Author: Daniel Indiviglio

As the government works to finalize by July its financial regulation bill meant to prevent another crisis, the Financial Crisis Inquiry Commission is still trying to figure out what went wrong. Despite the fact that President Obama will sign a bill this summer, the FCIC won’t even issue its report until December. What’s the point?

This question is posed by an editorial in today’s Washington Examiner. It provides FCIC Chairman Phil Angelides’ response:

Angelides and the FCIC’s vice chairman, former Republican Rep. Bill Thomas of California, told The Washington Examiner the panel won’t be making policy recommendations. “This report is to explain to the American people what really caused the meltdown,” said Angelides. But if it won’t be making policy recommendations and Congress has already passed legislative fixes to avoid another meltdown, why are we spending $8 million on this commission? The only explanation Angelides could offer was that his panel’s report might be of use to those who enforce the new law.

So $8 million of taxpayer money is being spent just in case someone might want to read it? Why not use that money to save some teacher jobs, or prevent a few dozen foreclosures? At least those options would provide tangible results.

In fact, a theoretical report that the government isn’t actually using to form its policy is a complete waste. If you want to learn what happened during the financial crisis, just pick up one of the many books written about it, such as former Treasury Secretary Hank Paulson’s “On The Brink,” Andrew Ross Sorkin’s, “Too Big to Fail,” or Michael Lewis’ “The Big Short,” to name a few. Or read some of what are sure to be thousands of economics and finance journal articles written by academics for the next 50 years about the crisis. All of that great stuff comes without costing taxpayers a cent.

What’s stranger is that the FCIC, which is a body that seeks transparency about Wall Street, refuses to disclose its own finances. According to the editorial, Angelides refuses to reveal how he’s spending the $8 million budget. He won’t release a list of staff members, salaries, or job descriptions. We requested this information as well, so should they decide to provide it, we’ll be sure to keep you posted. Of course, no matter how the FCIC is using the money, it’s pretty hard to imagine that it could be well spent, considering how little impact its report will ultimately have.

Financial Crisis Inquiry Commission – Wall Street – Economic – FCIC Chairman Phil Angelides – Michael Lewis

High-end jewelry retailer Tiffany & Co. posted an impressive 22% rise in sales for its first quarter ending April 30, 2010, compared to the same period in 2009. Once luxury companies start rebounding, that’s generally a positive sign for economic recovery. So should we take this to indicate the growing strength of the U.S. consumer? Sort of, but we shouldn’t get carried away.

If you break down the Americas’ stores contributions, you quickly find that its flagship New York store made up a very large portion of that 22%. In nominal terms, Tiffany had $57 more in Americas sales for the first quarter of 2010. Using the data provided, you can estimate how this breaks down for its flagship versus the others in the Americas. If you do, you find that around $47 million came from that single store. Only around $10 million came from the rest. That breaks down into a 26% increase for the NY store, and a 13% increase for its other U.S. locations.

Of course, 13% isn’t bad — but it isn’t 26%, or even 22%. What this likely means is that consumers are, indeed, stronger, but most of the impressive result is coming from New York.

Why does this matter? Because New York City isn’t a microcosm of the rest of the U.S. economy. Its economy was explicitly bailed out, as the financial sector benefitted hugely by government intervention. As a result, Wall Street got back to business as usual much more quickly than the rest of the U.S. Lawyers, consultants and accountants located in Manhattan consequently made more money, as did all other companies based in New York City, down to the hot dog vendors. All would have been worse off without a rescue. As a result, Tiffany, and likely other luxury retail stores in Manhattan, benefitted disproportionately. New York City’s wealthy recovered more quickly than average Americans.

Additionally, wealthier individuals are generally coming out of the recession more quickly than low- and middle-class Americans. Part of that has to do with the broad stock market recovery that the U.S. experienced since March 2009 lows. That wealth effect will be felt a lot more by the rich, since they have bigger investment portfolios than other Americans. Consequently, it makes sense that luxury would begin to rebound. After all, not many poor or even middle-class Americans shop at Tiffany’s.

New York – Wall Street – Tiffany – New York City – Tiffany & Co

As November midterm electrons get closer, Congress grows bolder in its effort to crack down on Wall Street. That could be part of the reason why the Senate’s bill is, in some places, more aggressive than the House’s legislation — it was completed five months later. Democrats assume that aggressive financial reform is very important to Americans, and Republicans worry that they’re right. Yet, a poll by Rasmussen casts doubt on this theory.

According to the pollster, more oppose additional financial regulation than those who favor it. In fact, 46% “oppose government regulation of the U.S. financial system.” Meanwhile, just 37% favor more regulation. The other 17% are undecided.

Sure, 46% isn’t a majority, but you should add the big portion of undecided to this tally if you want to see the number of voters who don’t much care about or are even against additional financial regulation. After all, if you’re undecided about something, chances are you’re not passionate about the cause. That leaves a measly 37% of voters who might be pleased enough with Washington’s effort to vote for an incumbent who voted for it.

Democrats are hoping that financial reform can save them some seats. They’ll have to rely on it, along with health care reform, as their body of accomplishments. Health care reform’s popularity wasn’t sweeping, and if Rasmussen’s poll is right, then cracking down on banks might not have as broad a populist appeal as Congress thinks.

Come November, unemployment will still likely be hovering around 10%, so the economy will likely be at the front of voters’ minds. But Rasmussen’s poll also indicates that an incredible 72% of Americans are not confident in Congress to address current economic problems. That doesn’t bode well for incumbents in the majority party.

