FedUpUSA

Archive for January, 2010

NUCLEAR: Did Goldman Offer To Tear Up AIG CDS?

Posted by Karl Denninger

Oh oh.

Remember, Blankfein testified in front of the FCIC at 10:12 AM on 1/13 that he never got a request to take less than 100 cents on the dollar for AIG credit default swap contracts.

Well then what’s this that Zerohedge dug up?

As everybody knows, AIG got a huge government bailout in September 2008 to help make payments on derivatives contracts with banks, including Goldman. Yet in the previous month, Goldman approached AIG about “tearing up” its contracts, according to a November 2008 analysis by BlackRock, then an adviser to the New York Fed.

WHAT?

Oh yeah.  Here’s the link to the Zerohedge article, and the paper in question is right here:

Thanks and noted on the tear up stand down.

We should get back with Goldman.  I will talk with Bill.

Date: 10/31/2008 6:57 PM.

Which followed:

Also, I spoke to Manzari this morning.  He asked me to stand down on tearing up / unwinding CDS trades on the CDO portfolio.

That appears to be a smoking gun in that it documents that there was an active negotiation on “tearing up” – that is, unwinding CDS trades at less than 100 cents on the dollar and that negotiation was intentionally terminated.

Will we next be entertained by a discussion of what the word “is” means, or can we take the above at its obvious face value – that GOLDMAN ITSELF APPEARS TO HAVE OFFERED TO TEAR UP THE CDS ON AIG’S PORTFOLIO!

If there indeed was such an offer – as is all but stated here – and if indeed there was an order given to “stand down” on such negotiations then those persons responsible must be summoned to the dock and compelled to provide testimony, as it appears that one or more individuals who have already stated that no such negotiation was possible may have committed perjury, never mind dispensing more than $10 billion of taxpayer money to Goldman Sachs unnecessarily – at best.

US GOP Report: Fed Poses Threat To Principles Of Democracy

By Michael R. Crittenden, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- The Federal?Reserve’s actions during the rescue of American International Group Inc. (AIG) have “serious implications for the continued health of democracy,” according to a GOP memo prepared for a Wednesday hearing featuring Treasury Secretary Timothy Geithner.

The report, prepared by staff for Rep. Darrell Issa (R., Calif.), calls the central?bank a “quasi-governmental agency, unaccountable to the American people.” The Fed’s actions during the AIG rescue, including the effort to withhold the names of the insurer’s counterparties, “demonstrates the threat that the Federal Reserve poses to basic principles of American democracy,” the report concludes.

The charged language could up the ante for a Wednesday hearing before the House Committee on Oversight and Government Reform. The panel is investigating the government’s rescue of AIG in the fall of 2008 at the height of the financial crisis, as well as the November 2008 decision to pay the insurer’s counterparties 100 cents on the dollars for securities tied to soured mortgage bets.

Documents uncovered by the panel show that officials at the Federal Reserve Bank of New York, which Geithner was then president of, had little confidence in their attempts to get the counterparties to accept less than 100% on payments they were owed.

“I don’t know why we even bothered to ask,” New York Fed General Counsel Thomas Baxter told committee investigators, according to the GOP report.

Lawmakers from both parties have also expressed outrage at what they view as an attempt by Fed officials in New York and Washington to withhold the names of AIG’s trading partners, which includes firms such as Goldman Sachs Group Inc. ( GS). The GOP report quotes a Nov. 24 email from Alejandro LaTorre in which the New York Fed assistant vice president asks “But can [AIG] make these docs public without our consent? Aren’t we parties to this and shouldn’t we have a say?”

The Treasury Department has insisted that Geithner had no say in the discussions dealing with disclosures, a response Baxter echoed in interviews with congressional investigators. The GOP report for Wednesday’s hearings make clear, however, that lawmakers are not satisfied with the answers they’ve received thus far.

“At a minimum, the cover-up of the details about AIG’s counterparty payments began on Secretary Geithner’s watch, and the culture of the [New York Fed] in which this behavior occurred reflected his leadership,” the report said.

-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273; michael.crittenden@dowjones.com

  (END) Dow Jones Newswires
  01-25-102046ET
  Copyright (c) 2010 Dow Jones & Company, Inc.

More Ponzi Failure: Stuyvesant

Posted by Karl Denninger

Doug Noland: Just Say The Words!

