Bank Crash Coming.....

I don't know if anyone saw this, but its extremely unnerving for the banks I am sure.

http://www.federalreserve.gov/newsevents/press/bcreg/20091030a.htm

This is the FRB telling the banks you are on your own when it comes to CRE. That the FED is encouraging active loan workouts as an official policy. Also Banks with significant CRE exposure are on their own. It seems to me that the FED is now acknowledging the major CRE problems. The biggest risk here are the banks who have not used the rally to offload exposure.

"Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers' financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined."

The Fed created QE for residential real estate, they have gotten hammered for it. They do not want the backlash of QE for CRE. Another reason why the markets got blitzed Friday.

I would not be surprised to see some CRE related downgrades in the financial sector Monday Morning. The same analysts who though the banks can go back to business as usual will do a complete turn around.

What Geithner Really Means.....

Treasury Secretary Tim Geithner was speaking to Congress this week trying to convince one set of crooks that the FSA plan cooked up by another set of crooks was a beneficial plan.



Also this:

http://www.nytimes.com/2009/10/30/business/30regulate.html?_r=1&scp=1&sq=Tim%20Geithner&st=cse

http://dealbook.blogs.nytimes.com/2009/10/29/geithner-recommends-stripping-fed-of-some-bailout-powers/?scp=2&sq=Tim%20Geithner&st=cse

But what does he really mean?

I stated before that he talks the talk but rarely walks the walk.

http://tradersutra.blogspot.com/2009/10/financial-stability-act-i-would-like-to.html

What he really means is although the Tax Payer really shouldn't have to fund another bank bailout, there is not going to be a resolution facility that would make future bank bailouts obsolete. No such measures are going to be implemented to make sure banks are not gambling with customer deposits. No such measures will be implemented to make sure the banks don't use their infinite subsidy against the taxpayer. What Geithner is really proposing is to let the Banks continue to steal all of the money, let them continue to loot the country. Only after they have done so in completely leeching the tax payer, and the entire system is on life support, the ones that survive, which will be the JP Morgans and GS of the world should be the first to bailout the country, not the taxpayer. Wonderful idea. Lets not fix TBTF. We are beyond that. Here we have the Treasury Secretary, the one that is responsible for being the custodian of our countries wealth for future generations basically telling you that TBTF institutions are an official policy going forward. That we should not draft any resolution that would restrict the TBTF ability to take risks with customer deposits. Simply create a penalty(To be levied by the Executive Branch of course)for them after they screw it all up again in the great casino we call financial markets.

What a wonderful depiction of equal representation under the Constitution by Mr. Geithner.

The question to ask is this?
Why is it legal for the Banks to continue to gamble with Tax Payer Money? The answer is THE BANKS RUN THE PLACE!

The banks are using the crisis that they created to liberalize the Casino to scam and loot the tax payer of even more funds.

We need more Elizabeth Warren's, more Neil Berofsky's, and even more Shiela Bair's in this world. I know Bair has her opponents, at least she pretends to be on our side.

Shams, Scams, Schemes & One Big Clunker.

The computer traded stock market rallied Thursday on better then expected GDP results. All I heard from the fraudsters on CNBC, was what are the naysayers going to do now? The economy is back! The shorts are finished! I knew that CNBC was in the business of fraud, but what struck me was the Bloomberg News was also waving the pom poms. It seems that the media is finally getting tipsy drinking the cool aid. The market rallied furiously Thursday. Even though my shorts were hedged going into the GDP report, I just knew that Part 9 of The "Great Sham" was taking hold. If you want to know:

Part 1 = Fannie, Freddie, Citigroup, & AIG backstops
Part 2 = TARP
Part 3 = TLGP & the roughly 13 other Government liquidity programs.
Part 4 = Permanent Open Market Operations or POMO
Part 5 = Stress Tests
Part 6 = Cash For Clunkers
Part 7 = FHA Rouse
Part 8 = Housing Tax Credit

Part 9 starts out with the much better then expected 3rd Quarter GDP figures.

From USA Today:

"Gross domestic product expanded at a 3.5% seasonally adjusted annual rate in the quarter ended in September, a rise that leaned heavily on government spending. Some of the largest components of growth came from spending on cars and house building -- two areas propped up by federal programs."

"Without stimulus programs such as "cash for clunkers" and a first-time home buyer's credit, "real GDP would have risen little, if at all, this past quarter," Christina Romer, president of the White House Council of Economic Advisers, said in a statement."


What I want to know is how in the world the market being up some 200 points on Thursday is helping the fortunes of the nation's 15.1 million unemployed?

Many smart bloggers are correctly saying that the 3.5% growth, about 1% point came from sales of motor vehicles and parts which directly benefited from cash for clunkers. Another 1/2% of GDP growth came from private residential investment, of which home building is a big component. If you are thinking $8000 Tax Credit you are correct.



Take out 0.5% for Housing which is 100% government run, 0.9% from inventories, and 1% from Cash For Clunkers, and what do you have? You have a Clunker of an Economy!

Now many people in the media would like you to believe that TARP has been successful as some financial institutions have made headlines for paying back TARP funds, the vast majority still owe the government billions. TARP lent $238 billion to more than 680 banks, only 44 banks have repaid the funds, for a total of $71 billion. That in itself is an outrage, but the bigger outrage and real bailout wasn't TARP.

It was lending and guarantee programs from the Federal Reserve, FDIC, and ultimately the Treasury. The Fed had a three borrowing programs before the crisis started in the summer of 2007, when two Bear Stearn's hedge funds failed. At the height of the bailout, there were 13 programs.

These programs enabled Wall Street firms to borrow money at historically cheap rates. At such levels, it isn’t hard to turn a profit from the spreads between borrowing and lending. Much of the money that taxpayers have pumped into the financial system has ended up at banks that are lending it back to the government by buying Treasury securities. What a wonderful concept! The FED makes money available to the banks at 0%, The banks lend it to back to Treasury/Fed at a markup of course, and the banks make money off our tax dollars. All along paying millions to lobbyists so they can continue to do so.

How can we forget the famous bailout of AIG? Unlike TARP, AIG doesn’t need to pay back the $85 billion that the FRBNY provided to pay off the insurer’s credit default swap trades at 100 cents on the dollar. Why you say they don't need to pay it back? Because they cant. They just tapped the government for billions more, right in time for bonus season.


Bloomberg ran this piece on Tuesday:

http://www.bloomberg.com/apps/news?pid=20601109&sid=a7T5HaOgYHpE

Goldman received $14 billion when AIG canceled its trades. Then Goldman was paid an additional $5.6B for selling the underlying investments behind its swaps to a government created toxic asset fund, called Maiden Lane III.

I have written about Maiden Lane here:

http://tradersutra.blogspot.com/2009/07/maidon-lane-llc-ulimate-siv-ponzy.html

http://tradersutra.blogspot.com/2009/08/frb-balance-sheet-and-credit-crisis-2.html

What worse is why are we paying Society General $16.5B and Deutsche Bank $8.5B to settle CDS at 100% when Citigroup was settling them for less then 40%?

http://tradersutra.blogspot.com/2009/06/more-on-gs-and-boys-at-aig.html

So the market was up Thursday. All was good. But Friday was another day. This was the day when the U. Of Michigan Sentiment Data came in line but the market really took it on the chin when distressed securities investor Wilbur Ross warned of massive commercial real estate losses. I have also written about this very frequently.

http://tradersutra.blogspot.com/2009/04/cre-get-ready-for-next-down-leg.html

http://tradersutra.blogspot.com/2009/02/commercial-real-estateanother-time-bomb.html

http://tradersutra.blogspot.com/2009/06/commercial-real-estate-defaults-rising.html

http://tradersutra.blogspot.com/2009/07/next-wave-of-failures.html

I have roughly 20 more posts on the next leg of defaults most notably CRE.

But, does Wall Street care? Nope. They just keep the shenanigans going.

http://tradersutra.blogspot.com/2009/08/return-of-king.html

Its the ultimate game of Extend and Pretend.



The Sham Banks have been swimming in losses since the collapse of the credit markets in mid-2007.

Real estate research firm Foresight Analytics estimates banks should have booked losses on around $110B of defaulted commercial real estate and construction loans. But so far they have taken their medicine in only about 1/3 of those cases. That means the banks could face a backlog of $70B or so defaulted but unreserved loans as we head into the teeth of down cycle in CRE where the bulk of bubble era loans are due to be repaid or refinanced between 2010 and 2012. Regional and community banks, rather than the giant TARP-taking entities, will bear the brunt of this onslaught. Banks with between $100MM and $10B in assets have almost $900B of commercial real estate exposure. That's three times their capital. We are at the beginning of this problem not the end.

Then we have non performing assets. Nonperforming asset levels were 17% higher in regulatory filings than in public statements, suggesting that some big banks are understating problem loans as they go through the restructuring process. Troubled debt restructurings have doubled over the past year, as banks extend loan maturities and cut interest rates or loan balances, particularly on troubled residential loans.

