The Light: Hillary

“If my aunt had balls, she’d be my uncle!!”

I love that line. I first heard it on the trading desk at Bear Stearns in the early ’90s. For the last twenty years, I have used the line often to counter those who would bemoan an outcome with the standard, “If only . . .” My response typically generates a healthy chuckle and we then move on.

At this point, I feel comfortable amending the line from above to “If my aunt had balls, she’d be Mary Schapiro.” Too harsh, you say? I think not. How so?

Let’s review a recent Wall Street Journal article, Madoff’s Ghost Still Haunts SEC:

Financial executives aren’t the only folks lawmakers are pursuing. They also want to see more heads roll at the Securities and Exchange Commission.

Nearly 18 months after Bernie Madoff’s multibillion-dollar Ponzi scheme was exposed and almost a year after the SEC’s inspector general issued a blistering report, lawmakers are still questioning how the SEC staffers who reviewed the Madoff firm and investigated fraud allegations were being punished.

SEC Chairman Mary Schapiro told Congress during an oversight hearing that 15 of 20 enforcement attorneys and 19 of 36 examination staffers that dealt with the Madoff matter had left the agency. The SEC was still conducting a disciplinary process, she said, but it should be concluded soon.

Republican Rep. Bill Posey of Florida –- home to many Madoff victims -– said he wants to know if those SEC employees ended up at other regulatory agencies, working for companies they were supposed to regulate, or retired with government pensions.

“There’s a necessity to know where they went,” said Posey. “It’s like letting a pedophile slink out the door or change neighborhoods. We’re dealing with the same type of problem here.”

Wow!! Representative Posey is being aggressive here, but I commend him because the nation still deserves answers to so many Madoff questions that have been swept under the SEC’s and FINRA’s rugs. The WSJ continues:

Schapiro strongly disagreed. “These aren’t bad people. In some cases they were people who were very junior and not adequately trained or supervised.” In other cases, she said, they were pulled from one project to another.

‘Junior people’ logically implies that in other cases there were senior people. In fact, the people calling the shots on the Madoff investigation were certainly not junior.

Why were the investigators pulled from the Madoff case? Were some of them getting too close for comfort? Were they asking too many questions? Were they being frozen out by the SEC’s inner circle? I do not ask these questions in a rhetorical fashion. I ask them because those were the clear cut impressions left by an SEC attorney well trained in the school of options trading who was making real progress in deciphering the Madoff scam. To whom do I refer? Longtime readers of Sense on Cents and listeners to No Quarter Radio’s Sense on Cents with Larry Doyle may recall my interview in October 2009 with Genevievette Walker-Lightfoot, a former SEC attorney who investigated Madoff. Genevievette was not bashful in excoriating the senior laden ‘inner circle’ at the SEC. Perhaps Mary may want to listen to the interview or call on Ms. Walker-Lightfoot. Maybe she’ll learn something.

What does Mary Schapiro have to say now about the impact Mr. Madoff has made on current work at the SEC?

During examinations, Schapiro said, “We don’t rely on the word of somebody like Madoff.”

Wow!!!!

Mary has some set of cojones!! Industry insiders have shared with me that Mary kept close company with Mr. Madoff at industry conferences. Now she has the balls to let America know that SEC investigators do not currently rely on the word of somebody like Madoff.

You can’t make this stuff up.

Sense on cents compels me to inquire, “Mary, how would you even know? If you were not able to detect the likes of a scam artist such as Madoff for decades, what makes you think America believes you might be able to detect another scam artist now?”

Yes indeed. If my aunt truly did have balls, she would be Mary Schapiro.

LD

The distance from the canyons of lower Manhattan to the now soiled beaches of the Gulf Coast runs about 1300 miles. A long way and decidedly different lifestyles, you may think? I do not think so. In very real terms, the economic disasters centered in each of these locales are virtually contiguous.

As I watched a replay of President Obama’s speech last evening (Red Sox and Celtics games took priority until both those games were effectively decided), I was struck by one segment of Obama’s speech and the stark similarity in the disasters centered on Wall Street and the Gulf. Which segment and which similarity?

The manner in which these industries are regulated, that is self-regulation.

Let’s review Obama’s speech. Please allow me to offer parallel assessments and comments in regard to appropriate financial initiatives and financial regulatory bodies as appropriate. From the White House website, Remarks by the President to the Nation on the BP Oil Spill:

The American people deserve to know why. The families I met with last week who lost their loved ones in the explosion — these families deserve to know why.

