Archive for January, 2010
Posted by Karl Denninger
So we got our “Bernanke” reconfirmation on two votes, the first the “real” one and the second the one that everyone is trying to “count.”
Let’s first look at the real vote – the vote for Cloture, without which there would have been no confirmation vote at all.
The following Senators voted YEA on Cloture and stand for election this November.
NC:Burr (R) YEA
ND:Dorgan (D) YEA
NH:Gregg (R) YEA (Retiring – to a Goldman affiliate!)
NV:Reid (D) YEA
NY:Schumer (D) YEA (Wall Street’s Chief Whore)
OK:Coburn (R) YEA
OR:Wyden (D) YEA
UT:Bennett (R) YEA
VT:Leahy (D) YEA
WA:Murray (D) YEA
Ignore the actual confirmation vote. Some of the clowns in the Senate, like Babs Boxer, tried to obfuscate reality by voting for Cloture and then voting “Nay” on the final vote itself, in an attempt to play “I voted against it before I voted for it.” This sort of symbolic malarkey must not be allowed to stand.
More importantly though is that Bernanke is now officially President Obama’s child. He put him up for renomination, he did not pull that nomination, and he personally lobbied for his reconfirmation. He owns it.
There are many who believe that Bernanke “saved us from another Depression.” I will note that there were many in 1930 who thought we had been “saved” as well. They were wrong.
They were wrong for the same reason they’re wrong this time. From SIGTARP’s latest report:
It is hard to see how any of the fundamental problems in the system have been addressed to date.
- To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.
- To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.
- To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.
- To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.
That report is 224 pages, and ought to be required reading. But the executive summary above that I have excerpted is the base of it all.
There is one place that I disagree with Barofsky – that is the “reinflation” of the housing bubble. That’s simply not going to happen, because the bubble itself was (as are all bubbles) predicated on false credit quality claims.
Bubbles all depend on credulity. That is, they rely on the ability to find more and more suckers upon which one can offload over-rated securities, each of which is worth less than claimed (and in some cases literally “worthless”!) They pop when the number of suckers is exhausted and the mad scramble for chairs begins as the music suddenly stops. Those left holding a bag with no sucker to offload it to go bankrupt and since the essence of bubble economics is the overuse of leverage the bagholders inevitably are geared and those who lent them their money are imperiled as well.
The natural check and balance on such behavior is the risk of bankruptcy. That fear prompts underwriting and proper margin supervision, thereby limiting the impact to those who actually speculated.
But we have failed on two accounts: We first allowed regulated banks and insurance companies to speculate, effectively allowing private parties to gamble with the credit of The United States, where they keep the winnings but pass on the losses to the taxpayer. Then, when the bust came, instead of punishing those who gambled and lost by forcing them through bankruptcy (even if it meant the taxpayer would take a huge hit) we instead took the hit but left those who did the evil things with operating businesses!
Bernanke is one of the chief architects of this structure. He has repeatedly engaged in “bubble economics” with scant regard for the common taxpayer – the citizens of this nation. Instead, his focus is on the few thousand brigands found in New York, who are plundering our society to the limit of their ability.
The last two weeks have treated us to a few ugly realities in regard to where the markets are and what Bernanke has done. By pumping a literal trillion dollars into the markets via his above-market-price purchase of mortgage and treasury securities along with a zero interest rate for short-term fed borrowing he has engendered a monstrous stock market bubble. This has come about due to the inherent disconnect between real valuations and yields in markets where he has interfered (when you overpay for something you drive its yield down.)
But that stock bubble has in turn been predicated on growth numbers that simply cannot arrive in the real world. The realization that “we’ve been had” may be coming now – but whether it is now, a month from now or six months from now, it will come, and instead of producing a flattening of the market (which would be the likely outcome were we trading in the 800s or even low 900s now on the S&P) the potential for an outright crash instead exists as people run for the door.
