FedUpUSA

Archive for June 12th, 2011

From the WSJ:

The latest infiltration was sophisticated in that it involved significant reconnaissance prior to the attack, and code written specifically to penetrate the IMF, said Tom Kellermann, a former cybersecurity specialist at the World Bank who has been tracking the incident.

“This isn’t malware you’ve seen before,” he said, making it that much more difficult to detect. The concern, Mr. Kellermann said, is that hackers designed their attack to gain market-moving insider information.

The attackers appeared to have broad access to IMF systems, which would give them visibility into IMF plans, particularly as it relates to bailing out the economies of countries on shaky financial footing, Mr. Kellermann said.

That could be a problem.

Apparently the IMF doesn’t seem to think that encrypting data in file stores is important.  It might now, of course, but it’s a bit late.

Now the question turns to who it was.  Was this a state-sponsored attack or was it the activity of what could be called “activists” who are interested in using this information either for profit or, more likely, as a means to either embarrass or even attempt to civilly detonate governments?

One has to wonder exactly what’s going on here with the recent ramp-up of these sorts of incidents.  The recent RSA token scandal was one that apparently had its roots planted several months ago and was hushed up.  These little ”two-factor” tokens are extremely secure provided the key-generation algorithm tied to their serial number is not compromised. But if it is then the token is literally worthless.

Why the IMF?  Well, that’s simple: There’s plenty worth stealing there, even though there shouldn’t be.  Rumors abound, of course – that the IMF entered into secret treaties (and “treaty-like” agreements) with various governments related to the Greek bailouts (and others), that there are certain hidden (and not-so-hidden) facts about who’s holding the risk on Greek debt in these discussions and more.

The latter, by the way, is interesting.  The “direct exposure” to a Greek, Irish or Portugese default is mostly in Europe, as you would expect.  But the indirect exposure via credit instruments, including those damned Credit Default Swaps, is substantially in the United States.

This is not a trivial amount of money either; we’re talking about, in aggregate, north of a trillion dollars.  Of that roughly $129 billion rests here in the United States in the form of these indirect and not clearly denoted obligations.

Guess what this means folks?  US Financial Institutions would have to make payments to European banks.  Once again we would be bailing out Europe for their idiocy.

When did this all happen?  Who’s been selling CDS against foreign debt, why, and where are the reserves, amounting to more than $120 billion, behind those sales?  That is not a small amount of money.

I have said this repeatedly since the crisis erupted: All credit instruments must be exchange traded, not “cleared” or “registered.”  This double-blinds the transaction and forces nightly posting of margin and identification of the risk that each party is holding.  It prevents “chained risk” and thus systemic risk.  And finally, it prevents hiding this sort of crap as the open interest on each contract is visible to everyone, every night, in public and everyone involved must prove capital sufficiency every night.

The solution to this problem remains as it was in 2007 when I started yelling about it: Force it all onto an exchange and for those who cannot post margin as they simply do not have the money declare the contracts fraudulently entered into and void. 

Dodd-Frank refused to address this.  Our government has refused to address this.  Now, four years on into the mess which was not fixed, we are seeing “Round #2″ and as the BIS data shows and John Mauldin has published, we are again being held hostage by a bunch of crooks who wrote “insurance” against risk without the money to pay.

It is time for Congress and the people to demand answers and stop this crap right now.  We, the people, must not pay off these bets in what is clearly an organized looting operation.

The Market-Ticker

It’s time we defended liberty and democracy against financial tyranny: take your money out of Wall Street and the “too big to fail” banks, and stop funding their fraud, churn and subversion of democracy.

June 14th is a national day of resistance against economic tyranny. We all need to do our part. The good folks at AmpedStatus.org have hosted this site: Acts of Resistance: What Are You Going To Do On June 14th to Rebel Against Economic Tyranny? Demonstrations and public actions are being planned in a number of cities.

If you cannot attend the public events, then consider taking direct action against Wall Street and the “too big to fail” banks. Direct action boils down to this simple act: remove your money from their grasp. Your money fuels their exploitation, their fraud, their skimming, their lobbying and thus their sabotage of democracy. If we all take our money out of their grasp, then they will shrink or expire.

If you haven’t already, move your IRA and other accounts out of Wall Street and “too big to fail” banks. Move the accounts to online firms, local credit unions or local banks. Yes, there are still locally owned and controlled banks. Moving your money to them is a direct-action statement against financial tyranny.