What about FASB and repatriation of OBS/SIVS? Did anyone notice when BOFA CEO/Born Thief Ken Lewis alerted the street that the bank would have to bring back some $125B in OBS assets/crap back onto BOFA's balance sheet? Is it not funny or coincidental that BOFA has not caught a bid since that statement?

Then we come to Wells.

Wells Fargo is a giant Mortgage Hedging operation disguised as a lending and deposit institution.

http://tradersutra.blogspot.com/2009/10/pure-simple-wells-fargo-is-disgrace.html

Add in Congress, K-Street, The Treasury, FRB, and the Media we have a powerful cocktail to get the masses drunk, while Wall Street continues to loot the country.

European Bank Smack Down

First it was ING.

http://www.ft.com/cms/s/0/681ffe72-c200-11de-be3a-00144feab49a.html

Now Brussels has its targets on RBS.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6470180/EU-competition-commission-foists-draconian-remedies-on-RBS.html

ING will be scaling back its balance sheet 30%. RBS, Lloyd's, and Northern Rock equally quaking in their boots.

Blackrock CEO Larry Fink thinks that downsizing US Financial Institutions (TBTF)will make it far more difficult to compete with European Banks. He should start reading European Financial newspapers.

Financial Stability Act - I would Like To Buy This Cave Please

Just like the Derivatives Bill is going to destabilize global markets and perpetuate more risk taking into infinity, so to will The Financial Stability Act with regards to TBTF financial institutions. All this really is the legalization of TBTF. If this act passes, then TBTF is an official policy of the Obama Administration.

http://www.financialstability.gov/

We had Tim Geithner defend the administrations stance earlier in the week. He keeps saying the right things, but the execution is not up to snuff.

The bill he is aggressively defending calls for putting a resolution process in place which ostensibly allows the cost of the failure of a too big to fail to not be passed on to taxpayers or the wider economy. The sentiments he expresses are the right ones. But, he is rightly being questioned about whether this proposal gives the executive branch power which it could abuse. Let me say - I am OK with giving the executive branch the power they need. But what have they done so far? Nothing! They have allowed Wall Street to loot the country. What good is power if its not used?

Its beyond any level comprehension that right after this speech GMAC was effectively nationalized and guess what? The non-government equity wasn't cleaned up. What is going on? Why is the tax payer being looted? The testimony and the actions are in direct contradiction with one another.

The biggest problem I have with the FSA is that TBTF is and will live on to perpetuity if and when this is passed. The banks are falling all over themselves in laughter at this moment. More so, TBTF institutions will now see an implicit government subsidy that puts them in the same category as FNM and FRE before the crisis. This in turn gives the large unbreakable banks a huge funding advantage over the regional banks. This just destabilizes the financial system more as more risks will be taken with even more leverage.

Its capitalism on steroids.

Geithner and the Obama Administration are suffering from Regulatory Capture. It was the Federal Reserve that wrote most of the regulations for the TBTF banks. Afterwards it was the Fed that failed the most. Now one wants to take accountability for this massive overhaul.

If this regulation gets passed, we are all in serious trouble. Its no longer calling the bomb squad to defuse a bomb. That's an after thought. We are going to let the bomb explode, and then figure out a way to clean up the mess later. Of course with taxpayer money and bonus subsidization involved. If this bill gets passed, Congress will no longer have the right to say yes or no to bailouts, that decision goes to the Executive Branch. Congress then is really off the hook with regards to bailouts. Is that good or bad ultimately?

The Obama Administration doesn't want to do the heavy lifting involved in regulating these banks. Don't worry though, the market will eventually come around to do the heavy lifting for them. Starting today.

EMH - Steel Cage Death Match

The Efficient Market Hypothesis shows us that financial markets are 100% informationally efficient, or that prices on traded assets already reflect all known information, and instantly change to reflect new information. Basically prices recalibrate with regards to all information. Ultimately it is impossible to consistently outperform the market by using any information that the market already knows. Doing so just requires luck. It can be naturally called the Rational Market Theory.

In theory prices truly reflect the information out there. There is no fear and no greed anywhere. Thus the market has no emotion or panic.

EMH was the one singular idea that stated the cottage industry that is Modern Day Risk Management.

I have noted before that markets are not always rational, they uncoil and the resulting quakes are painful.

http://tradersutra.blogspot.com/2009/07/markets-evolve-uncoilget-used-to-it.html

There was a duel over EMH this week.
In one corner their was Martin Wolf from FT.com who is an opponent of EMH.

http://www.ft.com/cms/s/0/38164e12-c330-11de-8eca-00144feab49a.html

"The era when central banks could target inflation and assume that what was happening in asset and credit markets was no concern of theirs is over. Not only can asset prices be valued; they have to be. “Leaning against the wind” requires judgment and will always prove controversial. Monetary and credit policies will also lose their simplicity. But it is better to be roughly right than precisely wrong. Pure inflation targeting and a belief in efficient markets proved wrong. These beliefs must be abandoned."

The other side has Professor Jeremy Siegel from the Wharton School.
Mr. Siegel makes a lot of good points, but lets be honest here, he is part of the academic elite, he is not about to tear down his gold standard. The single most important point that he doesn't understand is that all of the risk models failed because they were all based on rational pricing.

Its quite unnerving that the academic community still holds on to beliefs that simply don't work. That is why MBA programs should be marginalized and rendered useless going forward.

http://tradersutra.blogspot.com/2009/04/what-needs-to-happen-now.html

http://online.wsj.com/article/SB10001424052748703573604574491261905165886.html

"According to data collected by Prof. Robert Shiller of Yale University, in the 61 years from 1945 through 2006 the maximum cumulative decline in the average price of homes was 2.84% in 1991. If this low volatility of home prices persisted into the future, a mortgage security composed of a nationally diversified portfolio of loans comprising the first 80% of a home's value would have never come close to defaulting. The credit quality of home buyers was secondary because it was thought that underlying collateral—the home—could always cover the principal in the event the homeowner defaulted. These models led credit agencies to rate these subprime mortgages as "investment grade."

But this assessment was faulty. From 2000 through 2006, national home prices rose by 88.7%, far more than the 17.5% gain in the consumer price index or the paltry 1% rise in median household income. Never before have home prices jumped that far ahead of prices and incomes.

This should have sent up red flags and cast doubts on using models that looked only at historical declines to judge future risk. But these flags were ignored as Wall Street was reaping large profits bundling and selling the securities while Congress was happy that more Americans could enjoy the "American Dream" of home ownership. Indeed, through government-sponsored enterprises such as Fannie Mae and Freddie Mac, Washington helped fuel the subprime boom."

Of course someone should have noticed! But all of the bankers models never predicted down home prices. If fact AIG's CDS Model never factored in negative assumptions year over year for home prices. It wasn't sub prime/CDO/CDL/CDS that eventually killed AIG. That obviously helped and would have leveled them eventually. It was the collateral they had to pay off their counter parties because when housing took a header, the were not modeling collateral payments. I can pretty much guess that the AIG models had some sort of EMH schema behind them. Another thing that is lost here is all of these models have huge leverage tied to them.

The models that were built by rocket scientists simply couldn't have been wrong. Too many smart people worked on them everyday. How in the world can bank executives go against Nobel Prize winning economists and their financial models? Everyone was getting drunk rich off the cool aid.

Siegel makes the point that someone should have known. That it was obvious. He makes Mr. Wolf's retort easy. EMH says don't argue with the prices. They always adjust for new information. Well they did eventually.

"Our crisis wasn't due to blind faith in the Efficient Market Hypothesis. The fact that risk premiums were low does not mean they were nonexistent and that market prices were right. Despite the recent recession, the Great Moderation is real and our economy is inherently more stable."

No Mr. Siegel. You Are Wrong! EMH along with free market University Of Chicago style economic thought always taught us that we should be seduced by models. We should let markets do what ever they want, because at the end of the day prices are always right. We never learned from LTCM, it should have ended there

What's In Vogue?

Last year It was all about Crude Oil. Crude! Crude! Crude!
Everyone was an expert on the commodity. Everyday people were all hooked to the Nymex Website to find out where CL (CRUDE) was trading. Investors had CL at the top of their Index List. Anything and everything we were trading had to do with Crude. We were all trading crude and didn't even know it. Crude oil was the most influential asset class in the world. It was the biggest hedge trade in the world, as people were hedging sub prime with crude. The talk got so out of hand that it kinda peaked when crude hit 145. Ripe for a reversal.

Switch to today and its the Dollar that is talked about every single minute of the day. Dollar! Dollar! Dollar! Where is the US Dollar Index? Where is DX? How are Euro and Aussie doing? I am not going short as the dollar keeps going down and the dollar is sinking - I am buying.

Everyone including Matt Drudge is an international economist who knows everything about the Dollar. Kinda smells like oil. Which tells me the dollar is ripe for a 10% move up. We all know that the dollar is the funding currency for all of the speculative risk trading in the world. When the dollar rallies there is going to be a dislocation in risk asset markets around the globe. At the end of the day, its really pathetic that the Dow and SP needs a lower dollar everyday to get a bid. Truly mind boggling that currency destruction is the best news for buy side activity.

