FedUpUSA

Archive for July 19th, 2011

Politico reports that the latest development in the constantly changing and oh so theatric “struggle” to find a compromise on how to raise the debt ceiling by $2.5 trillion, is one which will not only not do anything to fix the deficit situation but will in fact set America back, as a key part of the “savings” will come precisely from the same change in the definition of inflation courtesy of the Chained CPI introduction, which the democrats previously blasted, and for good reason: because it will be an implicit theft from Social Security. Recall that the last time this was proposed the AARP started foaming in the mouth within minutes. The broad strokes of the plan are as follows: “The once moribund Senate “Gang of Six” regained new life Tuesday after Oklahoma Sen. Tom Coburn unexpectedly rejoined the group — and more senators are now coalescing around a new proposal that would cut the debt by as much as $3.7 trillion over the next decade.  According to a copy of the plan, obtained by POLITICO, the group would impose a two-step legislative process that would make $500 billion worth of cuts immediately followed by a second bill to create a “fast-track process” that would propose a comprehensive bill aimed at dramatically restructuring tax and spending programs. The plan calls for changes to Social Security to move on a separate track, and establishes an elaborate procedure for considering the measures on the floor.” And here is the kicker: “The $500 billion in cuts would come from a range of sources, including shifting to a new consumer price index to make cost-of-living adjustments to Social Security.” Care to wager what the bulk of this $500 billion will come from: that’s right – social security, whose deliverable obligations will plunge as suddenly the inflation variable in the actuarial calculation will very mysteriously be cut courtesy of Senate-endorsed theft.

More from Politico:

To enact a comprehensive deficit plan, the group calls for congressional committees to report legislation within six months that would “deliver real deficit savings in entitlement programs over 10 years,” the plan says.

It calls on the Finance Committee to permanently reform or replace Medicare’s Sustainable Growth Rate – an outdated formula aimed at determining the amount to reimburse doctors for treating Medicare patients – by $298 billion.

The Finance Committee would be instructed to deliver “real deficit savings” through simplifying the tax code and raise as much as $1 trillion. It would do this by establishing three tax brackets with rates of 8-12 percent, 14-22 percent and 23-29 percent. It would permanently repeal the $1.7 trillion Alternative Minimum Tax. And it calls for establishing a single corporate tax rate, between 23 percent and 29 percent, and to move to a competitive territorial tax system.

Overall, the group claims it would result in a $1.5 trillion net tax decrease.

The group punts many of the specifics to other committees, which would be asked to find savings in discretionary and mandatory spending. This includes: $80 billion out of Armed Services; $70 billion out of Health, Education, Labor and Pensions; $65 billion out of Homeland Security and Government Affairs; $11 billion out of Agriculture; $11 billion out of Commerce; $6 billion out of Energy and Natural Resources. The Judiciary Committee would be asked to find savings through medical malpractice reform.

Who is pushing the Chained CPI bill?

Senators in the Gang of Six – Kent Conrad (D-N.D.), Dick Durbin (D-Ill.), Mark Warner (D-Va.), Mike Crapo (R-Idaho) and Coburn – discussed the proposal with 43 senators Tuesday morning on the first floor of the Senate, after more than six months of struggling to broker a deal.

And here are the next steps in the theater:

If any committee cannot propose cuts, it would would impose “across-the-board” cuts to programs under the panel’s jurisdiction. It would exempt programs aimed at low-income communities.

To avoid gridlock, floor amendments that upset the deficit-reduction goals would be ruled out of order. Any bill that could receive 60 votes would be held at the desk until the Senate considers the separate Social Security bill.

Once a comprehensive deficit plan has the votes, a measure aimed at ensuring 75-years of solvency of Social Security would head to the floor. The Finance Committee would be required to recommend the Social Security changes.

Bottom line: our initial prediction that absolutely nothing will change now appears been optimistic, as the net result will be a far worse outcome, one which effectively changes the rules vis-a-vis inflation tracking, making stealth devaluation a core premise of this and any other future “deficit reductions.”

Once again, middle-class America is about to be raped by its own “representatives” while the banking oligarchy flourishes.

