Sunday, November 22, 2009

Wells Fargo To Tax Payer.....

...Our loans are your problem.

Chris Whalen from Institutional Risk Analytics singing the obvious over Wells Fargo and OBS exposure.

Why should Wells bring back assets onto their balance sheets that are already guaranteed by the FHA when those crappy mortgages are in deed the tax payers responsibility?

Wells Fargo is blatantly saying that since the FHA, which is the government,which is the taxpayer, which is us, will bail out Wells for loans that go bad, the TBTF institution doesn't have to reserve against those loans.

There is not a shortage of this type of behavior from one of Warren Buffets biggest holdings.

Friday, November 20, 2009

Geithner Needs To Exit Stage Left

WSJ is running this story.

All Tim Geithner does nowadays is backtrack and lie. After that he lies some more for good measure.

Geithner makes the point that the underlying insurance contracts not AIG CDS were the real systemic risk. Unreal!

What was the point of the bailouts then?
I know! To make Wall Street 100% whole!

AIG is a holding company.
AIG Financial Products (AIGFP) counter parties thus had no legal claim to make a run on the insurance assets of AIG.

So Geithners point is patently false. He should have made the banks take a haircut. Screw the French when they say its against their laws. He should have threatened to take AIGFP into bankruptcy instead of backstopping AIG entirely. Threatening to put AIGFP into bankruptcy would have provided the leverage to induce the banks to take a haircut.

I simply state that the fact that AIG had guaranteed the obligations of AIGFP, this would constitute a default by AIG, but that wouldn’t affect AIG’s insurance subsidiaries, which could stand alone quite nicely as insurance companies get most of their money from customer premiums. Do you actually think Goldman Sachs would sue to control underlying AIG Insurance Premiums?

Wednesday, November 18, 2009

Another Day...

....Another day to destroy our currency.

This is a nice headline to start the day for equities.

Fed's Bullard: Possible Fed Won't Hike Rates Until 2012

Which basically is a coded message to Wall Street to buy stock index futures because as evidenced by the CPI Data that was released today that rates are going to be near zero well into 2012.

Which is a signal to continue the hedge trade of short dollar-long commodities/risk assets.

Tuesday, November 17, 2009

Hybrid Trouble Ahead

I have been writing as far back as February that hybrid securities on bank balance sheets need to be reassessed.

“By analyzing the lessons learned from these cases, our ratings will now better capture this risk.”

This is coming from Moody's. Yes the same Moody's that used to rate everything AAA, because they themselves knew as far back as 2005-2006 that these institutions were TBTF.

Monday, November 16, 2009

Capture Mode Or Trust?

This is not good news for Obama and Health Care reformers.

The country really has cooled on Health Care Reform. Could it be that the country is in some sort of Reform Capture Mode? Or is it that the electorate just doesn't trust government?

I say the later.

Odds Of Double Dip Recession Increase

This is not something that I wanted to see or read.

Deficit reduction is always good if its done for the right reasons. Obama is kow tailing to the deficit hawks who have been hammering him over the countries finances. These articles are masked under the false premise of fiscal responsibility and smart tough political posturing, but in actuality the country has to brace themselves for serious spending cuts and higher income taxes. In any event this tactics will kill off any chance of demand pickup and lead us into a double dip recession.

I agree that the deficit is ludicrous but worrying about it at the moment is not a good idea. This recession we are currently in is a severe deep one. The systemic risk is greater. Housing is a still a black hole. Most importantly, global imbalances as evidenced by the trade data still poses problems.

The Obama Administration is clearly spooked about the elections in NJ/Virginia. They are moving towards a more fiscally prudent financial model. Normally I would agree with it if it also brought an end to the looting of the country by Wall Street. It hasn't and this is a catastrophic mistake.

Also look for a 2nd round of Stimulus in the range of about $250B or so. How in the world can be finance both the Stimulus and deficit reduction? You got it! HIGHER TAXES! Which is not that bad of an idea either in normal times.

One Quote Says It All

First We had Mishkin....
....Now We have Chicago FRB President Charles Evans.

"Central banks should not make fighting asset bubbles a monetary policy objective and regulation might be a better way to respond to rapid asset price movements if needed to ensure financial stability."

Evans in this speech expressed uneasiness at the notion of central banks trying to achieve a targeted decline in asset prices. He is very skeptical that policy makers would be able to sort out in real time whether a rapid increase in asset prices means the asset is becoming overvalued. The best way to combat this is through proper regulation.

Well. We don't have any meaningful regulation to speak of so I am left to think that the FRB is going to willfully ignore future asset price bubbles as well? The FRB doesn't want to be publicly and politically blamed for a correction in the markets. So they rationalize bubbles as a way not to do their jobs.

No wonder stocks keep flying every day.

Sunday, November 15, 2009

Goldman Sachs - No Reform Is Best

No surprise here.
At least their consistent.

"A Goldman Sachs analysis of health care legislation has concluded that, as far as the bottom line for insurance companies is concerned, the best thing to do is nothing. A close second would be passing a watered-down version of the Senate Finance Committee's bill."

This is what I want to hear. Bottom line is profits and medical loss ratios. Ratios that are calculated by Wall Street and then filtered to the insurance companies so that they have something to shoot for.

Bull Case For Insurance Companies.

"The Senate Finance Committee bill, which Goldman's analysts conclude is the version most likely to survive the legislative process, is described as the "base" scenario. Under that legislation (which did not include a public plan) the earnings per share for the top five insurers would grow an estimated five percent from 2010 through 2019. And yet, the "variance with current valuation" -- essentially, what the value of the stock is on the market -- is projected to drop four percent."

Bear Case For Insurance Companies

"Things are much worse, Goldman estimates, for legislation that resembles what was considered and (to a certain extent) passed by the House of Representatives. This is, the firm deems, the "bear case" scenario -- in which earnings per share for the top five insurers would decline an estimated one percent from 2010 through 2019 and the variance with current valuation is projected to be negative 36 percent."

What do you think is good for America?
What do you think Goldman thinks is right for America?

"What the firm sees as the best path forward for the private insurance industry's bottom line is, to be blunt, inaction."

"The study's authors advise that if no reform is passed, earnings per share would grow an estimated ten percent from 2010 through 2019, and the value of the stock would rise an estimated 59 percent during that time period."

The article goes on to state that a bill that is best for the insurance companies is the one that is most watered down. Of course Goldman states this is just an analytical report not to be taken seriously accept by the lobbyists. That their job was to provide a sober assessment of the market realities facing private insurers under various versions of health care reform.

One only needs to read the report to realize how scared sh^&^tless the insurance companies are over the public option. Health care reform is going to hurt their bottom line. Its so nice that Goldman Sachs is telling them so. Right in time for Goldman to reap more fees.

Thanks for letting us in on how the system really works.

China Walking Around Like An Elephant

China has some nerve. They walk around like they have Elephant testicles. As evidenced by this:

Do these guys live in the worlds biggest glass house? I mean the NERVE!

They keep their currency artificially depressed so they can export more to us nitwits in this country. Take all of the dollars from said nitwits, recycle them back into our US Treasury Market, all creating a huge housing asset bubble. For this they have room to complain? The only reason Chinese citizens eat is because of said nitwits.

They basically make the point that the USD Carry trade which is indirectly enabled by China continuously buying Treasuries is further enabling the liquidity driven global asset bubble. Are they serious? Am I living in the Bizaro World? Are these not the same Chinese that promote their own fraudulent closed non-transparent stock markets? I really can't tell the difference between Macau and Shanghai Stock Exchanges. They are both liquidity driven casino's. Are these the same Chinese that make up Economic Reports to quell the masses? 8% Growth? Your Joking. For twenty years there has been nearly a 100% correlation between electricity growth and GDP growth in China. Electricity growth stopped growing this year. Food for thought. Are these the same Chinese that have told their banks to lend money for the 100% purpose of those said funds to go into the stock market.

We are way past the point of saying hello when the Chinese are accusing the USA of posing a threat to global economic recovery. Let me channel Archie Bunker for a moment and say if it wasn't for the USA, the whole planet would be in flames. There would be bloody revolution from Milan to Minsk. From Shanghai to Sydney. From Lahore to London.