(Nav Image Credit: cliff1066/flickr)

Rasmussen – United States – Health care – Wall Street – Republican Party

Somewhere, Bill Clinton is smiling. One-time special prosecutor who uncovered the dirty details of the former President’s affair with intern Monica Lewinsky has been engaged in some bad behavior of his own, according to the Justice Department and Securities and Exchange Commission.

Correction (~3:18pm): Apparently there are two famous Kenneth Starrs. The one charged is an investment advisor to the stars, but not the former special prosecutor. Apologies to Bill Clinton if we got his hopes up — and to the other Kenneth Starr.

Kenneth Starr, notable Hollywood investment advisor — not the former special prosecutor of the same name who detailed the Bill Clinton-Monica Lewinsky affair — is being charged with running a $30 million Ponzi scheme. Complaints have been filed by both the Justice Department and Securities and Exchange Commission.

The Financial Times Alphaville blog breaks the news. It explains that Starr provided investment and tax advisory services for a number of high profile clients. Many of those are big names in entertainment including Martin Scorsese, Annie Leibovitz, Sylvester Stallone, and Wesley Snipes. The DOJ claims (.pdf) that Starr defrauded his clients, one of which it even says is an actress. In particular, there are five charges:

• Wire Fraud
• Investment Advisor Fraud
• Money Laundering
• False Statements in an IRS Filing
• False Statements to a Federal Officer

A separate, but similar, SEC complaint against Starr Investment Advisors LLC and Starr & Company LLC explains some of the alleged activity:

According to the SEC’s complaint, filed in federal court in Manhattan, Starr and his companies transferred $7 million from the accounts of three clients between April 13 and April 16, 2010, without any authorization. The transferred funds were ultimately used to purchase a $7.6 million apartment on the Upper East Side in Manhattan on April 16. When one of the clients detected the unauthorized transfer and demanded the money be returned, Starr reimbursed that client with money siphoned from the account of another client without authorization. The other two investors have not been reimbursed.

This sounds like pretty prototypical Ponzi scheme maneuvering. Take money from one client, channel it to another when necessary, and keep some for yourself. The DOJ complaint has similar sorts of allegations in even greater detail. It explains the tax scheme accusation, which involves former President of the New York City Council Andrew Stein, who Starr advised.

The SEC lawsuit also lists Starr’s wife Diane Passage as a defendant whose assets have been seized.

Update: Daily Beast reports that the actress mentioned above who was defrauded is Uma Thurman.

Bill Clinton – Manhattan – Monica Lewinsky – Sylvester Stallone – Upper East Side

How many times have you read a news article or seen segment about a view that the stock market, or some part of the economy, will improve based on an argument made by an investor? Some journalists love talking to fund managers about their investment strategies. Sure, they may have done some research that suggests some future expectation. But they also have an unabashed bias — since their view is driving their investment strategy. Why are they so easily trusted?

There are countless examples of news articles that take the form just described. Today, Bloomberg has one. Its headline is, “Barton Biggs Says Stock Market Set to ‘Pop’ in Days.” Biggs is a hedge fund manager. He apparently did quite well last year — his return was three times the industry average. Here are a few excerpts of the article:

“I think they’re going to stabilize in this general area, and then we’re going to have a significant move to the upside.”

Biggs recommended buying U.S. stocks last year when benchmark indexes sank to the lowest levels since the 1990s. The Standard & Poor’s 500 Index rallied 23 percent in 2009 as governments worldwide mounted stimulus programs to counter a recession.

But now comes the kicker!

On March 22 this year, Biggs told Bloomberg TV U.S. stocks had the potential to rally a further 10 percent. The S&P 500 has since declined 8.4 percent.

Whoops. And yet Bloomberg goes back to the same trough to feed. It then provides some further insight from Biggs:

“The market is very, very oversold, and I think we’re going to have a big pop to the upside some time in the next couple of days,” said Biggs. “I wouldn’t be surprised to see us go to a new recovery high, just to make everybody squirm.”

Or he could be wrong again, and we could get a drop — instead of a pop — leading to a new recovery low.

To its credit, Bloomberg doesn’t take Biggs’ word as gospel. It follows by presenting a contrasting view by another hedge fund manager who is bearish. He is better against stocks.

But both of these accounts suffer from the same problem: they’re hopelessly biased. If suddenly, one of these fund managers’ research analyst whispered in his ear that a big mistake was discovered in their analysis and their current market position is completely wrong, do you think they’d change their story on-air? Not before correcting their portfolio accordingly.

This problem could be corrected if the interviewer asks just one question: why? It’s fine to report that an investor thinks the market will improve or worsen. But on what is that opinion based? Provide some analysis, instead of just giving readers opinions contaminated by investors’ incentive to have their portfolios do well. Learning where fund managers stand in relation to the stock market without worrying about why may make for good entertainment, but it makes for poor journalism. 

For better or for worse, investors will likely remain popular sources for business news. Reporters don’t like to stick to interviewing only academics, and readers will tire of their theory and hunger for opinions of those in the trenches. The hope, then, is that readers always take the opinions of investors with great skepticism, unless compelling analysis is also provided.

Hedge fund – Standard & Poor – Bloomberg Television – Investing – Business

Are property taxes heroically keeping state and local economies afloat or villainously prolonging the recession? Both.

