Captain, We Cannot Withstand Another Attack

Captain, We Cannot Withstand Another Attack

Posted by Karl Denninger

So now we have Senator Dodd saying:

“I can’t write regulations, this is way beyond the competency of Congress”

Really Mr. Dodd?

How about “Bankruptcy Reform”?

How about the CARD act, which as you can see from my Ticker yesterday, was instantaneously circumvented by the banks.  Instead of “jacking interest rates” they simply put a CALL feature into their account disclosures, which now means you get raped by having the entire balance on your card due and payable literally on demand.  (As an aside, how hard would it have been to say “no adverse actions” as a consequence of universal default, instead of what  was actually done?  Oh, and did banking lobbying interests recommend the language you did adopt?)

“The business community needs certainty on this issue,” he said. “We ought to leave it to them to make the recommendations.”

Really?  Like the business community “recommended” OptionARMs, automated underwriting, blacklisting appraisers that didn’t participate in outright fraud on property valuations, bankruptcy “reform”, Credit Default Swaps, Synthetic CDOs and more?

Who’s on the other side of the table?  What other voice is there on input into this process?


Now let’s look at results.  I would have no quarrel with a wildly business-friendly environment if it produced prosperity.

But it did not.

It instead produced asset-stripping, fraud, scams of various dimension, a huge housing and credit bubble and threatened the nation, if Hank Paulson is to be believed, not just with economic depression but literal martial law.

If I in concert with others took actions that threatened the destruction of our government by force, and thus gave rise to an argument that martial law would have to be declared, I would (justifiably) be held on charges of seditious conspiracy.  Can someone explain why firms and individuals, acting between themselves in a fashion that leads them to effectively demand a $700 billion bailout lest the tanks roll, fails to meet this definition under the law?

We keep talking about how the government “saved us” from the depths of Hell – literally – with their “extraordinary measures.”  Whether it is Congress, The Administration or The Fed, all are credited with keeping the nation (and perhaps the world) from going over the cliff and straight down into the land of brimstone and sulfur.

But are we actually standing on terra firma, or are we playing Wile-E-Coyote dangling in the air?

Let’s look at the facts.

  • We claim to have “decent” growth now, running about 3.5% (expected) for the full year of 2010.  But that growth is false; Government is borrowing and spending an additional 9% of GDP beyond what it was before the disaster began, it has been doing so now for two years, and there is no inclination that it is going to slow down or stop.  Indeed, there is every reason to believe that the government can’t stop, lest the economy instantly implode, as final, true demand simply has not recovered.  It is, in fact, at depression levels – right now.

  • We supposedly prevented a monstrous cross-default credit default swap explosion.  Or did we?  Did we get rid of the credit-default swaps?  Have we proved that everyone currently “short” them has the ability to pay?  Can I reasonably expect that if there is a default in some bond issue that the counterparty is good for it?  Nope – none of the above.  In fact we have every reason to believe that the threat of a cross-default explosion is larger today than it was in September of 2008.

  • The centroid of this mess is claimed to be housing.  Has housing recovered?  No – yesterday’s existing home sales figures strongly suggest that the recent “tax incentives” have in fact worn off – they no longer do anything to spur sales!  The scary possibility, of course, is that they are effective, which means when they expire later this year sales will utterly collapse.  We’ll find out which is the case here in a few months.

  • Do we have reasonable transparency in bank balance sheets?  Nope.  Not only do we know that Wells and Citi have over $1 trillion in off-balance sheet exposures each (and we have absolutely no clue how much either of those exposures is worth “at the market” today) we also know that the Federal Home Loan Bank of Seattle, the poster child for mark-to-model which claimed only about $10 billion of expected “loss” on what was a mark-to-market loss of $300 billion is now suing for the entire $300 billion.  In other words, the “model” folks were wrong, and those such as myself who insisted that we had to mark to the market and that market prices reflected actual loss levels were (and are) right.  If that “ten times worse than we claimed” projection for embedded losses is anything close to typical the entire banking system is still insolvent.

