Category: Too Big To Fail

Final Thoughts On The SVB Situation

The Daily Escape:

Spring wildflowers, Four Peaks Wilderness, AZ – March 2023 photo by Chris Flores

(This will be the final column for this week as Wrongo and Ms. Right are heading to CA for the Napa Valley wedding of granddaughter Nicole. Columns will resume on 3/23)

Several readers commented on how Silicon Valley Bank’s (SVB) major problem went beyond Wrongo’s discussion of asset management. They’re all former bankers and former colleagues of Wrongo, and they rightly brought up liability management as a key contributor to SVB’s problem.

For banks, the deposits that people make are the bank’s liabilities. The essence of banking is borrowing short term (deposits, overnight borrowings and medium term borrowings) in order to lend that money out for a longer term (mortgages, long term loans or, investments in bonds and long dated US treasuries). The difference between what they pay on their liabilities and what they earn on their loans and investments (the spread) is how banks make their profits.

SVB had little risk that their loans wouldn’t be eventually paid back (credit risk), but they did have substantial interest rate risk if rates went up. That included the risk that the face value of the bonds they invested in would decline in value in higher interest rate scenarios.

This is a well-known challenge for all banks. They try to maintain enough of their assets in easily sold investments so if there’s an unforeseen need to pay out cash to depositors, they can meet that need. The bigger the expected (or unexpected) cash need, the more assets the bank must hold that are easily converted to cash.

It wasn’t a surprise to the banking industry that the Federal Reserve (Fed) was raising rates; Chair Powell clearly said they were going to do that until inflation was under control. Basic liability management principles should have told SVB to move to hedge the risks in a rising rate environment by investing more in very short term (near cash) assets. But SVB didn’t. Maybe they thought they knew better.

SVB isn’t alone. The Fed raised interest rates quickly and sharply during 2022, so the face value of bonds fell. According to the FDIC, US banks were sitting on $620 billion in unrealized losses (assets that had decreased in market value but were still on their books at purchase price) at the end of 2022.

Of that amount, Bank of America alone had unrealized losses of around $114 billion, or 18% of the total.

A major risk that the banks didn’t correctly anticipate was the effect of huge cash injections into the economy during the pandemic, along with a prolonged period of historically low interest rates that predated the pandemic. That had ripple effects on all banks. According to Marc Rubinstein:

“Between the end of 2019 and the first quarter of 2022, deposits at US banks rose by $5.4 trillion. With loan demand weak, only around 15% of that volume was channeled towards loans; the rest was invested in securities portfolios or kept as cash.”

Then came the Fed’s rapid rise in interest rates. From FDIC Chairman Martin Gruenberg:

“The current interest rate environment has had dramatic effects on the profitability and risk profile of banks’ funding and investment strategies….Unrealized losses weaken a bank’s future ability to meet unexpected liquidity needs,”

Banks do not continually adjust the value of their bond portfolio to market. So their unrealized losses can be difficult for an outsider to see. It also means banks find that selling parts of the portfolio will bring in less cash than they may need, because the securities are worth less in the market than they originally paid for them. That happened to SVB.

From Michael Batnick at Irrelevant Investor:

“Without the pandemic, rates are not at zero for two years. Without the pandemic, $638 billion does not go into venture capital. Without the pandemic, rates don’t go from 0% to 4.5% in a year. And without the pandemic, we wouldn’t be talking about a run on the bank.”

So there’s plenty of blame to go around. The SVB management surely failed: More Treasury bills and fewer bonds would have helped, that’s for sure. They had to know that their customer base, which was concentrated in start-ups, were hemorrhaging cash. They knew that they had unrealized losses in their bond portfolio. Shouldn’t they have shortened their asset mix?

Should we blame the regulators or SVB’s auditors? KPMG gave them a clean bill of health just a few weeks before they went belly up. You would think KPMG should have seen what was coming. And the Fed just announced that they are leading a review of “the supervision and regulation of Silicon Valley Bank in light of its failure.”

For SVB, the government drastically changed its policy about insured deposits. Had SVB been “The Bank of Depositors With No Political Clout”, you can bet that the $250,000 insured deposit limit would have been enforced. And depositors with larger deposits would have had to wait for their money.

But, the exception was made, and now, it will certainly happen again. Ben Carlson says it best:

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Another Bank Bailout!

The Daily Escape:

Pronghorn in Las Cienegas National Conservation Area, AZ  – March 2023 photo by Alan Nyiri Photography

More about the Silicon Valley Bank (SVB). A joint announcement by Treasury Secretary Yellen, Fed Chair Powell, and FDIC Chairman Gruenberg said:

“After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, California, in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13…”

This appears to be the mechanics of the bailout:

  1. The Fed gives money to the FDIC as needed.
    2. The FDIC makes all deposits available on Monday. Not just those that are FDIC-insured.
    3. The FDIC then sells the assets of the banks, which will take time.
    4. The difference between the cost of bailouts and the net proceeds from the asset sales is the actual amount the FDIC will have lost.
    5. The FDIC will charge all other banks a “special assessment” to cover the losses.
    6. The FDIC will then pay the Fed back with the special assessment funds it collects.

