Geithner’s Generosity Earns Wall Street’s Applause

Good Evening: U.S. stocks rose smartly today after some better than expected news on both the economic and earnings fronts. Financial stocks especially took flight after some generous comments from Treasury Secretary, Timothy Geithner, that seemed to ease some previous concerns about compensation limits. Whether emboldened by this change of heart at Treasury or not, a few Wall Street firms declared their intention to repay their TARP capital. In addition, both Lowe’s and the Housing Market Index reported upside surprises. These factors gave investors a bit more confidence today, the growing level of which was easy to spot in the prices posted at today’s close. And, if one considers the generous terms available to TALF participants, perhaps Mr. Geithner’s newfound kindness toward Wall Street on the bonus and TARP fronts is no fluke.

Aside from a huge rally in India over the re-election of the incumbent Congress party, I could find no decent explanation why U.S. stock index futures were well into the green before this morning’s open. Sure, Lowe’s 22% decline in earnings was better than expected, and they did indeed raise their ’09 guidance, but one company’s results do not mean housing has hit bottom. Still, market participants were in a chipper enough mood this morning to push the major averages more than 1% higher at today’s open.

Geithner Says Government Shouldn’t Set Limits on Pay
U.S. May Homebuilder Confidence Rises to Eight-Month High of 16
Goldman, Morgan Stanley Said to Apply for TARP Exit

These next three stories came out at different times of the day, and while they might not have had much impact in isolation, they all helped give investors confidence that the economic and investing climates were changing for the better. Addressing a particularly sore spot with many in Wall Street and a surprising number on Main Street, Secretary Geithner had the following to say about government’s role in setting compensation:

“I don’t think our government should set caps on compensation,” he said in answering questions at an event at the National Press Club today in Washington. “What I think we need to do is make sure we put in place some broad constraints on the incentives compensation systems create.” (source: Bloomberg article above)

housing-market-index-1995-to-present

The Secretary’s words may not represent a huge shift in policy, but they acknowledged at least some of the philosophical concerns so many have when they hear about government intrusion at the micro policy level. On top of these hopeful words, the Housing Market Index printed a slightly better than expected 16 versus last month’s 14. Some played up this release as more evidence of a bottom in housing, but it’s an awfully tough case to make if one looks at the long term chart of this index (see link to graph above). These figures are still horrendous (50 is “normal”), but better than expected is good enough these days.

Equities went from strength to strength all day, and there were no pullbacks of consequence. Stocks, especially the financial kind, received a final boost late in the day when the TARP payback story hit the wires. These firms have mentioned their desire to pay back TARP investments before, but today’s announcement implied the regulatory climate was thawing enough to make the paybacks seem more plausible. Friendless only last week, the BKX (+7.5%) spurted higher into the close and carried the other averages with it. No index was left behind as the gains logged fell somewhere between the Dow’s 2.85% and the Russell 2000’s 4%. Treasurys were dumped during the celebration, and yields fell between 6 and 12 bps as the curve steepened. Credit spreads confirmed today’s flight toward risk by tightening in many areas. The dollar couldn’t stand all the attendant chatter about prosperity and had a poor day, while commodities were firm. Only precious metals seemed to sit out the CRB’s nearly 1% gain today.

If the rise in junk email and the scams attached to a growing number of them are any indication, then the U.S. economy is definitely still struggling. Whether its the “U.K. Lottery” telling me I’ve won, or “Western Union” looking to send me cash, these emails trying to get my personal or financial information are usually and swiftly sent to the electronic version of purgatory. The one below caught my eye, however, due to the sender’s relatively high profile. It’s an obvious scam, one riddled with mistakes, but it does make one wonder whether emails like it will some day be sent out by the real Federal Reserve — the one in Washington, not New York. Quantitative Easing and all the money printing that come with it have raised the odds of this outcome from zero 18 months ago to some tiny number above zero at present. Here’s the actual email I received last week (Italics are mine and employed to distinguish the scam from the rest of these scribblings):

From: Ben S. Bernanke [mailto:BenBernanke78@live.com]
Sent: Thursday, May 14, 2009 7:46 AM
Subject: CONTRACT FUND CREDIT FROM BANK FEDERAL RESERVE BOARD

Chairman Federal Reserve Bank New York

It’s also not out of the realm of possibility that Treasury Secretary Geithner will soon have emails sent out under his name with a promise to send similar amounts to TALF participants. Our Treasury Secretary had already shown some kindness to the Street today, so the connection to the Bernanke email crystallized in my thoughts when a reader sent me the following article from Fortune Magazine:

Geithner’s gift to Wall Street

But, unlike the Bernanke email and its imagined ties to Quantitative Easing, the TALF is a real program where real participants can make a whole lot more than the figure quoted by the ersatz Fed chairman — and with a lot less risk! So if you are a qualified institutional investor and a kindly broker sends you an email touting the TALF, don’t delete it. Pluck it out of your spam folder and open it. The low risk and high returns embedded in this program may not be found in the economic textbooks, but it doesn’t take an MBA to see that only real risk is of the political variety. Taxpayers may be the ones who are on the hook for the TALF, but it’s the best example yet of just how generous Tim Geithner can be.

— Jack McHugh