Saturday, February 28, 2009

United or Divided

Since the day Obama was inaugurated, attacks from the right have been unceasing. I believe it is patently unfair, and part of a bigger revisionist movement being conducted by both political parties.

A friend of mine sent me a few questions, as he is very worried how the climate of communication between the parties is undermining any positive initiatives. Keep in mind, my friend and I are both conservative, by nature. Yet, we both recognize the political atmosphere is only heating up. And that is a major concern for our country, as the divide appears to be widening, when coming together is desperately needed.

I do not wish to endorse one party over the other, only to understand what got us here. No solution will be found until its formula is based on what caused the problem. Only then can the solution fix what was wrongly done.

Below is a recent exchange of emails, and I offer them as only a simple guide to recognition of the problems, both present and past.

From my friend;

What caused the derivatives' issuance and usage to skyrocket starting in '05? Did the AIG London office just 'discover' them and they took off virally? Or was there a set of circumstances in the mid-2000s that created some kind of perfect storm?

The reason I'm asking is, everyone I talk to says, consistently, both events started under Clinton, and that the Bush administration couldn't possibly have prevented an inexorable chain of events (?!) or even known about it (??!!), and that Obama is a pawn of the evil Clinton conspiracy and will make things worse.

If this type of blame-shifting is allowed to go on, there will be no popular support for the new administration's actions -- and whether you believe in bailouts or not, it's really bad for the country and the economy if the populace's confidence in the administration is undermined.
What the great depression teaches us is, even though there's little solid evidence that government projects and other actions brought us out of that predicament (ditto WWII) the 'propaganda value' of a confident government stressing progress and hope is perhaps the best thing we can create right now. My feeble understanding of Keynesian economics is such that I believe depressions--note the word choice there--are partly the result of the collective mood or attitude. If it's bad, the economy will spiral very quickly. If it's hopeful, people will not curtail their spending or business initiatives as radically. If it's full of optimism and confidence (watch a Roosevelt speech on YouTube) you will think you are on the upswing even if you're not.
Remember it's all about small business, this economy we have here. Create hope and a sense of the 'light at the end of the tunnel' and venture investment will spring back to life.

Naive and oversimplified, but that's how I roll.

My reply;

You are spot on with your insight and questions. The political divide seems to have only worsened once the political agenda invested in programming on both radio and television. Deflection from actual reality seems to be their only tool, as winning the next election is their only motivation.

OK, I love dialogue, yet am accused of being didactic. It is because, as I see it, the answers to complex problems are rarely simple. So please bear with me through this.

As for debt based derivatives, they have been around since the Clinton years, so that part is somewhat true. But, the collapse of LTCM in the late 90's due to Russia defaulting on its sovereign debt only gave insight to some Wall Street boards that sometimes entities, no matter how badly they have acted, can be "bailed out." That cannot be blamed on Clinton. LTCM was actually registered off shore, I think Iceland. In fact, it was under his direction that the major broker-dealers find a solution, for he was told by Wall Street the collapse of LTCM would cause a global systemic financial meltdown.

Because of the Lewinsky affair, and do not make the mistake of thinking it was small potatoes, allowed the other side to start biting, when before all they could do is bark. When our intelligence showed Bin Laden might have been in Sudan, and Clinton tried to get him, what was the Republican reaction? The Republicans, all the way from Limbaugh to DeLay screamed, everyday for weeks, that it was Clinton's attempt to deflect the headlines from Lewinsky, where the Republicans wanted to remain. The Republicans screamed, and I emphasize screamed, that it was an aspirin factory we bombed, even after the CIA provided proof the building was making bombs, and bomb making debris was scattered for miles. Limbaugh still says it was an aspirin factory on one day, then a week later says it was a toy factory.

They threatened everyday that Clinton had better not try to steer anything away until Lewinsky was over.

For Clinton, and yes, he lied under oath, Lewinsky never left.

Well, we didn't get Bin Laden either, did we?

You get my point how the message can be deflected, and is still.

Gramm, Leach Bliley was passed in 1999, and signed by the under siege Clinton. GLB removed Glass Steagall, one of the last vestiges of laws passed after the Great Depression designed to keep the banks from doing what caused the Great Depression. Remember, it was the collapse of fraudulent real estate bonds that set off the events which led to the Great Depression.

Congress passing laws for decades with the intention of helping those less fortunate were destined for failure if the very people being helped did not change WHY they needed help. Failure to have more oversight in Welfare, CRA, Medicare and almost every government program is partly to blame. Greenspan's inability to allow a corrective recession to take place after the Dot Com bubble is to partly to blame.

Here is where Bush (and the Republicans at large) comes in.

Clinton was more than a lame duck. The last year he was in office (2000) there was very little he or the Democrats could effect. The economy was moribund, Greenspan had wanted to lower interest rates for months, and the only thing Clinton could do was keep him from it.

Regardless of what you think of Clinton, he is one of the most intelligent people to ever sit in that chair. He single-handedly kept Greenspan from lowering the Fed Funds rate, knowing it would only increase lending, which is an increase in debt, and only pulls forward future demand which robs production from some future point.

What I mean is this - If you buy a TV today, on credit, then your demand (not need) for that item is gone for tomorrow. But, you have not done yourself any favor except gratification. Had you waited until you saved enough money to purchase the TV, then demand meets need. The consequence of buying on credit is two fold - 1) You just gave yourself extra payment on that item, because you have to pay interest, and 2) you robbed all future purchase because now you have less purchasing power due to the interest you paid. It is okay if a farmer buys seed on credit, because he is using it for something which is a necessity. It is not okay for a car buyer, because any car can get you from point A to point B, it is not a necessity to have the best car.

I know some will argue that credit grows economies. But they are stopping 80% of the way through the thinking process. Credit is always debt. Increase credit means increase debt. Increasing debt must stop somewhere.

That is what we did in this country. Since 10 families only need 10 houses, once all the upgrading is done, the process is over.

The incoming Bush administration was anxious to show they were like Reagan Redux. The first week of 2001, Greenspan, at the behest of the new administration, was green lighted to lower rates, and Clinton could not say no. It had an immediate effect. Mortgage rates dropped more than .75% instantly. I remember it well.

The drop in interest rates created instant stimulation, it worked. Homeowners, under constant advertising from mortgage lenders, refinanced their homes en masse. There were even some homeowners who refinanced 6, 7, 8 times and more within a few years span. They were able to do so because as the stimulus of the lower Fed rate wore off, Greenspan, under encouragement from the White House, would lower the Fed rate again, and again, and again. Each time the rate lowered, it provided a little stimulus. Until the Fed rate got to 1%.

The Fed could not really go any lower. There is always a certain cost to doing business. For mortgages, the processors, underwriters, office space, office machines etc all need to be there to do business, so mortgage rates could not get any lower. Some money must be there to support the organization.

Now Wall Street needed something else. Since the lowering of interest rates had the effect of allowing more buyers into the real estate market, real estate was making dramatic climbs in value. At the same time, since the Fed rate was so low, so were the Treasury yields low. Wall Street, hungry for more profit, and knowing certain investment vehicles such as annuities, pension programs and the like needed a guaranteed rate of return much higher than the the 3.5% of Treasuries, went to work.

First, in order for the plan to work, the ratings agencies must agree. The largest pools of money available for investing reside with entities that, by law in most cases, are allowed to buy only AAA rated securities. So a plan was hatched that the ratings agencies could be convinced to give certain securities, otherwise deemed risky, the highest ratings.

