Financial Review

Paulson, Bernanke, and Geithner Walk Into a Courtroom

Financial Review

DOW – 17 = 16991
SPX – 3 = 1964
NAS – 20 = 4454
10 YR YLD – .02 = 2.42%
OIL + .05 = 90.39
GOLD + 16.10 = 1207.80
SILV + .49 = 17.45

Stocks erased early gains. The Russell 2000 Index of small cap stocks took a hit of nearly 1%. Earnings season is right around the corner. Alcoa kicks off the unofficial start of earning season on Wednesday, and we’ll get 8 companies from the S&P500 reporting this week. The average estimate for the S&P500 calls for right at 5% earnings growth; however there are concerns about the impact of a strong dollar on overseas revenue.

Not much in the way of economic data today. The economy added at least 200,000 new jobs in seven of the past eight months and all signs point to similarly strong hiring through the end of the year. The latest evidence? A ninth straight increase in the employment trends index produced by the Conference Board, a nonprofit economic-research firm. The index is now 6.1% higher than a year ago.

Slightly less optimistic is the new, broader, all-purpose employment index from the Federal Reserve, it’s called labor market conditions index; it was up 2.5 points last month after an increase of 2.0 in August. This is a new index the Fed has built that draws on 19 separate jobs-related measures to give a broad sense of the labor market; it includes data on labor force participation, average weekly hours and hourly earnings, and hiring and quit rates. As we have seen in many of the monthly jobs reports, the unemployment rate is more of a headline number that doesn’t always tell us if the labor market is tight or slack. This new index is designed to be more comprehensive. That’s about all I can tell you for now.

The Federal Open Market Committee releases minutes from its Sept. 16-17 meeting on Oct. 8.

The protests in Hong Kong have faded away. Protestors briefly blocked entrances to two government buildings, but faced with the prospect of government violence, combined with an agreement between government and protestors to hold formal talks in the future, the mass crowds have largely gone home. Tens of thousands of protestors are now just a few hundred stragglers. It’s difficult to keep up a mass protest for more than about one week.

World Bank experts say China’s economic growth is likely to slow slightly to 7.4% this year, and to lag even a bit more next year. A separate World Bank report says growth will accelerate in India, expanding at a 6 percent rate next year, and a bit faster in 2016.

Yesterday was election day in Brazil, at least the first round. Incumbent Dilma Rousseff and pro-business rival Aecio Neves, will face off in an Oct. 26 runoff to decide what has been Brazil’s most unpredictable election in decades. The incumbent of the Workers’ Party, or PT, had 42 percent of the votes yesterday, followed by Neves of the Brazilian Social Democracy Party, known as PSDB, with 34 percent. While Brazil’s inflation hovers around the 6.5 percent upper limit of the target range and the economy slid into recession in the second quarter, unemployment at 5 percent remains near record lows.

Last week, JPMorgan Chase disclosed that hackers had broken into their computer systems in a massive security breach affecting 76 million households. That’s a huge number, just shy of two-thirds of American households, making the breach the largest cyber-attack against a bank in history.

Yet the company has not disclosed a separate, presumably even larger figure: the number of individual customers whose personal information was compromised. JPMorgan has said that no account information was stolen by the hackers, but that they were able to access contact details like names, phone numbers and email and home addresses. Internal bank information, such as what types of accounts individuals held, was also stolen. The bank has argued that because contact information was stolen, as opposed to account details, the best way to measure the size of the hack is by households, not individuals.

Hank Paulson, Ben Bernanke, and Tim Geithner walk into a courtroom; it sounds like the making of a joke, but it is serious business about why some firms were bailed out and others were hung out to dry. Specifically, it is part of a lawsuit alleging the 2008 federal rescue of American International Group cheated shareholders of $40 billion. Former Treasury Secretary Hank Paulson testified for 2 hours today. Paulson said he valued stability above all else in regulating markets, followed by the need for market participants to be responsible for the consequences of their actions.

“It was important that terms be harsh because I take moral hazard seriously,” Paulson said, referring to the economic term for consequence-free risks. Paulson drew a distinction between AIG’s treatment and that of Citigroup, which he acknowledged received better terms than the insurer. Paulson said AIG had to be rescued because if it failed “the country faced a real disaster.” The government avoided punitive terms for Citigroup because it feared doing so would encourage shortsellers to attack other banks, further destabilizing the economy. There was no similar risk of a domino effect in the insurance market.

