commission, Goldman Sachs) understands where loyalties lie. He asks Italians to adopt austerity for the good of Italy.

            An earlier call to internationalism died in August 1914. A fundamental tenet of Marxism was the international uniting of workers. Not a single English factory worker crossed the channel to fight beside his German comrades. The floor sweepers at Rolls-Royce assembly plants had more in common with their chairman than a single Pomeranian granadier.

            The test today will be after the banking systems fail. That will follow the ECB's inability to supply the loans or euros needed to prop the commercial banks. Brussels' finances and authority will wither. The question then will be the legitimacy of national institutions. Without banking systems, governments will not be able to meet financial commitments. The next question will be whether the people permit national governments latitude during the chaotic austerity that follows. (Unlike Americans, Europeans have lived through this, most recently in 1945.)

           The help may opt for the liberating panaceas of freedom, liberty, or anarchy. Such slogans usually boomerang and eat their own. Americans are advised to study the transfers of power. Who knows when, but the American government debt bubble will burst.

Wednesday, May 2, 2012

Limited Hope

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

Frederick Sheehan will speak at the Committee for Monetary Research and Education (CMRE) dinner on Thursday, May 17, 2012. It will be held at The Union League Club in New York. He will discuss "How We Got Here."

            Presidential election campaigns are a source for speculation. How would life change in a second Obama term or with a Romney victory? The economy and the financial markets will be discussed as a single topic.

The Federal Reserve's negative interest rate policy (inflation higher than interest rates) distorts both markets and the economy. Most voters care whether the distortions are in their personal interest.

            "What this country needs is a good five-percent savings rate," would invigorate the presidential race. Neither presidential candidate (Romney and Obama are assumed) will say this.

From the evidence, neither knows about the Federal Reserve's zero-percent, savings-rate policy. Neither seems aware of the constituencies they would attract. First and foremost are the voters who saved for retirement but are struggling to pay the rent. Is there a single public voice speaking on their behalf?

There are pension plans that will never pay beneficiaries if such low interest rates persist. There are good businesses tottering because they must compete with bad businesses that can borrow at 1%. The bad businesses run their operations like a roulette wheel. They always ran their businesses like a roulette wheel, but before Simple Ben took over the world, a 5% interest rate purged their foul practices from the economy.

There are small- to middle-sized banks that fight for survival because the bloated, Too-Big-To-Fail banks leverage their inscrutable balance sheets in daffy, derivative trades off minuscule interest rates. There are small- to middle-sized companies that traditionally borrow from small- to middle-sized banks, many of which were wise enough to forego Wall Street's antics and bonuses, only to find they must shrink their loan books because they are not members of the cabal. Of course, all of the above destroys jobs and precludes hiring. Yet, we can count on Romney and Obama to restrict their discussions to abstract job, housing, tax, and spending solutions.

This predicament came to mind when reading last week that Mitt Romney "criticized Bernanke for printing too much money." Such a foray seemed improbable, and, in fact, the quotation was an inaccurate extrapolation from another statement which is neither here-nor-there.

Back to the main point, Mitt Romney's two economic advisers, Greg Mankiw at Harvard and Glen Hubbard at Columbia, are just what you would expect if you expected nothing at all. Since Romney chose them, we can assume Romney is similarly garbed.

N. Gregory Mankiw sided against the 99% in the April 18, 2009, New York Times, under the headline: "It May be Time for the Fed to Go Negative." You can read all about it in "The 8% Solution." A quick search for Glenn Hubbard's quantitative easing position was unavailing, but to watch the documentary Inside Job is to know we have, as they say, "a team player."

Aside from Simple Ben's negative, interest-rate policy, these mastodons are incapable of planning for the future since they are working so hard at preserving the past. Glenn Hubbard published a forgettable budget plan in the April 25, 2012, Wall Street Journal. Larry Summers, gadfly economist, university president, and presidential adviser, responded to Hubbard's effort in the April 27, Financial Times. Summers rooted for President Obama's "plan that would cut deficits by more than $4 trillion over the decade."

Why even bother proposing or revising a budget that only cuts $4 billion over a decade when the U.S. Treasury is a couple of trillion dollars in the hole each year? Expecting that such debates will alter the nation's direction is far-fetched.

            It is naïve or vain to offer constructive criticism, but here goes: Stop making 10-year budget proposals. Concentrate on next year. Even that exceeds Washington's interest and ability, but at least there is a chance of concentration and accountability. We need look no further than Larry Summers to know how wrong and unaccountable are the brilliant economists who dominate public policy.

On February 7, 2000, Treasury Secretary Larry Summers presented the 2001 federal budget. The brilliant economist (he always seems to be described as "brilliant") averred: "This is a budget that preserves our progress and builds our future.... With respect to debt, this is a budget that...provides for the elimination of the national debt by 2013. That is, in effect, a major tax cut, in two respects. It is a major tax cut because it removes the burden of the interest payments on $3.5 trillion from the American people, and ensures that principal payments will not need to be made in the future."

Summers missed both the forest and the trees. When he spoke, it was obvious that recent federal budgets had caught a tailwind from Internet IPO's, stock-market gains, and stock-option cash-outs. That was the main reason for the-then recent federal surpluses. It required some intelligence to, say, disentangle a collateralized bond obligation, but the huge boost in government revenue was a matter of simple identification.

Hope may spring eternal, but the presidential victor in 2012 will dictate an economic policy that is stuck in the mud. What then, will break unsustainable imbalances and market interference? Lacking an untoward event, we will wait for the markets to revert. The currency and bond markets cannot be controlled forever. The form and speed of a reversion is unknown. The world is full of surprises. If rising inflation of things (not asset prices) is recognized by the general public, a scramble for stuff would upset the asset price-fixing of central banks.