Much about this makes Wrongo’s blood boil. We have a well-defined regulatory system for the US banking industry. But, as with our lax regulation of train traffic that resulted in the Norfolk Southern accident in East Palestine, these pesky banking regulations were considered a major impediment to Mr. Market.

Regional banks argued that they shouldn’t be held to the same standards as the biggest banks because if they failed, they wouldn’t pose systemic risks to the banking industry or the nation.

So in 2018, Dodd-Frank was amended by the Trump administration to raise the asset threshold at which a bank would be considered “too big to fail” from $50 million to $250 billion. The 2010 original law required that banks considered systemically important keep more capital on hand, undergo stress tests and produce a “living will” that would provide for their orderly dissolution.

But now five years later, the FDIC says that SVB and Signature Bank in NY really do pose a systemic risk to the banking system! The regulators are saying that the threat of a systemic risk gives them the authority to hold all SVB depositors harmless, even if their deposits exceed the current FDIC maximum of $250,000.

Few if any average Americans have $250,000 in a single bank account. Who has bank accounts above $250,000? Corporations.

The FDIC insurance on deposits is meant to assure retail customers, not companies that hold very large balances. Why? Because companies have the ability to perform their own risk analysis. This risk analysis should force them to ask questions about the business practices of the bank, to make sure the bank will properly manage their assets.

The US is going to protect the deposits of corporations in this bailout despite the fact that there’s a product called “Insured Cash Sweep” that cuts your large deposits into pieces that are FDIC insured (i.e. $250k each). In the event of a bank run, those deposits would not be over the limit, so they would be safe.

But, for reasons unknown, the Silicon Valley Venture Capital masters of the financial universe didn’t deign to use it.

American capitalism remains a system that privatizes profits until shit happens. And then? We socialize the losses, meaning it’s up to the federal government and taxpayers to handle the problem. When Biden says the banking system will pay fees via a special assessment, that means the cost will ultimately be paid by depositors and borrowers through higher fees and interest costs.

This is why people have so little faith in our government.

The very serious people in finance and politics were worried that the 2023 version of the US banking system might be close to another 2008-style collapse. So the Treasury, Fed and FDIC had to step in.

The basic problem relates to what’s called “asset management” in the banking biz. The goal of asset management is to maximize the return of the bank’s investment portfolio while maintaining an acceptable level of both liquidity and risk.

For banks, that means keeping a certain amount of cash available to meet the needs of depositors and investing the rest in loans or bonds. SVB invested in long-term bonds in order to realize better returns on their investment portfolio, because short-term interest rates were very low. They, like others, felt it was necessary to maintain a portfolio of higher yielding assets to offset the low market rates generally available to them.

But when mass withdrawals from depositors started to happen, they had to sell bonds at a loss, ultimately leading to default and FDIC takeover. Wasn’t it the job of the SVB executives to foresee this? And adjust their asset management accordingly?

This seems to mean that the $250,000 FDIC limit has effectively gone away. If true, there’s systemic risk that taxpayers will have to bail out bank deposits with uninsured deposits at any bank. Most of those depositors will be corporations. So, new rules must be written. And until then, we’re in trouble.

The big picture is that very few people of means in America ever pay a price for bad management.

And none go to jail.

Average Americans who get caught cheating on their taxes might go to jail if you were represented by an overworked public defender. But if you had the means to hire a high-priced lawyer, most likely, you will get community service, or probation.

It’s never been a fair system. Back in the 2008 Great Financial Crisis, then-Treasury Secretary Timothy Geithner worked to save his banker cronies; they didn’t lose money. They didn’t go to jail. The economy was saved, but no one who profited from blowing it up paid a price.

The bottom line: If I’m bad at my job, I’ll get fired. If these bankers are bad, they may get rescued by the government.

And one way or another, we’ll be paying for it.

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Boeing Documentary Shows Corporate Malfeasance

The Daily Escape:

Mount Liberty, White Mountains, NH – February 2022 photo by AG Evans Photography

Over the weekend, Wrongo and Ms. Right watched the Netflix Boeing documentary: “Downfall: The Case Against Boeing”. You can watch the trailer here. It exposes how Boeing’s management, Wall Street’s influence and the cratering of Boeing’s culture of quality control, resulted in two plane crashes of the 737 MAX, just months after being placed in service.

That two new planes would go down within five months of each other was beyond a chance event in 21st Century airplane manufacturing. Boeing initially blamed the pilots based in Indonesia and Ethiopia for being poorly trained. But it turns out that Boeing knew all along that the 737 MAX had a critical software problem that caused the plane to go into an irreversible nosedive.

The film makes it clear that pilots had just 10 seconds to reverse those faulty software commands before it was too late. It shows that Boeing told the FAA and the airlines that purchased the MAX that no new pilot training was required to fly the new plane, even though pilots knew nothing about the software or the glitch.