ZeroHedge

A simple 8-point plan would restore both the banking and the real estate sectors, and end the political dominance of the parasitic “too big to fail” banks.

Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore “aggregate demand.” OK, here’s how to start:

1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter  instruments.

2. Allow citizens to discharge all mortgage and student loan debt in  bankruptcy court, just like any other debt.

3. Banks must mark all their real estate to market weekly as defined by “last sales of nearby properties” adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

If a bank fraudulently originated a mortgage and the buyer misrepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors’ claims against the bank.

6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

You know what this is, of course: a return to trustworthy, transparent accounting. And you know what the consequences would be, too: all five “too big to fail” banks would instantly be declared insolvent, and most of the other top-25 big banks would also be closed and liquidated.

At least $3 trillion in impaired residential mortgage debt would be written off, maybe more, and $1 trillion in impaired commercial real estate would also be written down. Derivative losses are unknown, but let’s estimate it’s at least $1 trillion and maybe much more.

If $5.8 trillion of fantasy “value” is wiped off the nation’s books, that’s only a 10% reduction in net household and non-profit assets, which total $58 trillion. Even an $11 trillion hit would only knock off 20%. If that’s reality, if that’s what the assets are really worth in the real world, then let’s get it over with. Once we’ve restored truthful accounting and stopped living a grand series of debilitating lies, then the path will finally be clear for renewed growth.

The net result would be the destruction of the political power of the “too big to fail” banks, the clearing of the nation’s bloated, diseased real estate market, and the  restoration of trust in institutions which have been completely discredited.

Bank credit would flow again, and we could insist on a healthy competitive system of 250 small banks instead of a corrupting system of 5 insolvent parasitic monsters and 20 other bloated but equally insolvent  financial parasites.

Those who lied would finally get fried. At long last, those who misprepresented income, risk, etc. would actually pay some price for their malfeasance. Criminal proceedings would be a nice icing on the cake, but simply ending the pretence of solvency would go a long way to restoring banking and real estate and ending regulatory capture by TBTF banks.

What’s the downside to such a simple action plan? Oh boo-hoo, the craven politicos would lose their key campaign contributors. On the plus side, the politicos could finally wipe that brown stuff off their noses.

Of Two Minds

Someone has found religion…

Coburn is unveiling a plan to reduce deficit spending by a whopping $9 trillion, shrink government by some 20 percent and balance the budget, all within 10 years.

“It’s specific, it’s detailed, it makes hard choices,” Coburn said. “And it’s rough, but it’s necessary.”

The full monte can be found here including a summary, the full book-sized (600+ pages!) report itself and highlights.

I have not yet read the whole document, as this “just appeared” last night, but it looks to be very detailed and does not rely on “growth” to produce its results. That is, it’s real savings, not some ginned-up nonsense and game.

As can be expected the screaming began instantly when this was released.  I’ll read the entire thing over the next few days, but there are some excellent highlights:

• Gets the federal government the hell out of the educational system! Now that was something we were promised in the “Contract with America.”

• STOPS federal subsidization (and perhaps bankruptcy exemption?) on student loans.  (This, incidentally, might do more to contain college costs than anything else.)

I’m a bit more-wary of the Medicare/Medicaid claimed savings, as I see nothing at first blush that addresses the underlying issues in the medical industry.  Yet we must.  I also see little on energy policy, although there is discussion of nuclear power (good.)  There’s also nothing meaningful on tax, trade or immigration – three other places we must focus.

However, it can no longer be said that there are no serious proposals on the table.  There now are: One, and Senator Coburn is the man with it.

Back during the financial crisis of 2008, the American people were told that the largest banks in the United States were “too big to fail” and that was why it was necessary for the federal government to step in and bail them out.  The idea was that if several of our biggest banks collapsed at the same time the financial system would not be strong enough to keep things going and economic activity all across America would simply come to a standstill.  Congress was told that if the “too big to fail” banks did not receive bailouts that there would be chaos in the streets and this country would plunge into another Great Depression.  Since that time, however, essentially no efforts have been made to decentralize the U.S. banking system.  Instead, the “too big to fail” banks just keep getting larger and larger and larger.  Back in 2002, the top 10 banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 banks control 77 percent of all U.S. banking assets.  Unfortunately, these giant banks are also colossal mountains of risk, debt and leverage.  They are incredibly unstable and they could start coming apart again at any time.  None of the major problems that caused the crash of 2008 have been fixed.  In fact, the U.S. banking system is more centralized and more vulnerable today than it ever has been before.