Dissenting Opinions Need Not Apply

If there ever was a reason to have complete apathy over government and Wall Street, these following 3 articles will give you a million of them.

TBTF currently is an unofficial policy. Obama is making it a permanent official policy with his new financial reform bill.

http://www.ritholtz.com/blog/2009/10/congress-and-tbtf-%e2%80%93-bring-in-the-bomb-squad/

Congress continues not to listen to dissenting opinions on Derivative legislation. Heck, they are not even listening to the public.

Robert Johnson, director of the Economic Policy Initiative of the Roosevelt Institute, and formerly with Bankers Trust (Blew up PG with derivatives in the 90's, has been extremely critical of the US Government’s handling of matters related to financial services and most notably derivatives legislation.

On October 7, he gave testimony at the House of Representatives financial Services Committee expressing some of his concerns about regulations. Not only was he rushed but his entire testimony was stricken from the records. There is not one mention of his important testimony in the public records. Thank god we have the blogasphere who actually believe in the truth of a representative democracy, because Congress forgot that a longtime ago.

If it wasn't for bloggers like Zero Hedge, Naked Capitalism, Mish, and others, the entire country would be clueless. At least now we 5% of the country who know what actually is going on. I may be joking but 5% is a pretty good starting point for a revolution.

http://harpers.org/archive/2009/10/hbc-90006000

In the end this is outragious behaivior that would have gone unoticed if it wasnt for people who actually think this country is worth a damn anymore.

http://www.nakedcapitalism.com/2009/10/bank-favoring-censorship-in-government.html

http://www.newdeal20.org/?p=5613

Activist Judges....I Love Them!

Gretchen Morgenson has an excellent and potentially earth shattering piece about Mortgage Foreclosures that can potentially obliterate the entire securitization market.

www.nytimes.com/2009/10/25/business/economy/25gret.html?_r=1&pagewanted=print

This is just a continuation of an earlier piece on MERS

www.nytimes.com/2009/09/27/business/27gret.html?pagewanted=print

We all should throw a party for Judge Rakoff and Judge Drain.

Karma is a Bitch!

I will have a much more in depth piece about MERS and the entire sordid securitization business in a post real soon.

Capitalism Has Failed....

...But why worry when Socialism is there to bail them out.
This is the sorry state of affairs in our capital markets.

Since the forced unraveling of our global financial system a year ago, many Economists have suffered similar unravelings. I was watching "The Warning" on PBS a few nights ago, and what really struck me was the way Alan Greenspan had to eat his own words when he spoke in front of Congress last fall. He basically stated not in so many words that everything he knew about economics and market dynamics were a fraud. Whats more startling was how beat down he was. He was clearly a defeated man in front Congress that day.

"Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief."

Does this mean that the Ayn Rand laissez-faire capitalist leanings were completely wrong? Yes.

Back to laissez-faire capitalism. How in the world can Bankers be ruled by anything except greed? Where in the world did Greenspan ever get the notion they weren't? Ayn Rand that is where.

Anybody who has ever read Atlas Shrugged, Ayn Rand’s 1957 novel, Greenspan’s hands off philosophy of marketplace management sounds very familiar. At its core, the book supports a radically Utopian political/economic system called Objectivism, which suggests that the morality of rational self-interest, as opposed to religious or government intervention, should be the foundation of the ideal political structure.

According to a short description of Objectivism given by Ayn Rand in 1962, "The ideal political/economic system is laissez-faire capitalism. In a system of full capitalism, there should be (but, historically, has not yet been) a complete separation of state and economics, in the same way and for the same reasons as the separation of state and church."

Simply stated, Ayn Rand’s theory of the "morality of self-interest" exactly parallels Alan Greenspan’s testimony late last year about his now "shaken belief" in the ability of "self-interest of lending institutions to protect shareholder’s equity."

What we know have is Greenspan stating "Yes, I found a flaw" when grilled by Congress. "That is precisely the reason I was shocked, because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Ayn Rand would have been just as disgusted as the rest of us if she was around to watch what was going on last year. But like the rest of us she would be equally powerless to stop it. Mainly because her ideas had permeated the Zeitgeist of Global Financial Markets. Everyone was drunk off Moral Objectivism. They were drunk off of Milton Friedman. They were drunk off of the Committee To Save The World.

To complete this arc:

"My philosophy, in essence, is the concept of man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute." --Ayn Rand

How in world can anyone be stupid enough to believe in such drivel?

But then again we cant totally discredit Rand. She cant be the biggest influential factor. That achievement has to go to Milton Friedman. Its his Libertarian leanings that led to many structural changes in global markets. Its his total deregulation theme that caused OTC Derivatives to implode global economies. Its his idea that markets generally get it right that led Eugene Fama to invent Efficient Market Hypothesis. The simple idea that markets are always right and will always self regulate is the corner stone of most financial modeling. Its a cottage industry.

But what now? We have Obama who looks to be drinking the same cool aid that Friedman was passing out all of those years at the University Of Chicago. Remember he taught Law there. We are invariably headed for another meltdown. Housing is a 100% government run industry. When was the last time they actually added a job? Bank balance sheets are still soaked with crap. Consumers have started a generational shift to lower debt and save for retirement. There is absolutely zero demand for consumer loans. The banks don't want to lend, that's good, no one wants their money. The excess reserves in the system is very dangerous. $800B worth of very dangerous.

Let me say I still believe in Capitalism. There is a lot of inherent good in it. the inherent bad is:

*Network Finance
*Structured Finance
*Modern Finance

I believe that the above three are all though of as stabilizing forces, but in fact only create the illusion of stability while simultaneously creating the conditions for an inevitable and sudden collapse.

The economist Hyman Minsky once said:

“Instability - is an inherent and inescapable flaw of capitalism.”

Simply put, the whole financial system contains the seeds to its own destruction.

I may sound fatalistic, but with carefully crafted policies one cant blunt the collateral damage caused by financial crisis. What we have seen so far is the same economists who got it completely wrong for so many years in the first place are the first ones saying the recession is over. This doesn't help with the policy side of the equation. Its like "See, we only needed trillions of losses back stopped, now leave us alone!"

There is still some sort of perverse feeling that Neoclassical Economics still works. We need to extinguish the idea of self regulating and self stabilizing free markets. The only type of free markets are self absorbed.

John Maynard Keynes warned that capitalism might fail to maintain full employment. Most economists still believed that free market capitalism was a fundamentally stable basis for an economy. We have Keynes to thank for the acknowledgement that government might under certain circumstances play a role in keeping the economy and employment at a somewhat even level.

While other economists like Friedman won Nobel Prizes, Minsky went along with his life. He studied extensively and received his PhD from Harvard. He was largely forgotten because he was such a huge follower of Keynes. Its from studying Keynes very closely that he found his central theme of capitalism being inherently unstable and prone to great collapses. He unlike the neoclassical economists never fell far the idea of markets trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would leap over a cliff.

Minsky's advisor Joseph Schumpeter, the noted Austrian economist coined the phrase "Creative Destruction" from many of Minsky's insights. The two worked together, and Minsky came up with the idea of “Financial Instability Hypothesis.” This theory basically states that borrowers and lenders fuel the economy in a safe way, they stay clear of high risk loans, but inevitably the success they get from safe lending allows them to take on more risk in the reasonable hope of making more money. Does this sound familiar? Its basic behavioral finance as success breeds a disregard of the possibility of future failure. As the debt gets more riskier, those bets are leveraged even more in the attempt to double down. All in all the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit. Once this type of economy has been firmly established, any panic (LTCM 1998) could wreck the market. If a single firm (Lehman)goes bust, it could trigger a massive deleveraging of bad debt assets. All of this pain then spills over to the real economy, the same economy that ultimately depends upon the now collapsing financial system.

Its like Minsky had a crystal ball at the time he passed away. He warned of the dangers of securitization. Warned against complex financial products.

Today, I am more convinced that the inevitable collapse is upon us. I am not saying next week, next month, maybe not even next year, although I would bet a CDS that it happens a lot sooner then later.

Dark Pools & HFT - TBTF? TBTR?

I have written about HFT many times before.

http://tradersutra.blogspot.com/2009/07/volume-vs-liquidity.html

http://tradersutra.blogspot.com/2009/07/real-hft-issue.html

SO far the SEC has proposed Banning Flash Orders which is really legalized front running. What took them so long? Oh yes...it was the bloggers who came to mankind's rescue.

They have also moved into the Dark Pool Arena.

http://www.bloomberg.com/apps/news?pid=20601087&sid=azDE7Q.4qkTo

I for instance think this issue is blown out of proportion. IOI's or Indications Of Interests have been around for many many years. Dark Pools like Liquidnet and Pipeline Trading actually facilitate trading. Do they facilitate price Discovery is another question. But then again they are not registered exchanges so they are facilitating price discovery. They are there simply to match buyers with sellers at what ever price those two want to meet. Its a round about way to get to price discovery with the transparency.

