Another Word About the Shady Facebook Deal

Since The Daily Beast posted my article about the Facebook deal being similar to subprime CDOs, I've had some interesting email responses. They fall into three main categories (I'm paraphrasing here):

1) You are so far off-base with the subprime CDO comparison, it's hilarious, you idiot.

2) Who cares if Goldman's wealthy clients wanted to buy in? That's their problem.

3) Thanks for pointing out the obvious, we've been down this road before -  where the next great thing, turns out - not to be.

I'll start with (1);

Yes, a private deal to raise capital through offering shares in a private company does not have the identical nuts and bolts framework of the more complicated, CDO. BUT,  in this particular deal, there is uncomfortable secrecy surrounding the ASSUMPTIONs that are being used to evaluate Facebook at 5 times what is was valued at last year, even though its viewer count hasn't risen remotely by a factor of 5 during that time. According to Quantcast,  traffic has doubled over the past year, but the increase has slowed down relative to the period between 2008 and 2009. CDO's were stuffed not just with subprime loans and related assets, but with characterizations on those loans that were a secret to most investors and turned out to wildly off-base. The Facebook deal has that flavor. If it was just one deal, then the potential negative effect would be lower, but where Facebook and Goldman go, many like deals will follow - private issuance, off-shore investment vehicles, credit and other equity derivative baskets, etc. I am looking at this bigger picture of a 'hot' sector.

As for (2): 

The market as a whole, is too interconnected to allow for the separation of the set of actions or investment choices of one group, from the broader arena. If the values of not just Facebook, but scores of similar deals, are severely inflated, it will be because, in the short term, there is an investment-bank validated belief that its eyeballs and related advertisement fees can only rise. (The whole belief behind subprime CDOs and the related shuffle game, was that home prices could only rise, which would substantiate the belief that defaults would remain low.) If it turns out that this Facebook belief does not materialize, anyone who bought into the hype initially, or at a later point, will be impacted, not just the high net worth people, but the pension funds that put their money into investing hedge fund managers, the others forms of retirement and college funds that did the same, and down the line. Recall, US subprime CDO's brought down a town in Iceland. And aside from that, our government bailout out a whole Ponzi scheme of passing the product, and the derivatives associated with that product, along a giant risk pyramid that I examine in Pillage. Only $2 trillion of CDOs was issued during the 6 years leading up to the 2008 financial crisis, yet far more devastation was realized as a result.

With respect to (3):

It is of course possible, that Facebook will be the most popular social network site for the next several years, attracting the most amount of advertising dollars per eyeballs, and all the other sites that are contemplating a similar private (as in information-lite) deal will also enjoy the same trajectory. I mean, Myspace was considered to be the be-all-end-all a few years ago and ..... exactly. But, if you take a look at the video advertising figures for Facebook and other leading sites, the ratio of Goldman's evaluation of Facebook to the market caps of some of its competitors to the unique viewers to the minutes viewed of advertising video, Facebook has a long way to go to break even. And, that's not even counting the fact that other sites, as yet not on the 'social media map' might come into play - that's a lot of dispersion for advertisers to think about when they dole out their dollars. All of which means, that by the time 2013 rolls around, we could be seeing a severe deflation of values across the social-media space, which could have a negative knock-on effect throughout the market and economy - in a repeat of  the what goes up fast, comes down hard - scenario.

Digging Beneath Today's Jobs Report of Up 297,000

Everyone wants more jobs, most specifically the 26 million Americans who are unemployed or underemployed. So today's ADP Report noting an increase of a 297,000 jobs for the month of December, 2010 heralded by the mainstream press as (yet another!) recovery turning point, that sent various economists/analysts scratching their heads over their missed estimates (because analysts and economists forecasts of everything are always so right) seems some kind of New Year's Gift. 

Not to suck the air out of the mirth bubble here, but just because I was surprised too, I went to the ADP website to check it out, and compare today's December 2010 report to that of December 2009 (the last month of the year, being particularly retail/sales oriented.)

In short, while it is a more positive report than last year's (compared to a December 2008 report that was abysmal), the increases for private sector gains, remain predominantly service providing sector gains, and not goods producing sector ones, more unleashed by the propensity to spend money, and because of the weak economy, most of it in the form of credit card and other debt, rather than to create anything. And yet, the dollar was stronger on the back of the ADP report, business journalists began chattering about the Fed having to possibly tighten rates sooner rather than later (flip-flop irony, anyone?), and John Boehner is probably figuring out how the GOP can take credit for it all, as the 2012 election campaign gathers steam. 

In terms of the service-providing sector, last December, the ADP noted an addition of 22,000 jobs over November, 2009, so certainly this year's figures look better in terms of absolute additions. Meanwhile, the goods-producing sector shed 83,000 jobs over the same month period last year, again today's look better, but the number of goods-producing jobs are lower than last December (service-providing ones are marginally lower.) The 297,000 jobs increase for December 2010 vs. November 2010 breaks down into:

27,000 more jobs for the goods-producing sector (a loss of 3,000 for small business, a gain of 21,000 for medium, and a gain of 9,000 for large companies) and 270,000 more jobs for the services sector (a gain of 120,000 for small, 123,000 for medium and 27,000 for large companies).  