This can be painful. I had a 20-year business bond with my broker, and it was painful to pull the account away from him. But I explained why, and he understood; of course he understood.

Removing your shares and money is important because Wall Street and the TBTF banks use your money to churn profits for themselves. Your shares are sold short, your cash lent out on a daily basis, etc., and the proceeds are used to subvert democracy via lobbying and campaign donations, and to pay for the financial Elites’ mansions and yachts and tax attorneys.

The TBTF banks reap enormous profits from credit card and debit card transactions. Using cash instead of paying them a slice of every transaction is another direct-action way to “starve the beast.”

A critically important blow against financial tyranny is paying off all high-interest credit cards and other debt owed to Wall Street (margin debt) or the TBTF banks. You earn .01% on your cash, but the banks skim 18% on your credit card debt.

Although this isn’t an option for most people, in the longer term, a very powerful direct action is paying off your mortgage and not getting another one. The same can be said of auto loans and student loans. The single most important direct action is to remove debt from their churn machine. Without any home mortgages to securitize, Wall Street can’t spin off derivatives of that debt and book profits by packaging and selling it.

A debt-free society where citizens refuse to give their money to Wall Street is a society freed of the financial tyranny that has strangled the economy and democracy. We as a society have been brainwashed into believing debt benefits us; but that is a lie. Debt actually enslaves us in more ways than one: it enslaves us financially, and gives the Power Elites the means to enslave us politically.

Demonstrations are good, but direct action by millions of citizens is even better. Don’t take on $100,000 of debt you cannot dismiss in bankruptcy to get a marginal college degree; find another path that includes financial freedom. Don’t fall for the consumerist fantasy of “aspirational spending”–focus on self-expression and enterprise, not on buying a lot of crap with debt that only enriches Wall Street and the big banks.

Focus on paying off debt, even if it means sacrificing consumption.Paying off debt is a political action now, not just a financial act in favor of freedom. Paying off debt, removing your money from the greedy grasp of Wall Street and the TBTF banks– these are blows for liberty and against the financial tyranny which is destroying the nation.

Yes, we still have a mortgage, but we are devoted to paying it down in advance. We have no auto loans, no student loans, no credit card debt, and we use cash at the grocery stores and farmer’s markets. Every dime we each remove from Wall Street and the TBTF banks is a direct action against tyranny and a meaningful reinforcement of democracy and liberty.

Of Two Minds

This week’s “Dan Rather Reports” presents an in-depth interview with Neil Barofsky, who recently stepped down as the Special Inspector General for TARP, more commonly known ; as the $700 billion dollar taxpayer bailout of the country’s biggest banks. Barofsky warns that the safeguards that are supposed to be in place to help avoid another bank meltdown are woefully insufficient – and that another, bigger crisis could be right around the corner.

The Big Picture

Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed’s generosity during the peak of the credit crisis were foreign banks, among which Belgium’s Dexia was the most troubled, and thus most lent to, bank. Having been thus exposed, many speculated that going forward the US central bank would primarily focus its “rescue” efforts on US banks, not US-based (or local branches) of foreign (read European) banks: after all that’s what the ECB is for, while the Fed’s role is to stimulate US employment and to keep US inflation modest. And furthermore, should the ECB need to bail out its banks, it could simply do what the Fed does, and monetize debt, thus boosting its assets, while concurrently expanding its excess reserves thus generating fungible capital which would go to European banks. Wrong.

Below we present that not only has the Fed’s bailout of foreign banks not terminated with the drop in discount window borrowings or the unwind of the Primary Dealer Credit Facility, but that the only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains not only why US banks have been unwilling and, far more importantly, unable to lend out these reserves, but that anyone retaining hopes that with the end of QE2 the reserves that hypothetically had been accumulated at US banks would be flipped to purchase Treasurys, has been dead wrong, therefore making the case for QE3 a done deal.

In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!

For those who can’t wait for the punchline, here it is. Below we chart the total cash holdings of Foreign-related banks in the US using weekly H.8 data.

Note the $630 billion increase in foreign bank cash balances since November 3, which just so happens is the date when the Fed commenced QE2 operations in the form of adding excess reserves to the liability side of its balance sheet. Here is the change in Fed reserves during QE2 (from the Fed’s H.4.1 statement, ending with the week of June 1).

