Doug Henwood:
Mostly a mixed bag of economic news lately.
First-time claims for unemployment insurance fell by 12,000 last week, but the count of those continuing to draw benefits, which comes with a week’s delay, rose by 75,000. This continues the pattern we’ve been seeing recently, which suggests that the pace of job loss continues to slow, but hiring has yet to pick up.
In other labor market news, it’s not often appreciated how the monthly job gain or loss figures are merely the rather placid-seeming surface of a very turbulent underlying reality. That is, the monthly gain or loss of a few hundred thousand si the product of millions of job gains and losses. The Bureau of Labor Statistics surveys this every quarter. Early in the week, we learned that in the third quarter, there were 6.8 million new jobs created and 7.7 million destroyed, for a loss of over 900,000. That net loss was the product of over 14 million gross gains an losses—a furious pace of turnover, though actually rather modest by historical standards.. Though there was little change from the previous quarter in the number of jobs destroyed, there was a 400,000 decrease in the number created. It’s reassuring that the rate of job loss didn’t accelerate, but the rate of hiring has to pick up if the job market is ever going to recover.
Leading indexes—indicators that have a pretty good record in calling turns in the economy three to six months out—continue to report some cheering news, though. The Economic Cycles Research Institute’s weekly index rose last week for the fifth consecutive week, and it’s now 3% higher than where it was six months ago. That may not sound like much, but we haven’t seen anything that good in almost three years. The less sensitive, though still highly respectable, monthly leading index from the Conference Board rose 1% from March to April, its best showing since the economy took a turn for the worse last fall. So, this gives us reason to hope that not only has the economic slide slowed down, but we might even start seeing some positive numbers in the fall.
A money manager from BlackRock was quoted by Bloomberg—the financial wire service, not New York City’s mayor—the other day saying that “We need good numbers as opposed to less-bad numbers.” Exactly. We’ve been getting the less bad; let’s hope some better ones are on the way.
That aside, I’m sticking to my prediction that the job market will be the last to get the good news, should we start seeing some of that in a few months. My guess is that the unemployment rate will top out slightly north of 10%, and we’re going to lose something like another 2 million jobs. Then the job market will start turning around, though slowly. Perhaps very slowly.
Speaking of BlackRock, as I did just a moment ago, all the government’s efforts to rescue the financial system still have a bad odor about them. There’s the problem that I’ve pointed to many times that the government has hired advisors like BlackRock on how to handle toxic assets—at the same time that firms like BlackRock and their clients own very similar toxic assets. The polite way the New York Times, which I feel a little guilty about making fun of given its dwindling life expectancy, would describe this relationship as “raising questions.” It doesn’t really raise questions—it screams profound conflict of interest. But if there’s ever doubt about the class nature of the state, especially its executive branch, moments like these clarify things immensely. No, the relationship doesn’t raise questions. It answers them, if anyone’s asking.
But we’ve been there before. In the realm of new news, it’s looking like the FDIC is selling off banks to the usual gang of sharpies at fire sale prices. (And in what follows, I should say I’m drawing on a piece by Robert Cyran on the financial website breakingviews.com.) One problem is that the FDIC is underfinanced and overworked. It’s being called on to fund high-profile bailouts of name-brand banks, as well as more routine rescues of institutions no one within a 50 mile radius of their headquarters is likely to have heard of. An example of the first was the January sale of IndyMac to a consortium of private equity, or PE, firms. And now it’s selling Florida’s BankUnited to a PE syndicate including such stars of the field as Wilbur Ross, Carlyle Group, Blackstone, and Centerbridge.
(A quick parenthetical definition of private equity: PE funds are large pools of capital contributed by big institutions and rich individuals, devoted mainly to taking over companies, cutting costs, taking out as much cash as they can get away with, and ultimately selling the firms off to someone else, like another company or to public stock investors. They’re supposed to “unlock hidden value” or some such, but mostly they seem like asset strippers crossed with alchemists. The managers of PE firms make lots of money for themselves; it’s not clear how much they make for their outside investors.)
The terms of the BankUnited sale are very favorable to the PE firms. They’ll get almost $13 billion in troubled assets for just $900 million. And the FDIC will assume almost $5 billion in the bank’s losses. Most of the bank’s assets are in wretched subprime loans in South Florida, some of the most toxic assets of all. Still, it looks like the PE guys are buying the assets for less than 30 cents on the dollar, with not all that much downside risk. Yes, the FDIC is very short of funds. But, really, this is not the way to turn the page on the Second Gilded Age. It’s to write a new chapter—in a different style from what went before, but with the narrative still distinctly recognizable.
And there’s more. A Bloomberg analysis—again, the news service, not the billionaire mayor—shows that the banks that are looking to buy their way out of the Troubled Assets Relief Program, so they can get out from those onerous pay restrictions and all that public scrutiny, may do so at very favorable prices, if the first such transaction is any kind of model. When the government provided the TARP funds, it did so by buying warrants on the banks. (Warrants are rights to buy stock at some time in the future. If the stock’s price rose, the gov could have made some money as the value of the warrants rose in tandem. But warrants grant no voting rights, which is what the gov wanted. Fear of nationalization, you know.) To get out of the TARP, it has to buy back that stock, with the approval of the Treasury. Old National Bancorp, an Indiana institution, gave the Treasury $1.2 million to buy back its stock. Private analyses suggest that the price should have been five times higher, based on standard, first-year MBA financial formulas. If that sort of pricing prevails for other banks interested in freeing themselves of The Man, the gov will be shortchanged by about $10 billion, according to Bloomberg. That would give the banks about 80% of the profits the Treasury could have claimed, should this kind of pricing be a model. There’s no reason for this at all except kindness to the banks. None.
Raises questions, eh?
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