Kim Rueben from the Tax Policy Center celebrates property taxes for the first reason. She explains that property taxes are slow to come down as real estate prices decline. As a result, people are stuck paying higher property taxes than the new market value of their real estate would imply. Explaining what she learned at a recent Tax Policy Center conference, she says:

Nationally, property tax revenues have yet to fall both because the levy tends to be backward-looking (it takes a while for assessed values to catch up with reality on both the upside and the downside) and because local governments can raise rates. The strength of the property tax was the main driver of the small positive growth in overall state and local taxes for the fourth quarter of 2009. This was a theme in many of the presentations. New research by Byron Lutz, Raven Malloy and Hui Shan illustrates that house value declines don’t necessarily lead to lower property taxes, and when they do, it can take a while. With luck, by the time property taxes do dip, sales and income taxes will be recovering. The good news is that if property taxes could stand up in this recession, which was both deep and caused by a housing collapse, they can stand up to most crises.

That’s certainly one way to look at it. Good for those state and local governments for getting more money in tax revenue than they should be. Now there is a smaller chance that they’ll default, or crawl to Washington and plead for a federal bailout.

On the other hand, however, isn’t this a grave injustice for property taxpayers? Many of these people have already seen their real estate decline in value substantially — in some areas the decline approaches 50%. So if someone now has a home that’s worth $100,000, is it fair that the homeowner owes property taxes that assume it’s worth $200,000? The percentage decline in value will be proportional to the amount people are now overpaying in taxes.

The last thing these frustrated homeowners need is another reason to consider walking away from their home. Not only are many Americans stuck with paying a mortgage for more than their property is now worth — but they’re paying excessive taxes as well. This definitely makes strategic default look even more attractive.

Then, there’s the effect on the recession. If these people weren’t paying that money as taxes, they could be stimulating the economy. Spending would be higher, businesses would grow, and employment would improve. While the state and local governments certainly could use this money, it’s hard to justify providing the government with more money at a time when the private sector so desperately needs it.

This reveals a problem with property taxes. Their sticky nature leads to their unjust application when real estate values decline — or rise — quickly. They oppose economic cycles, which will make bubbles bigger and recessions more severe. This contrasts with income taxes or sales taxes. It’s impossible to ultimately over- or under-tax people based on their income or spending, because the taxes adjust dynamically as those variables change. That’s one reason to favor these alternatives to property taxes.

United States – Property tax – Tax – Income tax – Real estate

First quarter GDP growth was a little less than we thought. It was revised down to an annualized rate of 3.0% from its initial estimate of 3.2%, according to the Bureau of Economic Analysis. This came as a surprise to economists. Even though GDP was revised downward, they expected the opposite — for the second estimate to raise growth to 3.5%. What happened?

First, for those who like charts, here’s some historical perspective of GDP:

Even with this slight revision, the first quarter remained the second highest quarterly growth rate we’ve seen since the recession began in late 2007.

The revision was caused almost entirely by the personal consumption expenditures portion, i.e. consumer spending. Even though this got a lot better in the first quarter, it didn’t improve as much as originally thought. It was responsible for 2.42% of the 3.0% growth. The prior estimate reported a 2.55% contribution. That 0.13% difference is responsible for the vast majority of the 0.2% revised drop.

In particular, spending on services — not on goods — was overestimated. The services that consumers didn’t use as much as thought were housing and utilities, and food services and accommodations.

Of course, 0.2% isn’t much. But it is a little disappointing where most of this revision came from. Spending needs to drive the recovery to create jobs. It’s also unfortunate that restaurants and travel was one of the most downwardly revised components; spending on these non-necessities is also an indicator that consumers are feeling much more comfortable opening their wallets. This component, and spending overall, still showed a healthy increase compared to 2009, but these revisions make their progress a little less impressive.

Also interesting to note, but not a source of the revision, was how trade estimates changed. Exports were revised up a bit. They increased by $27.3 billion instead of $22.0 billion. Meanwhile, however, imports were also revised up to a $47.6 billion increase from $41.0 billion in the initial estimate. So the net result is mostly a wash: the two revisions approximately cancel each other out. But it is good to see more exports than originally anticipated.

Finally, keep in mind that there’s still another revision coming. Since downward revisions are more common than upward revisions, while there’s a chance that we could return to the 3.2% original estimate, it’s not too likely. But hopefully the final number won’t sink below 3.0%.

Note: Data above is seasonally adjusted.

Bureau of Economic Analysis – Gross domestic product – Economic growth – Recession – International trade

Just yesterday, the Conference Board reported that consumer confidence is up in May — way up. But an updated reading from Gallup says otherwise. Consumer confidence may have actually fallen last week.

The Conference’s Board reading only went through May 18th. But Gallup provides weekly poll results on consumer confidence. So it has new data through May 23rd. Here’s what it shows:

Although Gallup’s data doesn’t precisely coincide with the Conference Board’s magnitudes prior to May 23rd, they both agree that confidence had risen since March through mid-May. But last week, that ending May 23rd, Gallup saw a big 5-point drop. That erased its April gain, to put it back at late-March levels.

What happened last week? Gallup says:

This likely reflects fallout from the European financial crisis manifested in the declining U.S. stock market, and not included in Tuesday’s consumer confidence report.

So perhaps Europe and other general economic worries are beginning to weigh on American consumers. The stock market, in particular, could be a major area of anxiety. It’s down about 10% since its April high. Even if consumers aren’t worried about Europe, they may have felt a hit to their portfolios over the past month.