Those who invested in auction-rate securities also deserve to know why. Why can’t these investors access their $150 billion which was fraudulently taken from them? (I make this comment with all due respect to the families who lost loved ones in the BP disaster. I extend my sympathy to them and do not mean to equate personal losses with financial losses, but I also respect the anguish felt by so many families impacted by the ARS fiasco.)

And so I’ve established a National Commission to understand the causes of this disaster and offer recommendations on what additional safety and environmental standards we need to put in place.

This National Commission would seem to be designed along the lines of the Financial Crisis Inquiry Commission, which to date has produced no real meaningful results. In fact, the FCIC strikes me as a government ploy to buy time and pander to the American public. Time will tell if we get real results, but to date America has learned NOTHING!!

One place we’ve already begun to take action is at the agency in charge of regulating drilling and issuing permits, known as the Minerals Management Service. Over the last decade, this agency has become emblematic of a failed philosophy that views all regulation with hostility — a philosophy that says corporations should be allowed to play by their own rules and police themselves.

Can you say SEC and FINRA in place of the Minerals Management Service? Wall Street’s cop FINRA is a self-regulatory agency funded by the Wall Street banks themselves. Evidence is rampant that FINRA has been aligned with the industry. None other than Harry Markopolos said FINRA was “in bed with the industry.” I have never once heard President Obama reference FINRA’s name. Would he even know who FINRA is and how they operate?

At this agency, industry insiders were put in charge of industry oversight. Oil companies showered regulators with gifts and favors, and were essentially allowed to conduct their own safety inspections and write their own regulations.

Industry insiders? Who is a bigger insider than current SEC Chair Mary Schapiro?

Gifts? Favors? My commentary just yesterday (SEC Senior Staff/Inmates Are Running the Asylum) highlights the fact that much more egregious transgressions and shortcomings occurred numerous times at the SEC with no disciplinary action taken despite the recommendations of the SEC’s Office of Inspector General.

President Obama, are you listening? This is your SEC!! These are your people!! These are your failures!! The buck stops at your desk!!

When Ken Salazar became my Secretary of the Interior, one of his very first acts was to clean up the worst of the corruption at this agency. But it’s now clear that the problem there ran much deeper, and the pace of reform was just too slow. And so Secretary Salazar and I are bringing in new leadership at the agency — Michael Bromwich, who was a tough federal prosecutor and Inspector General. And his charge over the next few months is to build an organization that acts as the oil industry’s watchdog — not its partner.

When will the same occur both at the SEC and FINRA? Allegations of insider trading, front running, conflicts of interest, lying in proxy statements, and more at these financial regulators are screaming for exposure and action. The court of public opinion knows that the financial industry can not and should not be self-regulated. The Project on Government Oversight has made that very recommendation (Is FINRA’s Future in Doubt?) to Congressional sub-committees.

The Gulf of Mexico may be a long way from Wall Street, but for all the citizens of this great nation the foundations of these two disasters lie in the same bed known as self-regulation.

LD

Any employee in any organization knows that an internal disciplinary double standard is the quickest way to kill morale. Happens all the time, right? Likely even worse in organizations with lots of bureaucracy? Uncle Sam would not know how to operate otherwise, you say? The answers to all those questions may be the affirmative, but that does not make a double standard right nor does it mean that it should be tolerated. Why do I broach this topic?

Our friends at the Project on Government Oversight (POGO) released a report just yesterday highlighting the pathetic disciplinary measures and massive double standard at the SEC in responding to recommendations from its own Office of Inspector General (OIG). POGO reports:

….this is not the first time the SEC has refused to follow an OIG recommendation for disciplinary action. A report recently released by House Oversight and Government Reform Committee Ranking Member Darrell Issa (R-CA) made note of the fact that the SEC has repeatedly failed to implement reforms or hold wrongdoers accountable. The report mentioned an investigation by POGO which revealed that the SEC has failed to act on hundreds of recommendations made by the OIG in recent years.

Following up on that investigation, we’ve prepared a new document summarizing the agency’s response to reports in which the OIG specifically recommended disciplinary action. This information mostly comes from the OIG’s semiannual reports to Congress and documents obtained through the Freedom of Information Act (FOIA). As you can see, the SEC has taken little to no action on many of these recommendations, especially when the individual cited is a senior official.