We should know better – after all, the same dynamic took hold in the housing market. But that sort of dynamic was ignored then (“subprime is contained”) and is being ignored now (“I don’t see any asset bubbles”) by Bernanke, and will continue to be – right up until the market implodes.
Perhaps this is his (and President Obama’s) intent. After all, our dear President intends to send a nearly $4 trillion Federal Budget to Congress in the coming days, while we are running a deficit of nearly half that. With China increasingly unwilling (or unable) to continue to recycle hundreds of billions annually back to US Debt (a losing strategy for them in the longer term as they’ll never be paid off) and both Japan and England drowning under their own debt issuance one has to wonder exactly where Obama and Bernanke think they can source the over $1.5 trillion in net issuance they need to continue the charade.
Perhaps the answer is nothing more complex than intentionally cranking the stock market one more time, then crashing it again, scaring everyone into Treasuries. Recent changes in money-market fund rules to permit them to throw up gates without prior approval of the SEC may be part of this, as may the rumblings about “annuitizing” people’s retirement accounts. Anyone care to take a bet on there being some sort of “conversion to something safe” option being thrown about if and when the stock market dives once more?
In any event the key items here are that we now have a “hit list” of Senators that must go from their seats come November, and a reminder that President Obama can no longer blame what I believe is an upcoming collapse of the stock market – a multi-year affair that will be much worse than what we suffered in 2008 and early 2009 – on President Bush. He had the opportunity to name either Volcker or John Taylor (to name two) to the position that Bernanke has, and decided instead to go with the guy who has been a chief architect of the “Brigand-and-Loot-Em” society – for better or worse, it’s all his now.
Bonne chance mes amis.
Posted by Karl Denninger
You just knew they wouldn’t play by the rules, right?
Investment bankers in the U.S. have begun using equity derivatives to convert restricted shares paid as bonuses into cash, side-stepping new guidelines on remuneration which were designed to prevent bankers cashing out for at least three years, according to a headhunter.
The bankers are using over-the-counter equity derivatives strategies such as call options, put options and collars to monetise their shares now, albeit at a discount to what they would receive if they waited for the restrictions to lift.
The purpose of these rules was to insure that the banksters were actually promoting sustainable operation of the business instead of looting people, which could detonate the company’s share price before they could cash out.
So instead they’re taking a sizable haircut.
What does this tell you about the “sustainability” of their practices?
And why over-the-counter derivatives? They’re bilateral and thus there is no exchange record of what they’ve done.
Time to break up these banks right damn now folks. Break ‘em all up, shut ‘em down, stop this crap right now.
Oh, and if you’re in the markets? That’s the clearest indication I’ve ever seen that the very people inside know that it’s all going to blow up.
Before they could otherwise cash their bonuses out.
Ignore the actions of those on the inside at your peril.
Posted by Karl Denninger
Gee, now The Swiss are warning that UBS could “collapse” if UBS lost it’s US banking license:
“The actions of UBS in the United States are very problematic. Not just because they are punishable but also because they threaten all of the bank’s activities,” Eveline Widmer-Schlumpf told Le Matin Dimanche newspaper.
“The Swiss economy and the job market would suffer on a major scale if UBS fails as a result of its licence being revoked in the United States,” she said.
Let’s boil this down, shall we?
Is UBS a US company that locates itself in Switzerland for the express purpose of evading US law or is it a Swiss company that happens to do a significant (but not critical) amount of business in The United States?
The difference is in fact crucial.
If UBS is a Swiss Company located in Switzerland as it’s primary domicile because that’s where it transacts most of its business, but it happens to do some business here in the US then a revocation of its US banking license (which I have repeatedly argued should happen, including here) would be inconvenient but hardly catastrophic.
But if UBS is in fact a US company – that is, in form, volume and character of the business it does it is US-centric, and continues to be domiciled in Switzerland as a means of dodging enforcement of US law, including that pertaining to customers that are US citizens, then we have a larger problem.
I think we are owed an answer as to which case we’re dealing with, and the simplest way to find out is to revoke UBS’ United States banking charter.