Conference Board – United States – Gallup – Consumer confidence – Financial crisis

Who knew federal prosecutors were so good at breaking news? A former Disney administrative assistant and her friend have been arrested for attempting to sell non-public information to investors — but that may not be the big news. In the complaint (.pdf) that the government released today regarding the action, prosecutors may have inadvertently revealed that Disney may be on the verge of selling its broadcast network ABC.

According to the complaint, the ex-employee — Bonnie Hoxie — sent e-mails to several investors saying that she would sell them non-public information before the company’s earnings announcement. She was the administrative assistant of Disney’s Head of Corporate Communications. But the FBI got wind of this and had an undercover agent posing as an interested investor contact Hoxie. In an attempt to show her insider credentials, Hoxie sent the following e-mail after learning that the fake investor wanted to make a deal:

I only have access to the earnings report that is delivered to us three days before its official release date. Until then i will not be able to get you any other documents but here is a piece of information i can give away to show good faith and build trust. Bob Iger is in serious and advanced negotiations with two private equity firms to sell them the ABC network but no price has been determined yet. I will keep aware of any relevant information that could move the stock price in the future.

(The letter above is presented as is, not corrected for grammar or punctuation.)

Bob Iger is Disney’s CEO. A few months later, Hoxie accurately provided Disney’s quarterly earnings-per-share as $0.48 to the FBI agent a few hours before the information was publicly released.

It’s not a huge surprise that Disney is humoring an ABC sale, but it hasn’t been reported that it was in “serious and advanced” negotiations. On Monday, for example, the New York Post speculated that Disney might be considering looking for buyers:

Meanwhile, ABC’s future in the Mouse House is also not guaranteed, with Disney chief Bob Iger said to be taking a hard look at the network.

“There are no guarantees,” he said recently about ABC’s future at Disney. A source said the issue is what to do with the accompanying stations.

Being in “serious and advanced” negotiations with private equity investors for a sale isn’t “taking a “hard look” — it’s being on the verge of a sale. If this ex-employee had her facts right — and she did about EPS — then this is significant news. Did federal prosecutors realize that they were releasing this potential bombshell by unsealing the complaint?

Disney was contacted about the validity of Hoxie’s claim about its intent to sell ABC, but has not yet responded. (I will update this post if they do.)

Update: Thanks to a commenter who pointed out that, even though it isn’t on their own website’s press releases, Disney has issued a statement saying:

The reference in the complaint to conversations regarding the ABC Network were and are false.

Now we can only wonder why Hoxie would have used a false claim to attempt to ‘built trust’. Usually, you’d want to use a fact to do that. What if the investor had attempted to verify this information by asking around if his friends at any private equity firms are bidding on major networks? It might have also been nice to see the DOJ state that this purported fact was false in the complaint, rather than get the market wondering if it might be true.

Disney – Walt Disney Company – New York Post – ABC – American Broadcasting Company

Showing impressive demand for electronic vehicles, Nissan has sold out its Leaf vehicles that will be produced this year. Just a little more than a month after the automaker started taking pre-orders, it reached the 13,000 reservation mark. That’s not a huge number, but it does indicate that consumers may warmly embrace electric cars.

Nissan’s all-electric Leaf could cost consumers as little as $25,280, after the federal government tax credit. Additional state tax credits might also apply for some buyers, further cutting its price. That makes the Leaf surprisingly affordable, given its technological prowess. Nissan began taking orders on April 20th, which required a $99 reservation fee. The company announced the sell-out yesterday. The vehicles will be available in December.

Thirteen thousand might not sound like a lot, but clearly there are some Americans eager to purchase a car with zero tailpipe emissions. Of course, the power plants that produce the electricity used to power the cars will likely produce emissions, but the vehicles require no gas. The flip side is that you can only drive 100 miles without recharging at home or a charging station equipped with an electric outlet designed for the vehicle. But that must not bother the consumers who rushed to be the first to own the car.

At this point, Nissan is taking orders for its 2011 production. The company hopes to have 500,000 of these vehicles on the road by 2013. So even if this initial burst of production wasn’t big enough to be sure that Americans will broadly demand all-electric cars, we’ll know the verdict before too long.

Electric car – Nissan – Nissan Motors – Nissan Leaf – United States

Americans bought a lot of new homes in April, as they rushed to take advantage of the government tax credit. The sales of new homes increased 14.8% to an annualized rate of 504,000, according to the Census Bureau. This easily beats economists’ expectations of 425,000. April’s rise follows an upwardly-revised increase of 29.9% in March. Since February, new home sales are up an incredible 49.1%. This sounds wonderful, but once the influence of the buyer credit wears off, a brutal hangover in May will likely follow.

As impressive as the rise from February sounds, it needs to be taken in context. That month marked the fewest new homes sold since the government began keeping track in 1963. Even April’s huge rise to 504,000 looks pretty pathetic compared to the housing boom numbers:

As you can see, April’s new home sales are the highest in almost two years — since May 2008. The number also represents a 47.8% increase over April 2009, a year earlier. So if this trend continues, then that would be good news for construction jobs.

Unfortunately, it won’t. We also learned today that mortgage applications for new purchases declined for the third week straight, by 3.3%. In May, without the government credit, mortgage applications for purchases are down a 36.2%. Here’s how that looks:

The red line is the Mortgage Bankers Association index, and the bright green line shows its level during the week ending May 21st. Mortgage applications for purchases are now at a level not seen since April 1997.