By failing to take disciplinary action against the two senior officers named in the OIG’s FWRO (Fort Worth Regional Office) report, the SEC continues to broadcast the message that senior management will not be held personally accountable for misconduct, no matter how egregious.

Just how egregious are some of the findings made by the OIG? Let’s navigate and review the report from POGO highlighting 18 separate instances in which the OIG recommended disciplinary action and in which ‘no action’ was taken. I found the following six to be the most outrageous. The OIG’s findings include (I recommend you take a deep breath first!!):

1. Disclosure of non-public information
2. Inappropriate conduct
3. Misuse of official position
4. Misuse of government computer resources to assist Ponzi scheme and violations of standards of ethical conduct. (Are you kidding me? This is not a major front page story? A Supervisor in the SEC’s Office of Administrative Services is found by the OIG to have engaged in these behaviors and is allowed to retire without disciplinary action being taken?? What a joke!!)
5. Suspicions of insider trading and appearances of impropriety in financial transactions. (In light of this reality, we should certainly not expect the SEC’s OCIE to pursue the insider trading and front running at FINRA in its liquidation of auction-rate securities in 2007!!)
6. Conflict of interest and improper solicitation of gifts.

For those interested in viewing the POGO report in its entirety, please click on the image:

Yes, boys and girls, that is your government and your tax dollars at work. Accountability? Transparency? Integrity? A ‘new’ SEC? Talk is cheap. This report is strong evidence that the senior inmates are running the asylum at the SEC.

In light of this report, is there truly any surprise how and why Wall Street has run roughshod over Main Street?

What happened to our country?

LD

P.S. Hats off to POGO for great work!!

When the day of reckoning comes, the record will show that those misguided, incompetent and reckless legislators who supported and were supported by the house of cards known as Fannie Mae and Freddie Mac will have cost our nation untold hundreds of billions of dollars. In fact, the losses attributed to these organizations may ultimately cross the trillion dollar threshold. Think about that for a second.

While Franklin Raines, Leland Brendsel, Daniel Mudd, and other Fannie and Freddie execs walked out the door with tens of millions of dollars, our nation is left with a financial sinkhole that will serve as a drag on our economy for years if not generations. How and why did this happen?

Shallow, weak, and financially illiterate legislators from both sides of the aisle were bought off by their crony counterparts at Fannie and Freddie. The costs of those ‘payoffs’ are currently unknown, but will be felt for a long time.

Bloomberg addresses the reality of what will likely be the escalating costs embedded in Fannie and Freddie by writing, Fannie-Freddie Fix at $160 Billion with $1 Trillion Worst Case:

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

While the losses at Fannie and Freddie continue to mount, do not forget that these losses are not reflected on Uncle Sam’s balance sheet (Fannie and Freddie are in receivership). The fact is Washington at large and the Obama administration specifically do not now have, nor have they ever had, the political will and courage to face the reality of the financial charades created within these organizations. What is the key to measuring the depth of theses sinkholes? Expected losses resulting from future delinquencies, defaults, and foreclosures on mortgages held by Fannie and Freddie. What are the prospects on this front?

The composition of the $5.5 trillion of loans guaranteed by Fannie and Freddie suggests that the surge in delinquencies may continue. About $1.98 trillion of the loans were made in states with the nation’s highest foreclosure rates — California, Florida, Nevada and Arizona — and $1.13 trillion were issued in 2006 and 2007, when real estate values peaked. Mortgages on which borrowers owe more than 90 percent of a property’s value total $402 billion.

Fannie and Freddie may suffer additional losses as a result of the Treasury’s effort to prevent foreclosures. Under the program, banks with mortgages owned or guaranteed by the companies must rewrite loan terms to make them easier for borrowers to pay.

How long might this entire mess take to unwind and what are the impacts on our nation’s housing market? The Obama administration’s programs  to modify mortgages are ultimately a stalling tactic to stem the foreclosure process. What does that mean for the future of our housing market? Let’s visit housing and mortgage expert Mark Hanson who recently wrote that at the current pace of foreclosures, it will take 101 months (that’s right, over 8 years!!) to clear the number of loans in the distressed pipeline.

Add it all up, and we are talking potentially a trillion dollar loss and almost a decade for our nation to reconcile the housing mess driven by Fannie and Freddie, facilitated by their Washington cronies.