It really is difficult for ordinary Americans to get a handle on just how large these financial institutions are.  For example, the “big six” U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to approximately 60 percent of America’s gross national product.

These huge banks are giant financial vacuum cleaners.  Over the past couple of decades we have witnessed a financial consolidation in this country that is absolutely unprecedented.

This trend accelerated during the recent financial crisis.  While the big boys were receiving massive bailouts, the hundreds of small banks that were failing were either allowed to collapse or they were told that they should find a big bank that was willing to buy them.

As a group, Citigroup, JPMorgan Chase, Bank of America and Wells Fargo held approximately 22 percent of all banking deposits in FDIC-insured institutions back in 2000.

By the middle of 2009 that figure was up to 39 percent.

That is not just a trend – that is a landslide.

Sadly, smaller banks continue to fail in large numbers and the big banks just keep growing and getting more power.

Today, there are more than 1,000 U.S. banks that are on the “unofficial list” of problem banking institutions.

In the absence of fundamental changes, the consolidation of the banking industry is going to continue.

Meanwhile, the “too big to fail” banks are flush with cash and they are getting serious about expanding.  The Federal Reserve has been extremely good to the big boys and they are eager to grow.

For example, Citigroup is becoming extremely aggressive about expanding….

Citigroup has been hiring dozens of investment bankers, dialing up advertising and drawing up plans to add several hundred branches worldwide, including more than 200 in major cities across the United States.

Hopefully the big banks will start lending again.  The whole idea behind the bailouts and all of the “quantitative easing” that the Federal Reserve did was to get money into the hands of the big banks so that they would lend it out to ordinary Americans and get the economy rolling again.

Well, a funny thing happened.  The big banks just sat on a lot of that money.

In particular, what they did was they deposited much of it at the Fed and drew interest on it.

Since 2008, excess reserves parked at the Fed have grown by nearly 1.7 trillion dollars.  Just check out the chart posted below….

The American people were promised that TARP and all of the other bailouts would enable the big banks to lend out lots of money which would help get the economy going for ordinary Americans again.

Well, it turns out that in 2009 (the first full year after Congress passed the bailout legislation) U.S. banks posted their sharpest decline in lending since 1942.

Lending has never fully recovered since the crash of 2008.  The big financial institutions like Goldman Sachs, Morgan Stanley and JPMorgan Chase have been able to get all the cash that they need, but they have not passed that generosity along to ordinary Americans.

In fact, the biggest U.S. banks have actually reduced small business lending by about 50 percent since the crash of 2008.

That doesn’t sound like what we were promised.

These “too big to fail” banks have been able to borrow gigantic amounts of money from the Fed for next to nothing and yet they still refuse to let credit flow to local communities.  Instead, the big banks have found other purposes for all of the super cheap money that they have been getting from the Fed as Ellen Brown recently explained….

It can be very profitable indeed for the big Wall Street banks, but the purpose of the near-zero interest rates was supposed to be to get banks to lend again. Instead, they are, indeed, paying “outrageous bonuses to their top executives;” using the money to engage in the same sort of unregulated speculation that nearly brought down the economy in 2008; buying up smaller banks; or investing this virtually interest-free money in risk-free government bonds, on which taxpayers are paying 2.5 percent interest (more for longer-term securities).

What makes things even worse is that these big banks often pay next to nothing in taxes.

For example, between 2008 and 2010, Wells Fargo made a total profit of 49.37 billion dollars.

Over that same time period, their tax bill was negative 681 million dollars.

Do you understand what that means?  Over that 3 year time period, Wells Fargo actually got 681 million dollars back from the U.S. government.

Isn’t that just peachy?

Meanwhile, the big financial giants have not learned their lessons and they continue to do business pretty much as they did it prior to 2008.