What might this mean for new home sales? If they drop by the same proportion as mortgage purchase applications have so far in May, then they would hit a new all time low of 321,000 sales this month. And this time around, the low doesn’t have a government credit to bail it out in the months that follow like in February.

Of course, May isn’t over, so if the trend continues, then this would be an optimistic prediction. Moreover, it’s plausible that buyers will turn more to existing homes than new ones without the credit. They’ll seek bigger bargains on foreclosures and short sales since the government incentive is gone.

Ultimately, that would be good for housing market stability. Buyers need to focus on soaking up most of the massive existing housing inventory before building new homes. And that inventory is rising. As far as jobs are concerned, construction will have to mostly rely on renovations for those existing home sales.

Note: All data above is seasonally adjusted.

Mortgage – Mortgage Bankers Association – Tax credit – U.S. Housing Market – Business

Over the past two days, to big banking regulators, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), have each taken steps to help credit card consumers. The Fed introduced a new searchable database of credit card agreements. The FDIC, provided guidance for consumers on how to better manage their credit cards. Even though the Fed’s effort is more sweeping, the FDIC’s approach might be more effective.

You can play around with the Fed’s new database here. It contains hundreds of credit card disclosures. The creation of this accessible file of paperwork was required through last spring’s credit card regulation bill. While a valiant effort, it’s hard to see how the database changes much. Sure, if you have an Internet connection, you can now search online for your disclosure. But banks, theoretically, already supplied you with that disclosure. And they likely will supply you with another if you lost it (or should be required to if they aren’t).

Moreover, the problem isn’t really with obtaining these disclosures, but with understanding them. The Fed’s effort does nothing to simplify the legalese that stumps so many consumers without any finance training. Even though the Fed’s heart was in the right place on this one, it’s hard to see how it will have that much impact.

The FDIC’s effort is more useful, however. In its most recent consumer newsletter the regulator provides some clear and well-written information for credit card consumers. One part includes a nice narrative summarizing new consumer protections. Another provides eight ways to avoid credit card pitfalls. They include:  

• Understand your right to cancel a credit card before certain significant account changes take effect.
• Keep an eye on your credit limit.
• Decide how you want to handle transactions that would put you over your credit limit.
• Be cautious with “no-interest” offers.
• Keep only the credit cards you really need and then periodically use them all.
• Do your research before paying high annual fees for a “rewards” card.
• Take additional precautions against interest rate increases.
• Parents of young adults have a new opportunity to teach responsible management of credit cards.

The webpage contains additional detail on these tips. They’re great advice. Some of them might seem like common sense to fiscally responsible consumers, but others might find these tips revelations. These recommendations are especially good because even unsophisticated credit card users should be able to understand the advice that the FDIC provides. That gives this approach a big advantage over the Fed database.

Federal Deposit Insurance Corporation – Credit card – FDIC – Bank – Finance

The House and Senate may have both passed financial regulation bills, but the battle to create the final legislation isn’t over. Next up: the two chambers must reconcile their bills. The essence of these two bills overlaps fairly well, as explained here. But the details contain a number of significant differences that have to be hashed out. Here are some of the most important.

Consumer Financial Protection Agency/Bureau

Congress needs to worry about more than just what to call the new consumer watchdog. One of the biggest issues will be to determine where to put it. The Senate bill makes it an independent branch of the Federal Reserve, while the House version just creates it as a new agency altogether. House Financial Services Chairman Barney Frank (D-MA), who will be the lead negotiator for the House, has indicated he wants it independent. But Senate Banking Committee Chairman Christopher Dodd (D-CT), who will be the lead negotiator for the Senate, put it in the Federal Reserve to appease moderates. Either Dodd will have to convince some Senators that the agency should be truly independent or Frank will have to make peace with its presence in the Fed.

Some of the details of the powers and oversight of the agency/bureau also differ between the bills. One of the most notable differences is the auto dealer exclusion contained in the House bill. Even though the Senate’s bill doesn’t make this exception, expect the Senate to ultimately concur. It passed a resolution yesterday to direct conference committee to take this precise step, by a vote of 60 to 30. The White House, however, doesn’t like the exclusion — so you never know.

Derivatives

The derivatives language could be the most contentious of any section. The Senate bill took a very aggressive stance on this issue, and would force banks to put their derivatives businesses in separately capitalized affiliates. The House bill doesn’t contain any such proposal. While it’s unclear if Frank will go along with this provision, it matters more whether the House can pass a bill that includes the proposal. This could very well fall out of a final bill, especially if the conference process continues until after Blanche Lincoln’s (D-AR) runoff primary on June 8th. She was the author of the controversial section.

Resolution Authority

Both bills agree on the need for a regulator to step in and wind down giant non-bank institutions that collapse. They also agree that it makes sense for the FDIC to take on this task. But there are a couple of key differences. In particular, the chambers disagree on the tools that the FDIC will have in its chest. The House version would give it a pre-funded sum of up to $150 billion to work with to cover the costs of resolution. The Senate, however, has no fund and will worry about expenses of resolution after-the-fact, with a loan from taxpayers until bankruptcy proceeds will (hopefully) pay back the costs. The Senate could win out on this one, as Frank’s original bill also called for collecting costs after-the-fact, though through a different means. The provision was changed to a pre-emptive fund before it was finalized.

There are lots of other minor details to take care of here as well. The processes for determining how to wind down a firm aren’t precisely the same in both bills. The House bill paid more attention to how the resolution authority would treat creditors. It seems plausible that when one chamber provides greater detail than the other, such provisions will simply be adopted in the final bill, assuming little objection. That would generally err on the side of the House, since it took more time to work out the details, compared to the Senate’s rushed approach.