Nice legacy.

LD

Any investigation ultimately comes back to two questions:
1. What did they know?
2. When did they know it?

In order to determine the answers to these critical questions, investigators need to have real transparency and integrity in their pursuit of information. To this end, I welcome adding a link to my Watchdog category (right sidebar at Sense on Cents) for the The Center for Public Integrity.

In the pursuit of transparency and integrity to understand what really happened in the BP oil disaster in the Gulf of Mexico, the Center reviewed logs from the Coast Guard. What did they learn? The Center recently released a story highlighting the fact that the White House knew very early on that this disaster had the potential to be larger than the Exxon Valdez. The Center wrote, Coast Guard Logs Reveal Early Spill Estimate of 8,000 Barrels a Day:

Coast Guard officials grasped the potential threat of a catastrophic spill within hours of the explosion on board the Deepwater Horizon drilling rig, estimating that 8,000 barrels a day of crude oil could possibly gush out of the well in the event of a complete blowout, according to Coast Guard logs.

Over the first three days of the crisis — long before the public heard of a leak — the minimum estimate for a total well blowout ballooned eight-fold and the president was warned by his top aides that a major spill larger than the 1989 Exxon Valdez might be coming, according to the documents and interviews. (LD’s emphasis)

The logs, obtained by the Center for Public Integrity, provide the most detailed account of the early days of the BP disaster, and identify key events and notifications that were omitted from the White House’s official timeline of the crisis.

The estimate of the potential leak on April 21, the day after the rig exploded, reveals that first responders almost immediately understood the environmental threat to the Gulf of Mexico when Coast Guard officials detected the first signs of oil appearing on the Gulf waters.

“Potential environmental threat is 700,000 gallons of diesel on board the Deepwater Horizon and estimated potential of 8,000 barrels per day of crude oil, if the well were to completely blowout,” the Coast Guard reported on April 21, less than 24 hours after the accident was first reported.

Officials also learned within the first day of the disaster that the blowout preventer — an oil rig safety device that is supposed to cut off a well in case of an accident — was not functioning and could not be manually repaired by remote underwater robots.

“The second attempt of the ROV to shut-in the well has failed,” an entry at 11 a.m. CDT on April 21 read.

By April 23, the Coast Guard logs include a new estimate that a full blowout could result in a spill of 64,000 to 110,000 barrels per day, the logs show.

The leak estimates revealing an early awareness of a potential catastrophe are missing from the White House’s official timeline of the crisis. (LD’s emphasis)

That timeline first mentions a leak on April 24, four days after the explosion, when undersea robots discovered a plume of oil coming from the riser on the sea floor.

The White House has repeatedly rejected criticisms from both sides of the political aisle that it did not act quickly or decisively enough in the early days of the BP disaster, noting that the president on April 22 issued a public statement urging the federal government to make the accident its “No. 1 priority” and asserting that officials were worried about the environmental impact from the start.

White House spokesman Nick Shapiro did not respond to a questions from the Center submitted Tuesday about the logs. However, Shapiro told The New York Times that the White House timeline included a disclaimer at the bottom saying it was not meant to be comprehensive.

Shapiro also confirmed that in an April 22 meeting, Coast Guard Admiral Thad Allen told President Barack Obama that as soon as he saw the Deepwater Horizon oil rig on fire, he knew oil was likely to start gushing into the Gulf of Mexico. At that same meeting, Shapiro said, Interior Secretary Ken Salazar told the President this event could eclipse the amount of oil spilled during the Exxon Valdez.

The logs were provided to the Center by Rep. Darrell Issa of California, the senior Republican on the House Oversight and Government Reform Committee. The Center shared them with The New York Times.

“Less than 48 hours after the explosion, multiple attempts to activate the blowout preventer had already failed and the Coast Guard knew 8,000 barrels of crude oil spilling into gulf waters each day was a real possibility,” Issa told the Center.

“Americans have a right to be outraged by this spill, by top government officials caught off-guard, and by the facts the White House omitted in explaining what it knew and when it knew it,” he said.

The logs show that Coast Guard officials comprehended the possible scope of the spill nearly a week before an estimate was released measuring the leak at 5,000 barrels a day. That estimate led to an escalated response by the government.

Coast Guard officials declined to comment about the logs. Officials from the Homeland Security Department did not respond to phone calls and email messages.