The Mortgage Backed Security was, shall we say, re-born. MBS now were, in theory, structured in a way that they contained both good (prime) mortgages and bad (subprime) mortgages, and the argument Wall Street used was since only a portion of the MBS had risky mortgages, and historical models show only a certain rate of default, then if we plan for that default as reflected in the overall rate of return, then the MBS is extremely safe.

Next, Wall Street began selling MBS at a rabid pace. Investors were clawing for greater returns than government bonds. Soon, all the mortgages that could be securitized had been securitized. Wall Street needed more.

The birth of the CDO now came. Several MBS were combined, and packaged as a new type of bond. An average MBS may have contained between $50 - $100 Million worth of mortgages. The CDO's would be a bet on the performance of as many as 10, sometimes more, MBS in one single bond. Most CDO's were sold for more than $1 Billion. Wall Street sold these new bonds, the CDO's, CLO's, CMO's, as the way for fixed income investments to realize the rate of return they needed. What Wall Street did not tell these investors is the underlying MBS owned the mortgages, not the CDO. Wall Street did not tell them the CDO was only a bet on the positive performance of the underlying MBS.

The fees were enormous. The demand from pension funds, money market account managers, sovereign wealth funds, annuity funds etc. for higher yield than Treasuries was increasing. Wall Street needed more loans. So the system expanded. Some banks, such as Wamu and IndyMac, already were realizing greater profits from lowering guidelines, and Wall Street was buying all of their loans. Some dealers set up internal channels to service loans they could then package into MBS, and then CDO's.

It got to the point that people with very poor credit histories were being given loans that exceeded the value of the property by as much as 25%. Debt to income ratios, forever at the 35% or less level, were raised sometimes to as high 60%. Some people were even allowed to have three, four or more properties at one time with these new guidelines.

Very few people really lied to get a mortgage, they did not have to. Wall Street, the banks and the mortgage brokers feeding the banks were eager to let someone into a house, fully knowing the terms would never be filled, because they were selling the risk of that loan defaulting to someone else.

Again, Wall Street was selling the risk to someone else, at huge profits. They were doing everything they could to get more loans in, even giving loans to people they knew never had a chance of fulfilling the obligation. Was not the SEC, HUD, RESPA and every other regulator working at the pleasure of the President?

The real problem with all of this is housing values must keep increasing at an escalating rate greater than at the time of origination of the MBS. If a plateau is reached where housing prices remain steady, the people who had been given loans that exceeded their ability to pay had no way to get out of the house without default. If they had borrowed more than the house was worth, and housing prices remained flat, they could not flip the house for profit.

This was compounded by the credit card companies giving new homeowners cards with $10,000 to $50,000 limits. This practice escalated in 2005 when the banks figured out that a lot of people were buying houses, putting in granite counter tops and new appliances and selling the house for profit as the market rose. Why not give them a separate line of credit through a card which would be used at Home Depot, then paid off at the closing when they sold the house?

In 2005, something even more dramatic happened. Even with all of this, Wall Street was nearing the end run. If they could go beyond the legal leverage limits of 14:1, they could continue the game. Bush and Co. did not want anything to look bad, so they pressured congress. Henry Paulson begged in 2001 to allow leverage limits be lifted, and congress said no. In 2005, when he asked again, they said yes. By then end of 2006, Bear Stearns, Merrill Lynch, FNMA, FHLMC, Lehman Brothers were levered to 30:1 - 80:1. FNMA and FHLMC, despite what Republicans now say, were restricted until 2005. The accounting scandals of 2001-2002 brought severe limits on what they could take in. In 2005, the Republican Congress removed those limits and increased what they previously could do.

So XXX, since the escalation took place from January, 2001 on, tell me how Clinton is fully to blame? Was there a foundation laid years earlier? Yes, but that is not a pass to leapfrog over uncomfortable history.

The ramp up in over-leveraging by the banks was a direct consequence of the marriage between deregulation and lack of enforcement of laws. Understand, that is a direct Republican causation. They controlled everything from January 2001 to January 2007.

The effect of this illicit marriage allowed Wall Street to want looser guidelines for loans so they had more to securitize (make a bond out of) and sell for profit. Of course the people who live in our media controlled world want to live like a pro athlete, so when it was realized that you could make $8 an hour and buy a $400,000 house, and your loan officer and real estate agent said it was the American way, a lot of people threw caution to the wind. The very people that got into houses they couldn't really afford were being told by everyone, analysts on TV, real estate experts, Wall Street Titans, even Bush with his Ownership Society speeches, that it was their Patriotic Duty.

At best, Bush is guilty of allowing the law of unintended consequences to rule the day. At worst.......

You are so correct to worry about perception at this time in history. I think any objective reflection will illuminate what is wrong. How do we get everybody to drop the gloves? I don't know. The situation demands we all focus on creating a positive environment, and stop name calling.

When I listen to talk radio or watch cable TV, that is certainly not happening.

These people will first have to admit to themselves, and everyone they know, that the very ideology their belief system is based on is flawed enough to force all the rest of us to live in a depression.

I don't expect Rush to admit he could have done things differently.

I didn't see the Democrats falling on swords over Iraq, and now aren't willing to give up pork.

All of the above is why I have long believed it is foolish to buy into one political party over another.

My friend is right.
"Create hope and a sense of the 'light at the end of the tunnel' and venture investment will spring back to life." I realize the bulk of my response can be viewed as offering no hope. I see it as valuable information to become knowledgeable, which has the effect of lessening the impact of vitriolic political agenda.

We have no choice, right now, but to come together.

Until Limbaugh and Pelosi agree, we will see little light.

United we stand, divided we fall.

Thursday, February 26, 2009

AIG losses mount

It seems the information on AIG given last October by Messieurs Paulson and Bernanke is, shall we say, wrong, again.

In the flurry to save AIG from bankruptcy, we were told taxpayers would realize a gain on saving AIG because many of its parts were worth more than the government was putting in.

It appears that ain't so.

American International Assurance Co., the crown jewel of AIG was put up for auction late last year. AIG and the US Treasury told us back then the sale of two AIG subsidiaries would highlight how high the quality was of AIG's business.

Well, HSBC and AXA have both walked away from the process with AIA. Estimates last year said the company would get bids in the tens of billions. Now, there are few bidders at any price, and many are walking away as they discover previously unknown information.

The other subsidiary, American Life Insurance Co., or Alico, was estimated back then to be worth $30 Billion or more. Met Life, the first to put in a bid, did so at $11 Billion. Now, Propublica is reporting even that deal could be revised downward to as little as $8 Billion. The problem - apparently tax withholdings, amounting to $10 Billion, that weren't done in disbursements to foreign customers.

Next week AIG will announce they lost $60 Billion last quarter. Again, they will ask for tens of billions from US taxpayers.

What everyone would like to know is why the US Government really bought a 79.9% stake in AIG? It cannot be because they thought they would make money, even these guys aren't that stupid.

Or are they?

So much for honesty in the bailout promises.

Monday, February 23, 2009

The Problem

Please click on image for better view
Many thanks to Barry at The Big Picture

A picture is worth a thousand words, or in this case, a few trillion dollars.

In mid 2007, The Federal Reserve, which controls the currency of the United States, had around $800 Billion of US Treasury notes at its disposal. The Fed uses these Treasury notes to try and control interest rates through money flow. Usually $800 Billion is a lot of money to throw around, and it gave the Federal Reserve the effect of being the 800 lb gorilla in the corner.

Today, the Federal Reserve has about half the Treasury notes they did 18 months ago. They have also increased their balance sheet from $850 Billion (including miscellaneous debt), to a whopping $2.2 Trillion.

How did they do it? The Fed just simply typed in a new set of numbers and claimed to have that much more money. Then, through the exchanges listed below, electronically sends those new numbers out to the entities they are exchanging with.

