Here is another indicator of the weak job market, brought to us by the friendly people at the U.S. Department of labor:

In the week ending May 9, the advance figure for seasonally adjusted initial claims was 637,000, an increase of 32,000 from the previous week’s revised figure of 605,000. The 4-week moving average was 630,500, an increase of 6,000 from the previous week’s revised average of 624,500.

The advance number for seasonally adjusted insured unemployment during the week ending May 2 was 6,560,000, an increase of 202,000 from the preceding week’s revised level of 6,358,000. The 4-week moving average was 6,337,250, an increase of 128,750 from the preceding week’s revised average of 6,208,500.

A few things to note regarding this data:

• The initial claims number, while high, is roughly 30K less than the peak number (for this recession) that was established a few weeks ago

• The continued claims of 6.56M is a new record

• If GM goes into bankruptcy, it is reasonable to expect that initial claims will remain high even if other areas of the job market improve slightly

• If initial claims remain high, there will be a cascade effect to other areas of the economy – namely retail.

Bottom line: The “green shoots” of hope seen by the Federal Reserve are long since gone. While the economy may be in a bottoming process, we are far from being in a good position.

The Federal Reserve and Timothy Geithner have said, on a number of occasions, that the economy is starting to show signs of a recovery.

Remember the “Green Shoots” Bernanke observed?  Remember how everyone was curious as to why THEY were not seeing said green shoots? I’m guessing you do, and I am guessing you are still not seeing them.

Well, over the weekend the White House appears to have ripped the green shoots of a recovery and tossed them aside – there will be no recovery for those in the job market until 2010.

Speaking on C-SPAN, Christina Romer, chairwoman of the White House Council of Economic Advisers, said that she expected theG.D.P. to begin growing in the fourth quarter of this year. Ben S. Bernanke, the Federal Reserve chairman, made a similar prediction last week.

But Ms. Romer also said that she expected unemployment to rise even after the economy turns, saying that the G.D.P. has to grow at a rate of about 2.5 percent before unemployment will fall. Before that happens, she said, it is “unfortunately pretty realistic” that the unemployment rate could reach 9.5 percent. A reasonable estimate for the G.D.P.’s growth rate in 2010, she said, is three percent.

9.5% on the unemployment in 2009?  To me that seems less than realistic.  

I’ve said a number of times that I expect to hit 10% by the end of this year. If the nation sees a loss of another 1.1M people by 12/31, the U.S. Unemployment rate will end up at roughly 10.2% 

Here is the big question, though: Will the government switch people from “unemployed” to “underemployed” (those who have given up hope and are no longer looking) in order to keep the reported unemployment rate under 10%? My guess is yes.

If one looks past the discussion of economic news and listens to the other information, Ms. Romer is giving the public a look at the next major target the administration has in mind: Health care

“When you actually look at that budget going out in time, the thing that is going to bankrupt us is government expenditures on health care,” she said. 

Insurers of all kinds, take note and start to duck and cover.  The heat will be rising for you very shortly.

Since the announcement that the federal government was going to perform stress tests on the nations 19 largest financial institutions, economists questioned just exactly would that mean?  What was going to determine if a bank was “strong” or not, and if not, what action was going to be taken.

Well, it turns out that the real findings of the stress test may not be know… and what the general pubic is viewing, in terms of results, is a negotiated – seemingly random number – developed by the banks and the government.

Take a look at this via the Wall Street Journal:

When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of AmericaCorp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed’s exaggerated capital holes. A senior executive at one bank fumed that the Fed’s initial estimate was “mind-numbingly” large. Bank of America was “shocked” when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations.

At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks’ ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions.

…

The Fed ultimately accepted some of the banks’ pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter. 

Bank of America’s final gap was $33.9 billion, down from an earlier estimate of more than $50 billion, according to a person familiar with the negotiations.

A Bank of America spokesman wouldn’t comment on how much the previous gap was reduced, though he said it resulted from an adjustment for first-quarter results and errors made by regulators in their analysis. “It wasn’t lobbying,” he said.