Posted by Karl Denninger

Doug Noland over at The Prudent Bear has written a piece that everyone, in my opinion, should read – particularly the section on “The Volcker Rule”:

While certainly not without faults, the financial system back in the Volcker era was more stable.  The ABS market barely existed.  The Wall Street firms and their marketable debt instruments were not major factors in system Credit creation.  The banking system dominated the extension of private-sector Credit.  Derivatives markets were in their infancy – and certainly didn’t dominate the financial world.  Outside of some GSE MBS, mortgage Credit was in the form of bank loans.  There were only a handful of hedge funds – not thousands.  Leveraging marketable debt instruments wasn’t The Game.

….

One of the big problems today is that there are tens of Trillions of marketable securities out there – and their value depends greatly on the ongoing creation of Trillions more.  Our system needs major financial reform – no doubt about it.  From today’s Wall Street Journal:  “The White House’s relationship with Wall Street is close to the breaking point.”  A war on Wall Street would put Credit growth, asset markets and economic recovery all at risk.  

Just say it Doug: It’s a Ponzi Scheme and thus ultimately must fail, as do all Ponzi Schemes.

I find it amazing how far people will go – describing the essence of the scam, go through it in detail, laying it all out right in front of your eyes – and then they walk right past the obvious (and indeed the only) statement that sums it all up.

All such schemes of creation or maintenance of “wealth” that rely not on the underlying value but on creation of more of the same are Ponzi Schemes.  They all must fail because in each and every instance you must continue to find a way to make “more” of whatever you started with in order to maintain value, and as time goes on this “more” grows geometrically in support of what already exists.

This cannot occur forever as a consequence of basic mathematics, which is why all such schemes are supposed to be unlawful.

That is the underlying reason why we must have reform.  It is not a matter of one means of profit being “good” or “bad”, nor of whether the financial sector is “too big.”  It is that the structure of finance in this country, and indeed the world, has grown into a blood-sucking vampire that creates more vampires, and thus has turned into a Ponzi Scheme.  Eventually it must run out of blood sources simply due to the fact that it continues to expand in size at a rate faster than the productive economy and yet the productive economy upon which it feeds has a limited amount of blood that can be extracted without dying – just as is portrayed in the movie Daybreakers.

We reached that limit in 2007 and that is the root cause of the trouble we got into – and remain within.

Doug is just the latest of many who walks right up to the truth, stares it in the face, and then ignores it.

Wake up Doug.

The Rise of the Cashier and Retail Salesperson Economy – Employment and the Evolving Job Market of the United States – 8 Million Jobs Lost in this Recession but Deeper Financial Changes are Coming.

Posted by mybudget360

The recession that started in December of 2007 is still causing jobs losses even after 25 long and agonizing months.  Most Americans still feel that the economy is deep in the midst of a serious correction.  Since the recession started non-farm employment has shrunk from 138.152 million to 130.91 million.  Officially over 7.2 million jobs have been lost but a coming revision next month will show that 8 million people have fallen off the non-farm payroll figure.  Many are trying to figure out how the bailout of Wall Street and the banking sector has improved the underlying system holding up the economy.  Recent political movements show that Americans are still not satisfied with how the economy is being handled.  One thing not being covered by the media is that anger among the population is coming from the poor state of the economy.  Other factors are important but the economy is the number one topic on the minds of most Americans.

If we look at where the jobs losses are coming, we will see that manufacturing has taken another major hit in this contraction:

Every industry has seen significant job cuts.  It is interesting to look at the financial sector and see how well it has done in comparison to other sectors.  No wonder why Wall Street since March of 2009 has been on a historic rally.  Fascinating how in the last few days when mention of breaking up the too big to fail banks was brought about that we had our first major correction in nearly a year.  Could it be that the only way banks are making money in this current economy is by gambling in the stock market?  Absolutely.  In fact, most of their profits aren’t coming from making loans to average Americans but by trading and acting like pseudo-hedge funds except the banks are using taxpayer money as their safety net.  If you truly believe in capitalism then you understand that too big to fail should not even exist.  Creative destruction is part of a capitalistic system.  Right now banks are operating in a system that offers them different rules from typical Americans who are seeing their jobs disappear.  It is a two-tiered system.

It may also be the case that the system is learning to make do with part-time employment:

You rarely here that employment is a lagging indicator from reputable sources because of the cynical nature of this old economic mantra.  This line is as old as saying real estate prices never go down.  Sure, in previous recessions you would see the economy bounce right back up after a correction but this isn’t one of those typical recessions.  This is a generational correction and old rules of economics don’t play anymore.  Temporary help hiring has increased but the system isn’t hiring any full-time workers either on a net-basis.  In other words, we are still losing full-time jobs.  Businesses have learned to tweak their employment base to a much finer degree so the need for full-time workers with all additional benefits and compensation may not make financial sense.  In the end it is the average American that is thrown under the bus.