So they have effectively banned flash orders. Good.
Dark Pool trade limit has been cut to .25% of daily volume. On the fence on this one.

What needs to happen is HFT systems need to be looked at very seriously. I am not saying regulate them, but they need to be researched by the SEC.

Slowly HFT have garnered some 70% of the daily market volume on all exchanges. Its the machines that trade stock all day long. Does this sound like they are slowly becoming TBTF? Are they TBTR - Too Big To Resolve?

I am all in favor of liquidity. But these programs at the moment only add volume. Do they really add liquidity? No one can make that assumption until we see a serious drop in the markets. When every one is headed for the exits, will the HFT systems be there to soak up the sellers? Its all good in up markets remember.

Lets just say for arguments sake that they do add liquidity. I am all in favor of increased liquidity, but but when it works against transparency and fairness, transparency and fairness must win.

Spreads have narrowed, but prices quickly move back and forth, and high speed professional investors are better able than retail investors to take advantage of those price impacts.

But the bigger question and concern is that HFT, left unchecked, could develop into a systemic risk, becoming simply too big and too fast to regulate. Direct access to the exchanges by hedge funds, which still are unregulated entities and which employ high frequency strategies without even the checks associated with rules applicable to broker/dealers also increasingly jeopardizes systemic stability.

I am in favor of smart effective regulation that is actually enforced. The SEC even though is a sterile organization, its all we have at the moment. They must strike a balance by looking into HFT and Dark Pools understanding them and acknowledging the role of block trading and innovation for the institutional and retail investors.

Now whats up next after this? Co Location services? Perhaps. But we cant totally strip and regulate technology all together.

REG ATS in the late 90's spawned the stated goal of transparency and equal access to prices for all. That was good but lets get something straight. Not everyone should be trading stocks. We cant go back to the old days of looking at the tape for prices. We need certain amount of technological advancement. Fairness is always subjective. Its in the eye of the beholder. Transparency is not.

Kill The Quants - But Don't Forget Congress & Lobbyists

Financial Regulation?
That's Truly Hilarious!

Much earlier in the year I channeled my inner Shakespeare and stated that we needed to kill all of the Quants. How silly of me to forget the real parasites.

http://tradersutra.blogspot.com/2009/03/aig-quants.html
I left out the this parasitical structure that basically screws Americans only because I did not think they had the onions to step in and fight regulation. I didn't think the Banks would have the nerve to take Tax Payer money and then demand and fight regulation tooth and nail. How naive of me. I do apologize. I have no clue what came over me. I should have known from my years of working on Wall Street what was up. At the end of the day I give Humanity too much credit.

But we need to silence K-Street. How do we do it? I say give them everything they want. Give the banks a blank check to do what ever they want to do. Lets say to them you have won. Is this blasphemy? Am I drunk from partying all Saturday night? Nope. On the contrary. This only sets up an even greater meltdown sometime next year. You see if we give the bankers and lobbyists everything they ask for, then they cant blame regulators anymore when the crap hits the fan. They cant blame home owners next time. They cant blame bad lending. Who is left to blame? You got it! The bankers and scum bag lobbyists. This is where the real revolution takes place.

http://tradersutra.blogspot.com/2009/08/meltdown-soon-social-unrestrevolution.html

This is when America takes their country back with brute force. Blood will be spilled and heads will roll.

But we cant get to this cathartic moment without giving in to the scumbags first.

The Lobbyists have already spilled their own blood to the tune of $220MM so far in 2009. Should not that money be used to recapitalize the bad bank balance sheets?

Chief Tax Payer Traitor Barney Frank of the House Financial Services Committee has already watered down much of the Derivative legislation.

The House Financial Services Committee, for instance, approved a provision on Wednesday that Mr. Frank said would exempt “the great majority” of businesses that use derivative instruments to hedge their business risks from trading such instruments through exchanges or clearinghouses.

The CTFC found this to be outright stupid. This sounds so much like 1998 with Brooksly Born. The CTFC is yelling at the top of their lungs about the lack of true effective regulation and Congress just cuts them down.

This particular exemption would create too large a loophole for financial instruments that were unregulated and played a central role in the economic crisis.

What do you think Obama thought of this? He loved it and supported it. Why wouldn't he? Obama is all about hollow regulatory promises.

What about the Consumer Protection Agency? Granted I was never a firm believer in this, but the sheer opposition by the financial sector tells me that these guys want to go back to the days of predatory lending.

The Obama Administration has proposed that the new agency protect consumers from abusive or deceptive credit cards, mortgages and other loans. But responding to the concerns that the agency could try to exert its jurisdiction over an array of other industries that lend money, like retailers and car dealers Benedict Frank has made clear his intention to exempt many other businesses from oversight as part of his effort to steer the measure through Congress.

Now some 98% of the nations banks are exempt from these new regulations that Obama has directed.

The heavily neutered Financial Protection Agency now doesn't have jurisdiction over 8000 of the roughly 8200 banks in the country. Only the large banks are subject to the agency's examiners.

Even after all of this the ABA still is not satisfied!

“We continue to have our fundamental concern that the bill will create a new agency with incredibly broad powers that will be in constant conflict” with other regulators, said Edward L. Yingling, president of the American Bankers Association."

The Derivatives bill which passed 43-26 is also heavily neutered. Its all business as usual with the same old hollow promises. Like I said. Heads need to roll for these people to realize the games they are playing with real people and real money.

The legislation’s chapter on derivatives would impose new regulations and capital requirements on dealers, and would force more trades onto exchanges or electronic platforms. But in a major concession to businesses, many trades intended to hedge risks by companies like airlines, manufacturers and energy interests would be exempt from trading through exchanges or clearinghouses. What makes you so sure that Wall Street Banks wont buy energy interests and other manufacturers that have this exemption? They will just move all of their commodity operations to the exempt energy trading unit and they are back in business.


The political obstacles to the creation of a consumer protection agency are quite formidable. In the last decade, banking and other interests that now oppose the agency’s creation contributed more than $77 million to the members of the House Financial Services Committee, according to the Center for Responsive Politics.

Two of the largest recipients of money from the financial sector over the period have been? You guessed it! Mr. Barney Frank!

The other scumbag? Representative Spencer Bachus of Alabama, the senior Republican on the committee and a leading critic of the administration’s plan.

With elected officials like these? Who needs Al-Qaeda?

Top Marginal Tax Rates

I have posted here the Top Marginal Tax Rates for the USA.

Are you noticing that the MRT went from 73% in 1921 to 25% in 1931? That is why its called the roaring 20's. The age of excess. The age of Leverage. The age of Debt. It all culminated with the Great Depression. Don't let anyone tell you any differently. The FRB started to hike rates as late as 1928 but it was too late. Some say it was the hiking of interest rates that caused the crisis. Tom Foolery! It was the leverage and debt from years of easy money via lower MRT and short rates that caused that calamity. The Great Depression like our Derivative Crisis was years in the making, no matter what the Fed/Gov/Treasury was going to do was going to avert the inevitable collapse of the system.

Blaming higher MRT and Higher Short Rates is just an excuse for ludicrous financial behavior.

This type of behavior permeates the country today. Higher Tax Rates are the devil. Blah Blah Blah.


toprate_historical

Pure & Simple - Wells Fargo is a Disgrace & An Abomination

America's most fraudulent bank reported earnings that were much better then expected.

The Wall Street Whore machine was quickly on top of it.

*Great Results!
*Kicking On All Cylinders!
*Great Execution!
*Raising Estimates!
*Raising Price Target
*Buy! Buy! Buy!

From this stock futures and Wells common rose on the day earnings were announced.

But was it all good for Wells?
Are they killing it softly?
Kicking on all Cylinders?

In Short. NO!

Wells Fargo, the broader markets, and other banks were enjoying a decent day until late in the day an analyst who had come on CNBC earlier in the morning praising Wells suddenly downgraded it unleashing a late day sell off.

There was a lot of chatter about credit write downs and mortgage servicing rights or MSR's earlier in the week involving many banks including Wells Fargo. The earnings release clearly documented where Wells was making money. It wasn't in trading, commercial banking, private banking, investments, or even lending, it was all due to MSR hedging.

Lets get one thing straight. This has been a very good quarter for bank earnings. Goldman Sachs, Morgan Stanley, JP Morgan, Wells Fargo, US Bancorp,and most European Banks as one would expect are profiting from record low interest rates.

The broader question is for larger banks, have they taken enough losses? Are they properly reserved for future losses? Are the credit write downs continuing? Forget the fact that they are slowing, going from $10B to 8$ is no relief. The smaller banks are in serious trouble as they are significantly hedged to the broader economy via commercial real estate and construction loans. GS and MS should do better as they are more leveraged to sales and trading. But these stocks have risen so far that there is little room for valuation expansion.

Back to the disgrace that Wells Fargo is.

Wells Fargo posted a cosmetically pleasing to the eye profit of $3.2B, or double the loot from the same quarter last year, and in the process beating estimates.