The big banks continue to roll up massive amounts of risk, debt and leverage.

Today, Wall Street has become one giant financial casino.  More money is made on Wall Street by making side bets (commonly referred to as “derivatives“) than on the investments themselves.

If the bets pay off for the big financial institutions, mind blowing profits can be made.  But if the bets go against the big financial institutions (as we saw in 2008), firms can collapse almost overnight.

In fact, it was derivatives that almost brought down AIG.  The biggest insurance company in the world almost folded in 2008 because of a whole bunch of really bad bets.

The danger from derivatives is so great that Warren Buffet once called them “financial weapons
of mass destruction”.  It has been estimated that the notional value of the worldwide derivatives market is somewhere in the neighborhood of a quadrillion dollars.

The largest banks have tens of trillions of dollars of exposure to derivatives.  When the next great financial collapse happens, derivatives will almost certainly be at the center of it once again.  These side bets do not create anything real for the economy – they just make and lose huge amounts of money.  We never know when the next great derivatives crisis will strike.  Derivatives are essentially like a “sword of Damocles” that perpetually hangs over the U.S. financial system.

When I start talking about derivatives I get a lot of people in the financial community mad at me.  On Wall Street today you can bet on just about anything you can imagine.  Almost everyone in the financial world has gotten so used to making wild bets that they couldn’t even imagine a world without them.  If anyone even tried to put significant limits on futures, options and swaps it
would cause Wall Street to throw a hissy fit.

But someday the dominoes are going to start to fall and the house of cards is going to come crashing down.  It is an open secret that our financial system is fundamentally unsound.  Even a lot of people working on Wall Street will admit that.  It is just that people are so busy making such big piles of money that nobody wants the party to stop.

It is only a matter of time until some of these big banks get into a huge amount of trouble again.  When that happens, we might really find out whether they are “too big to fail” or whether we could get along just fine without them.

The Economic Collapse

Shares of Bank of America corporation are getting clobbered once again, this time on news of a $50 billion capital shortfall related to devastating mortgage losses.

Please consider BofA Mortgage Settlements Magnify Capital Strain as $50 Billion Gap Looms

Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds.

Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 — at about $18 billion for each percentage point — crimping Moynihan’s ability to raise dividends and repurchase shares.

Moynihan, 51, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since succeeding Kenneth D. Lewis last year. As the costs mounted, Bank of America’s stock declined 26 percent this year, the worst showing in the 24-company KBW Bank Index. The company reports second-quarter results tomorrow and has told investors to brace for a loss of as much as $9.1 billion.

Under rules prepared by the Basel Committee on Banking Supervision, Moynihan has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. That’s based on a 7 percent minimum and a 2.5 percent surcharge imposed by regulators on the largest companies whose collapse would pose a threat to the banking system.

Moynihan’s task was complicated after he underestimated how big the capital surcharge would be. The bank counted on 1 percentage point, an assumption based upon “fairly senior information saying that was a reasonable number to use,” Moynihan said in a June 1 conference. The 2.5 percent announced last month means an extra $27 billion burden.

Moynihan has previously had to revise guidance about the bank’s dividend after the Fed rejected what he called a “modest” increase requested for later this year. His deals to settle disputes over defective mortgages, including an $8.5 billion accord last month, means the CEO may have to adjust another promise to investors — a larger dividend boost by 2013.

In March, Moynihan said that all $42 billion of projected earnings in 2013 and 2014 would be returned to shareholders. Bank of America was “committed” to raising its 1-cent dividend to a higher level equal to 30 percent of earnings, he said.

“We go from being a company which gets its capital in shape in 2011 and 2012 and pays a modest dividend to a company which has significant capital generation from there on out,” Moynihan said at the March 8 conference. The result would be a total of $12 billion in payouts during those two years, he said.

Bank of America Daily Chart

The idea that Bank of America would soon be in a position to raise its dividend was silly when Moynihan proposed it and looks absurd now. Indeed, Bank of America should not have a dividend at all given its huge capital problems.

All the nay-sayers who said the Countrywide Financial takeover would kill Bank of America got it correct.

Mike  “Mish”  Shedlock
Global Economic Analysis