The logs detail the failed attempts to repair the blowout preventer on the sea floor, which was spewing oil that also fueled the fire on the rig. The logs also show that, as an extensive and wide-ranging search and rescue mission unfolded, the size of the oil slick was growing daily on the ocean’s surface, though Coast Guard officials believed that the oil was mainly being burnt off in the fire.

“There was a reported sheen while the MODU (mobile drilling unit) was afloat. However, the majority of the pollution was being mitigated by the fire,” read a Coast Guard entry dated 1:26 pm CDT on April 22. By that time, estimates of a visible oil sheen measured 16 square nautical miles.

A day earlier, a smaller sheen was detected.

“Sheen size is as follows: 2 miles by ½ mile, with 50 percent coverage with color ranging from dark to barely visible. The amount is estimated to be 30 gallons,” states a Coast Guard log entry dated 11:15 a.m. CDT on April 21. It said the sheen was first spotted at 10:10 a.m. that morning.

Additionally on April 22, a Coast Guard craft returning from a rescue mission spotted signs of a possible natural gas leak after the rig sank, further evidence that hydrocarbons might be leaking. “On return to home base, discovered what appeared to be a large area of bubbles in water, possible natural gas leak,” says a log entry dated the evening of April 22.

By early the morning of April 23, the Coast Guard had already flown five sorties and applied 1,500 gallons of dispersant to locations where sheens were reported, according to the logs, though officials that same day said the well appeared to be not leaking.

The White House timeline doesn’t mention any of the earlier sheens but does note on April 22 that 100,000 gallons of dispersant were “prepositioned” for use in the Gulf and “preapproved” by regulators “despite a lack of apparent leak.”

The logs, however, show the pre-positioning of the dispersant occurred after the oil sheens had already been discovered, the blow-out preventer was determined to be broken, and the first sorties launched to apply dispersant. The first dispersant flight departed at 2:43 p.m. CDT on April 22, according to an internal timeline kept by the Coast Guard.

The first mention on the White House timeline of any oil sheens occurs April 23 — two days after the first slicks were detected — when the timeline notes “an oil sheen was reported with approximately 8,400 gallons estimated on the water and there was no apparent leak.”

In contrast, the Coast Guard logs talk openly on the first day about a free flow of oil and about efforts by the rig’s owner, Transocean, to use a remote vehicle to stop the flow.

“Transocean is developing a plan to stop the flow/fire using an ROV” the logs note on April 21.

Conflicting reports seemed to complicate what appeared to be a simple chain of events: the rig continued to gush up until the moment it sank, making a leak seemingly inevitable.

On the morning of April 23, an undersea robotic vehicle reported that the valve on the blowout preventer had closed, sealing off the well, though that report was found to be false several hours later, the logs show.

The confusion in these reports may explain why the Coast Guard stated publicly that day that there appeared to be no leak.

Despite that report, BP began to establish an incident command post on April 23 “to prepare for potential release,” estimating that a release of 64,000 to 110,000 barrels a day could occur “if the well were to completely blowout.”

Coast Guard officials have repeatedly stated that they were preparing for a worst case scenario, and initially ordered a variety of oil response vessels to come to the scene, including a team that is assigned to respond to oil spills.

Oil skimming began and continued during the efforts to find the 11 workers who were initially missing and later presumed dead — efforts that were also complicated by what appears to be misinformation and false leads.

On the morning of April 22, members of the unified command held a phone conference to discuss the potential spill if the rig sank, which it did less than two hours later.

Around mid-day, aircraft flying over the spill reported a sheen of sixteen square miles, but added that “it wasn’t as bad as they imagined,” the logs state.

At a press conference that afternoon, Rear Admiral Mary Landry said that the oil on the surface appeared to be residual from the fire, though she raised the possibility that the gallons of diesel fuel on board might have begun leaking after the rig sank.

The next day, as the search for the missing 11 workers came to a close, Admiral Landry, possibly misled by the erroneous early report, said that it appeared that the blowout preventer had worked.

“It is not a guarantee,” she said at a news conference, “but right now we continue to see no oil emanating from the well.”

The understanding that oil was not leaking at the wellhead is corroborated by the logs, though at the time, a survey of the entire riser, which was still attached to the blowout preventer, had not been completed.

Coast Guard officials did caution that there was still uncertainty surrounding the status of the blowout preventer, but continued to view the 180,000 barrels of oil and water mix on the surface as residual from the days the rig was on fire.