OK. This could be just some pleasant bargaining before Obama comes to town, but If Obama is reading the FT article his first words must be CHILD PLEASE! Obama should let the Chinese know that what they say is true only to the extent that the nitwits he represents are willing to continue to consume. But how long can said nitwits continue to consume? How long can these global imbalances last?

Maybe China is short the carry trade at the moment? Who knows?

Obama is going to make the case for a reminbi revaluation, would the Chinese reciprocate is another question. Lets be honast the Chinese are also under pressure internally to revalue their currency, but how can they? When their entire economy is a house of cards. How can they put the breaks on a blind out of control train?

Does it also help that we have US based economists who want the status quo to continue?

Should be just let the Chinese get away with murder foe another 10 years? Would that make Mr. Roach happy?

My fear is that Obama goes out there does nothing comes back and starts talking about deficit reduction because that's what the Chinese want. Wait! That's rumored to be happening already.

If this rumor is true, we are definitely going into a double dip recession sometime next year. I just don't understand the entire Obama Economic Plan. I know its somewhere but where? Will someone tell me please? Or should I just ask a random Chinese guy?

Seriously folks. Obama has to find a way to re balance the trade relationship with China. The last 10 years the Chinese have some $2 Trillion in trade surplus with the US. We keep exporting jobs, factories, money, technology, and US Treasuries. All of the good stuff that matters to Americans. The only thing we didn't export was financial engineering. We kept that part.

Goldman 13F Holdings

Goldman 13F is out.

The very interesting thing here is that Goldman is breaking down their holdings based on values of Calls and Puts.

Always Hedge Baby!

Positive on SPY - Liquidity Game
Positive on JPM - Why not?
Positive on XRT - Retail
Positive on EAFE

Negative on the NASDAQ
Negative on Wells Fargo
Negative on PNC Bank
Negative on Mastercard - Means GS is negative on credit trends?
Negative on AIG
Negative on FXE - Is GS expecting Euro Weakness? Should we go long USD?

We really don't know how these call/puts play out because we don't know the delta hedging techniques that GS is engaged in, but what is interesting here is how transparent GS is.

Whats next? They break out their Naked CDS holdings? That would be something.

Good News......Worse News.

The Global Economy is rebounding as US Trade Deficit jumps in September.

The bad news of course is that we the US Consumer is back to being the crutch for the global imbalanced economy.

So much for a weaker dollar helping exports. You telling me that we have destroyed our currency to help fix an already broken global trade system?

Look At State Sales Tax Receipts

The Pew Center has this very sober research report on State Tax Receipts.

Nine states are in distress and only two have balanced budgets. So what ever stimulus the Federal Government is giving, the states are taking away.

The thinking here is that Retail Sales is not a good barometer for the state of the general economy. If we are in a general economic recovery, then where are the state sales taxe receipts? So if sales taxes are down, how come we keep hearing retail sales are up while employment ticks down? Well the reason is most of the headline economic reports are from surveys taken via big and mid sized retailers. It doesn't survey small business's that are in deep distress. Also chain stores will generally close under performing stores so existing stores get better results. Also of note, competition is less as more and more weaker stores (Circuit City)go out of business.

No matter what stimulus is provided, its not filtering down to every day citizens.
Filter in 10.2% unemployment and the non self sustaining housing recovery, and we have the ingredients to a double dip recession. But this time it will feel like a severe depression. The only way I think we can get back to even 7% unemployment rate within 5 years is a world where we have no recessions, where we actually add a couple million jobs.

Has the world ever worked like this before?

Dodd's Plan Is OK I Guess....

...Only because Barney Franks proposal was an absolute abomination.

He proposes a single US Systemic Regulator. He also is proposing to pair back the Feds/FDIC's power and responsibilities. The real truth here is again. How are we going to try to regulate TBTF Institutions? What is the process to resolve insolvent TBTF Institutions? Senator Dodd's plan to curtail the FEDS power is superficial because the FED currently doesn't even use those powers anyway. The FDIC is currently the best agency to regulate systemic risk. This is because unlike the FED they don't have the problem of Regulatory Capture. They are somewhat politically removed from the process. I cant take the FED seriously after they willfully ignored the asset bubble that leveled the economy.

Its not a question who controls the banks but how we control them. We have to get back to the public purpose of banking. After all is it not the banks that are gambling with deposits? The public purpose of banking is to provide a payment system and a prudent lending system that is designed by regulators. Where is the public purpose of off balance sheet assets? SIVS? CDS? Interest Rate Derivatives? Leave this to the Investment Banks not deposit banks. We can't take any type of financial reform seriously if it doesn't at the heart of the matter break up TBTF Financial Institutions. Ultimately banks have a public/private partnership that prices risks in the private sector, rather the public sector pricing in risk owned by the banks. Banks should not be allowed to securitize, own CDS insurance, and develop complex derivatives. Let the investment banks do all of that.

I am not some nut who has no practical experience here. I have worked on Wall Street for 20 years trading all types of complex exotic financial instruments. The only reason these products were ever created was to make bankers and traders even more rich. Guess what? That's fine if its the Investment Banks that do it with their money! Leave the bank deposits alone.

We can start by getting a plan that gets rid of the biggest fraud in banking circles, which is Fractional Reserve Banking, which is the root of whats wrong in the system.

Obama PR Team In Full Court Press

Remember the Arkansas Basketball Team's Full Court Press? 60 Minutes of Hell? Well what we are going to have over the next few months is a full court frontal assault by the Obama Economic Team to alert the masses that they are doing "Gods Work."

Ever get the idea that Team Obama is in full Cognitive Dissonance Mode?

The following was an opinion piece by current Columbia University Professor and Former Fed Governor Frederic Mishkin. Although he is no longer in the Fed he is widely listened to by Team Obama. I can only sadly say that we are going to see a lot of this in the near future.

The title of this story should be "MISHKIN IMPOSSIBLE".

What we have is Former Fed Governor Frederic Mishkin this past week explaining that bubbles are not that bad. Some bubbles are good. That the best way to deal with a bubble is to let it pop, then clean it up quickly. If you remember this is the basis for Geithner's FSA Plan to deal with systemic risk. Forget about defusing the bomb. We are way past that. Its all about the clean up.

There is no talk of prevention or regulation anywhere in Mr. Mishkins world. In fact Mr. Mishkin along with the FED has learned nothing and are still clueless after all that is happened. Any bubble that bursts causes genuine risk, but actually identifying bubbles is a hard tough job. You actually have to work at it.

"But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy."

"Tightening monetary policy in the US or Europe to restrain a possible bubble makes no sense at the current juncture. The Fed decision to retain the language that the funds rate will be kept “exceptionally low” for an “extended period” makes sense given the tentativeness of the recovery, the enormous slack in the economy, current low inflation rates and stable inflation expectations. At this critical juncture, the Fed must not take its eye off the ball by focusing on possible asset-price bubbles that are not of the dangerous, credit boom variety."

Mishkin would like for for us to believe that he along with the FED can in fact cleverly identify bubbles as long as they are of a particular variety. That the FED has to distinguish between bad bubbles and good bubbles. Mishkin distinguishes that bubble from what he calls a "pure irrational exuberance bubble" like the Tech/Telecom Equity Bubble. This is not a bad bubble, nothing to worry about and the FED should stay on the sidelines. But with Credit bubbles all bets are off. The FED has to engage in QE. Has to keep printing money.

This is where we get the term "CHOPPER FINANCE."

Mishkins entire argument is absurd. He is making the case for the Feds willful blindness to asset price bubbles. Their willful need not to do the heavy lifting in keeping a stable Monetary Policy. He is making the case that bubbles are OK only if the Fed happens to clean them up quickly.

This only reinforces my opinion that MBA Programs need to be gutted. The simple fact that we have people like Mr. Mishkin teaching MBA students his sordid logic is so disconcerting that it borders on the sublime. The reality of it is that Mr. Mishkins thinking is so widely shared by the Obama Economic Team that no real reform and or regulations ever will be enacted.

