Top 10 at 10: Blankfein’s lies; Corrupt ratings agencies; China’s property madness; Dilbert

China's property madness; Blankfein fisked; Dilbert

Here are my Top 10 links from around the Internet at 10 to 1pm. I welcome your additions and comments below or please send suggestion for Wednesday’s Top 10 at 10 We play with our flashlights a lot. 1. Chinese taxi drivers the new shoeshine boys - Joseph Kennedy famously sold his shares months before the 1929 when shoeshine boys started giving him stock tips. Now the canary in the mine is Chinese taxi drivers, who are all bragging about buying property. The LA Times has an evocative story from the usually unfashionable inland city of Hefei about the real estate fever currently gripping China after the banks there went on a massive lending spree to bolster the economy.

Taxi drivers boast of owning multiple flats for investment. Billboards hawk developments with names such as Villa Glorious and Rich Country. Frenzied crowds pack sales events with bags of cash, buying units that exist only on blueprints. Average home values in Hefei soared 50% last year. China's real estate rush, once confined to a handful of leading cities, has spilled into the hinterlands with a ferocity reminiscent of American expansion into exurbs like the Inland Empire. "The situation in Hefei is a symbol of the craziness in China's real estate market," said Cao Jianhai, a professor of economics at the Chinese Academy of Social Sciences, a government think tank. "Prices in second- and third-tier cities are increasing more dramatically than in the first tier. It's very dangerous and it puts local banks at risk." With land increasingly difficult to secure in the most coveted cities, developers are turning to lesser-known destinations in China. Local officials eager to generate revenue through leases and development fees, and to meet growth targets set by the central government, are quick to grant permits.

By the way, I drove through the 'Inland Empire' east of Los Angeles last year. It was an urban wasteland full of empty houses and strip malls. It has become a symbol of the worst excesses of the American housing boom and the bust that followed. 2. Big picture - This piece in The Atlantic about the long term effects of a jobless recovery in the United States puts everything into perspective. HT Waymad via Baby-Boomer thread.

The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come.

3. When the tide goes out - Those without underpants are exposed. This report on HousingWire.com shows the incidence of appraisal fraud (ie fibbing about the value of a house) has surged. There have been a few cases of mortgage fraud in New Zealand. Anything else anyone knows about? I welcome your pointers and links.

“It is not surprising given the current state of the housing market,” said Darius Bozorgi, CEO of Veros, an appraisal software provider to mortgage lenders and the secondary market. “Appraisal fraud was masked in the past by rapidly appreciating housing market,” added Bozorgi. “In a rapidly depreciating market, appraisal fraud is more apparent.”

4. Blankfein fisked - Tyler Durden at ZeroHedge has a good look through the prepared Senate testimony of Goldman Sachs CEO Lloyd Blankfein and finds a few lies, including the one about Goldman having repaid its debts to the US government.

Lie #1: Goldman is still responsible for at least $21 billion in TLGP loans, which are FDIC, and thus fully taxpayer backed. Ironically, this is just a little more than Goldman paid out in bonuses in 2009. Perhaps that money should have gone to really paying out US citizens instead of the bonuses of those who shorted against the US housing market. In the very least, it would be a wecome change if Goldman, just like GM, were to actually acknowledge that the firm is still on the taxpayer bailout dole. To be sure, we note that "god" is finally grateful for being alive and earning billions courtesy of the record steep 2s/10s curve.

And then Tyler has a go at Blankfein's comments that Goldman does a service by connecting buyers with sellers to create liquidity in the financial markets.

Lie #3: Goldman is nothing more than a massive prop desk/hedge fund which feeds on infinite flow from its second to none inventory and client relationships. Furthermore, Goldman's disclaimers for its REDI trading platform force clients to sign off on the possibility that Goldman will actively frontrun them and/or trade against them. If Goldman wishes to join the HFT brigade and call borderline criminal activity "providing liquidity" so be it.

5. Show me the gold - The World Gold Council has reported that gold investors bought a net 5.6 tonnes of gold through exchange traded funds in the first quarter of this year, taking the total held in exchange traded funds to a record US$63.4 billion.

The rush for money debasement around the world has escaped nobody's attention, and as a result the one undilutable commodity (unless everyone demands physical delivery at the same time) gold has seen investors around the world scramble to get their hands on the commodity, either in physical form or via ETFs.

6. The formidable Simon Johnson - One of my favourite financial commentators is Simon Johnson, a former IMF economist who now writes at Baseline Scenario and is actively campaigning for reform to break up the 'Too Big to Fail' banks. He is having a real impact. He also co-wrote a book called 13 bankers. Here the Telegraph has done a nice profile.

"Even if Goldman Sachs stamps all over the SEC in open court and beats its chest about it, I still think they will lose the wider battle," he says – that battle being the fight for public support. And in case you hadn't got the idea, he adds, in an unexpectedly calm voice: "I want to beat these big banks; I want them to come out and fight. I want them to look bad." Johnson's point, most fully enunciated in an article in The Atlantic magazine last year, is that big banking now so dominates not just the financial system and the economy but actual policymaking that it has become a quasi-oligarchy.

7. Just plain corrupt - Paul Krugman at the New York Times points out that the real news in the horde of emails released by Goldman Sachs was the bunch exposing the ratings agencies as worse than useless.

When Goldman Sachs employees bragged about the money they had made by shorting the housing market, it was ugly, but that didn’t amount to wrongdoing. No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status. What those e-mails reveal is a deeply corrupt system. And it’s a system that financial reform, as currently proposed, wouldn’t fix.

The key issue here is that the Reserve Bank of New Zealand is relying on the ratings agencies to be its 'outsourced watchdogs' (alongside the trustees!) for the non-bank deposit taking sector. This may not be much of an issue given hardly any will survive, but still, should we rely on these people? Here's some disturbing detail from Krugman.

The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.” Clearly, the rating agencies skewed their assessments to please their clients.

8. Reverse engineering - Here Gretchen Morgenson and Louise Story (great story from story!) at the New York Times detail how the investment banks managed to work the system with the ratings agencies.

One of the mysteries of the financial crisis is how mortgage investments that turned out to be so bad earned credit ratings that made them look so good. One answer is that Wall Street was given access to the formulas behind those magic ratings — and hired away some of the very people who had devised them. In essence, banks started with the answers and worked backward, reverse-engineering top-flight ratings for investments that were, in some cases, riskier than ratings suggested, according to former agency employees. But for Goldman and other banks, a road map to the right ratings wasn’t enough. Analysts from the agencies were hired to help construct the deals. In 2005, for instance, Goldman hired Shin Yukawa, a ratings expert at Fitch, who later worked with the bank’s mortgage unit to devise the Abacus investments.

9. The new Oligarchy - Kevin Hassett at Bloomberg writes that the new financial reform bill, which was blocked overnight in the senate, is designed to create new oligarchs.

The financial overhaul bill creeping toward law is more than a thousand pages, but it has a simple story line. President Barack Obama and the Democrats have decided to turn Goldman Sachs Group Inc. and a few other financial giants into organizations that resemble AT&T Corp. in the 1950s. Government rules will establish quasi-monopolies, and discourage competition. In exchange, the affected firms will be exposed to constant bureaucratic meddling, but will have the ability to manage this by influencing political appointments. Obama and his team have made a show of threatening the big firms, and this might have given the impression that the financial revisions will hurt their value. But for old-time AT&T shareholders, the deal was a net positive for many years. The same will be true today for the big financial companies.

10. Totally irrelevant video - Darth Vader plays golf