Wells Fargo’s capital hole shrank to $13.7 billion, according to people familiar with the matter. Before adjusting for first-quarter results and other factors, the figure was $17.3 billion, according to a federal document.

“In the end we agreed with the number. We didn’t necessarily like the number,” said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed’s assumptions about Wells Fargo’s revenue outlook.

The financial institutional that faced massive losses over the last six months didn’t like was was said about them, and their ability to provide capital for operations, so what do they do?  Complain to the federal team who, for a lack of better terms, was auditing them. And their complaining got them what?  Numbers that are more favorable to their business operations.

Just so I understand.. the government was to do a test to determine if a bank was financially sound, once performed it turned out that a bank was not and additional funding was needed.  Offended, the bank put up a stink and the government changed their findings to be more favorable to the bank.That is like me saying “I don’t like the C+ I obtained while taking my masters level mid-term, I want a B” and the teacher simply giving it to me simply because I asked.

If that is NOT a sign that the stress tests performed on the U.S. financial institutions are meaningless, I don’t know what is.

At 5:00 PM this afternoon, the bank “stress test” results were published.  From the looks of it, a number of banks need significant amounts of capital (originally posted at Calculated Risk):

Once you look past the fact that roughly $75B more is needed, one has to ask “what does this really mean?”

I’m afraid to say that the results may mean nothing.  Yes, $34B for Bank of America is a boat load.  Same goes for the $15B Wells Fargo and $11.5B for GMAC need, but what if the additional funding does not help in the long run?  I ask this question simply because there is significant doubt around the credibility of the stress test results.

The assumption the test is based on is that these 19 financial institutions could potentially face another $600B in losses under “the worst conditions” but what if it’s more?  What if there is another $1.2T in losses? Will the banks be able to turn to the private markets in order to raise capital, as Wells Fargo is already saying they will do?  Would the investment community continue to throw money down the hole, or would Uncle Sam need to act as backstop once again?

I still believe the worst is yet to come.

Here is a tip – if you really want to confuse your young child, send them mixed signals. 

Every time I listen to members of the current administration speaking about the states of the economy, I feel like that young, confused child receiving mixed signals from his parents.  Case in point, look what Federal Reserve chairman Bernanke and President Bush were quoted as saying Monday about the current economic situation…

Bernanke

“Well, you hear a lot of loose talk, but let me just … say, as a scholar of the Great Depression — and I’ve written books about the Depression and been very interested in this since I was in graduate school, there’s no comparison,” 

Bush

“I can remember sitting in the Roosevelt Room with Hank Paulson and Ben Bernanke and others, and they said to me that if we don’t act boldly, Mr. President, we could be in a depression greater than the Great Depression,”

President Bush was recalling a conversation between himself, Bernanke and Treasury Secretary Henry Paulson only weeks ago.  During the last two months only negative information has hit the market – housing starts at lows, unemployment rising, credit still unavailable, Citi Group needed Government assistance – so what changed and which is it.  

Is the United States simply in a long, deep recession or is the Nation facing a “depression greater than the Great Depression”

I am not a believe of conspiracy theories, and I have no intent on being cynical, but it almost appears Bernanke and Paulson are giving the “real” information to Bush and trying to keep the public calm by saying “there is nothing to worry about, pay no attention to the man behind the curtain”.  Actually, the ones who are really getting the correct signals are those pulling money out of hedge funds but it even looks like they are starting to have problems getting their money.

Economic information aside, if the administration wants to make public perception of the economic situation any worse, continue to send mixed signals. 

Oh – and for the record – I think Bernanke is right, this has no major comparison to the Great Depression of 1929.  To me it smacks of, and has a direct comparison to, the Long Depression of 1873.

This is a bit of interesting news that came out of the Fed today:

The Federal Reserve announced on Tuesday that it will purchase as much as $600 billion worth of mortgage-backed assets from fledgling companies in hopes of jump-starting lending by banks nationwide.