The Federal Reserve is owned by the big banks. It is not a part of the Federal Government. Ben Bernanke does not have to follow the advice of the President, he does have to follow the advice of the Fed's largest shareholders, which are the CEOs of the largest banks.

In 1914, The Federal Reserve Act removed control of the currency from the government, and gave it the newly established Federal Reserve. Congress can vote to change the rules under which the Federal Reserve operates. Congress can even vote to abolish the Federal Reserve, and bring control of the currency back into the US Treasury. So far, we have heard of no such movement in congress for any changes.

You may ask if the Federal Reserve is owned by the banks, don't they have to back any losses?

The answer is no.

The Federal Reserve is loaning the exchanged amount with the US Treasury. Because it is a loan to the US Government, it must be paid back, with interest. All losses associated with these exchanges will be born by the borrower, in this case, the taxpayers.

Let's break the chart down a little -

The big Purple area - that is how much we have given to foreign central banks that are mad at us because they bought debt based derivatives from Wall Street. As their derivative holdings continue to lose value, expect that area to get bigger.

Deep Pink, Aqua and Pink - Maiden Lane LLC was formed to guarantee assets of Bear Stearns for JPM Chase. Maiden Lane II and Maiden Lane III were formed to buy CDO's that AIG had insured through CDS. Expect all of those areas to significantly increase as the downgrading of derivatives continues.

Dark Blue - Money given to AIG so far, most of which has gone directly to Goldman Sachs (they were buying CDS on the CDOs they were selling, knowing they would fail). That area will probably get bigger, and there is 0% chance of recovery on anything given to AIG. AIG also insures the pension program of the US Congress. It probably does not insure your pension.

Green - That is more recent, and is the Fed's response to ease overnight commercial paper transactions. They are doing it by buying toxic assets.

Yellow - Asset backed commercial paper were toxic assets before the Fed bought them. They still are.

Light Pink - Securities lent to dealers. This means good US Treasuries exchanged for toxic assets that no one will buy, at any price. Problem is, the Fed exchanged them at purchased value, a 100% loss because these have a good chance of going to $0 in value, while the Fed holds them.

Red - TAF, the Term Auction Facility. Originally designed as the initial credit easing action, it has since turned into a free-for-all. The Fed initially accepted only AAA rated derivatives that were backed by solid debt. Now the Fed is accepting securitized auto loan debt, securitized credit card debt and securitized commercial loan debt. You can see how much the red has expanded recently, there is no logic telling us that growth will stop until the securitizing stops.

Are you getting nervous yet?

One thing needs to be pointed out: The total amount of shenanigans conducted by the Fed has actually declined since Obama took office. Unfortunately, because of promises made before the last administration exited, and with the appointment of Geithner to work with Bernanke, the total amount has a good chance of ballooning again.

All level 3 accounting must be eliminated, and all level 3 assets need to be declared, no matter who goes bankrupt. As the chart shows, our country will eventually fail if the hiding goes on any longer. Better to have the top ten banks fail than the US Government.

Wall Street created and sold over $600 Trillion in debt based derivatives. The Fed has been dealing with the first $1.5 Trillion to go bad, and it has already put us in danger.

Can they really handle a hundred trillion more?

Update 5:42 AM Tues., Feb. 24;
Today AIG may announce a $60 Billion loss in the last quarter, the largest loss ever recorded by a US corporation. Thanks to Henry Paulson and Congress, the US Treasury (American Taxpayers) are responsible for these losses.

Market Ticker has done some great homework, and
this column is a must read.

The Loan Ranger

Lawyer Outwits Banks in Foreclosure Battles

If you are a distressed homeowner, just email me at, or call April Charney.

I can help direct you to a loan modification. April can help if you are being foreclosed on.

"The loan servicers bringing most of the foreclosure actions in the country don't own the mortgages and have no standing to take away a person's home," said the lawyer, April Charney, who has stopped scores of foreclosure actions in Jacksonville, Fla., where she works as a Legal Aid lawyer."

"In essence, Charney has forced scores of plaintiffs in foreclosure actions in Jacksonville to admit they don't have legal ownership of the securitized mortgage they are trying to foreclose upon - stopping the home takeover battle in its tracks." "So far I've drafted about 1,500 lawyers into my army," Charney said in a telephone interview last week."

"Look, the same problem that banks are having with securitized mortgages is going to spread to defaults with car loans, credit card accounts and student loans - they are all securitized and the banks and loan servicers starting legal actions to collect on those defaulting loans will face the same issue proving ownership," said Charney."

Just more proof that structured financial debt derivatives were a complete scam. Luckily, the law, in this country, is on your side.

Sunday, February 22, 2009

Blame who II?

The furor over CNBC's Rick Santelli, and his much televised pushback to the homeowner bailout, is grabbed by politics.

First, I would like to say Mr. Santelli has been the only CNBC regular who has consistently warned what Wall Street was doing was at the very least, nonsense. He has been consistent, and often contradictory to other CNBC reporters, with his message for no less than four years.

Mr. Santelli has also consistently warned against all the government bailouts, and the actions of the Fed.

All of the remainder at CNBC exhibited mild retardation or blatant felonious partnership over the last four years. CNBC's motto is "First in Business." That must mean no matter how dirty their hands have to be.

While Wall Street was fraudulently making hundreds of billions, all the other CNBC reporters and hosts fawned over those CEO's and their analysts. Often with flirtatious demure, the CNBC employee allowed the Wall Street message to be anything Wall Street wanted. CNBC allows the very designers of this meltdown to come on and talk of how "well capitalized" their company is. At least four times in the last 18 months that company was in real trouble only days later.

With that record, when you see a CEO on CNBC, it is time to dump their stock, or short it.

CNBC not only cheered when the original TARP was rolled out, every speaker they could find told the viewers it would stop the meltdown. Did it? How could every single one of them, except Santelli, have been so wrong?

Kudlow remains the uber-fool with his "business is always right, no matter who they cheat" mentality. Cramer has been recorded, not by CNBC, bragging he can make a stock go up or down by talking about it. He actually told the interviewer if he wanted more shares, he spoke of the bad aspects of the company, driving the stock down. He also said if he had a large position and wanted to sell, he "talked up" a stock on his show, then sold the next day on the bump.

Maria Bartiromo has been caught getting a little too friendly on corporation junkets. Of course, these corporations are the ones she is supposed to be covering as a journalist, but what's a girl who refers to herself as "Money Honey" to do?

Erin Burnett speaks in a frenzy about how good corporations are, then sits looking at the camera as if she was hit by a Taser when news that BAC and C really are bankrupt and will disappear without tax money.

Folks, these people pretend they are reporters all day long. Yet, they have never been able to identify the exact reason of the meltdown. Not once, have I heard any of them even come close to getting an "A" for reporting. Most of the by-lines and guests they have on, and they have hundreds each week, seem designed to deflect the viewer from the true circumstances of the crimes Wall Street has committed.

Except Rick Santelli.

Several times over the years I thought Santelli would be fired. Often, he would call out the stooge Steve Liesman on a lie. He took on the prodigal son Gasparino. Surely Mr. Santelli's bosses at CNBC would shut him up to keep the advertisers from being exposed.

But, in a gift to all of us, Rick Santelli has remained.

The political game is more distraction.

The right is loving Mr. Santelli, because he does not want irresponsible borrowers to be rewarded for buying more house than they can afford. The right has clung to the idea that the whole meltdown is the fault of people that lied on their mortgage applications.