In a bit of a bombshell, Paulson said he talked with the Chinese government about investing in US firms as part of the rescue scheme; in AIG’s case, Paulson said he didn’t think the Chinese would be interested in a deal without a government guarantee. “The government couldn’t provide that assurance,” Paulson said. “The Chinese were very, very nervous” about investing in U.S. firms at the time.

Geithner is scheduled to testify tomorrow. Bernanke is scheduled to take the stand on Wednesday.

The FCC has extended its public comment timeframe for the proposed Comcast Time Warner Cable mega-merger. The $45 billion marriage was meant to be open for public comment and debate until Oct. 8, but that portion of the review has now been pushed back to Oct. 29; the agency expects its review of the deal to be done by Jan. 2016.

Hewlett-Packard said today that it plans to split into two separate companies, a personal-computer and printer business, and corporate hardware and services operations. Meg Whitman will lead Hewlett-Packard Enterprise, a business focused on corporate hardware and services, while Dion Weisler, the vice president in charge of Hewlett-Packard’s personal-computer and printer operations, will become CEO of that business. The HP split comes a week after eBay announced it would spin off PayPal to shareholders. This looks like another example of financial engineering. If HP hasn’t been able to right the ship after dozens of industry-spanning acquisitions and an inconclusive multiyear restructuring, the next logical step is to bust it up and hope the pieces are worth more than the whole.

Glencore Plc is laying the groundwork for a potential merger with Rio Tinto Group in the next year that would create the world’s largest mining company, worth about $160 billion. As a preliminary step, Glencore has reached out to Aluminum Corp. of China, the Chinese state-backed company that is Rio’s largest shareholder, to gauge its interest in a potential deal. A merger would catapult the combined company past BHP Billiton to become the largest mining group, combining Glencore’s commodity-trading operations with Rio’s portfolio of iron-ore projects.

The Spanish health minister reports a Spanish nurse who treated a missionary for Ebola at a hospital in Madrid, has tested positive for the disease. The female nurse was part of the medical team that treated a 69-year-old Spanish priest who died in a hospital last month after being flown back from Sierra Leone, where he was posted. The nurse is believed to have contracted the virus from that priest. The World Health Organization confirmed there has not been a previous transmission outside West Africa in the current outbreak. Spanish authorities said they were investigating how the nurse became infected at a hospital with modern health care facilities and special equipment for handling cases of deadly viruses.

Today, the White House announced the government would develop expanded screening of airline passengers for Ebola, both in the West African countries hit by the disease and the United States.

The 2014 Nobel Prize in Physiology or Medicine was awarded on Monday to American-British neuroscientist John O’Keefe, and Norwegian scientists May-Britt Moser and Edvard Moser. The Mosers are the fifth married couple to be awarded a Nobel Prize. The trio received the award for their discoveries of cells that constitute a positioning system in the brain, which was described as an “inner GPS.” In 2005, they discovered a type of nerve cell that generates a coordinate system and allows for precise positioning. Together, these discoveries explain how the brain creates a map of space and how we navigate our way through a complex environment. Now, here’s where it gets interesting; Alzheimer and dementia patients often have a hard time with location – they tend to get lost easily. Since these spatial cells are among the first to be hit in Alzheimer’s and other forms of dementia, understanding how they are degraded should shed important light on the disease process.

The Supreme Court today said it would not hear appeals from five states whose same-sex marriage bans had been invalidated by lower federal courts. The decision, issued without explanation, will lead to recognition of gay marriages in 11 more states. It also allows an avalanche of legal challenges to the remaining bans to keep going forward in state and federal courts, where gay and lesbian couples have overwhelmingly prevailed.

The court’s decision leaves unchanged 20 state laws blocking same-sex unions. Each is already under legal attack, facing challenges in state or federal court, and sometimes both. Challenges to marriage bans already have reached a handful of state appeals courts and in the federal Fifth, Sixth, Ninth and Eleventh circuit appeals courts. By letting gay and lesbian marriages go forward in 11 other states, the justices almost certainly made it harder to reverse course in the future. If they do, the court would have to do more than simply prohibit some couples from marrying; it would have to invalidate marriages that have already taken place. It will become very hard for the Supreme Court to take that back.

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Thanks Hank

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