And before the usual cadre of “useful idiots” pipes up and starts attacking me without engaging their brain first, let me be perfectly clear:
The Swiss are free to set any sort of legal standard up for their corporations they wish. I have no argument with their national sovereignty and in fact kind of like some of their viewpoints.
HOWEVER, this is immaterial to the point at hand, which is that just as they demand we respect their sovereignty and the rule of law with regard to their citizens, we have the right to demand the same of all firms that wish to do business inside the United States.
Therefore, if UBS wishes to have a US Banking License they must be forced to comply in all respects with US law irrespective of where the transaction takes place, and when it comes to accounts held by US Citizens this means they have an absolute obligation to report to the IRS as does every United States domiciled bank. If they do not like this obligation they must surrender their US Banking License and then are free to deal with US Citizens as they desire anywhere else in the world – but they may not have an office, representatives, or business presence in The United States nor may they enjoy the benefits of US Government Support as is offered to all US-licensed financial firms.
By Tom Braithwaite in Washington
Neil Barofsky, the special inspector-general overseeing the US government’s financial rescue efforts, is to probe allegations of insider trading among bank executives and their associates.
Eight of the largest banks in the US received between $2bn and $25bn in October 2008 under a programme to prop up the financial system led by Hank Paulson, then Treasury secretary.
Dozens more institutions followed and Mr Barofsky, who examines the troubled asset relief programme, is looking into whether information improperly made its way to trading rooms during a feverish period in which the government and banks were frequently exchanging information.
“We have pending investigations looking into that – typically into insider trading,” he said. “Once upon a time getting Tarp funds actually meant your stock price would go up and we are looking at specific trading around Tarp announcements by insiders or looking at potential tips from insiders.”
Sig-Tarp, the office of the special inspector-general, published its quarterly report to Congress on Sunday, criticising the capital investments in banks as having failed to stimulate lending.
“Part of the problem is, when the Tarp funds were extended . . . although there was this public disclosure that the purpose of these programmes was to increase lending, very little, if anything, was done to encourage or direct lending,” said Mr Barofsky.
The Treasury is celebrating faster than expected Tarp repayments from the financial sector; it now expects relatively small losses, with some elements generating big profits.
While Mr Barofsky acknowledges this, he said there remained substantial problems with the struc-ture of the public-private investment programme, which is designed to encourage investors to buy troubled assets from banks to clean their balance sheets and stimulate lending.
He said there should be walls between fund managers taking part in PPIP, which co-invests government funds with those of the private sector, and managers at the same firm buying and selling similar securities.
An example of suspicious activity at an unnamed firm showed a manager selling a security from a non-PPIP fund and then buying it back at a slightly higher price with a taxpayer-supported PPIP fund minutes later.
“The rules are insufficient,” said Mr Barofsky. He said even if the behaviour, which Sig-Tarp is investigating, was found to be within the rules “it still creates this credibility issue, this reputational damage, this appearance of fund managers gaming the system”.
The Treasury said it had identified the suspicious behaviour and brought it to the attention of Sig-Tarp, showing that the system was transparent.
In another example of the sometimes fractious relationship with Treasury, Herb Allison, the Treasury’s head of Tarp, said that Ken Feinberg, the so-called pay tsar, had initiated contact with the New York Federal Reserve to discuss pay at AIG long before Sig-Tarp had made the recommendation in a previous report.
Much of Sig-Tarp’s new report is given over to an examination of the housing market and the multitude of government schemes designed to support lending and help homeowners avoid foreclosure.
“The government has done more than simply support the mortgage market,” the report said. “In many ways it has become the mortgage market with the taxpayer shouldering the risk that had once been borne by the private investor.”
Mr Barofsky added: “All of the things that were broken in the housing market and the different roles that different private players have played, some of what we recognise now . . . actually contributed to the bubble and to the ensuing crisis are really being replicated by government actors.”
His latest report said Tarp was entering a transition as financial aid for banks including Bank of America and Wells Fargo & Co was recouped.
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