The left is vilifying him because he does not want irresponsible borrowers to be rewarded for buying more house than they can afford. They believe that all homeowners in trouble must be bailed out to save the "system."

Rick Santelli has been consistently against ALL BAILOUTS. I know, because I have listened to him. He has disagreed with every program the Fed has brought for the last 18 months. He disagreed with TARP. And, now he disagrees with the homeowner bailout. Mr. Santelli has been very consistent in stating that those that made bad decisions be forced to live with the consequences.

From what he has said, he is well aware the fallout will be bad by following his advice. By the same criteria, Santelli is aware that every bailout hides the underlying problem, thus making the end result worse. Understand this - The fallout from what was done with the mortgage business over the last 8 years is going to be bad, no matter what is done. It now is a question of how bad do you want it to be.

Please keep in mind where Mr. Santelli works everyday - at the Chicago Board of Trade. They see the flow of all commodities and bonds, and prices. Mr. Santelli has often raised the alarm that if our government keeps bailing out the very causes of this mess, the bond investors may decide they have had enough, and sell.

If that happens, Obama's initiatives will never work, for the hole that Wall Street has dug is far too big.

Rick Santelli is not just against the homeowner bailout, he wants prosecution of those responsible. That includes some big Wall Street names, as well as people who lied on mortgage applications.

Update 2/25/09, 7:17AM - Just saw Rick on G. Gordon Liddy's show. Am thoroughly disappointed. I had assumed he was cheering for this country, and now realize he is only cheering for himself.

CNBC should be renamed CNBS.

Blame who?

Big Banks that are bankrupt by several times, some in the multiples of ten digits.

Mainstream media that has yet to ask "What is the total amount of these toxic assets, and who has them?"

The Internet, cable news shows and radio waves being used and abused by those with explicit political agendas, attempting to place blame other than where it should be placed. All in an attempt to "win" the next election. Funny thing is, they all claim to be the "champions of truth" when in reality, most of the premises they start their tirades from are false.

No wonder 90+% of my friends (most very intelligent) believe it is still a subprime problem. They also argue that Bank Of America and CitiGroup are solid companies, when nothing could be further from the truth. They still believe it is wholly a FNMC and FHLMC debacle, when in reality they are symptoms of the disease.

To prove my point - The Congressional Budget Office now estimates that GSE losses will cost $240 billion in fiscal year 2009. Between FNMC and FHLMC, they service roughly $5 Trillion in mortgage loans. 20% are subprime, yet not all of those are in default. Even if the full 20 % default, that's $1 Trillion in losses. A big amount, yes. But, that does nothing to explain the tens of trillions in mortgage related losses so far, and the potential hundreds of trillions that may soon come.

Everyone knows who Barney Frank is. He gets the blame for easing the GSE's ability to take in low income applicants for mortgages. From 1994 - 2006, the Republicans controlled both houses, and from 2001 - 2008, also controlled the White House. What is so funny to me is this; for Republicans to blame Barney Frank for this mess means the big macho guys let Barney (I have to be careful here) have his way with them.

Yeah, right.

I'll Play The Blame Game

Phil Gramm was a Republican US Senator from Texas from 1985 - 2002. He is currently Vice Chairman of Investment at UBS Bank, where he started within days of leaving the Senate.

The Wall Street Journal has printed a nice little story from Mr. Gramm. I say nice, because the blame for the current financial system disaster can be laid at the feet of a small handful of people. Mr. Gramm's actions most certainly include him. He is very worried how history will reflect his championing of explicitly targeted deregulation. Every deregulatory effort he helped enact has been a direct cause of this financial crisis.

Congress was convinced by Phil Gramm that Banking deregulation was the answer. Eliminate the wall between investment and commercial banks and large amounts of money will create more jobs was his argument. In 1999, passage of the Gramm, Leach Bliley Act accomplished that, and removed one of the last vestiges of post-depression laws meant to keep the banking industry sound, Glass Steagall.

In 2008, the Washington Post named Gramm one of seven "key players" responsible for winning the 1998-1999 fight against regulation of derivatives trading. Nobel Laureate in Economics Paul Krugman has listed Gramm as the number two person (behind Alan Greenspan) most responsible for the financial crisis starting in 2008.

Gramm was the leading voice for the Commodity Futures Modernization Act of 2000 which kept derivatives transactions, including those involving credit default swaps (CDS), free of government regulation.

Free of government regulation really means all these "toxic assets" are traded "in the dark" with no public view of a bid/ask price. Combine that with accounting rules that state if "no observable inputs" are recognized, ie a public bid/ask, then the holder can say they are worth whatever the holder needs them to be worth. The holder may even claim they are worth more than they bought them for, even though they can't get a penny for some of them.

It is these very "toxic assets" that will still lose hundreds of trillions in value.

What the Commodity Futures Modernization Act of 2000 allowed became a $600 Trillion business, based on no physical assets. That is what Phil Gramm intended. This is what Phil Gramm is praying the mainstream media doesn't figure out.

Wendy Gramm was the Chairperson for the Commodity Futures Trading Commission from 1988 - 1992. Her most notable contribution to that commission was granting Enron an exemption from standard accounting procedures, which proved to be a boon to Enron.

Within days of granting Enron that exemption, Wendy quit the CFTC. Five weeks later, she joined the board of Directors at Enron.

After the demise of Enron, Wendy Gramm was named in several lawsuits, many of them won by the plaintiffs.

Wendy is Phil's wife.

We all know Enron lied. Yet for some reason, the Financial Community saw no prudence in learning from that disaster.

Neither did the Gramms.

As soon as he left the Senate, Phil was hired by United Bank of Switzerland, UBS. Phil had easy access to the Senate floor, and spent most of the last 6 years enjoying that access, and twisting arms for more deregulation.

Phil has made hundreds of millions of dollars at UBS. Within the last few days, UBS settled with the US Justice Department to hand over the names of several hundred US clients that created overseas accounts for the purpose of evading taxes.

UBS had to settle, for the Justice Department caught them red-handed with a dozen or so explicit examples of US uber-wealthy clients hiding profits made in the US in off shore accounts.

We ain't talkin' Joe Six-packs here, we are talking about Billionaires. Billionaires that benefited from the greatest society ever created, who not only refused to concede gratitude to God for placing them here, but act as Benedict Arnold did, like a spoiled child who takes his ball home when the other kids won't let him change the rules to his liking.

Now Phil calls foul. He is not to blame, in fact, Phil feels he is the reason the US is so good. Even though he works for a foreign company that hired him to break US laws.

What Phil Gramm has championed is the culture of lying through omission. In order to game the system so only the wealthy win, he has established a rhetoric that exalts only the heads of industry. Gramm makes no excuses for the ultra-high comp packages of CEO's:

"In economics, we define labor exploitation as paying people less than their marginal value product. I recently told Ed Whitacre (former CEO of AT&T, who retired with a $158 million pay package) he was probably the most exploited worker in American history because he took Southwestern Bell, which was the smallest of the former Bell companies, and he turned it into the dominant phone company on earth. His severance package should have been billions."

Yep, poor Mr. Whitacre. He is definitely exploited. By Phil Gramm, who took that comment to other wealthy people, and made them UBS clients.

Please don't misunderstand me. I do not feel we should be socialists. Capitalism allows for the expanding of ideas and innovations that make every one's life better, while motivating the best among us to exceed previously reached limits. Socialism only retards that.

I think there are many abuses concerning congress and entitlement programs that must be remedied. Yet I also feel it is our duty to create a society in which every member is as productive as their abilities allow. It is at the heart of this country's spirituality, or at least claimed spirituality. We are directed to help all those less fortunate. To consciously deny that, is to consciously deny that spirituality.