Capitalism For Dummies

....and the Dummy is the Tax Payer.

This is basically the statement that came out of the G20 last week.

They basically had a set of principles to guide policy during the balance of the crisis period. This is basically a Global Capitalist Manifesto. The clan/cabal is simply promoting the current recovery at the expense of contributing to a future crisis. From this an orgy of buy side activity emerged this week on the backs of the G-2o stating that global economies have returned to growth after severed declines. This recovery has been very uneven and may not be self sustaining. The financial credit markets have improved but are far from normal. There must be plans for an exit strategy to promote strong and balanced economic growth.

The Seven Principles Of The G-20 or Capitalist Manifesto:

Principle 1: The timing of exits should depend on the state of the economy and the financial system, and should err on the side of further supporting demand and financial repair.

Principle 2: With some exceptions, fiscal consolidation should be a top policy priority. Monetary policy can adjust more flexibly when normalization is needed.

Principle 3: Fiscal exit strategies should be transparent, comprehensive, and communicated clearly now, with the goal of lowering public debt to prudent levels within a clearly-specified time frame.

Principle 4: Stronger primary balances should be the key driving force of fiscal adjustment, beginning with actions to ensure that crisis-related fiscal stimulus measures remain temporary.

Principle 5: Unconventional monetary policy does not necessarily have to be unwound before conventional monetary policy is tightened.

Principle 6: Economic conditions, the stability of financial markets, and market-based mechanisms should determine when and how financial policy support is removed.

Principle 7: Making exit policies consistent will improve outcomes for all countries. Coordination does not necessarily imply synchronization, but lack of policy coordination could create adverse spillovers.

But the question I have are the following:

Why are we not taking about TBTF institutions?
What happens if an exit strategy is enacted and growth doesn't return?
Where is the talk on global imbalances? China Revaluation?
What about the dollar destruction and US Trade Deficit?

So far its all about keeping current policy intact so that rich bankers can become even richer bankers. The G-20 is not even pretending to lie that they cater to the elite. It seems to me that any type of fiscal policy can only be discussed in the context of "exit strategies." That expansionary monetary policy will enacted forever. All in the name of whats good for the people. Remember, they are doing Gods Work! If they were they would be doing it for free correct? I don't remember Jesus and his apostles getting billions for spreading the joy of God.

All this amounts is to further the welfare state for Goldman Sachs, JP Morgan, and BOFA and the expense of the real economy.

The G-20 is a joke. A cruel joke on humanity. They have no real plan.

Friday, November 13, 2009

Origins Of The Federal Reserve

This is a long read but well worth it.

I would like to know what Ron Paul thinks of this?

George Dubya Finally Speaks...

Ain't it a coincidence that FOX News broke this story?

George W. Bush speaking at Southern Methodist University.

The best line:

"It is pretty exciting for a 63-year-old to be back on a college campus," he said. "I enjoy popping in on classes from time to time -- come to think of it, that was my strategy when I was a student."

It would have been fun to figure out what a 3rd Bush term would have looked and felt like.

Wait! We already know what it feels like.

Bill Gross Says...Buy Equities?

Has everyone lost their minds? Or is it that Gross has also been brought over to the dark side of "Chopper" Finance as well?

He is looking to buy equities. Where was he 40% ago?

Gross has been saying:

Sell MBS.
Sell High Yield. The sell high yield part is very interesting considering that there has been huge outflows in PIMCO high yield funds.

Buy Treasuries.
Buy Investment Grade.

"The sustainability of the U.S. economic recovery by the private sector after government stimulus programs end remains in question, Gross said. Below-average growth may prompt yield spreads to increase on high-yield debt and the Federal Reserve’s plan to complete its mortgage purchase program will hurt returns on those securities, he said.

High-yield, high-risk bonds have returned a record 52 percent this year, including reinvested interest, compared with 19 percent for investment-grade debt and a loss of 2.5 percent for Treasuries, according to Merrill Lynch & Co. index data. Speculative-trade bonds are rated less than BBB- by Standard & Poor’s and below Baa3 by Moody’s Investors Service."

But now he is looking to buy equities as well.

Bill Gross who happens to be the smartest bond guy around believes the US is entering the new normal of very slow economic growth with high unemployment. This is the reality. But the Banana Republic Equity Markets are factoring in 5-7% nominal GDP growth. If this type of growth doesn't happen, then debt deflation, asset destruction,and a forced spiral deleveraging will take place.

But his play on equities leads me to believe that more and more investors are just throwing their hands in the air and hitting the buy button in equity land.

This just further illustrates my theory on the markets in general

Obama Moves To The Dark Side..

The President has spoken....

"The president will continue to be clear that one of the lessons of the economic crisis is that growth driven by U.S. consumers is not sustainable in the 21st century," said Ben Rhodes, a senior official in the White House National Security Council and Mr. Obama's lead foreign policy speech writer.
Mr. Obama will press his push to "rebalance" the world's economy, urging China to adjust its economic policy to spur domestic consumption as the U.S. encourages less consumption, more savings and more exports. Mr. Rhodes would not say whether the president would push concrete policy changes to cement his "rebalancing," such as convincing China to allow its currency to appreciate on the international currency market. A more valuable Chinese yuan would give Chinese consumers more buying power while making Chinese exports more expensive."

Is it just me or has President Obama moved to the dark side? Because he seems to think and believe like Geithner/Bernanke that killing the USD is an acceptable practice. I think he is trying to get his Doctorate in "Chopper" Finance from Benedict Arnold University.

Art Market Stabilizing

This is not surprising.

This is what happens when money is thrown out the windows of the Federal Reserve to subsidize the rich and wealthy.

US Monetary Policy Is A Theatre Of Horror

Nothing new here.

I would love to be a fly in the wall if Obama happens to meet Mr. Tsang in his Asian Tour.

Thats All It Took?

So Obama starts his Asian Tour and the rumors are that China is going to revalue their flawed currency?

This will surely wreck USD even more.,dwp_uuid=f6e7043e-6d68-11da-a4df-0000779e2340.html

All this means is more pain for USD.
More carnal adventures for the carry trade.
Higher SPX.

What a country! We need to systematically destroy our country to get stock prices higher.

Geithner Double Speak

Few days ago Benedict Geithner was on the tape with his useless USD needs to be strong rhetoric.

Today's drunken Wall Street missive:

“Market-oriented exchange rates in line with economic fundamentals will be essential”

This guy definitely thinks the public is stupid. Some things are so stupid, you have to make them up. I am still wondering if this guy works for us.

JP's Dimon on TBTF

JP Morgan Chase CEO Jamie Dimon (My Former Boss At SBS) has an interesting piece in the Washington Post today. He is clearly making an opposition to breaking up TBTF. He makes some good points but not enough in my opinion

The points he makes are as follows:

"Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail."

"But ending the era of "too big to fail" does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense. The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk."

"As we have seen clearly over the last several years, financial institutions, including those not considered "too big," can pose serious risks for our markets because of their inter connectivity."

"And it's not just multinational corporations that rely on such a large scale. J.P. Morgan Chase and others supply capital to states and municipalities as well as to firms of all sizes."

Well, for starters its refreshing to think that Dimon thinks JP should be liquidated in the event he mucks the company up. Surely after he pays out $30B in bonus money of course. Of course this should be the way it is handled. You screw up - You pay the consequences. Thanks for the heads up JD! Dimon knows that as his firm grows bigger and bigger they cant be broken up. That is what he is after, full immunity from reckless risk taking.He is using his firm as the ultimate weapon. Maybe we should have left Bear Stearns to fail as well? Wait! That would have destroyed your firm in the process. Its this inter connectivity and high correlation that has to be broken up.

His approach to a bigger banking model is based on the social responsibilities of banking. He states that scale brings choice to consumers. Choice? Like ARM Mortgages? Pay Option? Negative Am? How in the world is this good for customers? Good for the economy? The growth we have seen since 2003 is fake. It wasn't real growth. It was all structured finance.

