FedUpUSA

Archive for December 3rd, 2010

My Two Cents

As some of the disclosures required by the financial reform bill are made, everyday Americans are starting to figure out what many zealous economy and market watchers have known since 2008: The Fed’s rescue programs weren’t just aimed at domestic banks with Manhattan headquarters. The aid stretched far into the reaches of everyday America, with the recipients of approximately $885 billion in loans still not disclosed.

For those who had not already arrived at this conclusion, it should now be crystal clear: the collapse of 2008 was a mini financial coup d’ etat. The very institutions and individuals charged with the oversight of our financial system were the same people who were helping to blow up asset bubbles and perpetuating cheap, easy credit. I think that it is very important to understand that these folks have been systematically doing the exact same thing to our willing government in the form of debt monetization. In the 1990’s and forward, they sucked in a willing consumer with massive expansion of available credit and sleazy marketing campaigns aimed at convincing people that it was really ok to owe $15,000 on a credit card at 19.9% interest.
 
The American people and their government both readily embraced the concept of deficit spending and debt accumulation as a viable path to prosperity. The Federal Reserve and its member (owner) banks have been the primary facilitators in this great transition from prosperity to poverty. Its actions in 2008 and 2009 were nothing more than an attempt to snare even more control of the financial system and the economy, while kicking the can down the road just a little further. Banks have gone from their traditional role as financial intermediaries to micromanagers of the economy. And this has all taken place in a little over a generation.

The startling part of what has transpired is that more and more of our economic destiny than ever now falls under the direct control of a panel of unelected and virtually unaccountable banking aristocrats. These bankers made decisions in 2008 not only to shower electronic dollars created from nothing on Wall Street banks, but on international banks, and companies like Harley Davidson, Caterpillar, GE, and Verizon. GE is an easy one since it has a huge exposure to default risk through its banking operations. But what of the rest? These supposedly healthy companies couldn’t make it through a few months of tight credit without running to the Fed for assistance?

Here’s a breakdown of the assistance: The Fed purchased commercial paper (CP) from Harley Davidson 33 times in 2008 and early 2009 for a grand total of $2.3 Billion. It purchased commercial paper from Verizon twice for a total of $1.5 Billion. GE was the big winner at the time, selling to the Fed 12 times for a grand total of $16 Billion. However, the biggest winner of all is Uncle Sam who is has already sold and will continue to sell to the Fed for at least another $600 Billion.

The mere existence of this activity should in and of itself reveal the very phony nature of a fiat paper money system. However, in all the mainstream news articles (many of which are owned by GE incidentally), nobody has bothered to ask where the Fed got the $3.3 Trillion it used to conduct the bailouts.

Putting in Perspective 

Back in April of this year, Will Hutton of the London Observer wrote:

“The global financial crisis, it is now clear, was caused not just by the bankers’ colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday’s announcement that the world’s most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud. Yet Britain, centre of the world financial system, has not yet leveled charges against any bank; all that we’ve seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves.

Just consider the roll call beyond Goldman Sachs. In Ireland Sean Fitzpatrick, the ex-chair of the Anglo Irish bank – a bank which looks after the Post Office’s financial services – was arrested last month and questioned over alleged fraud. In Iceland last week a dossier assembled by its parliament on the Icelandic banks – huge lenders in Britain – was handed to its public prosecution service. A court-appointed examiner found that collapsed investment bank Lehman knowingly manipulated its balance sheet to make it look stronger than it was – accounts originally audited by the British firm Ernst and Young and given the legal green light by the British firm Linklaters. In Switzerland UBS has been defending itself from the US’s Inland Revenue Service for allegedly running 17,000 offshore accounts to evade tax. Be sure there are more revelations to come – except in saintly Britain.”

Hutton pretty much summed up what most of the sentiment here in the US is: The crisis of 2008 is starting to stink – bad. Remember that, at the time, the Fed assured everyone that it was saving the financial system. How many companies did the Fed end up buying CP from anyway? I don’t think for a minute that we even NOW have the full story on what went on. And that begs the question how many other firms were allowed to languish and become ripe for government takeover. Not to mention the small businesses that didn’t have access to the Fed’s supposed charity. And they still don’t since many are still unable to get credit, except via their small business credit cards and the accompanying astronomical rates.