On the morning of Saturday, April 24, an undersea robot noticed “a small quantity of unknown material” emanating from the drill pipe, which is encased in the riser.

After surveying the leak, it was determined that 1,000 barrels a day were pouring from the riser.

If the Coast Guard logs are to be believed, and the White House knew within the first three days of this crisis that the oil spill could likely be larger than the Exxon Valdez, what does that say about the White House response? Was the White House ‘playing politics’ when it should have been in emergency mode to protect the Gulf? Did the White House display sense on cents and protect our national interests?

Who knew what and when did they know it? The Coast Guard logs would indicate the White House knew a lot, very early on.

Thank you to the Center for Public Integrity for doing such fabulous investigative work.

LD

Do you hear a grinding sound? Listen a little harder. That sound is the brakes being applied to the U.S. economy.

The current price action in commodities markets (as highlighted in my commentary yesterday, “Commodities Growling Like a Bear”) is very much reflective of this braking process. How do we measure the slowing? Where can we gain evidence? Let’s turn to Rick Davis’ fabulous work at Consumer Metrics Institute.

Recall that Rick has not only been way out in front with his calls on the growth of the U.S. economy, but also very accurate especially given that he is projecting GDP a full 4 months prior to its official release. Rick is already on record with his call of -1.5% GDP for the 2nd quarter 2010. What does Rick see for the 3rd quarter?

May 30, 2010 – BEA Lowers 1st Quarter GDP Estimate as the Consumer Metrics Institute Previews 3rd Quarter GDP:

On May 27th the BEA released its first revision to its 1st Quarter 2010 GDP growth rate measurement, lowering the number from a 3.2% annualized growth rate to 3.0% annualized growth. One day later the Consumer Metrics Institute’s ‘Daily Growth Index’ was signalling what we should expect the BEA’s measurement of the 3rd Quarter 2010 GDP growth rate to be: contracting at about a 2.0% rate.

The prior BEA estimate of 1st Quarter 2010 GDP growth trailed our ‘Daily Growth Index’ by 127 days, and because of the rapid rate that the economy was cooling when the measurements were being made the newly adjusted estimate is now trailing our ‘Daily Growth Index’ by 125 days. Since the 3rd Quarter of 2010 ends 125 days after May 28th (when our ‘Daily Growth Index’ was recording a ‘growth’ rate of -1.99%), if the BEA estimates continue to trail our ‘Daily Growth Index’ in a consistent manner we should expect that the 3rd Quarter’s GDP ‘growth’ rate will be in the -2.0% neighborhood.

Several things were interesting about the BEA announcement, which seems to have been largely ignored by the equity markets on a day when the Dow Industrials were up over 280 points. Not only was the total growth rate revised downward by .2%, but the impact of inventory building was adjusted upward from 1.57% to 1.64%, meaning that the end growth rate of consumer demand (net of inventory build-ups) was dropped from about 1.63% to something closer to 1.36% — a 17% reduction that was hardly worthy of a 280 point rally in the markets. Perhaps the U.S. equity markets should obsess less about Greece and Spain and pay more attention to what is happening with consumers in their own domestic economy.

Since we first reported that our ‘trailing quarter’ had slipped into contraction on January 15th, we have charted how the current 2010 version of the consumer contraction event compares with prior similar events in 2006 and 2008. The current event is significantly different; while it is not as severe as the 2008 contraction, it has already lasted longer without forming a clearly defined bottom. We know that if the GDP mirrors consumer activities (as at least 70% of it should, net of inventory adjustments), both the 2nd and 3rd quarters of 2010 should be contracting at a level of between 1% and 2%. If this isn’t a classic ‘W’ shaped ‘double dip’, it is at least the downward glide of a plane with sputtering engines.

From our perspective the ‘economy’ lives where the consumer spends; everything else is merely the consequence of the downstream flow of commerce from the initial consumer ‘demand’. For this reason the official GDP measurements poorly reflect what is happening in the real-time economy, because they merely capture backward-looking factory production levels far downstream, as augmented by governmental redistribution of earlier tax collections and new public debt. Even John Maynard Keynes would have had to admit that governmental stimulus has to ultimately cause increases in aggregate consumer demand for a real recovery to be happening. We simply aren’t seeing that yet.

