Archive for September 5th, 2011
For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. In the United States, the sum stands at an astounding $2.2 trillion. Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits.
That $5 trillion dollars is not money invested in building roads, schools and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. Such transfers represent as cunning a tax on everyone else as one can imagine. It feels quite iniquitous that bankers, having helped cause today’s financial and economic troubles, are the only class that is not suffering from them – and in many cases are actually benefiting.
Mainstream megabanks are puzzling in many respects. It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact “Black Swan” events and benefiting from the free backstop of implicit public guarantees. Excessive leverage, rather than skills, can be seen as the source of their resulting profits, which then flow disproportionately to employees, and of their sometimes-massive losses, which are borne by shareholders and taxpayers.
In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees. In order to rescue the banking system, the Federal Reserve, for example, put interest rates at artificially low levels; as was disclosed recently, it also has provided secret loans of $1.2 trillion to banks. The main effect so far has been to help bankers generate bonuses (rather than attract borrowers) by hiding exposures.
Taxpayers end up paying for these exposures, as do retirees and others who rely on returns from their savings. Moreover, low-interest-rate policies transfer inflation risk to all savers – and to future generations. Perhaps the greatest insult to taxpayers, then, is that bankers’ compensation last year was back at its pre-crisis level.
Nassim Nicholas Taleb and Mark Spitznagel, Project Syndicate
Read the rest at Global Public Square
Despite some better-than-expected macro data overnight (admittedly marginal), investors continue to retreat from any European exposure as sovereign stress leads to financial stress and drags non-financials into an austerity-driven slowdown. The snaps wider in credit markets are very reminiscent of crises past when being hedged at any cost was more important than any short-term trade opportunity.
It appears we are entering an endgame of sorts and with the vitriol from Merkel (isn’t considering possibility of Euro Breakup), Draghi (don’t ‘expect’ bond purchases forever), Schaeuble (Tobin Tax is warranted, aid is conditional, and Euro ‘joint liability’ won’t fix crisis) growing louder and more strained and where decisions are being forced on a broad swathe of desperate politicians and bankers by a market-driven maelstrom.
Both equity and credit markets are bearing the brunt but credit seems the most aggressively beaten down (beta adjusted):
Main +12 to 177bps
XOver +44 to 738bps (handily wider than a closed HY now for over a week)
SovX +13 to 322bps
SENFIN +20 to 266bps
SUBFIN +33 to 476bps
Main Ex-FINLs +10 to 155bps
Germany +5 to 83.5bps
France +14 to 184bps
PIIGS (average) +18 to 1002bps
GDP-weighted European sovereign risk is breaking to new wides at 260bps (as Greek 10Y spreads among others make new Euro-era wides):
As we have noted in the past, short-sale bans don’t work – French and Spanish banks on the list are now notably negative:
European equity indices are a sea of red:
And ES is hurting overnight (retracing more than 50% of the recent swing low-to-high):
Chart gallery courtesy of Bloomberg
Put a fork in it folks.
As I write this the DAX is down well over 5% and there are multiple banks that are lock-limit down and have been suspended over in Europe.
Greek 1 and 2 year bonds are trading over 50% on yield. That’s not a yield, it’s an implied recovery on a default which the market now says is inevitable.
The fraud has finally caught up with the scammers and taking on more and more debt cover up unpayable debt has run its course. Nobody believes it any more, essentially. The market has called on the scams and frauds and is now serially demanding proof that the banks can fund their liabilities. It is doing so by driving down equity prices, forcing the institutions into a corner where their cash flow inadequacy is exposed.
Banks in the US and Europe have covered this up for the last three years. I pointed out the scams in 2007 and used as an example Washington Mutual when I caught them paying dividends with money they did not have.
That was all that honest regulators (call them “cops” if you wish) needed to step in and demand that crap stop immediately, and to close the institution if they couldn’t or wouldn’t cease and desist.
But that was not done.
Then 2008 happened, exactly as I predicted it would. Why? Because while you can lie about balance sheets for a long time, I’ve never seen a bank anywhere in the world that will let you lie about a deposit ticket. That is, cash flow always wins.
The solution? Borrow more money! Look Ma, I can’t be broke – I still have checks!
That was good for two years. But now that scam has run out of gas as well, as the ability to continue to roll over paper one instrument after another finally hit the wall and people said “wait a second, this is a scam – you can’t pay the original note and are trying to con me!”
Well, yes. They were. This is a surprise when we’ve spent 30 years running the same scam? Exactly how dumb are you to continue to buy into the same scheme that you know blew up in your face in 2008?
In 2007 and early 08 I counseled “ring-fencing” the government in the United States and pulling the supports, forcing the over-levered to default. Yes, I know, that would be disruptive. Very disruptive. But the government would go on and in the places where there was too much leverage, those people would go bankrupt on both sides of the transaction. Instead of blowing $4.5 trillion on “stimulus” programs we could have spent $200 billion providing three hots and cot to a quarter of the population for a year. “Creative destruction” would have taken care of the rest – the bad institutions would have gone under, bankruptcy would have been rampant, but from the ashes there would have been a massive rebound in the economy and the clouds would lift – with about half the debt in the nation gone.
But now the $4.5 trillion is gone and it did nothing other than make the problem worse! We propped up the insolvent and let them play games for two more years, but we solved nothing and there has been no recovery. There was no recovery in jobs, no recovery in anything – except stock prices that sucked people back in after having sold at or near the bottom. Now they’re being hammered a second time within three years by the same fraud that got them the last time, egged on by a Federal Reserve ChairSatan who has publicly taken credit for the stock market’s rise, implicitly stating he would continue to make sure it didn’t collapse again.
The problem is that neither he or anyone else can continue to cover up fraud forever.
The market has declared that it does not believe claims of solvency and capital adequacy of financial institutions and is now demanding strict proof. There is no proof available as the claims of solvency are lies.
Therefore, we’re seeing the DAX down more than 5% and many banks over in Europe falling 5 or even 10% a day. Our own markets were down 2.5% Friday and the futures at present are down another 2%, so we’re right behind them. Many European markets are just 15 – 20% above the 2009 lows and it appears they’re headed straight for them.
We won’t be far behind.
This is not an academic exercise. Many institutions – especially insurance companies and pension funds – are heavily dependent on that not happening. They will detonate if the market trades there and remains there for any length of time.
Congress has ignored the warnings from myself and a handful of others who have been in front of this for years. The government simply doesn’t give a damn – either Republicans or Democrats. Both sides of the aisle are too busy blowing the banksters under the desk and protecting their frauds.
Oh sure, there will be bounces and there will be moves higher in the market, and there will be further attempts to “save” the market and “save” the economy.
They will fail, because none of the proposals on the table are intended to do anything about the fraud and until that is cleared from the system there can be no actual and durable recovery.
Unfortunately there are so many possible detonations approaching at high speed that there is no option but to move the lights.
It’s over folks. Government-sponsored fraud: FAIL. Sovereign debt: FAIL. Greece: FAIL.
And our government: FAIL.
Markets are collapsing around the world as the reality of the situation – cash flow always wins – becomes apparent.
We’ll spend a half-hour between grilling for Labor Day – why not? A bit of doom to spice the ribs and chicken never hurt anyone, right?
Today, 3:30 Central Time.