Boeing was lying about training to keep the costs of the new aircraft competitive with Airbus. It was a lie that Boeing took months to correct. It also took months for Boeing to admit that they were flying an unsafe plane.

Why did this (and even worse things) occur while Boeing was attempting to bamboozle the Feds, the airlines, crash victims and their families? Money. The film features Michael Stumo, father of Ethiopian Airlines crash victim 24-year-old Samya Stumo. While not mentioned in the film, Ralph Nader is Samya’s uncle. At the time, he published an open letter to Dennis A. Muilenburg, then-CEO of Boeing. Here’s a part of his letter: (brackets by Wrongo)

“Your narrow-body passenger aircraft – namely, the long series of 737’s that began in the nineteen sixties was past its prime. How long could Boeing avoid making the investment needed to produce a “clean-sheet” [new design] aircraft and, instead, in the words of Bloomberg Businessweek “push an aging design beyond its limits?” Answer: As long as Boeing could get away with it and keep necessary pilot training and other costs low…as a sales incentive.”

Nader draws a connection between Boeing’s decision to “push an aging design” and their financial engineering:

“Did you use the $30 billion surplus from 2009 to 2017 to reinvest in R&D, in new narrow-body passenger aircraft? Or did you, instead, essentially burn this surplus with self-serving stock buybacks of $30 billion in that period?”

Nader notes that Boeing was one of the companies that MarketWatch labelled as “Five companies that spent lavishly on stock buybacks while pension funding lagged.” More:

“Incredibly, your buybacks of $9.24 billion in 2017 comprised 109% of annual earnings….in 2018, buybacks of $9 billion constituted 86% of annual earnings….in December 2018, you arranged for your rubberstamp Board of Directors to approve $20 billion more in buybacks.”

Nader shows that Boeing had the capital to invest in developing a new plane. They also had problems with the launch of the 787:

“In the summer of 2011, the 787 Dreamliner wasn’t yet done after billions invested and years of delays. More than 800 airplanes later…each 787 costs less to build than sell, but it’s still running a $23 billion production cost deficit.

The 737 MAX was the answer to Boeing’s prayer. It allowed them to continue their share buybacks while paying for the 787 cost overruns. Abandoning the 737 for a completely new plane would’ve meant walking away from a financial golden goose.

Rep. Peter DeFazio (D-OR) who chaired the House Committee on transportation and infrastructure that investigated Boeing, said:

“My committee’s investigation revealed numerous opportunities for Boeing to correct course during the development of the 737 Max but each time the company failed to do so, instead choosing to take a gamble with the safety of the flying public in hopes it wouldn’t catch up with them in the end…”

Wrongo remains baffled by how Boeing management was given a pass after this gross negligence. They paid the US government $2.5 billion to settle criminal charges that the company defrauded the FAA when it first won approval for the 737 MAX. The deal deferred any criminal charges by the DOJ to January 2024 and will dismiss the case then if there are no more misdeeds by the company.

Perhaps this is another example of a corporate mistake that’s simply too big to be punishable in the US. That means US corporations and their CEOs are immune to accountability. This should have put people into prison, but the CEO got off, and ultimately got a $62.2 million severance for his misdeeds, despite a lot of people dying on his watch.

To curry favor on Wall Street, Boeing reduced salaries. They cut costs deeply in quality assurance and safety programs to give the shareholders more money.

See the movie. Be outraged. Elect more people like Peter DeFazio.

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Monday Wake Up Call – March 2, 2020

The Daily Escape:

St. Augustine, FL – photo by Wrongo

Hot takes:

First to politics: Joe Biden rolled to a big win in South Carolina, and billionaire Tom Steyer and former mayor Pete Buttigieg both folded their tents. Some in the media say that Biden is once again the front runner, but Sanders’s win in Nevada remains significant, and he remains on track to pick up a lot of delegates in California and Texas.

The real news from South Carolina is that Biden has become the Not-Sanders candidate. For Super Tuesday, Bloomberg essentially replaces Steyer as the billionaire in the race. Super Tuesday results are less than 48 hours away, and after that, we’ll have a real idea of who really remains a viable candidate.

Second, peace in Afghanistan: After 18 years of war, we signed an agreement with the Taliban. The deal does not end the civil war, but it has placed the outcome of the conflict in the hands of the Afghan people. Heather Cox Richardson quotes Laurel Miller, the former deputy and then acting Special Representative for Afghanistan and Pakistan from 2013 to 2017 for the State Department: (emphasis by Wrongo)

 “There’s nothing new in the Joint Declaration signed in Kabul today. It reaffirms existing commitments and it re-states some of US-Taliban agreement. Its purpose is evidently political symbolism.”

She explained: It includes the Afghan government and its opposition in future discussions. It draws down US troops to 8600 people—the number who were there when Trump took office, and promises “all” will be gone within 14 months. The 8600 drawdown has long been planned. In exchange, the Taliban will “not allow any of its members, other individuals or groups, including al-Qa’ida, to use the soil of Afghanistan to threaten the security of the United States and its allies.”