Financial regulation before was a joke. Its a bigger joke at the moment. The way to fix a problem is to tackle the problem, not create 5 more agencies to muck the problem up more. We need smart enforceable regulation not more regulation. So what we have seen so far is more and more useless agencies that screw up the process more. On top of that, what ever smart regulation is blind sided by lobbyists.

Like I stated above, TBTF institutions are highly interconnected and the risks inherent in them are correlated and asymmetrical. Its for this one single reason that they need to be chopped down. We cant keep going around in circles every time there is a crisis.

You cant tell me that the entire planet is wrong in moving to decrease bank balance sheets and financial structure. This type of scale and size is something that customers, economy, and the tax payer don't need.

Nice Try!

So Much For Housing


"President Barack Obama on Nov. 6 signed into law the first major expansion of February’s stimulus plan, pushing the deadline for first-time buyers to close on a transaction out to April 30 from Nov. 30. The credit is worth of up to $8,000. The measure also added buyers who have owned a home for at least five years, making them eligible for a credit of up to $6,500."

Its truly a race to the bottom.

Whats next? $5,000 tax credit if you qualify for a loan modification? $4,000 if they actually foreclose on you? $3,000 if you stop paying your mortgage all together?

Tuesday, November 10, 2009

We Need More Great Journalists.....

.....Less Newspapers.

Great read:

“Society doesn’t need newspapers. What we need is journalism. For a century, the imperatives to strengthen journalism and to strengthen newspapers have been so tightly wound as to be indistinguishable. That’s been a fine accident to have, but when that accident stops, as it is stopping before our eyes, we’re going to need lots of other ways to strengthen journalism instead.

When we shift our attention from ’save newspapers’ to ’save society’, the imperative changes from ‘preserve the current institutions’ to ‘do whatever works.’ And what works today isn’t the same as what used to work.”

Newspapers are a dying breed because the quality of journalists is garbage. Fix that problem and you are 50% of the way there to fix the newspaper problem. The best financial journalists are in fact bloggers like Naked Capitalism, Credit Writedowns, and Mish. These people would never be hired by the newspaper establishment because they tell the truth.

Larry Summers = Public Enemy

I thought I had seen it all with this deification piece on Larry Summers

Another ludicrous piece from Vanity Fair.

Can we please stop with the fluff pieces on Larry Summers? This guy is 100% the reason we have had a crisis in the first place. If anyone has watched the Frontline piece on the committee to save the world will realize they just saved Wall Street to murder everyone else.

Am I free to think that accountability and responsibility is a luxury?

Summers was widely regarded as the "Heavy" to then Treasury Secretary Robert Rubin's plan to kill any and all requests to regulate derivatives proposed by CTFC Head Brooksly Born. The only reason we have a credit crisis with unregulated CDS exposure is Larry Summers. But! Do we have one passing mention of this in the Vanity Fair piece? NO!

Now we have Larry Summers calling for regulation of all derivatives.

Yes! They should be regulated now that I have made tens of millions of dollars not regulating them 10 years ago. Please regulate them as now I don't need anymore jobs on Wall Street that pays me millions for lobbying against them. Its so beyond hollow its not worth expanding upon.

I just don't understand how Obama can make this colossal mistake by putting this guy in a position of making suggestions.

Back to the VF atrocity.

Summers is the product of whats truly wrong with the economic profession. Laying down ones own ethics at the doorstop of money. Even when you know something is wrong do your best to prove otherwise because its the right financial thing to do. Bottom line, all most all of these financial/economic rock stars get the Wall Street "Bug". They want to convert boring economic theory into real world financial schemes. No way in the world Summers would have ever made this much amount of money if he ever was for regulating derivatives.

"After leaving Harvard, Summers signed on at D. E. Shaw, a $29 billion hedge fund, which gave him his first real-world taste of the psychological—as well as economic—dilemmas confronting traders on a daily basis. (He also got a taste of Wall Street compensation, receiving $5.2 million in 2008 working just one day a week.) The D. E. Shaw gig followed being on the board of advisers of Taconic Capital Advisors, a hedge fund founded by Goldman Sachs alumni Frank Brosens and Ken Brody. And for a total of $2.7 million in 2008 he was also giving regular and high-priced speeches to corporate America. (For instance, in April 2008, Summers spoke at Goldman Sachs, for $135,000; in February, he spoke at J. P. Morgan, for $67,500; in April, he spoke at Leh­man Brothers, for $67,500; and in May, he spoke at Siguler Guff, a New York–based hedge fund, for $67,500.)"

All of these places where he spoke was 100% benefited from deregulation.

Are the only places where we get the straight story on these nefarious characters in blogs and public broadcasting?

Sunday, November 8, 2009

CRE, B-WEEK, Geithner, & Bernanke - Perfect Together

Its nice to know that after Wilbur Ross and the FDIC alerted to us that Commercial Real Estate is the next disaster, the genius wunderkinds at BW had to go to work on a piece of their own.

Have I not been saying the same for the past 6 months?

I must have another 10 posts on CRE being the next black hole.

But of course Tim Geithner doesn't think its a crisis.

Doesn't Geithner sound a lot like Bernanke here?

Geithner goes on to say:

“I don’t think so,”
“That’s a problem the economy can manage through even though it’s going to be still exceptionally difficult.”
“You can say now with confidence that the financial system is stable, the economy is stabilized,”
“You can see the first signs of growth here and around the world.”

When asked whether commercial real estate could set off another banking meltdown.

All I can say is he is as clueless as Bernanke was at the eve of the subprime crisis. Just match up Geithner's words about CRE and Bernanke's thoughts on Subprime.

Does Geithner actually read the papers? Or does he just read the analyst reports on CRE straight from Goldman and BOFA's trading desk? Because he obviously is not living in realty. You cant tell me that Wilbur Ross, FDIC, and a million other people have CRE pegged wrong.,1032683.shtml

Its blatantly obvious that CRE is the next serious crisis. Unfortunetly, its not the last shoe to drop.

After that? OBS/SIVS and the collapse of shadow banking

After that? Shadow Housing Inventory.

After that? HELOC

After that? Auto Loans
Its a never ending sea of red ink and at every turn our leaders will tell you that there is nothing wrong. Its all controlled.
Yeah right.

Debt Contraction Continues Unabated

More Evidence that the secular deleveraging of American consumer debt is well under way. I get the feeling that the Stock Market and Wall Street is still thinking that consumer spending is around the corner.

Outstanding consumer debt fell at a 7.2% annual rate in September, the eighth consecutive decline. Consumer credit fell by $14.8B to $2.46T in September, down 4.7% compared with a year ago. So what we have is less consumer debt and less debt extended to consumers.

This decline in September was led by another huge drop in revolving debt, such as credit cards, which fell $9.9B to $889B, or a 13.3% annual rate.

Non revolving debt such as auto loans, student loans and other personal loans fell $4.9B to $1.57T, or a 3.7% annual rate.

We are in the midst of a huge credit cycle change.

Yet the government is not listening as they continue to stuff "cash for clunkers" down our throats. They want consumers to buy homes that they cant afford, and give them tax credits to do so.

Wait...On Second Thought...Jobs? Its Much Worse!

With the unemployment rate at 10.2% things look quite dire.
The U-6 Report is at 17.6% things looks very bleak.

But wait, they are actually much worse.

According to the Bureau Of Labor Statistics, payrolls fell at a 188,000 a month rate over the last three months. But their own household survey says employment fell at a 589,000 a month rate. So then why the discrepancy?

1-The BLS alerted the masses that payrolls were overestimated in the twelve months ending March by 824,000. The source of this error was the birth/death model. BLS used “plug” numbers for the number of births and deaths. These “plug” numbers were wrong. They led to estimated positive contributions to employment that were too high. Most of the error (675,000 out of a total 824,000 jobs) occurred in the first quarter of this year. The birth/death model was adding significantly to payrolls when all other payrolls were falling. In reality the contribution from net births and deaths was in fact negative.

2- The faulty birth/death model is still being used for the months after March of this year. The implication was that the faulty birth/death model would continue to overstate payrolls and understate the payroll job losses in the months since March.

So the BLS is still doing the same modeling! For the last three months they are assuming net birth/deaths have added 18,000 jobs a week. Last year over the same period they assumed it added 17,000 a week, the year before 18,000 a week, and the year before smack in the middle of the economic boom 18,000 a week.