Break-Up Powers

Some advocates for cracking down on big banks wanted them broken up. Neither bill explicitly takes this step, but both bills allow for firms to be broken up under certain circumstances. The House version provides the new council the power to break up firms if a simple majority of its members believe the systemic risk cannot be regulated out of them. The Senate bill, however, only calls for breakup as a possible punishment for firms that don’t provide the resolution authority adequate failure plans. In that case, two-thirds of the council and the Federal Reserve Board must consent to break-up.

It’s quite possible that the House’s provision, which was an amendment sponsored by Rep. Kanjorski (D-PA), could fall out of the final bill. The Senate refused to consider a provision that would have broken up large institutions, so Senators may reject the notion that the council should have broad authority to break up firms. Alternatively, the Senate might call for a stricter two-thirds vote standard.

Proprietary Trading

As explained at length here, both bills contain provisions that could lead to banning proprietary trading at financial institutions. Each depends on the whim of regulators, but the details differ. We’ll likely end up with some sort of prop trading ban, though it might require a study or remain at some regulator’s discretion. If a ban does happen, expect Frank to demand a few exclusions. He has already promised to fight to exclude insurance companies and bank asset management from the provision.

Leverage

Its 15 to 1 leverage limit is an important, and often overlooked, aspect of the House bill. It’s one of the few ways where its version is more aggressive than the Senate’s. In fact, some Senators did try to impose leverage limits on financial institutions through amendments. Those attempts failed, however. As a result, it’s a little hard to see how the House could manage to keep this provision alive in the final bill. But expect Frank to try.

Fed Audit

Each bill also contains a provision which calls for Congress auditing the Federal Reserve, but they differ significantly. The House’s version came through an amendment sponsored by Rep. Ron Paul (R-TX). It’s more aggressive than the Senate’s version. The House would provide the ability for Fed audits in perpetuity on many aspects of its business. The Senate’s version, however, provides for a one-time audit, specifically regarding the emergency stabilization measures it employed during the financial crisis. Since the House’s version resembled the Senate’s original proposal, sponsored by Rep. Bernie Sanders (I-VT), expect to see its new version win out. Sanders was forced to change it, because he didn’t have the votes for the House’s more aggressive approach.

Rating Agencies

Both bills attempt to reform the rating agencies, but the Senate bill goes much further. The House bill mostly just lightly regulates the agencies and allows investors to sue for gross negligence in rating. The Senate bill, however, allows investors to bring a lawsuit if an agency did not conduct a “reasonable investigation” — a weaker standard. Moreover, the Senate bill would create a committee of investors and other market participants who assign a rating agency to assign every new securitization deal, thanks to an amendment by Sen. Al Franken (D-MN). It’s unclear if the House will be on board with these stronger provisions.

As you may have noticed through this analysis, most of the differences among the two bills resulted from amendments. Even if some of these are shaven off, the essence of the legislation will still remain the same. Many of these details matter a lot, however. But ultimately, the conference committee must determine which of these details are politically popular so it can get a bill passed, not necessarily which are best for the financial system.

Senate Banking Committee – White House – Blanche Lincoln – Financial services – Federal Reserve System

No. But regulators looking at pornography, doing illegal drugs and other bad behavior explains part of the reason why the government failed to do its part to prevent the disaster. A new report (.pdf) from the Interior Department’s Inspector General details how the Minerals Management Service (MMS) employees who were supposed to be watching over the Louisiana region acted more like criminals than public servants. The report has some pretty awful findings.

Conflicts of interest existed between many MMS employees and the industry they regulated. The companies sponsored MMS sporting events, provided employees meals, and gave them lavish gifts, according to the report. It says was widespread throughout the culture of the office. Some examples of the gifts include: a trip to the 2005 Peach Bowl college football tournament, skeet-shooting contests, hunting and fishing trips, golf tournaments, crawfish boils, etc.

What did they get for these gifts? MMS inspectors allowed oil and gas production company personnel to fill out their own inspection forms, says the report. It’s pretty easy to pass an inspection when you do it yourself.

And that’s not all. Two employees admitted using illegal drugs — crystal meth and cocaine.

Then, there’s the porn. The report says:

We reviewed the e-mail accounts of MMS employees at the Lake Charles and New Orleans offices from 2005 to 2009. We found numerous instances of pornography and other inappropriate material on the e-mail accounts of 13 employees, six of whom have resigned. We specifically discovered 314 instances where the seven remaining employees received or forwarded pornographic images and links to Internet websites containing pornographic videos to other federal employees and individuals outside of the office using their government e-mail accounts.

What is it with bureaucrats and pornography? Last month, we learned that some SEC employees were busy surfing porn when they should have been discovering fraud or preventing the financial crisis. When will the government put some filters on its computers?

Of course, the real question here is why government regulators don’t just fail to do their jobs, but strive to fail so spectacularly? The report blames nepotism. It says most of the problem employees were hired more due to connections than actual knowledge or experience in the industry.

(h/t: Business Insider)

Consumer sentiment is definitely healing. In May, Confidence climbed further, according to the Conference Board. The Consumer Confidence Index now sits at 63.3, up from 57.7 in April. It has increased for the past three months, as it dipped all the way down to 46 in February. This is the best consumer sentiment we’ve seen since March 2008. It also soundly beat economists’ expectations of 59.0. The report contains even more good news.