Like I said, analysts were falling over themselves praising Wells for the results even though the results were all due to MSR Hedging. As the day went along, people really started to look at the report a little more in detail. Many tarted to complain that the bank's entire profit for the quarter came from a $3.6B profit on a hedging transaction. The bank's core operation's, meanwhile, produced results that ranged from mediocre to downright poor.

The analyst that came out with the sell rec late in the day was the same one waving the pom poms earlier on CNBC.

You cant make this stuff up.



The best part of the piece is at the end when CNBC anchor Becky Quick thanks Bove for speaking eloquently about the results so quickly after they were announced.

Yes America. We thank you for speaking eloquently and screwing us up at the same time. Its really par for the course when you had a dolt like Bush for President for 8 years. We now praise people who can actually complete sentences regardless of its total relevance and logic. This is the Obama Presidency in a nutshell.

I digress. Back to the disgrace.

The analyst Dick X Bove actually confessed that he didn't read the Wells earnings report before he got on air. Was it just CNBC trying to peddle more Wall Street smut to retail investors? Bove called Wells a "Standout" bank and that Wells has its loan losses "Under Control." Later in the day when he was actually doing his job, he reversed course and downgraded the piece of crap stating that the banks earnings were in fact "Pretty Poor" and mortgage hedging and unsustainable tax cuts inflated earnings. All of this was quite evident right off the bat in the morning, all people had to do was read the earnings report.

Bove continued to say:

"Wells Fargo reported earnings of $0.56 per share for the third quarter. This was well above my estimate of $0.41 per share and in line with second quarter results. The earnings forecast for 2009 has been increased to $2.08 per share from $1.94 per share. The estimates for 2010 and 2011 remain unchanged at $1.93 per share and $2.67 per share, respectively. The target price on the stock is being maintained at $25 per share. The rating is reduced to Sell."

Furthermore.

•While the quarterly number was higher than the expected, the increase seems to be due to two factors. The servicing fees on mortgages (MSR) jumped by $1.1 billion or $0.15 per share, and the tax rate fell by 2.2% adding another $0.02 per share to earnings.

•The volatility in the mortgage servicing fee is impossible to explain. In the past five quarters this fee has moved around as follows: $525 million, negative $40 million, $843 million, $753 million, and $1.9 billion. Mortgage rates in these five quarters have been as follows: 6.31%, 5.87%, 5.06%, 5.03%, and 5.15%. These rates would argue for a constant decline in the value of mortgage servicing until the third quarter this year.

•This is not what is depicted in the Wells Fargo numbers. The reason is that Wells hedges its servicing portfolio. These hedges are very large. For example in the second quarter, the bank lost $1.3 billion on its MSR hedges. In the third quarter, it made $3.6 billion on these hedges. The swing from quarter to quarter was $4.9 billion. The earnings per share impact was $0.68 per share. This is more money than the bank earned, overall, including the hedge profit, in the third quarter.

•The remaining businesses of the bank were very mixed in the quarter. Most disturbing is that loan losses seem to be accelerating on the negative side.

•Despite the fact that this is the most compelling earnings event in each quarter, the bank never spends much more than 5 seconds discussing it. It is an unsustainable profit but MSR hedges keep coming through for the company when it needs to bolster earnings.

This is the best point. Wells doesn't spend much time discussing MSR hedging. Why? Simply, they don't understand it themselves, and they only care if they are in their favor, so its like Gays In The Military - Don't Ask Don't Tell. Why go into the fact that the only reason you guys are in business is to make loans, but you are not making loans because loans are not in demand. The only reason you guys have not blown up the company is because of financial engineering that has for once worked. Broken clocks work at least twice a day. Wells sucks at commercial banking, consumer banking, and investments at the moment, but the blind squirrels at their mortgage hedging desk had a god quarter. They simply cant say that.

But lets go back to the MSR question. These next few points are right from Wells 10Q from their corporate website.


The Company originates, funds and services mortgage loans. These activities subject the Company to a number of risks, including credit, liquidity and interest rate risks. The Company manages credit and liquidity risk by selling or securitizing most of the loans it originates. Changes in interest rates, however, may have a potentially large impact on mortgage banking income in any calendar quarter and over time. The Company manages both the risk to net income over time from all sources as well as the risk to an immediate reduction in the fair value of its mortgage servicing rights. The Company relies on mortgage loans held on its balance sheet and derivative instruments to maintain these risks within Corporate ALCO parameters.


At September 30, 2003, the Company had mortgage servicing rights (MSRs) of $5.8 billion, net of a valuation allowance of $1.8 billion. The Company’s MSRs were valued at 1.03% of mortgage loans serviced for others at September 30, 2003, up from .92% at December 31, 2002 and .89% at September 30, 2002. The increase in MSRs was predominantly due to the growth in the servicing portfolio resulting from originations and purchases.


The value of the MSRs is influenced by prepayment speed assumptions affecting the duration of the mortgage loans to which the MSRs relate. Changes in long-term interest rates affect these prepayment speed assumptions. For example, a decrease in long-term rates would accelerate prepayment speed assumptions as borrowers refinance their existing mortgage loans and decrease the value of the MSRs. In contrast, prepayment speed assumptions would tend to slow in a rising interest rate environment and increase the value of the MSRs.

The Company mitigates mortgage banking interest rate risk in two ways. First, a significant portion of the MSRs are hedged against a change in interest rates with derivative contracts. The principal source of risk in this hedging process is the risk that changes in the value of the hedging contracts may not match changes in the value of the hedged portion of the MSRs for any given change in long-term interest rates.

Second, a portion of the potential reduction in the value of the MSRs for a given decline in interest rates is offset by estimated increases in origination and servicing fees over time from new mortgage activity or refinancing associated with that decline in interest rates. In a scenario of much lower long-term interest rates, the decline in the value of the MSRs and its impact on net income would be immediate whereas the additional fee income accrues over time.

Under GAAP, impairment of the MSRs, due to a decrease in long-term rates or other reasons, is reflected as a charge to earnings through an increase to the valuation allowance.

In scenarios of sustained increases in long-term interest rates, origination fees may eventually decline as refinancing activity slows. In such higher interest rate scenarios the duration of the servicing portfolio may extend. In such circumstances, periodic amortization of servicing costs may be reduced, and some or all of the valuation allowance may be released.

Its all there in black and white. They are basically telling you that they originate loans that have a number of risks including credit, liquidity and Interest Rate risk. That is why they securitize all that is holy under the sun. They manage the MSR risk with even more complex derivatives.

So in effect what these shysters are saying is that a decrease in interest rates as we have seen should lower net income right away as the loss in revenue flows through the income statement. Yet, this did not happen this quarter and his rarely consistent this year. The question then on everyone's mind is why? The answer is that Derivative Hedging is the business that Wells Fargo is in. They are not in the business of lending. Not in the Asset Management Business. Retail brokerage AG Edwards and Wachovia are all fronts for a giant hedging book. In short temporary gains from the hedging contracts have more than offset the more permanent loss in MSR income. But for how long? What about continued credit losses? RMBS Losses? CMBS losses? HELOC Losses? ARM losses? Option ARM losses? Off Balance Sheet exposure that needs to brought back onto Wells balance sheet? Wells Fargo will be making a kings ransom on mortgage refinancing, but these fees accrue over time. Please be advised that most existing home sales are distressed sales, that the $8K Tax Credit has spurred home sales across the country. Some say these sales would have happened anyway without the credit, to which I say Hogwash!

Net Net

What will happen with these massive MSR derivative hedges is very much unclear. What is clear is that these inflated MSR values this quarter will have to be written down and that will be a drag to income later on. So, when Investors wake up from their stupor and you strip out the hedges, the earnings level at Wells is misleadingly and shockingly fraudulently high.

The more troubling thing about this is that these hedges are actually marked to market and because there are no actively traded contracts for comparison, there are no reliable marks to mark to market them to. This is where they also lie and say "See We Are Marking To Market." Its just there is no market to compare.

In fact they are mark to make believe. Wells is not the only scam bank doing this. BOFA, JPM, and the largest mortgage service companies all practice and benefit from this.

This next nugget is from digging up regulatory filings. Did I tell you that Google Search is great?

"The four banks wrote up the value of their MSRs by about $11 billion in the second quarter, according to regulatory filings. Mortgage rates climbed by 0.35 percentage point in that period, according to Freddie Mac."

"The four banks control 56 percent of the market for the contracts, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter that has covered the industry since 1984. Service agents collect payments from borrowers and pass them on to mortgage lenders or investors, less fees. They also keep records, manage escrow accounts and contact delinquent debtors."

"Under U.S. accounting rules in place since 1995, banks should report the value of mortgage-servicing rights on a fair- market basis, or roughly what they would fetch in a sale. A bank must record a loss whenever it sells MSRs for a price below where they’re marked on the books."

"Because there’s no active trading in the contracts, there are no reliable prices to gauge whether banks are valuing the rights accurately, analysts said"

"Bank of America held the largest amount of MSRs as of Sept. 30, with $17.5 billion. JP Morgan had $13.6 billion, while Wells Fargo owned $14.5 billion and Citigroup $6.2 billion."