They know that the model is pure fallacy, but hey it underestimates the underlying problems. So its all good.

Therefore, reality probably lies somewhere between the payroll survey monthly rate of job loss of 188,000 and the noisy household survey rate of job loss of almost 589,000. So somewhere around 300,000 job losses. That is why the unemployment rate rose a stunning .4 to 10.2%.

I have written about the household surveys in the past.

Warren Buffett Is Not A Good Guy

We expect this type of behavior from Goldman Sachs, but not Warren Buffett. Calling Goldman Wall Street Whores is an insult to $5 hookers across the country.

But the Treasury in a moment of piety has struck down this deal.

“The proposed sale would result in a loss of aggregate tax revenues that would be greater than the savings to the federal government from a reduction in the capital contribution obligation of Treasury to Fannie Mae,” the Treasury said in the letter. “Withholding approval of the proposed sale affords more protection of the taxpayers than does providing approval.”

The shear utter gall Goldman exhibited in this affair is mind boggling. Again I am not surprised. They are well within their rights to try to pull the wool over the tax payers eyes. They have been doing it since the crisis started. What really upsets me is how complicit Buffett was in this affair. I thought he was above this type of behavior. He proved me wrong. I only have myself to blame in believing that Buffett really cares about Americans. All we hear is how smart Buffett is. That he told us of derivatives being WMD's. That's interesting considering that Berkshire is currently loaded with derivatives on their balance sheet. I guess there is a difference when accessing what side you are on the trade. Also wasn't Berkshire one of Moody's biggest investors? The same Moody's who's phony ratings were partly responsible for the mortgage meltdown? It was Buffett who sat in silence when Moody's was printing fees from the Wall Street Whore Machine. Its so disenginious to listen to Buffett talk about derivatives in any regard while Moody's was destroying the financial system.

Now we have to hear that Buffet is investing in America with his buy of Burlington Northern? Please!

Accountability Is A Luxury

From Patrick J. Buchanan's Blog

Glenn Greenwald who is fast becoming one of my favorite journalists has this excellent piece.

This is what happens to laws, rules, regulations, and ultimately responsibility and accountability when a country is at war. All of it goes down the drain in the name of national security.

Greenwald main points are:

"I want to add one principal point to all of this. This is precisely how the character of a country becomes fundamentally degraded when it becomes a state in permanent war. So continuous are the inhumane and brutal acts of government leaders that the citizens completely lose the capacity for moral outrage and horror. The permanent claims of existential threats from an endless array of enemies means that secrecy is paramount, accountability is deemed a luxury, and National Security trumps every other consideration — even including basic liberties and the rule of law. Worst of all, the President takes on the attributes of a protector-deity who can and must never be questioned lest we prevent him from keeping us safe."

"This is exactly why I find so objectionable and dangerous the ongoing embrace by the Obama administration of these same secrecy and immunity weapons. Obama had nothing to do with the Arar case — all the conduct, and even the legal briefing, occurred before he was President — but he has taken numerous steps to further institutionalize the core injustice here, including in cases that are quite similar to Arar: namely, that the Executive can use secrecy and national security claims to shield himself from the rule of law, even when he’s accused of torture and war crimes. That’s exactly what happened here, yet again."

What we have here is that accountability is a luxury when referring to the Executive Branch. They simply are like the rest of us, they don't want to do the heavy lifting, especially if its done by someone else.

Its strange, after eight years of Bush, we needed another Abraham Lincoln to get the country back in gear. We though that was Obama. How wrong we were. Obama is more like James Buchanan then Lincoln. Instead of saving the leaky boat he is a leaky bucket himself.

What does this mean to Americans in the future? We ultimately have the choice for voting in the same discredited do nothing Democratic Party that promised change and didn’t deliver, and on the other, a rabid, radical, ultra regressive wingnut GOP that is itself promising change from the failed former would be change providers. Has the GOP come up with one plan to reduce the deficit? One plan to fix the economy? One plan for Financial Reform? Their plan is to just promise change because that is what people hope to get. Once they are in power the cycle is restarted.

The Need To Change Comes From Force

This is an interesting thought provoking article from the left. Thought provoking in the sense that you really cant make this stuff up.

"Certainly the President deserves credit for passing the stimulus bill, stabilizing the financial markets and moving health care reform closer to realization. He also deserves credit for inspiring a new generation of Americans to take up community service through the Serve America Act and for opening up the government to greater transparency."

I don't know where to begin? How can we give him credit on the stimulus bill? We are still losing jobs at a huge clip. The financial markets are not stable. What Obama and Paulson before him have done is to stabilize the Wall Street Bonus Pool, which was damaged in 2009. Program trading is now some 70% of all volume on domestic exchanges, which means that the vast majority of Americans have sat this rally out. Health care is an afterthought after the non-farm payroll report on Friday morning. Who cares about Serving America? Put people to work! The last piece about greater transparency is a crock of crap. Just read this.

FDR made changes not because he wanted to. He was forced into making changes. Just like Obama hoodwinked the electorate with his "Change" speeches, he actually has to govern now. He has no appetite for change because it has not been forced on him as of yet. You can see it in the way he has dealt with Wall Street regulation. He is so captured that he cant change. It has to be forced on him by the independents that voted him in.

Order It Up

Now that the official U-3 unemployment figure is at 10.2% can we order up some real Green Shoots? Here you go:

The official U-6 is at 17.6%. Anyone for seconds?

The U-6 counts all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, and all the people who dropped off unemployment benefits because their unemployment benefits ran out.

Here is a list of people who we have entrusted the future of our country to and their thoughts from earlier this year. If you remember, the main idea of Stimulus 1 was to save jobs and keep the unemployment rate below 10%. I am pretty sure that has failed.

David Axelrod, Senior Adviser to President Obama on whether the stimulus plan will keep unemployment from reaching 10 percent (February 15, 2009):

"That’s our hope – that’s our hope. There’s no doubt that without it, that’s where we were looking: double-digit unemployment. That’s what we’re trying to forestall."

President Obama (February 13, 2009):

"That’s a story I’m confident will be repeated at companies across the country — companies that are currently struggling to borrow money selling their products, struggling to make payroll, but could find themselves in a different position when we start implementing the plan,” Obama said. “Rather than downsizing, they may be able to start growing again. Rather than cutting jobs, they may be able to create them again.”

Larry Summers, Lead Economic Adviser to President Obama (January 18, 2009):

"I don’t think so. I think while we’re going to see some substantial job losses, frankly what is important about the president’s program here is that it is going to contain what would otherwise be just a vicious cycle, people spend less, therefore they earn less. We’re going to contain this problem."

Ben Bernanke, Chairman of the Federal Reserve testifying before Congress’s joint economic committee (May 5, 2009):

"Currently, we don’t think it will get to 10 percent. Our current number is somewhere in the 9s."

The biggest joke quote of them all:

Presidential Candidate Barack Obama (April 3, 2008):

"Today’s job news is the latest indicator of how badly America needs fundamental change from Bush-McCain policies that have been devastating for working families and catastrophic for our economy. Our economy is struggling because the American people are struggling, and simply bailing out investment banks on Wall Street will not help Main Street."

I keep hearing that U-3 unemployment is a lagging indicator, that's just trader talk on Wall Street, believe me I am a Wall Street Trader. In the meantime may I have the desert menu?

Saturday, November 7, 2009

Foreclosures Vs. Delinquencies

Housing has stabilized with the 100% help of the Federal Government. Last months S&P Case-Shiller Home Price Index grew 1.2% MOM, and expanded for the third month in a row. This would appear to many that housing is recovering. Well. Let me give you two graphics that will make your jaw drop.

The above graphic shows the gap and disparity between delinquenices and foreclosures. As you can see, delinquencies are rising, but foreclosure starts are not. This gap has almost doubled. I can only say that all of this activity is "shadow foreclosure inventory." Higher unemployment begets delinquencies and defaults, but foreclosures aren’t flowing through due to modification efforts and other various reasons, specifically banks don't have the horses to get foreclosures going and they don't want the inventory on their books.