But it was less than two weeks ago the Fed said:

Purchasing toxic assets from troubled lenders, once the centerpiece of the rescue effort, is now seen as “not the most effective way” to use the government funds, Paulson iterated.

What I cannot tell from the information released today is if the assets mortgage-backed assets the Fed will now purchase are toxic or not. Also, lost in the news coming out today is the fact that the Federal will lend up to $200 billion to holders of securities backed by consumer debt (credit cards, student loans, auto loans).

I almost get the feeling that the government is now in 100% reactionary mode, just throwing money at any problem they see. Remember, uncertainty creates fear.

In an effort to prevent the proverbial house of cards from falling in the financial industry, the Federal Reserve is providing an 85 Billion dollar loan to AIG in exchange for an 80% stake in the company.

Here is what will now take place:

1. AIG obtains a 2 year, 85 Billion dollar loan
2. Certain lines of business will be sold in order to repay the loan
3. The company’s management will be replaced, former Allstate Corp. CEO Edward Liddy will take the top spot within AIG

Most likely the entire company will be sold, in the long run, to repay the debts owed to the Federal Reserve; however, the two years allows the new management to orderly sell of the company, repay debts, and not cause panic in the financial markets. The major reason the Fed stepped in with AIG, and not in the case of Lehman, was due to the chance AIG would bring down financial institutions in the U.S., as well as overseas financial institutions.

What is unknown at this point is what happens to the company, and any equity holders. Does a much leaner AIG come out to the market place, or does this entire process simply mean here is 85 billion dollars to orderly disband the company leaving employees, equity and bond holders with nothing.

But what does this mean to us, the bag holding public? Nothing. The assets of AIG will have to be sold off in order to pay a loans coming due and thereby protecting the taxpayer.

So, no, this is not like Fannie Mae and Freddie Mac… that is the deal that will hurt the tax paying public.

Others:

Ankle Biting Pundits – The Financial Meltdown
Let’s talk Money – Fed’s $85M loan to AIG; Time to fire Paulson
Lehman collapse – AIG on the way
A Time to choose – $85 Billion to AIG, oh my god
Jon Taplin’s Blog – The AIG Rescue

Wall St. woke up and saw the writing on the wall for Lehman Brothers (LEH) this past week.  Thinking bankruptcy was a distinct possibility; investors sold off the stock letting the price fall roughly 77.4% in the last five days alone.  So, where does this leave us?

Starting Friday evening, members of the Federal Reserve and Senior Management of Large US banking concerns were meeting to discuss a purchase of Lehman.  The Government made it clear no funds would be provided to save the bank, nor would they subsidize the purchase for any interested party.  Does that mean anything at this point?  Just a few weeks ago they said Freddie Mac and Fannie Mae were not going to be supported with Government funds either.

As the weekend continued on Barclays bank, out of the U.K., emerged as a potential buyer of Lehman but decided against the purchase when the U.S. government would not offer to limit the potential losses. This means, as of right now, no known buyer is stepping up to make the purcahse.

Right now it looks as if Bankruptcy is the only way out, but what other possible – all be it slim fates – may await Lehman?

• Another buyer is found who is willing to pick up all liabilities
• Another buyer is found but the Federal Reserve will help support the purchase by funding a portion of the sale or accepting some of Lehman’s liabilities
• No buyer is found; bankruptcy takes place, causing possible panic on Wall St.

The big reason the Fed wants to resolve this issue over the weekend really means a Lehman collapse has the potential to throw the market into a panic and bring other banks down in the process, but the Street seems to think otherwise.  With the pending collapse of Lehman is that the money markets do not seem to be concerned with what is occurring.

Is it a bankruptcy?  Is it a buy-out?  Is it a buy-out with government support?  Let’s see what Monday brings…

Others covering:

Chartsandnumbers – Lehman Brothers Fate
Lehman Brothers Weekend Opera @ Ruleboy
nahnopenotquite.com – Lehman to be Liquidated?