Miller’s conclusion:

“The Taliban got a lot. It got its main goal—a clear timeline for US withdrawal—and fast removal of sanctions and prisoner releases. The US got the power to decide whether “vaguely-stated conditions are met, so that in reality can withdraw when it chooses—will be political not military decision.” The Afghan government didn’t get much, but “this deal wasn’t really about the Afghan government.”

Trump, America’s Man of Peace. This looks a lot like what he did in North Korea, a PR moment that resembles a deal, but turns out not to be much of a deal.

Finally, the WaPo features a new report published by the Manhattan Institute, a conservative think tank, that clearly demonstrates the disconnect between the “great” economy described by economists, and the economy experienced by regular people. This chart shows the problem:

 

From the article (emphasis by Wrongo)

“In 1985, the typical male worker could cover a family of four’s major expenditures (housing, health care, transportation, education) on 30 weeks of salary….By 2018 it took 53 weeks. Which is a problem, there being 52 weeks in a year.”

Lead study author Oren Cass (formerly Mitt Romney’s domestic policy director) calls this calculation the Cost-of-Thriving Index. It measures the median male annual salary against four major household expenditures:

  • Housing: the annual rent for a three-bedroom house in the 40th percentile of the local housing market
  • Health care: the annual premium on a typical family health insurance policy
  • Transportation: the average cost of owning and operating a car driven 15,000 miles per year
  • Education: the average cost of tuition, fees, and room and board at a four-year public college

In 1985, the typical male breadwinner could cover those costs, and still have 22 weeks of pay left for other family needs, such as food, clothing, entertainment and savings. Today, the typical salary doesn’t even cover the four basics.

They also looked at female earners. The typical woman needed to work 45 weeks to cover the four big annual expenses in 1985. Today she needs 66 weeks. The most astonishing conclusion is that it was easier for a female breadwinner to provide for her family in 1985 than it is for a lone male earner today.

Remember that the study comes from a conservative-leaning institute. Here’s Cass:

“You can have a rising GDP….but if it’s in the context of collapsing families and people no longer getting married and declining fertility rates and so on and so forth, you haven’t necessarily enhanced well-being.”

Wake up America! The GOP has undone 50 years of economic gains that produced a robust middle class and vastly more economic and social justice than the country had ever known before, or since.

They have chosen candidates whose real agenda was to assist the corporatocracy in fleecing the very people who voted for them. Their candidates ran on issues like the Second Amendment, abortion, gay marriage and immigration. And then, the GOP shifted the tax burden onto the middle class. They deregulated industry and socialized corporate losses, eliminating any downside risk for banks.

We can begin undoing these things by electing Democratic majorities in the  House and Senate in November.

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Sunday Cartoon Blogging – November 4, 2018

Truthout reports:

Wall Street donors have been lavishing the Democrats in the Senate with far more money than their GOP colleagues. The top six recipients (and nine of the top 10) of Wall Street money in 2018 among senators are Democrats. Of the top 20 Senate candidates to receive donations from Wall Street this cycle, 17 are Democrats, up from six in the last midterm in 2014…

Here are the top 12 recipients of Wall Street money. Eleven are Democrats:

Screen shot from Center for Responsive Politics

Why is Wall Street supporting these Dems? Seventeen Democrats helped repeal portions of the Obama-era Dodd-Frank legislation by voting with Republicans on the Dodd-Frank repeal. Nine Democrats also crossed party lines to appoint Goldman Sachs bailout attorney Jay Clayton to lead the Securities and Exchange Commission. 37 Democratic Senators opposed his confirmation.

This is despite Pew saying in a May 2018 poll that two-thirds of Americans support laws to limit money in politics. Truthout says that for this mid-term, Wall Street has donated nearly $43 million to Senate Democrats, compared with only $19 million for Republicans, a departure from typical election years.

The Democrats’ dependence on Wall Street money is not new. In fact, President Obama raised more money from finance than any candidate in history in his first presidential campaign. Even though polling shows deep distrust over Wall Street, most politicians don’t seem to care.

Will taking Wall Street money be worth it? Will McCaskill, Tester and Heitkamp hold on? If voters really want this to change, they’ll have to stop electing politicians who represent Wall Street. On to cartoons:

Will Tuesday bring nightmares?

Tuesday’s choice:

Shouldn’t we be more worried about the gerrymandering, the crooked voting machines, the $ billions in corporate money, and the slander and attack ads?

Trump’s parade:

And a yoga class. The home of the brave has become the fortress of fear:

Keeping out the criminals:

It’s getting tougher for the GOP to keep using terrorism as their rallying call:

 

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Letter From Russia, Part III

The Daily Escape:

The Assumption Cathedral, Yaroslavl, RU. Originally built in 1210, it was  blown up by the Soviets in 1937 as part of their anti-religion policy. This new cathedral was constructed in 2010 on the same spot. In front is an eternal flame memorializing the soldiers and the workers of WWII.