Not only that, once you get the foreclosure process started, it’s taking a while for the foreclosing lender to actually get the homes on the market.

What this means is that a full 12 months after the foreclosure process is started, 30% of these homes are still caught up somewhere in that process and have not been put on the market.

I have posted about shadow inventory before:

The coming supply of foreclosed homes is usually called a wave. This wave has slowed of late so its difficult to measure, but if anyone thinks housing prices are going to rise better look else where.

The Excess Reserve Problem.

I have spoken about the "Excess Reserve" Problem.

Bloomberg out with this piece.

Excess Reserves on the Fed's balance sheet will soon cross the $1T mark. With continued QE asset purchases and the wind down of the Supplemental Financial Program (SPF)of the Treasury will drive this figure to $1.2T by January 2010. Other central banks are at elevated levels as well. Why is this such a problem? Well for starters, these deposits are earning little or no interest. The bigger problem from reading the Bloomberg piece above is that the banks are not lending this money out, partially because their is no private lending demand, but more disturbing is the bad shape bank balance sheets are in currently. Its nice to know that the banks are quite liquid at the moment. Too bad its not their money. If and when loan demand comes back or if the banks go out and purchase assets to drive interest rates down, its going to lead to higher inflation in the future. I only see this possibility much farther into the future. The bigger concern is the following. The banks are hoarding cash and the Fed thus has all of these toxic loans on their books, if we take it at face value that the banks are hunkering down for more rough seas, what does this mean for the FED and the banking system as a whole? It tells me that there is much more pain ahead in terms of outright losses and write downs. The banks have been weak of late. The concerns are now Commercial Real Estate. Add in uneven mortgage underwriting (MSR's) results and we have seen a roughly %15 correction in the sector(BKX).

QE or Quantitative Easing created the excess reserve problem. Starting in September 2008, central banks opened up liquidity facilities to alleviate the stress from frozen fixed income markets. In the past, such a build up in these type of reserves would have been minimizes by central banks by selling government securities. This time around, however, that was not done for two reasons. First, central banks have pursued QE with the intention of increasing the growth of money, given near zero policy rates, while more ER would push overnight rates lower. Second, the sheer size of the increase in ER relative to the size of government securities held by or available to the Fed that could be used to drain reserves was at least partly responsible for central banks not being able to drain excess reserves. Under these extenuating circumstances, the Fed even turned to the Treasury for assistance and the Supplemental Financing Program was created to help drain ER. The Fed has also been engaged in Tri-Party Repo agreements with primary dealers in an attempt to squeeze reserves out of the system.

The dealer side of the equation is much more of a problem. The Fed can continuously print money as they have been doing. But the ER problem at the banks is much more serious. Most of the dealer to dealer lending at the moment is on an overnight basis. The risks at the moment for primary dealers is not liquidity. It never was a liquidity problem from the beginning. Wall Street dealers are very nervous about future losses and write downs. This the high level of reserves in the system. Even if the banks wanted to make loans, the demand for bank credit is simply not there. This issue's will persist for some time.

Another reason for the elevated levels is that ER earn interest currently. Prior to October 2008 this was not the case. So before 10/2008, it wasn't in Wall Streets interest to keep money in ER, as it was not interest bearing. At the moment they are earning a better spread parking them.

The Fed has been making the argument that the reason for high levels of ER is because of QE, once they drain the system of these reserves, the levels can go back to norms. Its easier said then done. The Fed wanted to test some tri-party repo's with Wall Street dealers, and there were some rumors that these repo's failed. All in all, Wall Street has a great thing going at the moment, that is until the losses pile up.

Friday, November 6, 2009

Obama Is More Bush Then Bush Himself

I have been reading many stories about the Obama Administrations handling of the economic crisis. Most of them are very critical. In a word the Obama Administration is captured in a web of secrecy and delusion.

These guys actually think the Banking Industry is solvent. They actually think that liquidity was the main problem. They actually think that accounting was the reason for all of the balance sheet issues in the banking industry, not toxic loans. In the end, all that was needed to fix the banking crisis was a lot of liquidity, government backstops and, most importantly, time and patience. Oh! I forgot, Tax Payer Trillions as well needed. That the only way to fix the crisis was to ultimately loot the tax payer to bailout the banking industry, because they are the lifeblood of the economy. I understand that a lot of the policy was enacted before Obama took office, but he had the chance to change course. He just didn't do it. A lot like the dude who was there before him.

But what is so politically damaging to the President is that all of these pretenses are wrong. The banks didn't needed to be bailed out, they just needed to be made solvent. Not liquid. There is a major difference between solvency and liquidity. Solvency means nationalization and liquidity means bailout.

Its strange and almost cathartic to watch the HBO piece on Obama and his election night victory. Its just more brainwashing. Listen, Americans voted for Obama not because they thought he was more qualified then McCain. Americans believed that the country was on the wrong path and wanted change, qualification was secondary. That is why Obaam won. Americans were tired of two disastrous wars and wanted a directional change. Also Obama was able to gain valuable credibility when he was seen in the presence of two very wise men, Paul Volcker and Warren Buffett. Did we hear of the name Lawrence Summers once during the campaign? Obama had alerted the masses that these two wise men had a plan to get the country out of the crisis. Volcker and Buffett knew that CDS and TBTF institutions were systemic dangers and needed to be eliminated. These were radical changes that these men were talking about, and Obama's puppets fed from it. That is how they got all of those suckers to vote for him. So after he hoodwinked the nation, what did he do? Did we see change? Did he listen to Volker? Buffett? He did the opposite. He brought in the same people (SUMMERS, GEITHNER, BERNANKE) who destroyed the system in the first place to help him loot the tax payers. These Wall Street Whores told all of us that nationalization was not feasible, even though it was the case in regards to Fannie Mae/Freddie Mac. They proposed a solution of again looting the tax base to subsidize the Wall Street bonus pool.

But this is not the kind of solution we needed. What we needed was a solution by the Obama Administration to take prompt corrective action in seizing bankrupt institutions, dismissing poor management, punishing any misdeeds and setting up a timetable to sell off the institution’s assets. That was the change you can believe in, this was the change he suckered us into believing. This was the change that people voted on last November. Government had choices to deal with these insolvent institutions, they took the crony capitalism/kleptocracy route instead. Sound vaguely familiar? Bush? Katrina? Brownie? Medicare Prescription Benefit? Black Water? Haliburton? Big Oil? This is why so many people in the country are so hesitant to Health Care regulation and virtually all other programs/ideas from this administration.

Obama has lost almost all of his election night mojo. All that political capital has been lost. You can see it in the Governors race in NJ, where Corzine got smoked by Christie. Obama has lost the center of the country. He never had the right, and the right just got a hail marry pass. You can surely bet they will hammer him over his Wall Street/Economic policies in front of mid term elections next year.

But the worst most egregious error in judgment and slight of hand has to be Obama's midnight card trick of marginalizing Paul Volker. The former Fed Chairman is a red headed step child inside the administration. He gave the keys to the kingdom to Geithner, Summers,and Bernanke. Sound familiar? Bush giving the keys to the country to Cheney, Wolfowitz, and Rumsfeld? Bush's entire legacy was 9/11, Iraq, and Afghanistan, and Bush relied on those 3 stooges to make his foreign policy legitimate. Just like Obama has his three stooges (Geithner, Bernanke, Summers) to make his economic policy legitimate. Just like Bush could have listened to Colin Powell, Obama could have listened to Volker. But chose not to.

Just like George W. Bush, it goes to the basic concept of pre-disposition. Paul Volcker was a critical member of the Obama 2008 campaign. He also was a key member of Obama’s economic policy team. But, he has been speaking a very different message that is not in sync with team Obama. So, as with Bush and his marginalization of Powell, one has to believe Barack Obama has chosen to side with Geithner, Summers, and Bernanke over Volcker.

This is just in the case of the economy. What about all of that talk about Guantanamo? Torture? Extraordinary Rendition? State Secrets? CIA?