Phil Gramm, and many like him, would rather "game" the system for their personal benefit, instead of building it to a model where all can participate to their fullest.

Phil Gramm actually taught economics at Texas A&M, so he knows what he did. Wendy Gramm is also an economist, and is currently on the board of the Mercatus Center at George Mason University. A right wing think tank designed to find strategies to eliminate all regulation, the Gramm's were instrumental in the Mercatus Center's establishment.

Judging by history, the Gramms' have lost all faith in their fellow beings and follow only greed as their shining star. How else can you explain their actions?

More on Phil and Wendy;
Phil Gramm's UBS problem
Texas on line
Enron and the Gramms
Phil Gramm's Evisceration
Wendy Gramm has no regrets
Phil Gramm on government reform
Texas Lawyer Blog

Thursday, February 19, 2009

Looking Forward

New leadership in the US, same worries.

The following is only a portion of the challenges facing all of us going into the future. These areas of concern are simply those which have a more immediate likelihood of impact.

1) Failure to force Banks into full disclosure of level 3 (off balance sheet) holdings. With no way to accurately determine who is solvent, and who is not, investment will shun, and destroy, any equity left, even in good companies.

If you are a market groupie and follow the charts, the DOW seems almost certain to break below 6000 very soon. Beyond that, there is little support down to 2200. 401k = 201k = 101k = 50.5k.

The only way this changes is to tell the politicians they must force the big banks into bankruptcy, now. It really appears we do not have the luxury of a few months any longer.

As Karl Denninger in Market Ticker puts it:

"I have it on good authority that there is very strong support of stock prices at zero, and if you look at charts of Bank of America (closed under $4 today), Citibank (closed under $2.50), Wells Fargo (closed at $12.01), Fifth-Third ($1.21), SunTrust ($6.70) along with dozens more you will find that all of them are in fact racing directly towards that very heavy support right at that zero boundary. Many of these stocks have been cut in half or more in the last two weeks."

The failure of regulating (or deregulation, if you prefer) of the financial industry during the first six years of this decade will lead to a financial meltdown unless confidence in every corporations' balance sheet is restored, very soon. The way it is right now, the big money knows the banks are lying. They will take their money and go home. That leaves the average, uninformed investor with no support from the sharks that are the market makers. These sharks will suck every penny out of good companies as they ride the market down, and make your principal theirs.

2) Instability among major powers. I, for the sake of being realistic, will include all countries that have nuclear weapons. Even the smaller members of the nuclear club, for they can start an unstoppable chain reaction.

Russia is at the breaking point. With tens of thousands of old USSR warheads still undismantled, Russia, Ukraine and Kazakhstan can easily sell a few for cash with no one but the buyer knowing.

Pakistan. The military coup that ruled, and brought stability, to Pakistan for almost a decade is gone. Their centuries old anger with the Hindus, and their equal yet new anger at the US, give little hope that they won't lob a bomb at one or the other, or both, in the very near future. The US really screwed up by focusing on Iraq.

Israel and Iran. Unless these two lead the Middle East into a new peaceful era, they will ignite the great conflict of Mohammedanism and Christianity. Never have the religious divides been overcome. It can be argued, successfully, that the Roman Empire was brought down, in part, because of resources diverted to the Middle East. Funny how history repeats itself.

It is unclear if Syria, Libya, Algeria or any of the Arab States has bought a bomb from the North Koreans or one of the USSR satellites, yet the likelihood is great. Be certain they will jump in when they feel it necessary.

3) The competition for natural resources. Oil being the largest concern. Unless the US leads an immediate revolution into green technologies, the competition only gets stronger. China, India and the EU need vast amounts of oil, as does the US.

For more than four decades, the US has had only 4% of the world's population, yet consumed 25% of the world's resources. One of the unintended consequences of US corporations championing globalization for profit is this - As those economies grow, they will need increasing amounts of resources. Doing the math presents a large dilemma;
Only 16% of the world's population can have the same lifestyle as the average US citizen, and for that to occur, the remaining 84% must survive on 0% resources.

With Swipe at US, Iraq Builds Ties to French

“The time for putting pressure on Iraq is over,” Mr. Maliki said in answer to a reporter’s question about Mr. Biden’s remarks. “The Iraqi government knows what its responsibilities are. We are carrying out reform, and we are in the last step of reconciliation.”

"According to political advisers, Mr. Maliki is intent on changing the nature of Baghdad’s relationship with Washington, shifting Iraq’s role from a client state to a more equal partner.'

"The French overture came at a time of intense jockeying among the world’s leading oil companies for contracts in Iraq, with France’s Total among the major competitors."

China Lends Russia $25 bln to get 20 years of oil

"We agreed on supplies of 15 million tonnes of oil every year over a period of 20 years," Russian Deputy Prime Minister Igor Sechin told state news channel Vesti 24. He said a separate loan deal was signed but gave no further details."

China to lend Petrobras $10 bln for oil

"The financing is in line with China's policy of attempting to shore up future supplies in natural resources such as petroleum, agricultural goods and minerals for its voracious economy."

China Buying Oil Stake

"A Chinese public fund has been building a stake in the French oil major Total since the end of 2007, the company confirmed on Thursday."
China Rushes Toward Oil Pact With Iran

"The completion of the agreement would advance China's global quest for new stocks of energy. It could also undermine U.S. and European initiatives to halt Iran's nuclear plans, possibly generating friction in China's relations with outside powers."

China Looks to Increase Oil Imports from Africa 40%.

"The IAGS reports that China has provided "economic grants, interest free loans and preferential loans" to 53 African nations in an effort to establish the foundation for future collaborations that would allow for the much needed oil imports for China's expanding economy. IAGS stated that by 202 China will have 120 million private vehicles traveling its roads, and the country will be importing 60% of its oil."

China-Iran tango threatens US leverage

"Iranian Petroleum Minister Bijan Zandaneh told China Business Weekly recently that Tehran wants China to replace Japan as the biggest importer of its oil and gas. "Japan is our No 1 energy importer due to historical reasons, but we would like to give preference to exports to China," Zanganeh commented during his visit to Beijing in late October.'

"Earlier this month, Chinese Foreign Minister Li Zhaoxing, who has just crowned a year of negotiations between the two countries, paid a rare visit to Tehran. In a meeting with Iranian President Mohammad Khatami, Li said Beijing would oppose US efforts to refer Iran to the UN Security Council over its nuclear program."

Since China will dominate our future foreign relations efforts, the majority of articles I provide are about their quest to secure more oil. The EU needs oil. Brazil, India, Russia and every other economy must have oil. Even as their economies contract due to the current financial malaise, their populations are increasing. Demand for limited oil supplies, over the longer term, will only increase.

The US must accept that China will now compete for needed resources. Bad news for the US with its current economic structure - China has 1.3 Billion people, the US 300 Million. For just 1/4 of China's population to live as the average American, they must have access to the same amount of resources as the US.

If the US does not immediately become the leader in new energy technologies, the consequences will be unpleasant, at best. It was a fallacy to think we could pour enough money into China that they would, or could, adopt our financial model. The just aren't enough resources for that to happen.

Wednesday, February 18, 2009

Bonus this

Greenspan Backs Bank Nationalisation

"In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.'

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Since no other bank, hedge fund, private equity fund, sovereign wealth fund or central bank will buy these "toxic" assets at the value our banks say they are worth, the guys who made this whole mess happen now say the US government should take the debt.

Mr. Greenspan may not be treated too kindly by history. The dot com bubble was under his watch. I have friends that saw 50% and more of their portfolios evaporate when that bubble burst.