Above, note that Fed reserves increased by $610 billion for the duration of QE2 through the week ending June 1 (and by another $70 billion in the week ending June 8, although since we only have bank cash data through June 1, we use the former number, although we are certain that the bulk of this incremental cash once again went to foreign financial institutions).

So how did cash held by US banks fare during QE2? Well, not good. The chart below demonstrates cash balances at small and large US domestic banks, as well as the cash at foreign banks, all of which is compared to total Fed reserves plotted on the same axis. It pretty much explains it all.

The chart above has tremendous implications for everything from US and European monetary policy, to exhange rate and trade policy, to the current account on both sides of the Atlantic, to US fiscal policy, to borrowing and lending activity in the US, and, lastly, to QE 3.

What is the first notable thing about the above chart is that while cash levels in US and US-based foreign-banks correlate almost perfectly with the Fed’s reserve balances, as they should, there is a notable divergence beginning around May of 2010, or the first Greek bailout, when Europe was in a state of turmoil, and when cash assets of foreign banks jumped by $200 billion, independent of the Fed and of cash holdings by US banks. About 6 months later, this jump in foreign bank cash balances had plunged to the lowest in years, due to repatriated fungible cash being used to plug undercapitalized local operations, with total cash just $265 billion as of November 17, just as QE2 was commencing. Incidentally, the last time foreign banks had this little cash was April 2009… Just as QE1 was beginning. As to what happens next, the first chart above says it all: cash held by foreign banks jumps from $308 billion on November 3, or the official start of QE2, to $940 billion as of June 1: an almost dollar for dollar increase with the increase in Fed reserve balances.

In other words, while the Fed did nothing to rescue foreign banks in the aftermath of the first Greek crisis, aside from opening up FX swap lines, one can argue that the whole point of QE2 was not so much to spike equity markets, or the proverbial “third mandate” of Ben Bernanke, but solely to rescue European banks!

What this observation also means, is that the bulk of risk asset purchasing by dealer desks (if any), has not been performed by US-based primary dealers, as has been widely speculated, but by foreign dealers, which have the designatin of “Primary” with the Federal Reserve. Below is the list of 20 Primary Dealers currently recognized by the New York Fed. The foreign ones, with US-based operations, are bolded:

• BNP Paribas Securities Corp.
• Barclays Capital Inc.
• Cantor Fitzgerald & Co.
• Citigroup Global Markets Inc.
• Credit Suisse Securities (USA) LLC
• Daiwa Capital Markets America Inc.
• Deutsche Bank Securities Inc.
• Goldman, Sachs & Co.
• HSBC Securities (USA) Inc.
• Jefferies & Company, Inc.
• J.P. Morgan Securities LLC
• MF Global Inc.
• Merrill Lynch, Pierce, Fenner & Smith Incorporated
• Mizuho Securities USA Inc.
• Morgan Stanley & Co. LLC
• Nomura Securities International, Inc.
• RBC Capital Markets, LLC
• RBS Securities Inc.
• SG Americas Securities, LLC
• UBS Securities LLC.

That’s right, out of 20 Primary Dealers, 12 are…. foreign. And incidentally, the reason why we added the (if any) above, is that since this cash is fungible between on and off-shore operations, what happened is that the $600 billion in cash was promptly repatriated and used by domestic branches of foreign banks to fill undercapitalization voids left by exposure to insolvent European PIIGS and for all other bankruptcy-related capital needs.

And one wonders why suddenly German banks are so willing to take haircuts on Greek bonds: it is simply because courtesy of their US based branches which have been getting the bulk of the Fed’s dollars in 1 and 0 format, they suddenly find themselves willing and ready to face the mark to market on Greek debt from par to 50 cents on the dollar. And not only Greek, but all other PIIGS, which will inevitably happen once Greece goes bankrupt, either volutnarily or otherwise. In fact, the $600 billion in cash that was repatriated to Europe will mean that European banks likely are fully covered to face the capitalization shortfall that will occur once Portugal, Ireland, Greece, Spain and possibly Italy are forced to face the inevitable Event of Default that will see their bonds marked down anywhere between 20% and 60%.

Of course, this will also expose the ECB as an insolvent central bank, but that largely explains why Germany has been so willing to allow Mario Draghi to take the helm at an institution that will soon be left insolvent, and also explains the recent shocking animosity between Angela Merkel and Jean Claude Trichet: the German are preparing for the end of the ECB, and thanks to Ben Bernanke they are certainly capitalized well enough to handle the end of Europe’s lender of first and last resort.