The entire FSA proposal by the Obama Administration is a power grab. Its all about Executive power. The entire Bush Presidency was about Executive Power. Where is the change? I am begging you to help me find it.

But I am not surprised that Obama turned out the way he did. He is like all the other politicians caring only about big business all the while his attitudes towards the public is superficial at best.

I am just wondering what mask Barack Obama was wearing on Halloween?

Two Sided Coins At Goldman Sachs

Goldman Sachs our with their 10-Q on Thursday. The usual we rule the world. We run the government. Obama and Geithner get us our dry cleaning. Try to stop us routine. People actually read this stuff now a days not because they want to be in the know, but they are looking for more vulgar displays of sheer greed and power. Let me tell you. You won't be disappointed this quarter with the goose. Its real Bonfire Of The Vanity's stuff. The first one which is staggering is that Goldman lost money on just one trading day in the 3rd quarter, making money on all the other 64 days! If you remember from their 2ND quarter 10-Q, they dared to lose money in 2 days that quarter. Put it all together and they have lost money on 3 days the last 6 months! The devil himself is shaking his head. Any more reason not to believe in normal distribution? Goldman Sachs has single handily defeated modern portfolio theory the last 2 quarters. You cant make this stuff up. Going back to our friend Satan, even he would throw a few bogeys here and there, you know, to make people believe he actually doesn't exist. These type of returns are Madoff like, the SEC must be thinking.

The other thing that is very interesting is that Goldman's VAR actually declined this quarter to $189MM from last quarters $221. So less risk = more money? Again, the rules and theories have changed. They have to totally revamp Business School Programs to these new paradigms. The VAR explanation was quite interesting that everything that happened last quarter, Goldman was on the right side of. Interest Rates went down, Goldman was on the right side. Commodities rallied, thus GS was on the right side. Volatility was low, Goldman was short that. YADA.. YADA.. YADA..

We have seen over the last few days everyone (Roubini, Faber, Soros) and their mothers predict a USD rally. Sorry bets here till I find out what side Blankfien is on.

Quite simply, Like the Medellin Drug Cartel, Goldman has eliminated the competition. Instead of machine Guns and Colombian Neck Ties its been demanding collateral on naked CDS and Hermes Neck Ties. Let me make this point. Fixed Income, Currency and Commodities or FICC to the Ferrari Folks, jumped from $1.6B in Q3 2008 to $6B last quarter. That's what happens when there is no more Lehman, Bear, or Merrill Lynch. The best part is that Goldman is overtly telling you that they are in the business of making money for themselves and their employees only. Screw the public and their customers. This is evidenced by equity commissions dropping from to $930MM from $1.2BB. Why spread the governments wealth with our customers when we can gorge on it all alone? Need any more evidence that GS is a giant hedge fund? Proprietary Equities Trading exploded from $354MM to $1.8B year over year.

Its a shell game and with two sided coins.

Classic Mark Up Brings Pain To Main Street Only.

The broader stock averages flew yesterday as almost every sector was up over 2%. It was a classic mark up of stocks before a significant economic report out this morning. That report is the October Non-Farm Payroll. More on this in a moment.

Why so much strength? Well for instance initial claims for state unemployment benefits dropped to 512,000 in the week ended Oct. 31, the lowest level since early January. Markets had expected a decline to only 523,000, from the 530,000 reported in the prior week. This was seen as a positive. Another report that was well received by the rich and affluent was U.S. Business Productivity, which grew at its fastest clip in six years in the third quarter. The Labor Department said that productivity surged at a 9.5% annual rate, the quickest pace since the third quarter of 2003, as companies squeezed more output from a smaller pool of labor to hold the line on costs. The blind experts had expected productivity to rise at a 6.4% rate. It grew at a 6.9% pace in the April-June period,when the economy was still contracting. Unit labor costs, a measure of the cost of labor for any given
amount of production, fell 5.2% last quarter after declining 6.1% the previous period. Analysts had forecast a drop of only 4%. So what we have is higher productivity and lower unit labor costs, a perfect cocktail for the corporate profit machine.

US Productivity

All of this created a buying/short covering frenzy ahead of Non-Farm Payrolls out this morning. So would the good times last? Well, coming in this morning, the futures were up some 3 points ahead of the 8:30am report. The report came out and guess what? It was bad! The futures tanked some 11 points almost immediately. Payrolls came in at -190K down in October vs. -219K down in September. The consensus was a loss of -175K. Meaning, since the start of the recession in December 2007, the number of unemployed has increased by 8.2MM and the unemployment rate has grown by 5.3% points. What was truly soul crushing for Main Street was that the U.S. unemployment rose by more than expected in October to hit its highest level in more than 26 years. That rate calculated using a survey of households as opposed to
companies, rose by 0.4% point to 10.2%, the Labor Department said Friday. Economists had forecast an increase to 9.9% only. The Broader U-6 measure of unemployment or
"underutilization" rises to 17.5% in Oct from 17%. The work week was flat at 33 hours. Again, the markup that began yesterday which momentarily was stopped after this report, will begin again when the market opens up. I guarantee it! Where ever we finish the day is entirely up in the air. We can finish up 100 or down 200. Who knows. But the pressure we see in stock index futures at the moment will alleviate. We are at a perverse moment in time where less catastrophically bad news is actually good news.

The perverted sense that less lower payroll losses is actually good will rally equities today, because somehow the masses have been brainwashed by the media into thinking that employment is a lagging indicator. It has to get better. It may or may not be still, but sooner or later something has got to give. We can't continuously print higher and higher job losses regardless if they are decelerating or not. Many conventional economic indicators have turned, but the most important is stuck in quick sand. We are at a point where stock averages keep printing higher prices waiting for payrolls to turn. One side of the equation is waiting.

Wednesday, November 4, 2009

Lesson Learned?

Now that former Goldman Sachs acolyte John Corzine has been showed the door in the State of New Jersey. What does this mean for President Obama? Quite Simply, that business as usual is not going to get it done. Its really ludicrous for citizens of the Garden State to do something so self destructive as to elect Chris Christie, but something had to be done to alert Obama that the looting of America has got to stop. I totally believe that this victory by Christie was a protest vote not only against Corzine, but a vote against Goldman Sachs and Wall Street in general. Of course the economy sucks in Jersey, the property taxes are out of control, and the budget problems are a headache, no one can come in and fix them including Christie, but this was a vote executed out of anger and rage against what was seen as bottom line kleptocracy. Not all of the problems are Corzine's fault, but he is seen as proxy for Obama, and he had to pay for it.

This is not a GOP/DEM issue. Mayor Mike Bloomberg after spending $100MM in his election, barely defeated his opponent. Many people are just fed up with Wall Street executives. They are fed up that Geithner/Bernanke are more convinced that restoring the credit/financial system to what it was 5 years ago is in the bets interests of America. These fat cats are not interested in reform or regulation. You can see it Geithners FSA program.

The entire planet thinks that TBTF financial institutions are systemically dangerous. There has already been major downsizing this week alone in Great Britain's banking circles.

Ludicrously, the Obama administration has maintained that large banks should be preserved because they play an important role in the economy and that taxpayers instead should be protected by creating a new system for liquidating large banks that run into problems.

But the lesson to be learned from whats happening in Europe is the supposed economies of scale of massive financial institutions are outweighed by the difficulties in controlling risk inside them.

Why is this point not filtering into the minds of Geithner/Bernanke/Summers/Obama? What are they waiting for?

I am a NJ Democrat who is very happy that Corzine lost last night. Its a wake up call for the Democrats and Obama that the looting of America has got to stop!

Tuesday, November 3, 2009

If You Don't Succeed At First...Just Gamble More

This one single quote from UBS Financial Head John Cryan says it all. His name says it all. The only one "CRYAN" are the shareholders.

"I would like to see our regulatory value at risk go up a bit because I would like to see us put a bit more risk on the table and trade a bit harder."

Such is life. What? losing $553MM in the 3rd Quarter was not enough? You are going for $1B next quarter?

This is what happens when the state prints money and hands it over to bankers. UBS would never ratchet up the leverage/risk if it was their money at stake currently.