Instead of advising the country to swallow its medicine, and take the necessary adjustment to GDP, which would have forced big business to rein in outsourcing, Greenspan went the other way. To stop the small recession that would have occurred, Greenspan decided to lower interest rates to spur economic activity.

In January, 2001, the incoming Bush Administration was eager for Greenspan's plan. They didn't want some nasty little recession to get in the way of the massive tax cuts they had planned. The Republicans wanted to look like White Knights riding in to save the day. Little did those nimble minds realize the laws they recently had worked so hard to pass, and that removed depression era banking safeguards, would be a fatal platform for the banks to launch a new bubble surrounding real estate activity.

Greenspan, of all people, should know the last, and best, asset any country has is the land it occupies. To create a bubble with property means all other avenues for economic productivity are exhausted. Wouldn't that be a red flag to an economist? How did these "great" minds not adamantly argue we should not fool around with the last asset we all must have, shelter.

At the height of the bubble, housing values in some markets were 10 times average wages. History shows us that no economy can function properly unless housing values are between 2.5 - 3.5 times average wages. Housing must be affordable, lest you concentrate wealth into the hands of a few, like in medieval Europe.

Where were the economists? They were praising Greenspan for a job well done.

Well, that job was far from well done, as is now evident.

Will Mr. Greenspan now tell congress that bank managers need billions in bonuses every year, also? I guess the bonus gets bigger as the losses get bigger?

I have read several good proposals to arrest this financial tsunami, and none of them include giving banks that are bankrupt any taxpayer money.

Links to some of the ideas are here:
Willem Buiter
Paul Romer
Karl Denninger, The Genesis Plan
RGE Monitor

If I understand it correctly, the best proposal establishes ten new regional banks. With a total of $300 Billion for initial capital, that's $30 Billion each, they can generate $3.6 Trillion in funds to be lent when following current 12:1 leverage ratios. If they go public and issue an IPO, the amount that could be lent dramatically goes up. An onerous coupon is placed on the new banks, meaning they must pay off the $30 Billion from the first dollar of profits. The taxpayer realizes no losses.

That sounds far better than to give $9.7 Trillion to banks that will only use that money to pay off the tens of trillions in losses they are realizing. Greenspan, the Wall Street elite, Congress, and many other financial leaders will argue against the "Good Bank" idea. Why? Because they know 200 years from now they will be held as examples of what not to do. They know what they have done, and they are currently acting as though they do not care what damage is done, as long as they can keep their money and blame someone else.

For more on the subject of why we must not allow the current bankrupt banks to get any more money, please see:
Mish - The Nationalization Train has left the station
Gerald Epstein - Bad Bank - Bad Idea
Charles Wallace - Bad Bank? Bad Idea
OC Register Opinion - A Profoundly Bad Idea

Oh, BTW - nationalization of the banks is socialism, but only for the well heeled. The serfs get the privilege of paying the bonuses.

Tuesday, February 17, 2009

How deep do you want it?

click on image for better view
Compliments of QQQ Trader via The Big Picture

The above chart gives us an example of losses among 16 of the world's largest banks and investment houses - in less than two years.

You need to know that the bailouts will only work if much of that what was lost is replaced. When you hear the talking heads on CNBC, or the Keynesian Economists state "We must re-inflate the banks", what they mean is the government, which taxes you for its money, must give the banks the money they lost.

There just isn't enough money in the world to do that.

The only solution is to allow the banks that are bad to go bust. Then, and only then, can new banks be capitalized, unencumbered by malinvestment through fraudulent activity.

As Market Ticker puts it, "It will suck." But if we don't force the banks that made the bad decisions to live with them, their level3 accounting ledgers WILL cause Global Systemic Financial Meltdown. It is far better to have a short, deep recession, than a long, slow, painful depression.

Private investment money will not return until the bad assets at the bad banks are completely removed from the system. That means no recovery will take place until the bad banks, and their incompetent (at best) executives are removed from financial influence.

Of course, those responsible for us being at the edge of the abyss are crying for help, and crying foul that we dare suggest that their pay be limited. After all, they only lost a few hundred trillion dollars.

I say, this is America. If you don't like your job, go get another one. Oh, that's right, you guys just destroyed most of the good jobs.

Good Luck!

Think your CD is safe?

Stanford International Bank Said to Bar Withdrawals Amid Probe

"Feb. 17 (Bloomberg) -- Stanford International Bank Ltd., the Antigua-based affiliate of billionaire R. Allen Stanford’s U.S. investment firm, placed a 60-day moratorium on early redemptions of its certificates of deposit, people familiar with the matter said.'

"Stanford Group Co. financial advisers have told three clients that they can’t redeem CDs sold by the firm prior to their maturity date, according to the customers, who asked that their names not be used.'

"A customer in Houston, who said he has more than $2 million in Stanford CDs, said a representative told him on Feb. 11 that he’d have to wait until the maturity date to get his money back.'

"Stanford International Bank has $8.5 billion in assets and 30,000 clients, according to its Web site. It describes the CDs in its disclosure statement as traditional bank deposits. The bank says it doesn’t lend proceeds and instead invests in a mix of equities, metals, currencies and
derivatives, according to its Web site and CD disclosures."

I highlighted derivatives because even CD accounts were allowed to buy them because they were rated AAA by Wall Street.

Other "safe" investments such as annuities, pension funds and money market accounts have derivatives.

Any account with any structured financial product is prone to losing the entire value represented by ownership of these structured financial products.

Knowledge of what your advisor has done with your money should be a priority. If they cannot explain, on demand, exactly what is in the accounts where they placed your money, you are in trouble. What I mean is this - if they have to get back to you, or look it up, it's because they don't know. If they don't know, they put your money in harm's way.

The downgrading of CDO's, CLO's and other derivatives has been occurring for quite some time. If your advisor was not discussing with you the dangers of derivatives a year ago, why do you trust that person now?

Monday, February 16, 2009

A "Voice" from the dark

How much cheating and fraud occurred on Wall Street over the last ten years has gotten scant coverage. That may be changing.

In this article from The Village Voice, a beacon of light is showing us a once dark corner that the financial controllers don't want us to see.

What Cooked the World's Economy? connects previously unconnected dots. It by no means gives us the complete picture. But it does succeed in giving us an outline. For the inquiring mind, it is a must read.

I have italicized some excerpts, with my comments in between.

"This was the beginning of the heyday of hedge funds. Unregulated investment houses were originally based on the questionable but legal practice of short-selling—selling a financial instrument you don't own in hopes of buying it back later at a lower price.'

Hedge Funds are private money, with the managers receiving up to 35% of the gains. These are the same guys that argued they should not be taxed at corporate rates, but at the individual tax rate for gains. Wildly successful at playing with money from only the well-heeled and well-connected, these hedge fund managers were known to make billions in a single year.

"But it wasn't magic. It amounted to the return of the age-old scam called "bucket shops." Also sometimes known as "boiler rooms," bucket shops emerged after the Civil War. Usually, they were storefronts where people came to bet on stocks without owning them. Unlike their customers, the shops actually owned blocks of stock. If customers were betting that a stock would go up, the shops would sell it and the price would plunge; if bettors were bearish, the shops would buy. In this way, they cleaned out their customers. Frenetic bucket-shop activity caused the Panic of 1907. By 1909, New York had banned bucket shops, and every other state soon followed.'

The full Federal Reserve Act was passed in 1914, and signed by Woodrow Wilson. Before the presidential campaign of 1912, Wilson wasn't contemplating running. That is until JP Morgan and the rest of Wall Street convinced him to run, and promised to fully finance his campaign. The political community laughed and said Wilson did not stand a chance.