Wrongo and Ms. Right spent the day in Yaroslavl, Russia. It’s a mid-sized town of about 600k residents, and an important port on the Volga River. The Volga is more than 2,000 miles long, tying the western Russian cities together. Yaroslavl is an ancient city, founded in 1010.

In Yaroslavl, we learned two interesting facts about Russian towns. Any town of size has a fortress that includes a church. In Russia, that space is called a “Kremlin”. Second, despite the collapse of the the Soviet Union, statues of the heroes of the revolution were not taken down. The idea is that young people should understand their history, both the good and the bad. Major streets have kept their revolutionary names as well.

Maybe there is a lesson in that for America.

In visiting both tiny towns and large cities, it quickly becomes evident that the peoples of Russia have suffered immensely over the centuries. They endured long periods of starvation, and their losses in blood and treasure at the hands of both their enemies and their rulers were truly extraordinary:

  • As many as 17 million died under Stalin in the Gulags. At their high point, there were thousands of Gulags across the Soviet Union.
  • In WWII, during the war with Germany, Russia lost 27 million people.
  • During the 400 years of serfdom, millions of serfs died during forced labor. They built the palaces, roads and waterways that remain in use today between Moscow and St. Petersburg.

If history teaches us just one thing about Russia, it is that its people know suffering. They have survived, and in Wrongo’s brief visit, appear to have thrived. Stores are full of product, markets are busy with the purchase of fresh vegetables, meats and fish. New cars are on the streets, theaters are open, and everything looks very clean.

How have a people who have endured so much suffering, succeeded in the modern world? How were they not irretrievably damaged by their multiple tragedies?

How are they so resilient?

Perhaps their legendary winters forge a determination to do whatever is necessary to survive a long, hard fight with limited resources. Perhaps Russia’s long history of invasion and occupation by hostile powers has played a role: Russians have been invaded by the Mongols, the Turks, the Poles, the Swedes, the Germans and the French. Their story is ultimately one of resilience despite tremendous loss of life, repeated destruction of infrastructure, and against long odds.

Another thing is that the people seem to have a profound and deep feeling for their homeland, Mother Russia. That seems to be true, regardless of who is in control in the Kremlin, or which Tsar was in charge at the time.

So they fought and died for the motherland, regardless of who was leading them.

Compare that with America’s resilience. How resilient are we, in the 21st Century? We have never faced invasion, but we have faced attack. On our homeland, we fought a seven-year revolution, and a bloody civil war. We’ve faced natural disasters.

After 9/11, we overreacted to the threat of Islamic extremists by weakening our First Amendment rights with the Patriot Act. We launched wars in Afghanistan and Iraq. But, we didn’t come together as a nation. In fact, 9/11 threw gasoline on the fire of America’s already factionalized politics.

When Japan attacked us at Pearl Harbor in 1941, we came together as a people. There were a few who said we shouldn’t go to war, but the vast majority of our people got behind a global war against fascism. We sent our fathers, brothers and husbands off to war. Women worked in the factories for the war effort. Some were on the front lines with the troops. We rationed butter and sugar.

Our people knew hardship, and pulled together in common cause.

The question is: Will today’s America still pull together in common cause? Do we have the strength of character, the grit, to fight for something larger than ourselves? Could we again sacrifice for what we believe to be the right thing?

Our response to the Great Recession of 2008 showed us that in an American financial crisis, it’s every person for themselves, unless that citizen happens to be a financial institution.

When you think about it, do you still love Lady Liberty enough to fight for her?

To send your kids to fight for her?

And, do you think that we love her as much as Russians seem to love Mother Russia?

 

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Lockheed’s F-35 Jet a Failure After 17 Years

The Daily Escape:

Cherry Blossoms in snow, Fairfax VA – March 2018 photo by Jen Johnson

Lockheed Martin‘s fifth-generation stealth fighter, the F-35, has cost $406.5 billion so far. And it still has 263 “high priority” unaddressed performance and safety deficiencies. The list of setbacks includes faulty ejection seats, software delays, weapons targeting problems, and helmet-display issues.

The program was launched in 2001. The blog, War Is Boring says:

The American people were assured the new jet would enter service in 2008 and be a high-performance replacement for the military’s aging airframes while only costing between $40 million and $50 million.

But, 17+years later, the F-35 has continuing redesign, test deficiencies, fixes, schedule slippages and cost overruns. And according to War Is Boring (WisB), it’s going into production with many still-unsolved problems:

Despite this, the F-35 Joint Program Office now intends to call—quite arbitrarily—an end to the plane’s development phase and developmental testing. Instead of completing the presently planned development work, the Program Office is now proposing to substitute a vaguely defined F-35 upgrade program called “continuous capability development and delivery.”

This means that the F-35 will begin operational testing this year, using 23 planes that still incorporate the 263 known deficiencies.