This is just a look at the tip of the iceberg at Wells Fargo.
MSR Hedging is just one skeleton in their closets.

I posted this a month ago about a potential CDS nightmare:

tradersutra.blogspot.com/2009/09/wells-fargo-just-keeps-shenanigans.html

And this about their OBS/SIV exposure:

tradersutra.blogspot.com/2009/06/mortgage-pain-ahead.html

And this about non performing assets.

tradersutra.blogspot.com/2009/07/more-on-wells-non-performing-assets.html

The only way Wells survives is if the general investment public keeps believing in the lies that Wells executives spew out. The only way this company survives is if Congress legislates accounting fraud across the board in America. That really is the only way any of the banks survive at the end of the day.

They have already done that to some extent with FASB rollbacks.

tradersutra.blogspot.com/2009/07/back-to-fasb-repercussions.html

tradersutra.blogspot.com/2009/08/frb-balance-sheet-and-credit-crisis-2.html

tradersutra.blogspot.com/2009/03/more-mark-to-market-non-sense.html

But FASB is no longer laughing.

tradersutra.blogspot.com/2009/07/congress-is-jokebut-fasb-not-laughing.html

Its just a matter of time before we have the eventual caving in of the entire shadow banking system, a system that was saved by TARP and near low rates.

The Great Heist - Game Over For America

Andrew Ross Sorkin's Too Big To Fail should really be called The Great Heist - How Politicians and Bankers Looted Everyday Citizens In the Greatest Scheme Of All Time.

I have not bought or read Mr. Sorkins book, although I will be buying it very soon, but do I really need to read it? The simple reason is I already know from my years working on Wall Street how the game is incredibly rigged and ultimately played. The rich, affluent, and ultra wealthy will always loot the rest of society, how else do you think they get so wealthy? Tax cuts, pork barrel projects, lobbyists, and the general lack of any enforceable regulation is all an attempt to get the the upper 1% so ludicrously wealthy beyond imagination, that they themselves will call the shots at the end of the day. The tax code in itself is written by ultra wealthy organizations and individuals. Lobbyists and to a lesser extent Think Tanks have completely high jacked America.

I have read a few parts of Too Big To Fail on the Internet, and read many other book reviews, its a very well researched book. I am surprised that he got this much access to the looters. Again, I think its unbelievable arrogant and shows unreal hubris of these politicians, government officials, and bankers to allow Mr. Sorkins to have access to their shenanigans. It shows what their ultimate end game was. Mr. Sorkin alerts us that the day after Bear Stearns was sold to JP Morgan, Treasury head Paulson was already trying to make deals for Lehman Brothers and Wachovia. He knew that Lehman brothers was in big trouble. All of the people in that room knew the entire system was on life support, this is why they had already drawn up some sort of bailout program for Wall Street. The Looting Of America to stabilize and reinvigorate the Wall Street Bonus Pool had just embryonically begun. The TARP program that came out of left field in September 2008 really was written on April 15Th of 2008. Who do you think wrote this document? Neel Kashkhari, former Investment Looter/Banker at Goldman Sachs. Mr.Sorkin has this document in his book That alone should cover the cost of buying the book.

What the public doesn't know and what the main stream media hasn't reported on was that in these closed door meetings, all of Wall Streets dirty laundry was being shown for everyone to see. Merrill Lynch was in trouble. Lehman was in trouble. Wachovia and Washington Mutual were in trouble. Morgan Stanley was in trouble. So knowing this, you don't think the exec's at JP Morgan, Goldman Sachs, Wells Fargo, and BOFA wouldn't take advantage of the valuable information that they had? At the end of the day who survived? Yes it was GS, JP, And BOFA. You don't think that JP was leaning on Washington Mutual stock on the short side? You don't think they owned CDS against Wamu debt? How about GS? These guys were bleeding AIG, Lehman, and Wachovia dry. They were shorting the stuffing's out of the common and buying CDS protection on the back end. The final death spiral for LTCM happened when they opened their trading books to Wall Street and specifically Goldman Sachs. Goldman left the meetings and immediately went and leaned on LTCM bad positions. This is what happens when their are no rules or ethics. It was a free trade back in 1998, and again in 2008. I also forgot, you don't think these guys in these meetings made some calls to their hedge fund buddies? At the end of the day Lehman, WAMU, and Wachovia were sacrificed so that the rest of Wall Street can eat. Morgan Stanley was saved by Mitsubishi UFJ Financial Group and Merrill as we all know was fraudulently peddled to BOFA.

As I posted yesterday this type of behavior has happened before.

tradersutra.blogspot.com/2009/10/it-has-happened-before.html

tradersutra.blogspot.com/2009/03/how-ltcm-enabled-sub-prime-meltdown.html

Now what I knew in 1998 was the same the general public knew in 2008.

-Wall Street and Financials are TBTF.
-OTC Derivatives pose a systemic risk to the economy.
-Leverage is way out of control.
-Our national debt is ludicrous
-Americans for years have lived beyond their means and are heavily in debt.
-The banks are not properly capitalized and continue to lie about their books.
-The banks do not want to be regulated and will fight to the death to prevent it.
-Congress is no different then a $2 Hooker, who will sell the Taxpayer out.
-The dependence of credit and credit creation cant be sustained.
-Complex Financial Products are really WMD's in disguise.
-The dependence of Financial Modeling is vastly overrated and downright dangerous.

Most Importantly

-The lack of regulation in our financial system with regards to OTC Derivatives and Complex Financial Products is the main reason why the system and ultimately the Tax Payer continually takes it in the ass.

Its this last point that really makes the masses angry. The bankers go around the cocktail circuit telling every one that they are survivors. Survivors! They are only survivors to the extent that everyday citizens bailed them out. The only reason these guys have jobs to go to is because school teachers, fireman, auto workers, and plumbers just to name a few were bamboozled into laying their tax dollars so that Dimon, Blankfein, and Lewis can extravagantly show off their vulgar wealth. Its the same people who say they are survivors who are fighting financial regulation this time around, and they are going about it the same way they know how. The same way they cut down Brooksly Born in 1998. Its a stealth campaign perpetuated by Wall Street and laid out by the lobbyists to make sure that Congress never ever kills the Golden Goose for Wall Street.

The next serious downturn will leave actual blood on the streets. Heads are going to roll literally and figuratively.

tradersutra.blogspot.com/2009/08/meltdown-soon-social-unrestrevolution.html

If Sorkin's book is not depressing enough, please watch PBS's Frontline program "The Warning." It details one woman's (Brooksly Born) efforts and warnings to regulate OTC Derivatives. At every turn then Treasury Secretary Robert Rubin, Fed Chairman Alan Greenspan, Lawrence Summers with the help of Tim Geithner, and a cadre of financial lobbysts killed any and all talk of regulating OTC Derivatives. Congress which was drunk off of campaign contributions shrugged off the LTCM disaster as a one time once in a 100 years event. Make that once in 10 years. Where do you think Rubin ended up? He took his act to Citigroup. Where did Geithner and Summers end up? You guessed it! They slid right into Obama's inner circle. Greenspan is now universally villified for his Ayn Rand/Milton Friedman Economic Polices.

I find it funny that there is so much venom sprayed at Bush and Cheney. At least their shenanigans actually made Americans safer, although that is hard to prove empirically, I do believe in my heart of hearts that this is true. They can sleep better at night knowing their actions some how benefited average Americans.

How in the world can Geithner, Bernanke, Summers, Greenspan, Dimon, Blankfein, Lewis, Financial Lobbysts, and most importantly Congress do the same?

Can we honestly say any of these problems that everyone knew as fact have been alleviated in 2009?
|
The sound of silence is always the best answer.

Now Hear This - We Need A Stronger Dollar & Higher Taxes

I have stated before that no country in the history of the world has gotten wealthy and prosperous by self devaluing its own currency. This is the exact policy that Geithner and Bernanke are following.

No one can possibly make the point that a weaker dollar is actually good for America in the long run. Sure, PG, IBM, and the Tax Payer Sellout US Chamber Of Commerce make boat loads of money off of a weaker dollar, but what about the rest of us?

Nobel Prize winning Economist Paul Krugman, a man whom I have tremendous respect for seems to think that a weaker dollar is good. Yes it is for exports, but what about imports? Its Seinfeld all over again. You have to balance exports with imports. That is the problem. We are always in a state of imbalance. Furthermore, the only thing the US is currently exporting are bad cars and even worse Financial Engineering. What ever we are exporting foreigners don't want. So the theory that a falling dollar is helping exports doesn't fly as long the economy is leveraged to complex financial products.


A stronger USD is just good business. Its psychologically important. I am not naive to understand that there are trillions in unfunded Medicare/Social Security benefits that need to be accounted for. That is why they need to continue to print money and issue Treasuries. This unfortunately kills the dollar. What good is it to save the fort when the country is burning down? Our elected officials don't realize that Rome is indeed burning, but are much more worried about the Coliseum.