By the end of the campaign, the bankers money won, outspending all other candidates by more than 10-1. Now the banks had their man in the oval office. Now the banks controlled the currency of the United States.

Wilson later regretted passage of the Federal Reserve Act. Please see my article "Fuel to the fire" for his remarks.

That single act has been blamed for every rise and fall in our economy since. Many historians believe the Great Depression would not have happened were it not for the Federal Reserve.

"In the mid-'90s, though, the credit-derivatives industry was hitting its stride and argued vehemently for exclusion from all state and federal anti-bucket-shop regulations. On the side of the industry were Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and his deputy, Lawrence Summers. Holding the fort for the regulators was Brooksley Born, who headed the Commodity Futures Trading Commission (CFTC). The three financial titans ridiculed the virtually unknown and cloutless, but brilliant and prophetic Born, who warned that unrestricted derivatives trading would "threaten our regulated markets, or indeed, our economy, without any federal agency knowing about it."' "But Congress loved Greenspan—a/k/a "the Maestro" and "the Oracle"—and Clinton loved Rubin. The sleepy hearings received almost no public attention. The upshot was that Congress removed oversight of derivatives from the CFTC and preempted all state anti-bucket-shop laws. Born resigned shortly afterward.'

Born resigned, and today no one knows who he is. Many other true patriots of this country have resigned, or tried, in vain, to warn us of the credit derivative scam. I say true patriots, because I know the leaders on Wall Street don't give a damn about this country.

I hope, as many others do, that the leaders of Wall Street may soon be described as having committed treason. What else would you call knowingly ruining the US economy while greedily lining your own pockets? What else would you call taking taxpayer money, claiming you will go bankrupt, then refuse to disclose how that money was used, all the while giving yourself a bonus, for losing billions?

"...what we are living through is the worst financial scandal in history. It dwarfs 1929, Ponzi's scheme, Teapot Dome, the South Sea Bubble, tulip bulbs, you name it. Bernie Madoff? He's peanuts.'

"Credit derivatives—those securities that few have ever seen—are one reason why this crisis is so different from 1929.'

The article gives $595 Trillion as the amount of derivatives out there. In all likelihood, it is probably a good deal more. We have no way of being sure, for they are all traded "in the dark," outside of any regulatory control, with no public bid/ask.

CDO's are securitized debt derivatives. CDS are protection derivatives, ie insurance on CDO's. As the big bankers on Wall Street were clamoring for more mortgages to make CDO's, no matter how loose the guidelines, they began buying CDS on the CDO's they were selling. They were betting they would fail.

Who sold these CDS, fully knowing the purchasers were betting the bond (derivative) they just sold was going to fail? AIG, Bear Stearns, Lehman Brothers, and many more. More importantly, why would they participate in this questionable trade?

"The heart of darkness was the AIG Financial Products (AIGFP) office in London, where a large proportion of the derivatives were written. AIG had placed this unit outside American borders, which meant that it would not have to abide by American insurance reserve requirements. In other words, the derivatives clerks in London could sell as many products as they could write—even if it would bankrupt the company.'

"Revenue from premiums for derivatives at AIGFP rose from $737 million in 1999 to $3.26 billion in 2005."

"....The scam bled AIG white. In mid-September, when it was on the ropes, AIG received an astonishing $85 billion emergency line of credit from the Fed. Soon, that was supplemented by another $67 billion. Much of that money, to use the government's euphemism, has already been "drawn down." Shamefully, neither Washington nor AIG will explain where the billions went. But the answer is increasingly clear: It went to counterparties who bought derivatives from Cassano's shop in London.'

Who is AIG's biggest customer? Goldman Sachs.

"After the relative worthlessness of these CDOs became clear, the raters rushed to downgrade them to junk status. This occurred suddenly with more than 4,000 CDOs in the first quarter of 2008—the financial community now regards them as "toxic waste."'

4000 CDO's. CDO's typically are well over $1 Billion, with many as high as $5 Billion. CDO's squared can represent as much as $20 Billion in securitized debt. And that is just from the first quarter of 2008.

"What about the $600 trillion in credit derivatives that are still out there, sucking vital liquidity and credit out of the system? It's the tyrannosaurus in the mall, the one that made Henry Paulson, the former Treasury Secretary who looks like Daddy Warbucks, get down on his knees and beg Nancy Pelosi for a bailout.'

Paulson threatened congress that martial law would be used if the bailout was not passed. I think he knows how bad it really is, afterall, he was the CEO of Goldman Sachs during their biggest years of selling CDO's and buying CDS.

".....according to William Black, an effective federal litigator and regulator during the 1980s savings-and-loan scandal, by 2004, the FBI perceived an epidemic of fraud. Now a professor of law and finance at the University of Missouri–Kansas City, Black has testified to Congress about the current crisis and paints it as "control fraud" at every level. Such fraud flows from the top tiers of corporations—typically CEOs and CFOs, who control perverse compensation systems that reward cheating and volume rather than quality, and circumvent standard due diligence such as underwriting and accounting.' "The environment from the top of the chain—derivatives gang leaders—to the bottom of the chain—subprime, no-doc loan officers—became "criminogenic," Black says. The only real response? Aggressive prosecution of "elites" at all stages in this twisted mess. Black says sentences should not be the light, six-month slaps that white-collar criminals usually get, or the Madoff-style penthouse arrest.'

"In finance, the bottom line is the bottom line. The bottom line in this scandal is that fantastically wealthy entities positioned themselves to make unfathomable fortunes by betting that average Americans—Joe Six-Packs and hockey moms—would fail.'

"No one knows how much could be clawed back from the soiled derivatives reap. Clearly, it's not $600 trillion. William Bergman, formerly a market analyst at the Chicago Fed in "netting"—what's left after financial institutions pay each other off for ongoing deals and debts—makes a "guess" that perhaps only 5 percent could be recouped, which he concedes is unfortunately low. Still, that's $30 trillion, a huge number, more than 10 times what the Fed can deploy and over twice the U.S. gross domestic product. Such a sum, if recovered through the criminal justice process, could ease the liquidity crisis and actually get the credit arteries flowing. Not everyone would like it.'

"Lehman drowned, but Goldman Sachs, where Paulson was formerly CEO, was saved. The day before AIG reaped its initial $85 billion bonanza, Paulson met with his successor, Lloyd Blankfein, who reportedly argued that Goldman would lose $20 billion and fail unless AIG was rescued. AIG got the money.'

"Had Goldman bought from AIG credit derivatives that it needed to redeem? Like most other huge financial traders, Goldman has a secretive hedge fund, Global Alpha, that refuses to reveal its transactions. Regardless, Paulson's meeting with Blankfein was a low point. If Dick Cheney had met with his successor at Halliburton and, the very next day, written a check for billions that guaranteed its survival, the press would have screamed for his head.'

"To say the bailout hasn't worked so far is putting it mildly. Since the crisis broke, Washington's reaction has been chaotic, lenient to favorites, secretive, and staggeringly expensive. An estimated $7.36 trillion, more than double the total American outlay for World War II (even correcting for inflation), has been thrown at the problem, according to press reports. Along the way, banking, insurance, and car companies have been nationalized, and no one has been brought to justice."

Let us hope that changes, soon. The financial world outside of this country is blaming our leaders, both financial and political, for all that ails their economies. Without prosecutions and punishment for those responsible, confidence in our financial system will be lost. That confidence cannot return unless we do the morally correct thing.

Saturday, February 14, 2009

What a deal

Now, let me see if I understand this:

The "insurance" Mr. Pandit refers to are CDS.