And it’s worse than it appears. The reason to build this aircraft was to combat advanced future threats by our competitor’s air forces. However, WisB reports that testing shows that the planes already delivered cannot even effectively address the current threats. That’s a problem. The ancient, battle-proven A-10 is one of the aircrafts the F-35 was designed to replace:

As of now, testing shows the F-35 is incapable of performing most of the functions required for an acceptable close support aircraft, functions the A-10 is performing daily in current combat.

More:

In the air-to-air mission, the current F-35 is similarly incapable of matching legacy aircraft like the F-15, F-16 and F-22.

So, it looks as if we have a mismanaged program that may take many additional years to turn around. Along the way, they have gotten much more expensive. CNBC reports that the cost of each aircraft has doubled:

As it stands now, the unit price for an F-35A — including aircraft, engine and fees — is $94.3 million.

So, it’s actually a worse aircraft than those it supposedly replaces, and it’s more expensive. And, we’re ordering many, many more of them. CNBC reports that the fleet will grow from 280 aircraft to 800-plus by the end of 2021.

And it seems well past the stage where the program could be cancelled, even if the Department of Defense wanted to. The plane has suppliers in all 50 states, a perfect form of political insulation from any effort to scrap the program.

If the F-35 can’t be fixed, we may see a gradual trickle of announcements about additional procurement of A-10s, F-18’s, etc., to plug the gaps. It might turn out that F-35s will be for show, or limited use only, a little like battleships in WWII.

The colossal cost for a program that doesn’t work is mind blowing – all things considered, the F-35 program will cost in the low trillions of dollars. Despite all of the effort, time, and money, it remains an open question if the F-35 will ever live up to the promises the Defense Department made years ago.

The latest annual report from the Director, Operational Test & Evaluation, (DOT&E) has this summation: (brackets by WisB)

Finally and most importantly, the program will likely deliver Block 3F [the untested, allegedly “fully combat-capable” F-35 model now entering production] to the field with shortfalls in capabilities the F-35 needs in combat against current threats.

In other words, they acknowledge that the F-35s rolling off the production line will be unable to even deal with existing threats, let alone future ones. Where’s the accountability?

But the F-35 is a success in other ways. It’s been a perfect way for Congress to move taxpayer money to the defense industry. If the object is to keep Lockheed Martin shareholders happy, the F-35 is a roaring success.

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All Aboard The Bailout Train

In February 2014, Wrongo alerted that hedge funds and other Wall Street firms had been buying up single family homes, many of which had been foreclosed on during the housing crisis between 2007 and 2010:

Most rental houses in the US are owned by individuals…but a new breed has emerged: Wall Street-backed investment companies with billions of dollars at their disposal. In just the last two years, large investors have bought as many as 200,000 single-family houses and are now renting them out.

Tim G, a Wrongologist reader who is an expert in mortgage finance, commented at the time that he hoped that:

Fitch/Moody’s and any other rating agencies learned their lesson from 2007, and won’t (as you suggested) just slap AAA ratings on these. By definition these rental properties carry much more risk, since if they are vacant for any period, the incentive to keep paying drops quickly.

Well, slap they did. You know the drill from 2008; the new game was just like the old game: The new bundled securities were AAA rated by the same rating agencies. The bonds were sold to those seeking high yield without commensurately high risk.

Now we have a new wrinkle. Wolf Richter is reporting that Invitation Homes (owned by private equity giant, Blackstone) today owns 48,431 single-family homes. This makes Invitation Homes the largest landlord of single-family homes in the US. They just obtained government guarantees for $1 billion in rental-home mortgage backed securities. From Richter:

The disclosure came in an amended S-11 filing with the SEC on Monday in preparation for Invitation Homes’ IPO. Invitation Homes bought these properties out of foreclosure and turned them into rental properties, concentrated in 12 urban areas. The IPO filing lists $9.7 billion in single-family properties and $7.7 billion in debt.

The plan is to have a successful IPO, and then refinance some of the debt with the sale of $1 billion of government-guaranteed rental-home mortgage-backed securities.

Fannie Mae, a government-sponsored entity (GSE) that was bailed out, and then taken over by the US government during the 2008 financial crisis, is providing the guarantee of bond principal and interest, and the offering documents call them “Guaranteed Certificates”. More from Wolf: (emphasis by the Wrongologist)

This is the first time ever that a government-sponsored enterprise has guaranteed single-family rental-home mortgage-backed securities, issued by a huge corporate landlord. It’s an essential step forward in financializing rents: taxpayer backing for funding the biggest landlords.

These government guarantees allow Invitation Homes to pay lower interest rates. The bottom line is that Invitation will have cheap financing for future home purchases, and thus lower costs and greater profits.

It’s a sweet deal: low-cost funding made possible by government guarantees, is a special gift that was agreed to by the Obama administration. Other corporate landlords will want to follow in Blackstone’s footsteps, and it is difficult to see how Fannie Mae will choose not to guarantee the other firms.