More than two years after the beginning of the credit crunch, this situation has still not been resolved. This is allowed to continue while banks rake in huge profits by skinning fractions of pennies from each other by front-running transactions on the exchanges. The same folks have been amassing huge reserves at the Fed itself. I have been begging people to ask the important questions for two years now: Where did the bailout money go? We now have what at best can be considered a partial answer there. Why is the Fed paying banks to keep reserves at the central bank and incentivizing them to do so by paying interest? This is a very important question given the fact that Bernanke’s talking points have centered on making credit available to small businesses!

There are two main (and possibly more) reasons for this accumulation of reserves. The first is that banks are lying through their teeth and expect further massive losses from bad loans, bad bets, and trillions more in OTC derivative beatings. The second potential reason is that banks (and the Fed) are preparing for a fire sale of the American economy. This is by far the worst of the two scenarios and would fall squarely into the category of a financial coup d’ etat.

The bottom line in all of this is that eventually a critical mass is reached and the truth is demanded. Even then, it will be slow to come out, and will be a process. We’re lucky if we know 10% of what went on during the second half of 2008. If we want the rest we’re going to have to fight tooth and nail for it. Above all else the financial establishment is well versed in self-preservation tactics. However, what we do know certainly makes it clear that the survival of the financial ‘system’ was put well ahead of the economy that should be sustaining it. Not the other way around.

Andrew W. Sutton, MBA received graduate honors in the field of Economics and is the Chief Market Strategist for Sutton & Associates, LLC, a Registered Investment Adviser in the Commonwealth of Pennsylvania. For more information about the company, its products and services, or contact information, please visit our website. Please feel free to distribute, copy or otherwise disseminate this information.

The truth is that no one in Congress that receives money from the big banks wants to expose the fraud, because then they cut off their own money supply to run their campaigns.  The banks, Wall Street and big corporate interests pay for most of the Members of Congress’s campaigns and in exchange, Congress writes legislation not only favorable to these institutions, but in some cases, allows blatant law breaking for a select few.  If you thought the new GOP majority House was going to do anything about the corrupt banks, be prepared to be disappointed because already they are trying to keep the one person in DC that understands the Federal Reserve and monetary policy from being on the Committee where he could actually make a difference.

The Federal Reserve released a stunning report showing the details of bailouts that occurred during the peak of the credit crisis.  They won’t call it “bailouts” but giving money when others won’t is exactly that.  What the report shows is that the Fed operated as a global pawnshop taking in practically anything the banks had for collateral.  What is even more disturbing is that the Federal Reserve did not enact any punitive charges to these borrowers so you had banks like Goldman Sachs utilizing the crisis to siphon off cheap collateral.  The Fed is quick to point out that “taxpayers were fully protected” but mention little of the destruction they have caused to the US dollar.  This is a hidden cost to Americans and it also didn’t help that they were the fuel that set off the biggest global housing bubble ever witnessed by humanity.  A total of $9 trillion in short-term loans were made to 18 financial institutions.  Still think the banking bailout didn’t happen or cost us nothing?  Let us first look at the explosion of assets on the Fed balance sheet.

The Fed is still carrying longer term debt on its books that shouldn’t be there:

The Fed typically would carry under $900 billion in high quality government Treasuries on its balance sheet.  But today it is carrying roughly $2.4 trillion in “assets” and the biggest part of this is made up of questionable mortgages:

Over $1 trillion of mortgage backed securities sit on the Fed balance sheet and QE2 is only starting.  Other tens of billions of dollars are sitting in the balance sheet as well that include failed commercial real estate projects and defunct shopping centers around the country. Of course the Fed would like to give the appearance that all is well but no one makes $9 trillion in short-term loans without undergoing serious problems.  And doesn’t it bother the public that an institution that represents our banking system essentially bailed out the world at the expense of US taxpayers (without asking by the way) and now taxpayers are having to deal with a toxic banking system and a jobs market that is hammered into the ground?

This concern was raised:

“(NY Times) But Senator Bernard Sanders, independent of Vermont, who wrote a provision in the law requiring the disclosures by Dec. 1, reached a different conclusion.

“After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed’s multitrillion-dollar bailout of Wall Street and corporate America,” he said. “Perhaps most surprising is the huge sum that went to bail out foreign private banks and corporations.”

Senator Sanders is absolutely right.  Did you also know that billions of dollars went to foreign central banks as well?  We all know the issues going on with the European Zone today but the Fed never mentioned this during the bailout frenzy.  Don’t be fooled when the Fed says there is no cost associated.  26 million Americans are unemployed or underemployed and 44 million Americans are on food assistance.  The US dollar has done the following in the last decade:

Yet this is the response:

“In a statement accompanying the disclosure, the Fed said it had fully protected taxpayers. “The Federal Reserve followed sound risk-management practices in administering all of these programs, incurred no credit losses on programs that have been wound down, and expects to incur no credit losses on the few remaining programs,” it said.”