  • The states are going broke.  Fast.  California is “firing” 15,000 San Francisco employees, then “re-hiring” some of them but holding down hours.  The Illinois and California university systems are imploding, and major protests are occurring (apparently the students involved failed their middle-school math classes.)  The states have made pension promises they are bound by state constitution (in many cases) to keep, but which mathematically can’t be kept, and some of them result in payouts of $200,000 or more annually with retirement permitted at 55 (for the math-impaired this results in a likely pension of more than $6 million smackers!)  New York and New Jersey have critical state funding shortages.  Sales tax receipts remain in the toilet, despite the repeated claims of “a turnaround in economic activity.”  Public-sector unions, including police, firefighters and teachers have responded to calls for them to take the same sort of 20% or more cuts in pay and benefits that have been widespread throughout the private sector with threats.  We have allowed public sector employees to define for themselves growth in their costs that exceed growth rates in the productive economy.  Mathematically, this cannot continue.

  • Treasury yesterday claimed “There is no government guarantee for big financial firms.”  This is a lie.  By definition any bank that can come to the government and say “help us or the economy will suffer critical damage” has such a guarantee, whether Treasury admits it or not.

Now consider this: There is neither the capital or the political will to go through another bailout cycle.  Not now, not any time in the foreseeable future.

IF a sovereign nation starts a chain-reaction default (e.g. Greece, Spain, etc), IF there is a massive fraud discovered at one of the big banks, IF there is a speculative attack on a currency, any of a thousand IFs.

We won’t be able to stop it.

Not The Fed, not The Government, not anyone.

We have been given the ability – a gift really – to pull the fuse on this mess.  To lock up the nuclear financial weapons away from the kids.  To let the adults in the room.

So far, we’ve not only done none of the above, we’ve gone further to concentrate and increase systemic risk.

We cannot withstand another attack.

Everyone wants to talk about health care.  Sorry folks, that’s a misdirection.  A scam.  It is simply a way to try to get more tax revenue – right now – to stave off a possible federal funding crisis.  Treasury knows it, Obama knows it, and Congress knows it.

They won’t tell you, but they know the truth.

We cannot withstand another attack.

We must break up the large financial institutions that caused this mess.  What sort of act is more anti-competitive than going to the government and threatening it with economic armageddon if it does not hand you billions of taxpayer dollars?  Whether it’s a loan or a handout makes no difference – the very issuance of such a threat is a declaration of trust behavior banned under The Sherman Act, among others.  We need no new laws to deal with this situation – we simply can and must enforce the existing ones.

We cannot withstand another attack.

Stiglitz, in a remarkable display of truth, said today that The Federal Reserve System is corrupt.  He’s right, of course.  What other explanation is there for an institution that literally sat back and watched more than $10 trillion in fraudulent credit creation take place – all so a bunch of banksters could make billion-dollar bonuses?  This must change – here and now. 

We cannot withstand another attack.

But we’re gonna suffer one, and soon, if we don’t pull the fuse.

The Credit Default Swap monster has to be caged.  I know I sound like a broken record, but it has to happen.  Now.  Today.  I don’t give a damn if the banks like it or not.  I don’t care if bankrupts all of them.  It has to happen now.

The off-balance-sheet crap has to be exposed and valued, along with everything else, at the market.  Yes, I know it will cause major problems for the banks.  I don’t care.  It has to be happen now.

We have to get control of federal spending.  We cannot spend $1.3 trillion more a year than the government takes in via taxes.  We just can’t.  We’re getting away with it right now because everyone is scared that Greece is about to blow the Euro Zone to pieces.  But once that either happens or the fear recedes, the speculators will point their weapons of financial destruction here.  We have either fixed the problem before then, or we’re next. 

And finally, we must know what The Fed is holding, what they’ve bought, what they’ve monetized, who got paid off and what sort of trash is hidden in the black hole known as their balance sheet.  This means full audits – now and evermore in the future.  No exceptions.

If you remember back when Paulson’s “bazooka” was first discussed I said that the market calls all bets. 

It did. 

Within days.

We’re there again folks, about to witness the market calling our leaders’ bet again, and we are enjoying a respite only because there are other hookers in the room of nations with a worse case of crotch rot than we have.

But that’s not a sign of strength – it is a sign of danger, for our own particular financial STD has not been cured.

We’re running out of time to take the penicillin.