Bloomberg reported on a Dodd-Frank mandated stress test conducted by the Federal Housing Finance Agency. It showed that during the next severe economic downturn, Fannie Mae and its sister Freddie Mac would need between $49 billion and $126 billion in taxpayer bailout money.

Socialize the losses, Part Infinity.

The Blackstone deal looks like new policy: The government subsidizes the largest landlords, helping increase their profits from renting out the same single-family homes that individual homeowners lost to the same financial thugs during the housing foreclosure crisis. The mission of Fannie Mae is to promote home ownership, not to give real estate entrepreneurs a way to limit their losses.

This guarantee was worked out under Obama’s watch, but Blackstone did not make it public until it updated its filing with the SEC this week. The timing is curious. The public disclosure comes after the Trump team is in charge, meaning Obama wouldn’t face criticism, and the Trump Administration will certainly let the deal stand.

This is worse than the government’s gift of TARP to Wall Street. That at least had optics that said it protected Main Street. But, this securitized mortgage market doesn’t involve Main Street, and the market isn’t even in big trouble.

This isn’t a bailout. It’s a grift. The Kleptocracy is now more entrenched than in 2008.

How ironic. Big business gets a sweetheart government deal, while the GOP moves to cut social programs.

Will this add new jobs to the Trump economy?

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GOP Plans To Gut Dodd-Frank

Do you trust the banks and brokerage houses to govern themselves? Do you think that reducing banking regulations will help the economy, or your personal financial situation? Before you answer:

  • Remember that the economic meltdown of 2008 was caused by overreach by the financial industry.
  • Remember that it took the next eight years to climb out of the Great Recession and return to pre-2008 employment levels.

Dave Dayen in the Fiscal Times points out that there will be a vote this week in the Congress that will say a lot about how willing the Democrats in Congress will be to fight the deregulation avalanche that’s about to come crashing down on We the People. From Dayen: (brackets and emphasis by the Wrongologist)

As early as Wednesday, the House will take up H.R. 6392, the Systemic Risk Designation Improvement Act. This bill would lift mandatory Dodd-Frank regulatory supervision for all banks with more than $50 billion in assets, meaning those financial giants would no longer be subject to blanket requirements regarding capital and leverage, public disclosures and the production of “living wills” to map out how to unwind [the bank] during a crisis.

The intent of the new regulation authored by Blaine Leutkemeyer (R-MO), isn’t about helping the biggest banks, but the relatively smaller regional players, firms like PNC Bank, Capital One and SunTrust. An estimated 28 institutions would be affected. The eight “global systemically important banks” would remain subject to the standards: Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, Wells Fargo, Bank of New York Mellon, Morgan Stanley and State Street Bank.

But the so-called regional banks are not small operations. These 28 regionals have combined assets of about $4.5 trillion. It is useful to remember that in the 2008 crisis, regional banks like Washington Mutual and Wachovia also came crashing down.

The American Banker says that the Financial Stability Oversight Council (FSOC), the new super-regulator charged with monitoring systemic risk, will be gutted by the Trump administration: (brackets and emphasis by the Wrongologist)

Because the FSOC is headed by the Treasury secretary…[a cabinet post selected]…by the White House, a Trump administration is unlikely to continue any of the council’s…priorities, including the designation of nonbanks or continued regulation of those firms already designated.

It is obvious that if this bill passes and is signed by President Trump, financial regulation will be relaxed, not by repeal, but through atrophy. Republicans want to replace any mandatory rules for regulation with discretionary ones. That way they can claim that they’re merely improving the system by putting the decisions in the hands of the experts instead of members of Congress.

A next step will be to hire regulators dedicated to turning a blind eye to what the financial industry does. The chair of FSOC is the Treasury Secretary. Trump’s candidates for Treasury Secretary include Steven Mnuchin, Trump’s national finance chair and the most likely choice for Treasury, who sits on the board of directors of CIT, a financial services company with more than $50 billion in assets. The Treasury Secretary will ensure that the rest of the FSOC board is made up of regulators and presidential appointees who share Trump’s laissez-faire philosophy.

President Obama will veto this bill if it passes the Senate before January 20th. But the Republicans plan to roll it out this week, instead of waiting for Trump to enter the Oval Office. They want to gauge just how much backbone Democrats have after their thumping in the election. More from Dayen:

This is really a moment of truth for those Democrats. If Republicans put up a big bipartisan vote in the House for this, the Senate will be more inclined to try to pass it down the road. And it will serve as a test case for Democratic resolve more generally.

Wall Street-friendly Dems have already endorsed tailoring Dodd-Frank rules to eliminate smaller regionals from the rules. This bill is a big change, and the question is whether Democrats play ball with Trump’s deregulation agenda, or will they recognize the harm it will cause?

This is an early test for those Dems whose seats are at-risk in 2018 and 2020.

Financial deregulation has rarely been a partisan political matter. Democrats and Republicans have typically worked together to roll back rules and loosen up the Wall Street casino.