In the 1970s, Presidents Nixon, Ford and Carter pursued a weak dollar policy, and the result was a 17% S&P 500 return made negative in real terms based on the dollar's decline.

Much the same has occurred this decade amid weak dollar policies sought by the Bush and Obama administrations.

Looking at the 1980's and 1990's, something different occurred altogether. Reagan and Clinton both felt a strong dollar was in the nation's national interest, and the market result was a 121% S&P return under Reagan, and a 208% return under Clinton.

What can you decipher from this?

Periods of currency strength correlate with powerful equity returns that lift the fortunes of every day hard working people in our country who will never be technically wealthy.

We also need higher taxes. Why you ask? For the same reason that a stronger USD equates to stronger growth and prosperity. The economy and stock market does better when taxes are raised. President Reagan raised taxes in 1982, what happened to the economy and the stock market after words? President Clinton was murdered by Congressional Republicans over his Tax Increase in the early 90's. What happened to the economy and stock market subsequently?

The Republicans want you to believe that increasing Marginal Tax Rates will be certain death. OK...lets go to the figures.

During the 8 Reagan years, when marginal rates were sharply cut but deficits were substantial, equities on the NYSE and the SP 500 about doubled.

During the Bush 41 years, when the top marginal rate was increased, equities rose about 50%.

During the Clinton Years, when tax rates were substantially increased, equities tripled, deficits turned into large surpluses as far as the eye could see.

The market today is roughly where it is when Nitwit Bush 43 took over, who cut marginal tax rates, but ballooned the deficit.

So, Bush 41 and Clinton raised Marginal Tax Rates without tanking the economy, and Clinton left Bush 43 with a shangra-la fiscal situation.

So much for the Republican/GOP argument that reducing Marginal Tax Rates is the bliss of tax/economic policy and raising Marginal Tax rates is its coffin.

When did ideology substitute reality? When did it trump the actual figures?

For Conservatives to give up on the Tax Cut policy is to give up the last thing they stand for. Its a religious war for them. Their entire self interest is so attached to this ideology that it is separated from realty at the end of the day

If you don't believe me all you have to do is your own research.
The powers that be want you to believe in the hype of tax cuts.

Its simply not true.
Figures don't lie but liars always figure.

It Has Happened Before.

The New York Times ran this story much earlier in the year.

http://www.nytimes.com/2009/02/13/business/worldbusiness/13iht-13insolvent.20163493.html?pagewanted=1&_r=2

"In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system."

Simply speaking the the nations biggest banks were all insolvent in the 1980's when the Latin American debt crisis was happening.

Richard C. Koo - former economist at the FRB of New York and now chief economist for Nomura, confirmed last year in a speech to the Center for Strategic & International Studies that most of the giant money center banks were insolvent in the 1980s.

Koo's main points were:

•After the Latin American crisis hit in 1982, the New York Fed concluded that 7 out of 8 money center banks were actually "underwater"

•All the foreign banks (especially the Japanese banks) had to keep their lending facilities open to American banks so the American banking system didn't collapse overtly and out in the open

•The Fed knew that virtually all of the American banks were "bankrupt", but could not publicly discuss how bad the situation was. If went out and said the "American banks are bankrupt", the next day they will go overtly go bankrupt. So the Fed had to come up with a lot of stories like "its good debt on their books" Sound Familiar?

•Then-chairman Volcker instructed the banks to keep lending to the Mexican dictator so that the Mexican economy didn't totally collapse, because if Mexico collapsed it would become obvious that all of the U.S. banks were underwater, and they would immediately collapse.

•It took 13 years to manage the crisis.

The way that Volcker approached the problem was that he allowed U.S. banks to keep their lending rates relatively high, while the central bank brought short term rates down. The spread between the two ("Fat Spread") became revenue for the banks, and the banks used the high fat spread to gradually write off problem loans and to repair their balance sheets.

•Volcker's covert rescue of the American banks using secrecy and a high fat spread didn't cost U.S. taxpayers a cent. For this we owe him a debt of gratitude. Unfortunately the banks never learned their lessons visa vie LTCM, S&L, & Sub Prime.

•Koo points out that you can't use the fat spread approach where there are no borrowers as the situation we are in today.

All this shows is that this type of bank behavior has happened before and will continue to happen well into the future unless we make our elected officials accountable.

All of the largest US Banks gambled and speculated wrongly in Latin America and went bankrupt.

Have they learned their lesson or changed their behavior? No. They have not. They just went and gambled at a different casino. The CDO/CDL/CDS casino that was built on a house of cards that we call the US Housing Market. They bet and lost badly and the Fed/Treasury are just pretending that these guys are solvent.

At least Volcker didn't murder the Taxpayer with his scheme.
The Summers, Geithner, and Bernanke cabal's entire plan seems to be to restart the great leverage machines.

tradersutra.blogspot.com/2009/08/return-of-king.html

This plan is doomed.

The whole scheme revolves around restarting the shadow banking system and leverage the economy back up to stratospheric levels. That all of the boats will be lifted, asset prices will rise, and that "toxic assets" will regain their "true" higher value. The whole economy and financial credit system will be afloat once again, so we can all go back to singing in the rain.

One slight problem on the way to the arena. American are in a secular deleveraging cycle. They don't want to borrow. Most Americans do not trust the Government as far as they can throw them. They know the entire economy is a ponzi scheme. They know that Wall Street has looted them good. How in the world can the banks restart the shadow banking system if the biggest suckers are no longer willing to play the game?

Re leveraging the economy can not and will not work without a full frontal assault by the US Consumer. The same ones that have been looted.

Lessons From GBP Sterling Crash

It has been said that Great Britain has twice averted disaster over the past century by a timely humiliating crash in its own currency. Is this what the US needs? Do we need a humbling humiliating crash in the USD and subsequently the US Treasury Market to finally get our fiscal house in order.

We hear many people keep saying, don't worry about deficits, we have to get out of this debilitating deflationary death spiral. We need to get through this massive deleveraging phase first, then we can work on the deficits. To which I say "Bullshit!" We live in a global economy with interconnected financial markets. One cant purposefully damage one's own currency day after day and have no one notice. The simple reason foreigners still buy US Treasuries is that they are still diluting themselves to think that American consumers will bailout the global economy. They have this ludicrous idea that once the American consumer gets re-liquefied all will be OK again. For the life of me I am still searching for a reason why foreign central banks still buy or Treasuries when they know we are purposefully killing and devaluing or own currency every single day. I understand that we have a massive trade deficit that needs to be dwindled down, a cheaper USD helps that. I am also aware of massive global imbalances that persist, but one only needs to look to China and their Madoff like economy to realize where the problem lies. Why do we continually hammer or own currency without putting the crews to China? Market Rates cant stay at near zero forever, its mathematically not feasible or healthy. I have spoken of the ultimate Black Swan moment before.

/tradersutra.blogspot.com/2009/06/black-swans-and-unthinkable-stuff.html

Rates will almost sky rocket overnight.
Trillions in Interest Rate Swap contracts would implode. I don't think the Treasury or the Fed have the vaguest of clues about how to handle such a mess. If the way they handled Lehman's collapse is any indication, we are all in serious trouble when the USD and Treasuries get crushed while LIBOR soars. What are these guys going to do then? Print more worthless currency? Sorry.. been there and done that. Continue to Bailout Insolvent Zombie Institutions? Sorry.. been there and done that. Continue to lie to the American Taxpayer and not give any indication or proper accounting for Treasury and Fed disbursements? Sorry..Been there and done that. Its not going to fly anymore the next time. Because the next time, real heads are going to roll. Real blood is going to be spilt in the streets.

tradersutra.blogspot.com/2009/08/meltdown-soon-social-unrestrevolution.html

tradersutra.blogspot.com/2009/09/i-love-smell-of-revolution-in-air.html

Banks continue to use Tax Payer money to make leveraged bets in a game of heads I win - Tales you lose. They continue not to make loans and then lie about it. They continue to cut bank credit lines and then lie about it. They continue not to modify mortgages and then lie about it. They continue to kill consumers with ridiculous fees and then get the lobbyists/Congress to rubber stamp it. They continue to take excess reserves and hoard it. The amount of excess reserves in the banking system in 2008 was $2.4B. The figure was $1.4B in 2007. That figure is currently $800B in 2009. They have effectively taken the money from Treasury and Fed and financed their trading operations. They have used that money to run up commodity prices so that every day Americans can again pay $4 a gallon for gas.

tradersutra.blogspot.com/2009/09/bank-credit-m3-money-supply-keeps.html

The three headed monster which consists of Wall Street, K-Street, and Congress think they have pulled the wool over taxpayers eyes. They think they have effectively squashed Financial regulation. They may have for the time being, but lets just wait until all of those ARM mortgages reset and the foreclosures come like an avalanche. Lets wait and see when the Perfect Storm Black Swan moment happens.

The HFT trading systems will not be able to save the stock market then. Then we will really find out what these systems were in fact stock manipulation schemes from the get go.