Though the 27,000 job gain for the goods producing sector puts the overall job count for December higher than that of September through November, it remains at a lower number than say it was throughout 2009 and up through August, 2010. Last December's goods producing sector job figures had trended down throughout the year, and today's figures remain below last year's in terms of people in jobs. (recall, according to Washington and the mainstream medium, the recession had already ended.)

Obama's Mid-Way Economic Report Card

(Happy New Year! This piece of mine was posted on Truthdig on Dec. 31, 2010)

There are two potential ways to measure the economic performance of a political leader. One is by the profitability, stock prices and executive bonuses of a nation’s corporations. The other is by the financial condition of the majority of its population. Since he came to power, President Obama and his economic team have propped up the former and failed miserably to aid the latter.  (For the record, ever since the first paragraph of Obama’s pre-primary website economics plan put free markets before people, this is where we were going, but it still hurts to get there.)

The S&P 500 index is up 50% since Obama took office. But unemployment remains higher than it was when he entered the White House, home foreclosures continue to mount to the detriment of borrowers and entire neighborhoods, health insurance companies responded to his health care “reform” bill by raising premiums, and the financial system’s largest banks continue to prosper in the wake of a multi-trillion dollar bailout with no strings attached to share their subsidizations with the rest of American citizens. To top it all off, as he approaches the midpoint of his first, and likely last, term, Obama bowed to the pressure of the Republican Party and extended tax cuts for the richest Americans in order to be able to also extend them for everyone else more sorely in need. There’s only so long you can blame another administration for your actions.

Obama’s economic policies have either been continuations of his predecessor’s, as in the case of taxes and bank bailouts, or bills so watered down to appease corporations, notably banks and insurance companies, that they are ineffective. In the process, he continues to alienate his supporters—individual voters, not the companies that funded his candidacy—leaving their economy in shambles. Here’s the recap.

Taxes

Just in time for Christmas, we got Obama’s big tax-cut compromise. Obama’s reverse Robin Hood deal with the Republicans disproportionally takes from the poor to give to the rich. The plan adds another $1 trillion to the record United States deficit, $700 billion of which would be the cost of extending tax breaks to the wealthiest 2 percent of the country, the rest going toward jobless benefits—necessary to help those victims of the wider economic problems, but not complemented with a job-creation program.

According to the Center on Budget and Policy Priorities, American millionaires would get 22 percent (or $200 billion over two years) of the benefits of the deal, while the bottom 20 percent of American workers would get less than one-half of one percent. According to David Cay Johnston, the 45 million households that make less than $20,000 a year will be slapped with a tax increase of $150 to $200.

Even though the majority of his own Democratic Party supported extending cuts only to Americans making less than $250,000 a year (on TV anyway, apparently not at their seats once the compromise was inked, notables with balls like Sen. Bernie Sanders aside), Republican “all-or-nothing” pressure was met by Obama’s capitulation. He could have bargained harder—say by suggesting that tax cuts not be extended for people making more than a million dollars, rather than punting the tax cut issue into the 2012 presidential election period.

What Obama effectively did was adopt George W. Bush’s tax policy in total rather than come up with a better deal, even though the Bush tax cuts increased the net worth of the wealthiest Americans while the wages of the rest of Americans (the ones that had jobs) stagnated or decreased per hour worked. The Republicans obviously considered the deal a victory, to hell with any Republican voters in the bottom 98 percent of the country. Wall Street thought it was better than expected. Jamie Dimon was all but salivating. Even though the majority of Americans wanted to end tax breaks for the wealthiest, plus extend unemployment benefits, Obama couldn’t pull it off.

Housing

Obama’s $75 billion Home Affordable Modification Program (HAMP) was an unmitigated disaster for the borrowers who tried to take part, despite his promises that it would help 3 to 4 million struggling borrowers keep their homes.

On Dec. 15, I spoke at a mortgage fraud seminar in Ontario, Calif., and, let me tell you, there’s more fraud going on in modification-land than there was in loan-origination-land. The next day, over in Washington, Tim Geithner spoke glowingly of everything the administration has done to help the financial system, gloating laboriously over the bells and whistles of the various asset purchase and loan extension bank bailout programs and how much money we taxpayers made as a result. As for borrowers—you know, the little people—he stressed the number of modification applications in the pipeline instead of actual permanent modifications. This was primarily because it was a voluntary program on the part of the banks, which had no incentive, economic or legal, to work with borrowers. In the meantime, 8 million to 13 million foreclosures are expected to have taken place from the time the banks got their bailouts until 2012. If you figure on average there are three people living in each home, we’re talking 24 million to 39 million displaced people.

I really wish Geithner could have been standing in front of the borrowers at the seminar I attended, if only to get a clue.

Half of the 1.4 million borrowers that entered the HAMP program were kicked out. Only 2 percent of the loan modifications so far have involved lasting principal reductions. Most of the rest were given temporary reprieve, only to see their payments rise at the end of their trial periods or their banks rush to foreclose on them anyway.