It is befuddling to me that UBS can't make money with rates near zero. It just goes to show you how bad the banks are really run. Don't be surprised to find out billions in Swiss tax payer money including Roger Federer's will be used to pay Mr. Cryan's bonus in February 2010.

Monday, November 2, 2009

Is Japan Really In Trouble?

This is a real thought provoking piece from again a British Newspaper.

I'm kinda on the fence on this one.
Hey...Japan's economy has been on life support for 20 years. How many times have people predicted doom and it hasn't happened? Its getting to the point where Godzilla could be the only one that can crush Japan.

We have a lot of smart money managers who have started to bet against the worlds 2ND largest economy. You cant deficit spend forever. Can you?

Its a cautionary tail that stimulus and money printing can't be seen as the magic elixir to all that is wrong with an economy. Tack on the fact that any economy that has high debt burdens and no domestic demand cant have the excess's rung out by just printing money. It didn't work in Japan so why would it work here? Japan has kicked the can, extend and pretend for twenty years. Maybe its time it catches up to them?

I just don't see it yet.

Japanese consumers have already gone through 20 years of deleveraging and most of Japans debt (90%) is inside the country. The only way things spiral out of control, is a run on the Yen, which simply is not happening as of yet.

Dangers In USD Carry Trade

Nouriel Roubini in the Financial Times saying that the USD Carry Trade will have to inevitably break down.

I was saying the same a month ago.

Citigroup Stuff

The NY Times ran this yesterday.

I posted back in July that Citigroup will be liquidated.

The Times article goes on to say:

"Chris Whalen, editor of the Institutional Risk Analyst, calls Citigroup “the queen of the zombie dance,” referring to the group of financial institutions that the government has on life support."

“They are hoping that a combination of bank assistance and maximizing revenue and buying time will let them survive,” he said. “When I look at the whole picture, Citigroup is in the process of resolution. I continue to believe the equity is worth zero and that the company will have to go to bondholders for some kind of money to make the bank stable.”

The news flow has been decidedly negative for the banks of late including Citigroup which got hit Friday on reports of more write downs.

GDP Is Up....

...Buts its not going to offset the horrible labor markets. When was the last time people were jumping up and down in Times Square when the non farm payrolls were released and it showed that less jobs were lost in the economy? Were ordinary people giving high five's when the GDP was announced last Thursday? Listen. There is no way that people are getting excited over DOW 10K or that Goldman is back close to $200. Ordinary Joe's are not exhibiting the same euphoric emotions that the people who ring the bell at the NYSE are showing. Sorry! Where are the jobs? People are not getting excited over the number of jobs that were saved by the Stimulus. BTW. How do you actually forecast/quantify that anyway? Isn't that like Bush/Cheney stating that all of the eavesdropping, wiretapping, raids, and overall suppression of constitutional rights was done to save American Lives and they can prove it because there has been no hits to our country since?

Back to GDP.

GDP grew at 3.7% annual rate from 1992-2000, while the base unemployment rate fell from 7.4% to 3.9%. If you think that the economy grows at similar 3.5% rate over next eight years, do you think unemployment will likely fall from 9.8% to 3.9%? No way! Most people think that if we get 3.5% GDP growth for the next 8 years the unemployment rate will fall only to 6.3%, which is still high. This is structurally a much different economy then it was the 90's. I don't think we are getting anywhere near 4% unemployment anytime in the future. Someone should alert Mr. Market to that fact.

Many are calling for the Fed to not raise rates until the unemployment rate reaches close to 7%, which could be some 8 years from now. So keep the printing press greased up.

Deferred Tax Assets Another Shoe That Has To Drop

Shares of Citigroup fell 5% Friday along with the broader markets. Lets forget for the moment that Commercial Real Estate is awful. Lets forget for a moment that bank balance sheets still have toxic assets. Lets forget momentarily that even though foreclosures are slightly slowing down, the delinquencies have soared. Lets forget that the banks have to bring back OBS items back onto balance sheets. Lets forget for the time being that SIVS have to incorporated back unto balance sheets. Lets finally forget about HELOC, Auto Loans, and Credit Card write offs. If that is not enough to worry about. How about this? TAX ASSETS!

The banks have been very weak of late for a myriad of reasons, but the new virus in town is Deferred Tax Assets. Investors are becoming increasingly worried about a new wave of write downs on bank balance sheets. We have seen a few banks report earnings and in the process written down assets which essentially represent cash flow expected from future tax benefits. If this is a trend then major banks must also write them down as well if they are unsure that they will generate enough taxable income in the future to realize the benefits.

When a bank posts a big loss like they have been doing for the better part of the last year, the result is a theoretical reduction in their future tax bill, which they can record as an asset on their books. You got to love accounting! After multiple quarters of losses, many banks have big deferred tax assets on their books. But then again, you can only claim these benefits if you actually make net income. If you don't, the ledger has got to balanced out and these tax credits have to be minimized.

In the case of Citi, analysts are estimating that the company will have to take a $10B hit to this credit. Write downs can have a substantial impact on a company's net worth and Citi which has $38B of these deferred tax credits on its books needs to adjust. The $10B write-down is about 7% of their capital.

The rules for writing down these assets are complicated and really depend upon auditors. But the banks could be pressed to write down their deferred tax assets if they have recorded losses for the past several years, and are likely to in the future. Banks can follow strategies to retain tax assets, such as selling assets that can generate taxable income. This is the case for Fannie Mae this morning as they are looking to sell their tax credits to GS.

Just one more thing to think about.

GS Is OK...Except For This......

I posted yesterday regarding a story that McClatchy Newspapers was reporting on their website. The piece was about how Goldman Sachs was betting on a collapse of the housing market. The piece is a good one, except that it is stuff that the well informed is aware of. I am much more interested in learning how they got short sub prime. Because simply getting short the ABX Index was not going to do it. It looks to me that GS was underwriting lots of sub prime junk which really is not against the law. How they did it. When they did it is the question. Nonetheless, its still a very interesting story that needs to be further investigates.

Let me just come out and say that I am not against Goldman Sachs, they were one of the only people who saw a crisis coming, the question here is when? When did they decide to go short or pair back? We have heard from many that GS had lost money for some 10 consecutive days on their mortgage desk in late 2007. I am ok with the fact that they were huge underwriters and securititizers of sub prime debt. Again its sinful for anyone to be involved in predatory lending, but that business was running on all cylinders, you simply can't blame GS for getting into the act. I am OK with the fact that after they had dumped all of that inventory onto the hands of pension funds and bond funds. Here the question again, when did they clean out their inventory and when did they actively go short? If GS was actively going short CDS from AIG and dumping billions in CDO/CDL/Subprime MBS unto the market, that is fraud and they should be prosecuted. We simply don't know the answer, and I am giving them the benefit of the doubt here. I don't have a problem with GS when they were squeezing AIG for every nickle of collateral from their CDS hedges. Goldman was well within their rights to demand collateral. AIG should have never underwritten insurance for which they didn't have the funds to payout. Where I have a problem with Goldman Sachs is right here.

I have a problem with outfits like Goldman Sachs who used CDS offensively against AIG/CDO's as opposed to as a natural hedge. It looks to me that Goldman had an entire program of trades put together to go effectively short the sub prime market, they then again went on the offensive with outright CDS purchases from AIG. Their sole purpose in doing the CDS deals was NOT TO get long protection on the underlying bonds they had underwritten or held in house. AIG was simply the prime driver they chose to monetize their P&L's. They knew that they can squeeze AIG and they did so.Looking at the situation, it seems to me there were two separate type of camps buying CDS insurance from AIG. In one camp there were outfits like Society General and Deutsche Bank, these institutions were huge players in the sub prime market. They held/underwrote billions of MBS/CDO on their books. They needed to naturally and defensively hedge their bets. The other camp, Goldman Sachs who used AIG as their step child for offensively constructed trades to capitalize on AIG's miss-priced subprime risk. At the end of the day, both of these camps should have known AIG couldn't pay out on all of its obligations, because it was next to impossible to do so. They never should have been made whole. But if anyone was going to be made whole it should really be the ones who defensively hedged their bets like SocGen and Deutsche not Goldman Sachs.