What is around the bend as we navigate the economic landscape? A double dip on our economic trail. Thanks to Rick Davis and the Consumer Metrics Institute for his fabulous work.

LD

The disaster unfolding in the Gulf of Mexico is enormous and will have an untold impact on our economy and environment. This tragedy could have been avoided. What a shame. There should be hell to pay by those charged with overseeing the oil industry.

Where were the regulators? A statement released just yesterday by the Department of Interior highlights evidence that the regulation of our oil industry in the Gulf has been quite incestuous. What’s a little incest without throwing in a healthy dose of sex, drugs, and football as well?

Wow. You can’t make this stuff up. The Project on Government Oversight addresses the issues em’bedded’ in the relationship between oil regulators and the industry in writing, MMS District Manager to IG: “Obviously, We’re All Oil Industry”:

This morning the Interior Department Inspector General’s released a report on the investigation into the Lake Charles District office of the Minerals Management Service (MMS). Ian Urbina’s New York Times story covers the essentials about how regulators did crystal meth, accepted gifts and trips from industry, and allowed industry to draft their own inspection reports in pencil.

Here at POGO, we’re referring to the report as “Interior Sex and Drugs 2.0,” though to be fair, only the Royalty-In-Kind staff in Lakewood, Colorado were literally in bed with industry. The IG only found “inappropriate humor and pornography” at Lake Charles.

A release dated yesterday from the Department of Interior highlights the nature of the relationship between regulators and the oil industry.

Of greatest concern to me is the environment in which these inspectors operate — particularly the ease with which they move between industry and government. While not included in our report, we discovered that the individuals involved in the fraternizing and gift exchange — both government and industry — have often known one another since childhood.

Their relationships were formed well before they took their jobs with industry or government. MMS relies on the ability to hire employees with industry experience. I am pleased that MMS has advised us that it will enhance ethics training specifically for its inspectors to address this unique industry/government dilemma, and will establish controls, like a two year waiting period, to minimize the potential for conflicts of interest.

In the same release but from an April 12th Department of Interior statement, we learn more salacious details:

Two employees at the Lake Charles office also admitted to using illegal drugs during their employment at MMS. We found that many of the inspectors had e-mails that contained inappropriate humor and pornography on their government computers. Finally, we determined that between June and July 2008, one MMS inspector conducted four inspections of IOC platforms while in the process of negotiating and later accepting employment with that company.

In an investigation completed March 31, 2010 (and included in yesterday’s release), we learn of more incriminating details in this incestuous relationship, including:

During our investigation, we reviewed hundreds of e-mails and financial disclosure reports from MMS employees. We also interviewed 15 MMS inspectors and supervisors. We developed confidential sources during our investigation, who provided additional information pertaining to MMS employees at the Lake Charles District Office, including acceptance of a trip to the 2005 Peach Bowl game that was paid for by an oil and gas company; illicit drug use; misuse of government computers; and inspection report falsification.

If I didn’t know the report was produced by the Department of Interior in review of the oil industry, I would have sworn these activities were highlighting the regulatory oversight of Wall Street.

Think there were kickbacks going on here as well? You think??!!

Meanwhile, the oil at the floor of the Gulf of Mexico gushes and the costs to our economy and our country escalate.

When will it all end?

LD

Is the American taxpayer ultimately bailing out the European Union? Far fetched? Don’t be so sure.

While the focus of the European bailout has been on the European Central Bank, the European Union, and the IMF, little attention is being given to swap lines which were reopened between the Federal Reserve and the European Central Bank.

The ECB has steadfastly fought the idea of breeching the principles which formed the European common currency (the Euro) in order to fashion a bailout for the EU. Did the ECB crater to political pressure by the EU? Or, did the risks of the bailout shift from the ECB to another large central bank? Such as? The Federal Reserve!

Adding fuel to this fire is the fact that the Fed reopened swap lines with the ECB and other central banks just yesterday. The Wall Street Journal reports, Fed’s Swap Decision Could Ratchet Up Political Pressure:

The U.S. Federal Reserve’s decision to reopen swap lines with the European Central Bank and central banks in Japan, Switzerland, England and Canada puts it in a delicate political position.

The U.S. Congress is in the midst of rewriting a financial regulatory overhaul that could rein in the Fed amid sharp criticism of its actions before and during the financial crisis. The overseas lending program it reopened Sunday in response to pleas from Europe has been among the programs lawmakers have criticized, with some suggesting it is bailing out foreign banks and other saying the Fed is too secretive about details.