HR 6392 could represent a return to those times, or it could be the moment when Democrats join together and say “no”, forcing Republicans to support the banking industry agenda on their own.

Party line resistance by Democrats could be in their longer-term best interest.

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Our New Political Majority

(This is the last column for this week. We will resume on Sunday with cartoons. Everyone has reasons to be thankful, so take the time to talk about them with your loved ones, or your close friends this week.)

Last weekend, like most Americans, Wrongo spoke with friends and family about how we got to the disappointing political place where we are today.

Der Spiegel Online asked: If you think back ten years, could you have imagined in 2006 that America’s reality would be Donald Trump as president of the US? Probably not, but ten years ago:

  1. Economic growth and job growth both fell in 2006 as the residential housing boom came to an end.
  2. Wages were the smallest share of national income since the government began compiling the statistic in 1947.
  3. Consumer debt soared to new heights, while consumer debt payments rose to the highest on record.

Those were dispatches from the ongoing war that corporations and neoliberal economic elites made on our citizens. And it didn’t stop there. After 2006, we had the financial meltdown and the Great Recession. Banks had to be bailed out. Millions of people lost their jobs. Debt grew, and faith in government’s willingness and ability to improve the fortunes of their citizens evaporated.

The clear losers were workers in traditional economic sectors, particularly in manufacturing. According to a study by economists David Autor, David Dorn and Gordon Hanson, the increase in imports from China have resulted in the loss of 1.5 million manufacturing jobs since the early 1990s.

But automation had a greater impact: In total, some 6.9 million manufacturing jobs were lost in the US between the early 1990s and 2011. For those who have lost their jobs, it seems that their political representatives have forgotten them. Particularly when establishment Democrats and Republicans continue to push for more trade, by which they mean more imports from our global corporations who continue to export those jobs to lower-wage countries.

In 2016, despite substantially better economic times, many American still worried about losing their jobs and their financial security. They saw themselves as the losers in a game that only helps corporations and the elites. This domination of our politics by the economic elites has produced a defacto disenfranchisement of everyone else.

A new political map has emerged, one that doesn’t neatly fit into the Left vs. Right model of our politics. The new dividing line is between those who support, and those who oppose, America’s economic elites and their neoliberal policies. Those on both sides of the old ideologies who distrust the elites are connected by their fear of being left behind. This was clear in 2016 in those precincts where Trump outperformed Romney, and where Clinton underperformed Obama.

This is today’s landscape, but in 1998, Richard Rorty, an American philosopher who died in 2007, wrote “Achieving Our Country” which predicted our current political situation. According to the NYT, the following fragment of the book has been retweeted thousands of times since the election:

Members of labor unions, and unorganized unskilled workers, will sooner or later realize that their government is not even trying to prevent wages from sinking or to prevent jobs from being exported. Around the same time, they will realize that suburban white-collar workers — themselves desperately afraid of being downsized — are not going to let themselves be taxed to provide social benefits for anyone else.

At that point, something will crack. The nonsuburban electorate will decide that the system has failed and start looking around for a strongman to vote for — someone willing to assure them that, once he is elected, the smug bureaucrats, tricky lawyers, overpaid bond salesmen, and postmodernist professors will no longer be calling the shots.

One thing that is very likely to happen is that the gains made in the past 40 years by black and brown Americans, and by homosexuals, will be wiped out. Jocular contempt for women will come back into fashion…All the resentment which badly educated Americans feel about having their manners dictated to them by college graduates will find an outlet.

Rorty’s basic contention is that the left abandoned its core philosophy in favor of a neo-liberal worldview that promoted globalism and corporatism. Rorty said in a lecture in 1997:

This world economy will soon be owned by a cosmopolitan upper class which has no more sense of community with any workers anywhere than the great American capitalists of the year 1900.

Mr. Rorty’s most prescient words:

The cultural Left has a vision of an America in which the white patriarchs have stopped voting and have left all the voting to be done by members of previously victimized groups.

Rorty said that in 1998. And in 2016, it was Hillary Clinton’s failed election strategy.

What’s so striking about “Achieving Our Country” is Rorty’s argument that both the cultural and political left abandoned economic justice in favor of identity politics, ignoring too many economically disadvantaged Americans.

According to voter turnout statistics from the 2016 election, 58.4% of eligible voters actually voted (135.2 million). Clinton received about 63.7 million votes (27.5% of eligible voters) to Trump’s 62 million, (26.8%) while 9.5 million votes went to others.

This means that 41.6% of America voted for nobody, far outweighing the votes cast for Trump or Clinton.

That the majority of Americans did not vote is not because they don’t care. They voted no confidence in a political system that forgot about them a long time ago.

A minority elected Trump. The majority voted against our neoliberal political system.

 

(BTW, Tuesday was the 53rd anniversary of JFK’s assassination. While it remains fresh in Wrongo’s mind, it hardly registers in the minds of the press or the public. A new idea on Oswald’s motives appeared in the LA Times. Take a look.)

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