Sound risk-management?  The entire purpose is to destroy the currency in a slow methodical process and inflate away the debt.  Yet there is a cost to this born by the many for the few.  Over the last decade it has meant the depreciation of the dollar by 33 percent.  That is a real cost.  It might not be a big deal if you hold money in foreign countries but most Americans only have a paycheck that is issued in US dollars.  The actual amount of Fed loans is simply jaw dropping:

“At home, from March 2008 to May 2009, the Fed extended a cumulative total of nearly $9 trillion in short-term loans to 18 financial institutions under a credit program.

Previously, the Fed had only revealed that four financial firms had tapped the special lending program, and did not reveal their identities or the loan amounts.

The data appeared to confirm that Citigroup, Merrill Lynch and Morgan Stanley were under severe strain after the collapse of Lehman Brothers in September 2008. All three tapped the program on more than 100 occasions.”

Keep in mind that unemployment insurance will cost roughly $4 billion per month and most of this money will go back into the economy.  Congress is stalling on this yet the media is completely silent on the $9 trillion in Federal Reserve loans?  This should be the headline story over and over until people realize how big the bailout was (and how this false dichotomy is being used as propaganda in the media as if $4 billion a month is going to bankrupt the system).  The banking elites just want to shift the blame to “poor” people while ignoring the elephant in the room which are the trillions of dollars in Fed loans.

Everyone got in the game:

“Big institutional investors, like Pimco, T. Rowe Price and BlackRock, borrowed from the TALF program. So did the California Public Employees Retirement System, the nation’s largest public pension fund, and several insurers and university endowments.”

Source:  New York Times

Every big player got into this and you will recall the rhetoric that it was for small businesses and the American consumer.  None of that happened.  Banks are still sitting on incredibly large excess reserves:

The Fed is operating without any checks and balances from Congress and another trillion dollar exposure has come out with the mainstream media channels like ABC, CBS, and NBC all remaining silent.  Can’t interrupt Wheel of Fortune right?

My Budget360

A Center for Freedom and Prosperity Foundation “Economics 101″ Video Exposes Keynesian Consumer Spending Fallacy.

“Keynesian stimulus schemes failed under Bush and now they are failing under Obama” said CF&P Foundation President Andrew Quinlan. “This new video hopefully will prevent similar mistakes in the future by helping people understand the importance of growth rather than redistribution.”

“Keynesian policy is based on the fallacy that you can become richer by taking money out of one pocket and putting it another pocket, but this is a zero-sum game that appeals to statists and other redistributionists,” added Dan Mitchell of the Cato Institute. “Real economic growth occurs when we figure out ways to increase national income, which is why good policy means reducing the burden of government.”

Video Summary

Politicians and journalists who fixate on consumer spending are putting the cart before the horse. Consumer spending generally is a consequence of growth, not the cause of growth. This Center for Freedom and Prosperity video helps explain how to achieve more prosperity by looking at the differences between gross domestic product and gross domestic income.

This new video is part of CF&P’s Economics 101 video series, which is designed to explain free market concepts, with particular emphasis on reaching students and young people. This is the tenth video in the series.

Other Econ 101 Videos

• Indexing the Capital Gains Tax to Protect Taxpayers from Inflation,
• Repealing Obamacare and Restoring a Free Market in Healthcare,
• The Job-Killing Impact of Minimum Wage Laws;
• Deficits, Debts and Unfunded Liabilities;
• Cost of the Internal Revenue Code;
• Lessons Learned From Sweden; Government Monopolies; Moral Hazard;
• Don’t Copy Europe’s Mistakes.

Mini-Documentaries

• Tax Competition Primer,
• VAT-Hidden Tax,
• Global Flat Tax Revolution,
• Cutting the U.S. Corporate Income Tax,
• Promoting Prosperity,
• Obama’s So-Called Stimulus,
• Obama’s Deferral Proposal,
• Case Against Class-Warfare Tax Policy,
• President Obama’s Dishonest Demagoguery on Tax Havens,
• Six Reasons Why the Capital Gains Tax Should Be Abolished,
• Benefits of Tax Havens
• Laffer Curve.