Is the American taxpayer ultimately bailing out the EU? While the German populace is livid at the idea of providing bailout funds for the wastefulness and fiscal follies in other EU countries, has the wool just been pulled over the American public’s eyes?

Will the America public ever learn what is going on here?

Audit the Fed!!!

Hat tip to loyal Sense on Cents reader Matt for providing the following video from last summer:

LD

They blinked.

The European Union and European Central Bank stole a play from the wizards in Washington to avert an immediate currency crisis in the EU and the potential ripple effect around the world. Did they do the right thing? For me, the question of addressing the fiscal crisis within the EU is not one of right or wrong; rather, when the crisis comes, how large will it be and how long will it last?

The trillion dollar package provided by the European Central Bank, the European Union itself, and the IMF is a combination of loan guarantees and quantitative easing. Shock and awe and punish those who would dare sell the Euro short, right? Clearly, the massive injection of capital will squeeze those who have shorted the Euro, but what about the long haul?

The EU is subverting the very tenets upon which the union was founded. Those tenets precluded this type of financial bailout. Violation of a moral hazard, perhaps? Straight from the Washington playbook. In fact, reports indicate that President Obama himself called on German Prime Minister Angela Merkel and French Prime Minister Nicolas Sarkozy to compel them to implement this plan. What about rules of law and principles of treaties upon which those investing capital make decisions? The ends obviously justify the means for these political leaders.

The markets will rally today, the shorts will scurry to cover, and the pom-poms will bounce mightily. But has anything really changed? The core of our global economy, and especially the economies of selected nations within the EU, remains gutted by excessive debts. That debt remains. Who will hold the nations within the EU accountable to address these debts?

Who is holding the political powers in Washington accountable? The markets have always been the mechanism to impose the necessary discipline. Markets can be gamed for a while, but ultimately the bills must be paid. Our political leaders have chosen to pay these bills by screwing future generations while kicking the debt can down the road.

The charades and shell games being played out in Washington and now the EU are not averting the inevitable economic pain and underperformance, but only delaying it.

Violating rules and principles of economic treaties and unions comes with a price. The EU and global economy still have to pay that price.

LD

The challenges on our economic landscape remain daunting. While employment and manufacturing may be stabilizing, the housing and mortgage markets remain mired with real issues.

The issues within housing and mortgages are at the base of our economic crisis encompassing both Wall Street and Washington. From structured transactions on Wall Street to financial regulatory reforms in Washington, the issues ultimately come back to housing and mortgages. I will discuss all these issues tonight from 8-9pm ET as No Quarter Radio’s Sense on Cents with Larry Doyle. Bill Berliner is uniquely qualified to address these topics. Bill has extensive experience within the financial industry and currently shares this experience from his firm, Berliner Consulting and Research, LLC:

Berliner Consulting & Research is devoted to providing information, data, and advice on mortgage lending and mortgage-backed securities acquisition and management. Formed in 2008 by William Berliner, the firm is dedicated to providing outstanding information, advice, and commentary to its clients.

The firm provides advice and analysis to clients on a wide variety of mortgage products and mortgage-backed securities. Located in Southern California, Berliner Consulting & Research provides assistance in developing loan origination, securities valuation, and risk-management systems. We also help lenders and investors deal with the increased reporting required for directors and regulators by providing expert writing and report-creation services.

In regard to Bill’s background:

A respected analyst and author with a wide variety of experience, Mr. Berliner began his career in the Government Operations department at Bear, Stearns & Company in 1985. He was promoted to the trading floor in 1986, and eventually ran the position tracking (“Pops”) desk for the MBS trading desk. He worked in CMO trading from 1988-1993, when he left to join Nikko Securities. After stints at Nikko, Prebon Yamane, and the New York State Banking Department, he joined Countrywide’s Capital Markets unit as a CMO trader in 1996. He moved to the Fixed Income Research Department in 1998, and eventually ran the firm’s highly-regarded Trade Strategies Group until September of 2008.

Please join me this evening for what will be an engaging and informative discussion. Listen LIVE at the BlogTalkRadio website. Dial in with questions at 347-677-0792 or join our always energized chat room. As a reminder, all NQR shows are taped, archived, and available as podcasts on iTunes.

LD