Our employment base has also shifted to a major focus on service orientation.  If we rewind to the 1940s and 1950s a large part of our economy revolved around manufacturing.  This isn’t to say that having a large manufacturing base is necessarily good or bad but a large part of Americans had a job that was stable and also provided an income that would make it easy to pursue the American dream.  What did this mean?  Being able to buy a home and support a family without going into massive debt that would put you at risk for bankruptcy and foreclosure down the road.  The rise of the two income household is a positive but it is also an economic necessity for many.  The typical American household brings in $52,000 per year.  Considering this is the median for a household, you can see how quickly losing one job can send a family into a financial tailspin.

And if we look at the top jobs in our country, we realize that we have replaced manufacturing with a near obsession with service oriented jobs:

Source:  BLS

I find it amazing that the two biggest occupations include retail salespersons and cashiers.  If you consider that a family might have one worker in each of these fields, they wouldn’t even come close to meeting the median annual household income of $52,000.  And go down the list.  The vast majority of the jobs above pay slightly above the federal poverty level if someone were to have a family.  It is no wonder that many households went into debt using toxic credit cards that change fees at the drop of a hat.  I find it amazing how quickly some people are to judge these people for financially mismanaging their budgets but at the same time, remain silent on the financial shenanigans of the banking sector that is largely responsible for this financial mess.  The cognitive dissonance is palatable but it is clear that the vast majority of Americans see this distinction and are lashing out at Wall Street and rightfully so.

And when we say Wall Street, we mean the financial sector.  Keep in mind that what I would view as core capitalistic companies like Google or Apple actually provide a service and added value products and these companies aren’t even asking for a government handout.  In fact, they are adding real wealth back into the economy instead of siphoning it off.  How many companies failed trying to be like Google or Apple?  Remember the search engine Alta Vista?  It once reigned supreme and is no longer here.  Companies come and go and that is part of our system.  The idea that banking is somehow immune to this is troubling.  And that is exactly what we did.  Well, not exactly “we” per se because the vast majority of American don’t support the bailouts but this is what was done by those representing us.  What we have now is a full functioning corporatocracy.  The recent Supreme Court ruling allowing corporations to contribute to candidates unlimited sums of money only cements this structure further.

If we look at the S&P 500 and compare it to companies back in the 1950s, approximately 50 companies still remain on the top 500 list.  Many have failed or dropped out or have simply been surpassed by companies that are fairly new (i.e., Google, Apple, Microsoft, etc).  This is the beauty of our system.  Ideally we wouldn’t favor one industry over another.  Yet our slow process into favoring the banking sector is disturbing because we are allowing the financial sector to govern our country.  And clearly we are seeing that what is best for Wall Street isn’t best for Main Street.  Even Henry Ford despised Wall Street and it should be clear to most Americans why.  Wall Street has its place but when it starts becoming a revolving door to D.C. and has Congress on speed-dial we have bigger issues.

44 states recorded increases in their unemployment rates last month.  And what is even more troubling is the length of time people are remaining unemployed:

Nearly 6 million Americans have been unemployed for over 27 weeks, the highest number we have ever seen on a percentage basis.  But on the other side of the coin, we have seen part-time employment for economic reasons spike to over 9 million during this recession.  This group is made up of people looking for full-time work but only being able to find part-time employment.  Add these two together and you start getting a sense of where our economy is heading if things don’t change.  Japan during their lost decade(s) followed a similar path to the one we are going down.  They bailed out their banking sector allowing zombie banks to remain and slowly over a grueling generation, one-third of their population was classified as part-time workers.  Japan also had major fiscal programs but nothing has helped.  Just look at the Nikkei average over this time:

The Nikkei is down 71 percent over 20+years.  So the banks are still there in spirit but what about the overall economy?  Japan has been lagging over the past two decades and bailing out the banks had a lot to do with this.  It is no coincidence that their part-time employment sector makes up one-third of their employment base.