Inquiring minds will want to check out some of those videos.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Jonathan Weil has piped up, which marks a turning point, I suspect…

Here’s the latest: Thanks to a Nov. 16 court ruling in Camden, New Jersey, we now know that a Bank of America Corp. employee, Linda DeMartini, testified last year that the lender routinely retained possession of mortgage promissory notes and related documents, even after loans were packaged into bonds that were sold to investors. If we’re to believe what she said, it raises the prospect that some of those loans still should be on Bank of America’s balance sheet today.

Actually, it’s more bizarre than that. 

The original case began with a claim that the mortgage was owned and all in the good, as is always the case.

The problem was that the documentation thereof was legally insufficient.

There began the trouble.

There was allegedly an “allonge” (that is, another sheet of additional assignments) that is supposed to be “permanently attached” (e.g. riveted, etc) to the original so as to prevent someone from detaching it and replacing it later.  This, incidentally, is required by the UCC.  If my information is correct it was presented to the court as a loose sheet of paper – that is, not attached at all.  Examination of the so-called transfers showed that the note was assigned to the trust after the default and just before foreclosure was initiated.

And the pooling and servicing agreement, which the borrower’s counsel asked to have produced (to prove that all of the other things done were on the “up and up” was allegedly produced in court unexecuted and with the word “DRAFT” emblazoned over the top of it, after an attempt to find it on the SEC’s EDGAR website proved fruitless.

DeMartini’s statements also place Bank of America’s outside auditor, PricewaterhouseCoopers LLP, in a tough spot. The firm has no choice now under U.S. auditing standards but to find out definitively if what DeMartini said is correct, and whether the answer would affect any of its prior audit conclusions. PwC billed Bank of America $128 million for its audit and other services last year. The mortgage at issue in the court ruling was originated in 2006 by Countrywide Financial, which Bank of America bought in 2008.

Auditors have never mattered since ENRON.  In fact, basically all of them involved in auditing the financials of banks should be strung up by their nuts by now.  How you can possibly argue that an audit opinion has merit after the disclosure of The Fed haircuts on the so-called “assets” pledged for TAF and similar programs at this point is beyond the pale.  That is, we now know that banks came to these programs and pledged assets with ten times or more the face value of what they “borrowed” – but then when these loans were repaid those worthless assets (in the opinion of the NY Fed desk) were never recognized at that valuation by anyone ever again.  In fact, they’re probably still sitting on bank balance sheets – at 95 or even 100 cents on the dollar. 

This much I can tell you with certainty – whatever collateral was pledged on 1/21/2009 in the “face” amount of $185 billion for a $15 billion loan was never exposed in a 10K or 10Q as having taken a loss of more than 90%. 

Such a loss would have resulted in in the instantaneous detonation of Bank of America.  Indeed, that loss is more than half of the firm’s enterprise value as of today and exceeds the company’s market cap.

That is, it was more than enough to blow them to Mars – and that was one transaction.

While some of those loans were clearly rollovers of earlier ones, and thus the “9 trillion” bandied about is a histrionic distortion (typical of many people in the media and Congress) the fact remains that these programs disclose monstrous hidden losses in the form of worthless collateral that was posted by these institutions and which then disappeared once again into their bowels and has not been seen since.

A Bank of America spokesman, Jerry Dubrowski, declined to answer questions about PwC, but said it was premature to speculate on the need for any accounting reviews. A PwC spokesman, Steven Silber, declined to comment. Countrywide’s financial filings show the company sold more than $1 trillion of loans from 2005 to 2007, primarily in the form of securities.

Uh huh.  The need for accounting reviews was evident a hell of a long time ago. 

Where are the damn “assets” that were haircut by 90% or more during Fed TAF and similar operations – and we’re not talking just about BAC either.  Pick a bank – they’re all showing the same sorts of things, although some are not quite that extreme.  Nonetheless 80% writedowns on collateral valuations are absolutely common and yet there has been no exposition by these institutions WHATSOEVER as to where those valuations AS DEFINED BY THE FED went.

If you think we’ve really “recovered” in our banking system you have to deal with and dispose of this problem.  Valuations that are 80% less than claimed face value are for all intents and purposes zero.

I’ve talked about this repeatedly since the crisis began and have repeatedly been told I was full of crap.  Well, if I’m so full of it, why is it that The Federal Reserve agrees with me on the value of these so-called “assets”? 

We now know why everyone is so assiduously trying to hide the truth – including the armwaving now over Wikileaks and their alleged knowledge of some highly-embarassing documents related to banks. 

The entirety of this so-called “recovery” in the financial sector IS A LIE.