The banks have vociferously argued with the regulators that CDS are not "insurance", so that the CDS can qualify as AAA rated assets, thus allowing the assets they are hedged against from being downgraded. Those assets might otherwise go from AAA to BBB, or lower, in a heartbeat, and be worth far, far less AND require much higher reserve requirements.

That is why, in the official deal between Citi and the US Treasury, the word "insurance" never appears.

But in front of Congress, the banks argue that the CDS are "insurance" so they can mollify lawmakers for 90% guarantees from the government on these assets that so desperately need this "insurance."

The US Treasury is guaranteeing $250 Billion of these toxic assets from just Citi in this deal alone, which does not reflect, nor include, monies already given them.

The laughable/tragic thing about this is: If these assets gain in value, Citi gets 100% of the profit, the US Treasury 0%. If these assets lose value, the government will pay out 90% of the losses.

These assets will probably lose all of their value.

CitiGroup alone, over the last six months, has received government guarantees for toxic assets of over $300 Billion, yet the entire market cap of Citi is less than $20 Billion.

That translates into this - If the $300 Billion in Toxic assets are really worth $0 (there are no bidders for what they hold), then CitiGroup is bankrupt by 14 times.

300 divided by 20 = 15 - 1 ($20 Billion market cap) = 14

Best case scenario might get bids of 30 cents on the dollar for these toxic assets. That leaves $210 Billion in losses, and Citigroup is still bankrupt 9.5 times over.

210 divided by 20 = 10.5 - 1 ($20 Billion market cap) = 9.5

Citi cannot and will not survive this. Every dime extended them will be a 100% loss.

Guess what - We haven't even touched on all the other corporations with significant toxic holdings who are working their own separate deals with Treasury. This type of guarantee deal is just getting started. Multiply Citi's deal by 10, 20, 30 times or more?

Oh, and the Federal Reserve has already worked guarantee deals with the Koreans, the Chinese, the Japanese and a few others. Yes, our US Treasury is guaranteeing the toxic holdings (sold by our guys on Wall Street) in foreign central banks. Those numbers make Citi's deal look downright small.

C'mon. What are these clowns in Washington doing?

At least one, Alan Grayson D-FL, is asking some good questions.

He needs the other 534 clowns to make it mean anything.

Friday, February 13, 2009

Emerging fronts

The battle to find a bottom for our economic malaise may actually be getting worse. Some critical events happening outside of the US may greatly effect our ability to control the markets inside the US.

From Businessweek via Mish;

"A decade of heavy borrowing has lofted euro zone debt to $11 trillion, and it's starting to come due just when companies are strapped for cash.'

"More toxic debt soon could come crashing through the global financial system. The surprising source: Europe Inc. Once-stodgy Old World companies, from cement makers to phone operators to chemical companies, went on an unprecedented borrowing spree over the past decade that has left them up to their necks in debt. Corporate debt in the euro zone stands at more than $11 trillion, equaling some 95% of the region's economy, vs. only 50% in the U.S." "In better times, companies might have gone to the bank to refinance. No more. Bank lending to euro zone companies plunged 40% last fall as the credit squeeze tightened.' "Rising defaults could send shock waves through global markets. Just as with subprime mortgages in the U.S., corporate bonds and loans were packaged and resold to investors in vehicles called CDOs and CLOs, or collateralized debt obligations and collateralized loan obligations. "There was a flood of cheap debt, lower and lower terms," says Jon Moulton, head of London private equity group Alchemy Partners, "and with less and less due diligence."

It appears our model for financial destruction was carefully followed. Many analysts, of late, have predicted that Europe will suffer more than the US. European Banks have as great, if not greater, exposure to toxic assets, and only look good now because the breakdown of those investments is lagging the US by six months.

Much of the United States' success has come from foreign investment seeking returns here they could not find elsewhere. As the amount of money evaporates with the devaluing of derivatives, that leaves less money to be invested, anywhere.

But that is not the only front to be concerned with.

The graphs in an article from are eye catching. They depict the areas of the world under stress from drought, and predict 2009 may have significant shortfalls of food production.

I had wrote earlier that some of my worries in the near future are for a spike in prices of commodities and food. My reasoning is based on market mechanics - as asset deflation sets in, the market makers, whom are accustomed to making huge profits, have less and less opportunity with equities. Lower stock prices leave less room to bet to the downside. Food, fuel and industrial materials are easy targets to manipulate for profit. Since we must have food and fuel, prices can go up, and these things will still be purchased.

Now, Mother Nature is adding her two cents worth.

Seven Chinese provinces are in emergency drought situation. In Australia, the argument of climate change is no longer discussed, with even the most conservative now true believers. In the US, California is in historical drought, Texas is bracing for historic record low rainfall, the western Carolinas and eastern Georgia are in record territory for two straight years and Florida has already realized lost crop production this season as half the state is in some type of drought.

Argentina, Brazil, Paraguay, Uruguay, Bolivia, Chile, Kenya, Tanzania, Burundi, Uganda, South Africa, Malawi, Zambia, Swaziland, Somalia, Zimbabwe, Mozambique, Tunisia, Angola, Ethiopia, Iraq, Syria, Afghanistan, Jordan, Lebanon, Israel, Bangladesh, Myanmar, India, Turkmenistan, Thailand, Nepal, Pakistan Turkey, Kyrgyzstan, Uzbekistan, Cyprus and Iran are all in record or near record drought.

Low food prices also lead to lower food production. Right now, food prices are low, so Kansas farmers have seeded a record low number of acres. Canada will use 1.1 million less acres this year for wheat. Grain output for Australia, Canada, United States and the European Union combined was 47.4 million tons in 2004. In 2008, the combined total was less than 28 million tons.

Because of the global lack of rainfall, sustaining low food prices has little chance of success. This will weigh greatly in the near future as asset deflation sets in, as what goods countries now offer will bring less profit.

"Some observers are anticipating “competitive currency devaluations” in addition to deflation for 2009 (nations devalue their currencies to help their export sector). The coming global food shortage makes this highly unlikely. Depreciating their currency in the current environment will produce the unwanted consequence of boosting exports—of food. Even with export restrictions like those in China, currency depreciation would cause the outflow of significant quantities of grain via the black market.' "Instead of “competitive currency devaluations”, spiking food prices will likely cause competitive currency appreciation in 2009.
Foreign exchange reserves exist for just this type of emergency . Central banks around the world will lower domestic food prices by either directly selling off their reserves to appreciate their currencies or by using them to purchase grain on the world market.'

"Appreciating a currency is the fastest way to control food inflation. A more valuable currency allows a nation to monopolize more global resources (ie: the overvalued dollar allows the US to consume 25% of the world's oil despite having only 4% of the world's population). If China were to selloff its US reserves, its enormous population would start sucking up the world's food supply like the US has been doing with oil.'

"On the flip side, when a nation appreciates its currency and starts consuming more of the world's resources, it leaves less for everyone else. So when China appreciates the yuan, food shortages worldwide will increase and prices everywhere else will jump upwards. As there is nothing that breeds social unrest like soaring food prices, nations around the world, from Russia, to the EU, to Saudi Arabia, to India, will sell off their foreign reserves to appreciate their currencies and reduce the cost of food imports. In response to this, China will sell even more of its reserves and so on. That is competitive currency appreciation.'

"When faced with competitive currency appreciation, you do NOT want to be the world's reserve currency. The dollar is likely to do very poorly as central banks liquidate trillions in US holdings to buy food and appreciate their currencies."

Initiatives to wean us from mideast oil will only add to the demand for what crops are being produced to be used as bio-fuels. I would anticipate that the market makers will take full advantage, and food prices will begin a climb sometime soon.

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