But before getting into that, here’s the miniature chart that the Conference Board provides:

This begins to show just how much confidence has risen recently. If this trend continues, we’ll soon hit pre-recession levels of confidence.

Speaking of pre-recession levels, that’s where the Conference Board’s expectations index stood in May. It rose to 85.3 from 77.4 in April. Of course, expectations prior to a recession aren’t necessarily impressive. Indeed, the confidence reading, though rising, is still weak by historical levels. So good times aren’t exactly here again for U.S. consumers, but they clearly feel a lot better than they had during most of the recession. And the expectations index shows their optimism.

Yet, the market today, and over the past few weeks, poses a nagging question: can this consumer recovery really take hold? The Dow is down 12% since its April high of 11,205. The housing market is also showing signs of weakness now that the government credit has ended. And that doesn’t even begin to take into account all of the instability overseas with conflict in the Koreas and sovereign debt crises plaguing Europe. So far, consumers haven’t let any of that get to them. But if those worries mount, they could begin to pull back again.

Conference Board – Consumer Confidence Index – United States – Economic – Economy

If you’re a market-watcher, then you know the Dow fell below 10,000 at its open, down 200 points as of around 10:15am. What’s driving the drop? Europe’s instability? Korea’s conflict? General fear of a double dip? Probably all of the above, and more.

As Megan McArdle explained last week, it’s always tempting to try to make a big deal out of the stock market dropping a few percent, and explain it away with a chief cause. But it’s also generally hack journalism. The stock market is hopelessly complicated, and its moving parts change direction for a variety of reasons. As a result, while single reasons for aggregate changes in a major index may be appealing due to their simplicity, they’re also generally incorrect.

The truth is that the Dow could close up a hundred points today. We’ve entered another period of instability. It’s starting to look a lot like mid-2008. If you followed the market back then, you remember the insane volatility that gripped stocks. They could be down 400 early only to end up 300 by day’s end. The next day, they’d be down 200 again.

Uncertainty drives volatility, because stock trading becomes a psychological exercise instead of a technically one. If you can’t trust the numbers you’re using to value equities, then you have to rely on how the back-and-forth swings of the headlines instead. And right now, the euro zone has created an incredible amount of instability, very reminiscent of the U.S. leading up to the financial crisis. Will Greece collapse? How about Spain? Italy? Portugal? Today, there was even a New York Times article that said Britain’s debt problems are really the greatest. Will North Korea nuke South Korea? And that doesn’t even get into the mixed signals we’re getting for the U.S. economy’s recovery.

When people ask what they should do with their stocks at a time like this, all you can really do is shrug. Uncertainty, instability, and volatility are the enemies of market, because they make it impossible to even try to understand. If the worst-case scenario happens, and a contagion strikes the entire euro zone, coupled with a war in the Koreas and a double-dip in the U.S., then the Dow will likely touch 8,000 again or worse. If everything turns out to be okay, then it will head towards 11,000 again. The problem is that no one knows. And that’s why anyone who wades into the stock market needs to be able to stomach the possibility of a big short-term loss.

North Korea – Korea – Stock market – Business – Stocks and Bonds

The government isn’t really curtailing the activity of the government-sponsored entities Fannie Mae and Freddie Mac — it’s just pushing business over to the Federal Housing Administration instead. In fact, the FHA was the guarantor of choice in the first-quarter. It backed more loans than Fannie and Freddie combined. And the broken system sputters on.

Bloomberg reports, quoting FHA head David Stevens:

“This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”

The FHA, which backs loans with down payments as low as 3.5 percent, insured $52.5 billion of home-purchase mortgages in the first quarter, compared with $46 billion of purchases of the debt by Fannie Mae and Freddie Mac, according to data compiled by Washington-based Potomac Partners.

The FHA and Fannie Mae and Freddie Mac, which regulators seized in 2008, have been financing more than 90 percent of U.S. home lending after a retreat by banks and the collapse of the market for mortgage bonds without government-backed guarantees.

Put another way, the FHA has become the savior for the mortgage market since the housing bubble’s pop. Without it, far fewer people would have obtained home loans. The risk premium has been too great for banks or investors to stand behind these mortgages without a government back-stop. Luckily, the government has a seemingly unlimited tolerance for risk. After all, taxpayers have deep pockets — or at least, China has a strong appetite for Treasuries.

But in all seriousness, this data shows the need for housing policy reform. The FHA was never meant play the role it has taken on. While it would have been frustrating in the short-term if consumers didn’t have access to funding in order to secure as many mortgages over the past few years, the precedent this potentially sets in the long-term for the government’s permanence in the mortgage business is arguably more dangerous.

And what’s worse: there’s no end in sight. With the economy picking up, the government is backing more loans recently, not fewer. The Wall Street Journal reported a few weeks ago:

Government-related entities backed 96.5% of all home loans during the first quarter, up from 90% in 2009, according to Inside Mortgage Finance.

Yet the power in Washington still stubbornly refuses to solve the GSE problem, despite the evidence that it’s getting worse instead of better. In several thousand pages of financial regulation bills approved by Congress, there isn’t a single provision that would reform the government’s role in the mortgage industry.

We keep hearing rumor after rumor that Apple will be expanding its offering of iPhone service providers to include Verizon. But both companies stubbornly refuse to comment. Indeed, there have also been recent developments that cast doubt on a potential Apple-Verizon alliance. A few examples include Apple using AT&T for iPad data and Verizon’s anti-iPhone commercials. A survey by an analyst at Morgan Stanley, however, indicates that Apple would be smart to bring Verizon on board.