To fix this problem, Obama has just created a $14 billion principal reduction program – something that should have been done on a far grander scale about two years ago. It remains to be seen whether this will be any more effective than the larger initial program, since participation is equally voluntary on the part of lenders, notably the biggest five banks that control two-thirds of the nation’s mortgages. I’m not holding my breath.

Unreformed Banking System

Throughout his presidential campaign and his first 18 months in office leading up to the passing of the Dodd-Frank so-called financial reform bill this summer, President Obama asserted that the crippled economy was predominantly the result of failures in the banking system.

He admonished bankers for their greed and vowed that those days were over.  Never again. Blah, blah, blah. But, the financial reform bill that he championed stopped none of the risky practices of the most powerful banks. (If you want to buy a package of distressed mortgages, call any of them today.) Nor did it break them up into smaller, more easily regulatable entities. Indeed, the largest banks in the United States are now bigger and stronger than they were before the bailout, even as smaller banks continue to close, creating a far less stable banking environment than before the crisis.

Geithner, as Obama’s treasury secretary, remains an apologist for the bailout, and it was Obama who moved to reconfirm Ben Bernanke as head of the Federal Reserve instead of making good on his major promise of “change” in the financial system. That’s why Wall Street bonuses this year are expected to be 5 to 10 percent higher than last year, even though bank profits are lower and lending remains muted. Because things have changed so much.

Jobs

On the job front, the picture remains bleak, as everyone is keenly aware. Nearly 11.5 million people have lost their jobs since Obama took office, despite claims that the $787 billion stimulus package saved 3 million to 4 million jobs. The unemployment rate of 9.8 percent is 32 percent higher than the 7.4 percent rate it was before Obama was inaugurated, and it has steadfastly stood at that level throughout his term.

Even worse, the number of workers who have been unemployed for over six months remains the seventh-highest on record at 6.1 million. There are still 4.4 unemployed workers for every available job (compared to 2.8 workers per job during the early 2000s recession). Thus, one in six U.S. workers is either unemployed or underemployed, which amounts to nearly 26.8 million workers.

Meanwhile, corporate profits have jumped back to near-historical highs, and banks are hoarding an extra $1 trillion in reserve at the Fed instead of using it to restructure mortgages or lend to small businesses that could create jobs with the money. Obama’s administration has been unable to find a way to force more job creation by tying corporate and bank well-being to that of the greater economy, either because it can’t or doesn’t want to.

Health Insurance

There were 59 million Americans without any health insurance in 2010, up from 46.3 million, or about 15.4% of the population in 2009, which was a slight increase from 2008. That 27% increase in 2010 is the highest per year under any presidency.

Sure, Obama promised that his new health-care-so-called-reform bill would help when it takes effect in 2014 and expand coverage to more than 32 million uninsured Americans. Meanwhile, health insurance companies hiked premiums by 14% this year and dropped the amount of coverage they provide for those increases. Why? Because they can. At that rate, even people that do have insurance coverage will see their costs nearly double by the time the reform bill takes effect, because “reform” never capped the premiums insurance companies can charge, which is not a tiny omission. This while attempting to mandate that everyone purchase health insurance, a double gift for insurance companies, now being battled out in the courts for the constitutionality of the mandate, not the extortionist cost of health care and insurance.

Meanwhile, the top 10 health insurance company CEOs bagged $228 million in 2009, up nearly 162% from the year before Obama took office, and they anticipate even more for 2010—and yet there are no major audits of their business practices on the horizon.

Citizen Sentiment

Despite his rhetoric to the contrary, Obama’s policies are far more pro-corporate than pro-populace, not a huge surprise, but still the reason that the Main Street economy isn’t improving. According to a Bloomberg survey from early December, more than 50 percent of Americans say they are now worse off economically than they were when Obama took office, a third think they are doing better, and two-thirds believe the country is headed in the wrong direction.

Those poll numbers, considering the weakness in the economy, aren’t necessarily horrible. President Ronald Reagan’s numbers were even worse after his first two years, and he still won his second term decisively. Plus, Obama inherited an abysmal economy, as he continues to remind us.

But just because you get on the train after it’s already rushing out of the station doesn’t mean you can’t find a way to stop it before it decimates a town or something bigger. The guys in the film “Unstoppable” ignored the dumb ranting of their suited bosses and saved the day. It can be done. (Go see the film; it’ll make you smile.)

A higher stock market is of little comfort to the millions of Americans who don’t have jobs, are facing foreclosure, fraudulent or otherwise, or have no health coverage. Equally, it’s of little comfort that, rather than finding the money to help this swath of citizens, the Obama administration added $700 billion to the deficit by giving the wealthiest Americans more tax breaks. Hell, if you’re gonna go for broke on the deficit, why not fight to spread that same $700 billion over the rest of the citizenry instead?

Obama’s economic priorities are primarily benefitting a small and influential part of the population, but they have not provided the rest of the country with anything to be optimistic about this holiday season. In that regard, he’s more Scrooge than George Bailey.