We are on the eve of a such an event.
Its going to happen sooner rather then later.

I have called for nationalizing the banks from day one. I will not ever take those words back. The banks are all zombie institutions that can not be reformed. They are 100% insolvent even today.

It took the humbling of the Sterling in 1992 to get the British off their asses and fix their fiscal house.

We also need a humbling humiliating moment.

Need Any More Evidence?

That Ben Bernanke and Tim Geithner who may or may not have created TBTF Institutions, but will gladly except them as the gold standard?

blogs.wsj.com/economics/2009/10/23/bernanke-smaller-banks-not-necessarily-the-answer-for-too-big-to-fail-dilemma

Bernanke would like a much more "Sublte" approach to the problem. Hmmmm...does $23 Trillion sound subtle enough?

"Mr. Bernanke suggested alternatives such as higher capital requirements against bank trading books, higher capital for “systemically important” institutions and a congressionally created process for coping with failing big financial firms in ways other than bankruptcy or bail out."

This sounds correct, but where is the regulation? Where has the administration put this down in writing in the form of a bill?

They have not done so because they are in the pockets of lobbyists who want to go back to business as usual with the US Taxpayer as Wall Streets personal piggy bank.

Case closed.

Here Comes The Leverage.

Great piece in in The Financial Times.

www.ft.com/cms/s/0/064f0ff2-bf2c-11de-a696-00144feab49a.html

I will stand by my statement that this entire rally is completely bogus.

Its all been about liquidity and global fund flows backed by borrowed dollars via the USD carry trade.

Why else would every single risk asset class being bought hand over fist?

www.economist.com/businessfinance/displaystory.cfm?story_id=14700710

Its all going to end badly. When is the $23 Trillion question.

tradersutra.blogspot.com/2009/09/labor-day-not-good-times.html

I say summer of 2010. We will have a perfect storm of excess housing inventory and an overflow of foreclosures that will drastically sink the housing market. By then the bankrupt FHA will be guaranteeing 1/3 of all mortgages in the country.

My guess is the roughly hundreds of billions of ARM mortgages that are set to reset by end of year will eventually be a derivative death nil for the banks, this coupled with massive repatriation of trillions of SIV/OBS crap back on to Bank balance sheets will be the nail in the coffin.

tradersutra.blogspot.com/2009/07/next-wave-of-failures.html

tradersutra.blogspot.com/2009/08/return-of-king.html

Now one is speaking about the shadow banking system.

tradersutra.blogspot.com/2009/07/shadow-banking-for-dummies.html

Asleep at the wheel.

No one is talking about Interest Rate Swap Exposure which is slowly reaching $900 Trillion! Who cares about putting CDS on exchanges! That's only a $20 Trillion problem! Again, the powers that be are like the Northwest Airlines pilots.

Obama Regulation plan should be called: "Free Money For Jamie/Kenny/Lloyd Plan."

Financial regulation is a total absurd joke with the American Taxpayer as the punch line.

At the heart of a true sincere regulatory environment is:

They need to eliminate complex financial products across the board.

tradersutra.blogspot.com/2009/04/what-needs-to-happen-now.html

Looking In the Mirrror and Craving Sushi

www.bloomberg.com/apps/news?pid=20601068&sid=a5682ThUSwY4

I have written pretty extensively on how the US Economy is headed for Japanese style destruction.

tradersutra.blogspot.com/2009/10/more-on-speaking-japanese-without.html

tradersutra.blogspot.com/2009/10/japanese-as-second-language.html

The only reason Japan averted a total nuclear winter was massive government spending to keep the machine alive. That debt has neared 200% of their GDP unfortunately. The US is doing the same thing to keep the machine going.

Japanese debt is absurd at 200% of GDP, we are not nearly there yet, but we are exponentially 10X worse then Japan for the following reasons.

1-Japanese consumers have already gone through some 20 years of deleveraging.
2-Japanese consumers have vast amounts of real assets and savings.
3-Japan's foreign owned debt is only 10% compared to 46% for USA.
4-Half of Japan's government bonds are held by the public sector, government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest.

All of this makes Japanese financial markets much more systemically safer then ours will ever be. You will not see a total debt market collapse in Japan, because the Japanese people are invested directly in it. Its totally the opposite in this country.

USd Treasuries are still considered "Risk Free......"

....But at what price and for how long?

Geithner and Bernanke talk a good game when they discuss deficits and the dollar, but surely they are smart enough to know that once the devil is out of the bag, its impossible to get him back in? We are going to have horrendous deficits for the next decade or so. Its mathematically impossible to reduce the deficit. That is why they continue to print dollars and slowly kill the dollar. The Treasury and Fed wants global imbalances that are so prevalent today to slowly unwind in favor of the USA. The country drastically needs to reduce its trade deficit, a lower dollar helps that. But be careful what you wish for. No country in the history of man has ever gotten wealthy and prosperous by devaluing ones own currency. This cant continue mid-long term.

American Home Owners Still Leaving In Wonderland.

...well soon they will be living on the sidewalk.

www.nytimes.com/2009/10/11/business/economy/11view.html?ref=business

This type of reporting is sure fire way of getting Shiller a Nobel Prize for Economics. Then maybe he can go ahead with this plan to sell Housing Derivatives to the same nitwit Americans who though flipping houses was as easy as buying Ariba at 300 back in 2000.

Hijacked

Dylan Ratigan formally of Head Wall Street enabler CNBC wrote this piece a while back.

www.huffingtonpost.com/dylan-ratigan/americans-have-been-taken_b_285225.html

As well as this...

www.huffingtonpost.com/dylan-ratigan/why-would-we-let-them-rig_b_302480.html

Well...if you don't think lobbyists, PACS, and special interests have not wrecked this country, maybe you should read this.

www.opensecrets.org/news/2009/02/tarp-recipients-paid-out-114-m.html

The depressing facts are downloadable in Excel Form.

www.opensecrets.org/news/TARP%20Recipients.xls

Currency Destruction and Quantitative Easing

I have posted continuously over the last few months that the stock market was rallying not because of any pick up in the real economy. Not rallying because the fundamentals were getting better. It wasn't even rallying because of sentiment was turning.

It was only rallying because of drunken money printing. Everything else fell in place.

Quantitative Easing which really is "Money Printing", "Dollar Crushing", and "Currency Devaluation" all wrapped up in a Tuna Melt is the main reason the stock market is nearing 10K. With the expansion of the monetary base to stratospheric levels, investors are tripping over each other in lifting offers to buy stock.



There have been many market pundits who believe that this will only lead to inflationary pressures further down the road.

www.cnbc.com/id/33004753

www.marketfolly.com/2009/09/julian-robertson-shifts-from-curve.html

Other real smart guys are betting the opposite.

www.marketfolly.com/2009/10/pimcos-bill-gross-bets-on-deflation.html

www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Gross+Sept+On+the+Course+to+a+New+Normal.htm

www.bloomberg.com/apps/news?pid=20601109&sid=aIQSkFg5czbg

Either eventual outcome is disastrous for our economy. This is why we need an effective Federal Reserve to assist the markets in properly unwinding the excess reserves from the system. Give Bernanke some credit, he at least is trying.

Its another reason why I think Ron Paul is a jerk off. His book End The Fed does nothing to alleviate the pain in our economy in the event of another calamity.

www.bloomberg.com/apps/news?pid=newsarchive&sid=anw1RguZxm9E

The markets have become the ultimate casino. Valuations don't matter.



Why should they matter? Why worry about valuations when they are getting effectively free money from the Fed/Treasury?

Why has this happened? Where is the sanity?

The monetary expansion that was intended to cure the credit crisis was in the end accomplished with zero financial market reform, no accounting rule enforcement, and no systemic regulations and rebalancing. Financial engineering is getting more influential and more leveraged bets are taking place. All of that free hot Treasury/Fed dough will never flow to the real economy. It will all go into high beta financial assets which in turn will again force investors to seek alpha. Truly nothing has changed.

Again...Why lend to Americans who are in the process of a secular deleveraging?
Why do this, when the banks can get free money from the government and get much greater speculative returns elsewhere with minimal regulations and reform?

The banks have not deleveraged.
The economy has not deleveraged.
The real economy (Consumers) has started a long term secular deleveraging. The banks know this, so the next real thing to do is to legislate no reform and or regulation with regards to derivatives.



The banks have taken effectively public money, money that should have been used to help the public, but instead credit has contracted and leverage has increased everywhere else. The financial system has just drained the rest of the economy.

When you strip it down to the lowest common denominator, Quantitative easing that is not part of an overall program to reform, regulate and rebalance the system to change and try to correct the pieces that caused the crisis in the first place, is nothing more than a Ponzi Scheme.

The optimal time to reform the system was with the collapse of LTCM in the 90's. They failed and this is where we are.

tradersutra.blogspot.com/2009/03/how-ltcm-enabled-sub-prime-meltdown.html

tradersutra.blogspot.com/2009/08/chrysler-disaster-mans-biggest-weakness.html

Its third world economics at its worst.