Bizjournals.com reports that the analyst, Katy Huberty, found nearly 17% of Verizon customers would switch to an iPhone if given the opportunity. And the number might have been even higher than that if Apple hadn’t allowed some Verizon customers to become content with Android-based devices. This is a huge segment consumers who lie out of Apple’s reach entirely due to its exclusivity contract with AT&T.

According to Huberty, that 17% would result in nearly 7 to 8 million iPhones sold per year to Verizon customers. And this isn’t just gravy for AT&T. Since these are existing mobile phone customers, it would also mean 7 to 8 million fewer Blackberry, Android, and other smartphones sold.

These are very big numbers, and it’s bizarre that Apple is able to ignore them. While alliances between device-makers and service providers are complex, Apple must consider expanding to Verizon if it hopes to keep the iPhone sales growth going. Considering the move would also likely result in many disgruntled AT&T iPhone users switching to (or back to) Verizon, it’s hard to imagine that Verizon would have much reason to resist.

At least, that’s what the Federal Reserve should have titled the report (.pdf) it released today. Instead, it went for the incredibly boring-sounding name, “Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009.” But despite the awful title, it actually has some pretty fascinating information and charts. The major theme is that times are still difficult for smaller commercial banks.

Let’s start with its chart for bank profitability:

This probably goes against the predominate theme you hear in the news that banks are doing great again. That’s because most of the banks reaping huge profits these days are the big guys. The smaller banks continue to struggle. The report says:

Profitability diverged between the largest banking institutions and the rest of the industry, primarily reflecting the ability of large banks to generate income from specialized activities in which other banks do not generally participate.

Those other activities are mostly trading and other capital markets-based profits. And that change gives you the next pair of charts:

Lots of banks have been failing or consolidating over the past, well, 20 years. There around half as many now as there were in 1990. Moreover, the market share of the 10 largest banks has risen to around 55%, from around 20% in 1990. The top 100 have around 82%. That 18% left over doesn’t provide a whole lot of business for the other 6,800 smaller banks to spread around.

One reasons why banks are having so much trouble has to do with commercial loan volume. This market is traditionally a major source of revenue for commercial banks, but it has dried up with lackluster demand for commercial and industrial loans. These loans plummeted nearly 19% in 2009:

The first chart below shows the general lack of demand that commercial banks are sensing. Demand was growing stronger, but still quite low by the end of 2009:

But the second graph is more telling. It’s important to read it carefully, however. The chart likely still indicates that lending standards are much tighter now than they were before the financial crisis, as it just says that banks have stopped tightening, and a few even began loosening. In fact, the latter part of 2009 marks the first time since early 2007 that some banks were loosening standards. They likely felt the need to do so in order to compete for the few loans being applied for out there.

The 37-page report contains a lot of other detail about the commercial banking industry, so you may want to give it a read if you find this subject fascinating. But one thing is clear: small commercial banks still have a rough road ahead. Until high-quality commercial loan applications pick up, it’s going to be increasingly difficult for them to compete with the big banks.

Ford’s a little slow from the line, but the automaker made clear today that it wants to win the electric car race. The company announced that it will invest $135 million in its engineering and production effort for its next-generation electric-hybrid vehicles. That will include plug-in vehicles, to compete with those planned by GM and Nissan. The move shows a renewed effort on the part of Ford to be a leader in green autos.

Ford offers a few hybrid models already, including versions of its Focus compact Fusion mid-size* vehicle and Escape SUV. But it doesn’t plan to release a plug-in vehicle until 2011, with its Focus Electric. The car’s introduction will likely be a little anticlimactic, since the Chevy Volt and Nissan Leaf plug-ins will already be on the road at that time — both expected to hit the market in late 2010. Ford’s new initiative won’t speed up its timeline, as the new vehicles the investment is intended for won’t go into production until 2012.

This news closely follows Toyota’s announcement last week of an investment in and partnership with electric carmaker Tesla. While it’s tempting to compare the two initiatives, they’re actually pretty different. Ford already has an electric car in production, so the $125 million investment announced today is supplemental to its current effort. It’s an investment in becoming an electric car leader — not just another player. Toyota, on the other hand, just announced $50 million investment in Tesla, which would include a partnership that allows Toyota to leverage the electric vehicle maker’s experience and expertise.

With GM and Ford showing a clear intention to produce mass market electric vehicles, it makes you wonder where the other U.S. automaker — Chrysler — stands on electric. Between its Chrysler, Dodge, Jeep, and Ram brands, there’s not a hybrid to be found. In fact, the only car it offers that’s even close to the subcompact style most electric vehicles would take is its Dodge Caliber.

If consumers end up liking electric vehicles, then that will be a major problem for Chrysler. It hasn’t diversified itself much beyond the meaty, gas-guzzling vehicles embodied by its sports/muscle car options and trucks. Indeed, in the “Coming Soon” section of the Dodge website, rather than a fuel-efficient plug-in, it shows its “Nitro Detonator,” which it advertises as having “a road scorching 260-hp 4.0L V6 engine” and “aggressive 20-inch aluminum wheels.” From that description, it sounds like it would get even fewer than the 22-mpg (highway) that the current Nitro SUV gets.

Of course, it’s unknown whether the American consumer will embrace the electric car. But clearly, Ford today raised its bet today, as Toyota did last week. Meanwhile, not everyone must be convinced, however. Chrysler isn’t even in the game.

*Correction