But don’t take our word for this: here is Stone McCarthy’s explanation of what massive reserve sequestering by foreign banks means: “Foreign banks operating in the US often lend reserves to home offices or other banks operating outside the US. These loans do not change the volume of excess reserves in the system, but do support the funding of dollar denominated assets outside the US….Foreign banks operating in the US do not present a large source of C&I, Consumer, or Real Estate Loans. These banks represent about 16% of commercial bank assets, but only about 9% of bank credit. Thus, the concern that excess reserves will quickly fuel lending activities and money growth is probably diminished by the skewing of excess reserve balances towards foreign banks.”

Which brings us to point #2: prepare for the Bernanke hearings and possible impeachment. For if it becomes popular knowledge that the Chairman of the Fed, despite explicit instructions to enforce the trickle down of “printed” dollars to US banks, was only concerned about rescuing foreign banks with the $600 billion in excess cash created out of QE2, then all political hell is about to break loose, and not even Democrats will be able to defend Bernanke’s actions to a public furious with the complete inability to procure a loan. Any loan. Furthermore the data above proves beyond a reasonable doubt why there has been no excess lending by US banks to US borrowers: none of the cash ever even made it to US banks! This also resolves the mystery of the broken money multiplier and why the velocity of money has imploded.

Implication #3 explains why the US dollar has been as week as it has since the start of QE 2. Instead of repricing the EUR to a fair value, somewhere around parity with the USD, this stealthy fund flow from the US to Europe to the tune of $600 billion has likely resulted in an artificial boost in the european currency to the tune of 2000-3000 pips, keeping it far from its fair value of about 1.1 EURUSD. If this data does not send European (read German) exporters into a blind rage, after the realization that the Fed (most certainly with the complicity of the G7) was willing to sacrifice European economic output in order to plug European bank undercapitalization, then nothing will.

But implication #4 is by far the most important. Recall that Bill Gross has long been asking where the cash to purchase bonds come the end of QE 2 would come from. Well, the punditry, in its parroting groupthink stupidity (validated by precisely zero actual research), immediately set forth the thesis that there is no problem: after all banks would simply reverse the process of reserve expansion and use the $750 billion in Cash that will be accumulated by the end of QE 2 on June 30 to purchase US Treasurys.

Wrong.

The above data destroys this thesis completely: since the bulk of the reserve induced bank cash has long since departed US shores and is now being used to ratably fill European bank balance sheet voids, and since US banks have benefited precisely not at all from any of the reserves generated by QE 2, there is exactly zero dry powder for the US Primary Dealers to purchase Treasurys starting July 1.

This observation may well be the missing link that justifies the Gross argument, as it puts to rest any speculation that there is any buyer remaining for Treasurys. Alas: the digital cash generated by the Fed’s computers has long since been spent… a few thousand miles east of the US.

Which leads us to implication #5. QE 3 is a certainty. The one thing people focus on during every episode of monetary easing is the change in Fed assets, which courtesy of LSAP means a jump in Treasurys, MBS, Agency paper, or (for the tin foil brigade) ES: the truth is all these are a distraction. The one thing people always forget is the change in Fed liabilities, all of them: currency in circulation, which has barely budged in the past 3 years, and far more importantly- excess reserves, which as this article demonstrates, is the electronic “cash” that goes to needy banks the world over in order to fund this need or that. In fact, it is the need to expand the Fed’s liabilities that is and has always been a driver of monetary stimulus, not the need to boost Fed assets. The latter is, counterintuitively, merely a mathematical aftereffect of matching an asset-for-liability expansion.

This means that as banks are about to face yet another risk flaring episode in the next several months, the Fed will need to release another $500-$1000 billion in excess reserves. As to what asset will be used to match this balance sheet expansion, why take your pick; the Fed could buy MBS, Muni bonds, Treasurys, or go Japanese, and purchase ETFs, REITs, or just go ahead and outright buy up every underwater mortgage in the US. This side of the ledger is largely irrelevant, and will serve only two functions: to send the S&P surging, and to send the precious metal complex surging² as it becomes clear that the dollar is now entirely worthless.

That said, of all of the above, the one we are most looking forward to is the impeachment of Ben Bernanke: because if there is one definitive proof of the Fed abdicating any and all of its mandates, and merely playing the role of globofunder explicitly at the expense of US consumers and borrowers, not to mention lackey for the banking syndicate, this is it.

ZeroHedge