And tying this all together including with the commercial real estate bust, we see that demand for commercial space is absolutely at the bottom:

Source:  Atlanta Fed

And why would you expect this number to be anything else?  Banks needed more and more demand even if the market didn’t demand it so they could keep on expanding and making further and further bad bets.  What did they care?  Ultimately they were bailed out by the taxpayers and government.  Yet we are now seeing deep anger in our country because nothing infuriates a society more than having a large unemployed population especially when aid was given to the banking sector that actually created this employment disaster in the first place.  Apparently Americans are still hungry for change.

Why Markets Have Technical Targets Near Zero

Posted by Karl Denninger

Yes, they really do have potential technical targets in that general area.

For instance, this chart:

Or this one.

Or this one.

All show potential ”head and shoulders” patterns in process.  None are confirmed, but all will be if we head back toward March’s lows.  Note that these are patterns stretching back more than a decade and thus there is no immediate expectation that this is a “tomorrow” thing – rather, it is a longer-term problem.

All target, effectively, zero.

The Nikkei has a very similar pattern on it, as do most of the other major international indices.

What could cause such a preposterous outcome in the global stock markets?

This sort of crap:

Jan. 25 (Bloomberg) — Bank of Japan policy makers are prepared to consider expanding an emergency-loan program for banks and increasing purchases of government debt should the recovery falter, people with knowledge of the matter said.

Which “emergency” is that?

This one?

When it introduced a quantitative easing policy of pumping cash into the banking system in March 2001, it said the step would stay until prices stopped falling.

This “EMERGENCY” is A DECADE OLD!

Will the global capital markets keep putting up with this?  So far the answer has been “yes.”  But there exists some point – somewhere – that such a policy will cause a full-on collapse of the bond market.

Realize that Bernanke has already effectively destroyed the market for Fannie and Freddie securities.  He is the market; there is nobody who will buy Fannie and Freddie paper at anything approaching the price he has paid.

In the Ivory Tower-filled halls of central bankers, there are those who believe they can twist the dials without consequence.  That their acts, however insane, are confined to their own nations and within their own borders.

This is a dangerous, even suicidal fantasy.

Not all nations will be forever tied at the hip to such magical thinking.  Many may not be even now, and as time progresses those who are bent over the table the most by such fantasies (cough-China-cough) will of necessity find ways to decouple from this self-destructive paradigm.

If the nations involved in this fantasy (Japan, the United States and perhaps Britain) do not stop of their own accord they will continue to see deteriorating public finances which, of course, will prompt them to buy even more of their own debt. 

But such an exercise is at best a circle-jerk and at worst it destroys private investment through crowding out.and destruction of the free market’s pricing mechanisms.

The “over center” point where one becomes too deeply in the gravity well of the black hole at the center is almost impossible to determine in advance.  Japan may have already crossed beyond it. 

Once that point is reached it becomes quite literally impossible to prevent a full-on collapse of the monetary system involved.  Other nations will be forced to jettison their ties lest they be sucked into the vortex like two ships tied together when the first sinks below the waves.  If those ties cannot be jettisoned in time a coordinated worldwide bond collapse is quite possible.

There is no attention being paid to these risks, yet with Japan’s public debt twice GDP it is rapidly sucking private savings into the vortex along with it. 

When, not if, that private savings is exhausted it will be too late.

The United States does not have the luxury Japan has had, as we do not have the reservoir of private savings the Japanese had at the outset of their folly.  Instead, it is a near-certainty that The United States will attempt to cajole and, if that does not work, coerce private citizens to buy Treasury debt as a means of staving off the collapse.  There is several trillion dollars in pensions, 401ks and IRAs that could be effectively forced into such a program, should the government decide to get out its jackboots.

But that has no different outcome than does Japan’s mess – as with Japan it simply sucks all the private capital into the vortex along with the government.

If there is one thing we should have learned from Japan’s debacle, now well into its second decade, it is that “Quantitative Easing” does not work.  It fails to halt deflationary pressures because the root of the problem is that there is too much debt in the economy relative to productive output. 

Quantitative Easing is an attempt to avoid the inevitable pain of debt deflation and default.  It is nothing other than a sop aimed at preventing those who made bad loans from being forced to eat them, recognizing their insolvency and going out of business.

Since “Quantitative Easing” does not reduce the level of debt in the system it is mathematically impossible for it to succeed in the goal of relieving the debt overhang.  Indeed, it is virtually assured to make such an overhang worse, since by definition such a program will prompt further and more aggressive debt issuance, especially by the government.  It did in Japan and now it has here in The United States as well.

You cannot fix a drinking problem with a case of whiskey, but you sure as hell can get alcohol poisoning and die.

Japan is well on the road, and we are not all that far behind them.