FedUpUSA

Archive for November 9th, 2011

Republican Rep. Joe Walsh held a townhall at Uno Bar and Grill in Gurnee, Illinois, over the weekend, and things got a little heated.  Walsh is wrong for the most part, spewing the oft-repeated Wall Street-backed nonsense that the financial crisis was caused by government regulations, the CRA, etc.  We are not fans of government, not by any stretch of the imagination, but this argument is old, tired, and false.  The banks did it to themselves, and unchecked leverage on Wall Street and in European banks turned a housing crisis into a global meltdown.

Barry Ritholtz at the Big Picture wrote the definitive piece shooting down this argument:

Excerpt:

Let’s clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

• Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

• 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

• What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

• Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

• Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

• Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

• How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?

• What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time?

• Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

• Did the GSEs require banks to not check credit scores? Assets? Income?

• What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood.

• What was it in the Act that forced banks to make “interest only” loans? Were “Neg Am loans” also part of the legislative requirements also?

“It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.”

The Republicans just keep running the same lies that are being spewed by the banks and Wall Street.  Incidentally, the CRA and regulators didn’t force any of the big banks to LIE under oath in front of Congress.  Repeatedly.  Yet they did.

h/t The Daily Bail

Discussion (registration required to post)

As suspected, MF Global brazenly took liquid assets like Treasuries and warehouse receipts, but not cash which would have been more quickly missed, from customer accounts to post as illegal collateral for emergency funding with a lender who must have known that they were receiving stolen goods.

When things fell apart, the lender simply took the collateral and liquidated it, and kept the money.

And now they are refusing to even acknowledge this transaction, and apparently the management of MF Global is not yet talking. Why? Because it was an insider deal, and they don’t want to give back the stolen money.

When ‘non-consequential’ customers were requesting their funds, they were issued checks instead of wire transfers. The checks of course were not honored and bounced. But days later, and just hours before the bankruptcy filing, MF Global was paying BONUSES to its UK traders. Remarkable in light of how much dirty business the NY firms have been outsourcing to London. Follow the hush money.

This is a scandal of the first order, and a severe test for the Obama Justice Department, the regulatory agencies, and the exchanges.  This is a great crime, undeniably premeditated, and possibly the tip of an iceberg that would shake the public confidence in a deeply corrupt financial system. 

If a registered broker can simply take Treasuries and receipts for physical assets like gold and silver from customer accounts and give them to a complicit crony lender, and then look at the public with a straight face and say the money is missing and they do not know where it is, then no one’s accounts are safe, anywhere, at any bank or broker, in the US financial system. 

This has every appearance of a legally sanctioned theft, pure and simple.

Here is a synopsis of the likely events from Forbes:

When did MF Global exploit the customer segregated accounts and why? How were the proceeds used to stem the firm’s deepening insolvency?

Based on the sequence of events described above, I believe that MF Global transferred assets, not cash, from customer segregated accounts to a “house” account sometime late Wednesday or early Thursday.

I’ve given those who executed the “nuclear option” to save MF Global the benefit of the doubt. I believe those executives used all available legitimate means to raise cash first, including trying to sell proprietary assets, as CNBC reported, and exhausting existing credit lines. When margin calls on the repurchase agreements and account closure demands from strategically important clients – not the bread and butter individual traders and smaller investors and money managers who got rubber checks – kept coming, they hit the wall.

Why do I believe MF Global executives transferred customer assets not cash to “house” accounts? Because missing cash would be noticed immediately. Their clients were still trading and clearing and cash was required to settle. Securities such as U.S. Treasury Bills, blue-chip equities such as CME Group stock held by many exchange members, and physical assets such as gold, warehouse receipts, and other certificates of title are less active. They would not be missed Thursday through Monday…

Any firm willing to lend $300-400 million for a week or so against approximately $700 million of customer assets was certainly wise enough to require recourse to those assets in the event of a bankruptcy. Some of the assets, like CME stock, were sure to drop in value if the bankruptcy occurred.

When MF Global filed for bankruptcy midday on Monday October 31, 2011, the lender owned the customer assets.

My guess is the pledged assets were immediately liquidated.

No one is raising their hand to admit they’re the firm who lent MF Global several hundred million dollars, enough to get them through the weekend, based on collateral MF Global had no right to pledge. It’s not clear what the responsibility of a firm is in that situation to ask questions and confirm title. What is clear is that the arrangement, most likely a favor called in based on very strong relationships, must have been planned in advance. When all else failed to generate enough cash on Wednesday afternoon, someone at MF Global pressed the button and set the wheels in motion.

The lender must have had the capacity to make such a loan and the ability to execute a strategy intended to leave few traces. But there are always trails to follow. (Like the traces of the enormous number of put options that were placed prior to 911.)

Regulators can look for records at MF Global and at the DTC of transfers of assets between customer accounts and MF Global house accounts and, then, of those same assets between MF Global and a third party. I suspect there is only one lender, since there was not enough time to arrange for more than one and the potential for exposure would be greater with more counterparties.

I don’t think the last inning lender is one of the banks with existing MF Global accounts. Everyone knew those organizations would be under immediate and heavy scrutiny....”

Read the rest here.

I beg to differ with the author. I do think it is a big, very well-connected name, and I think they are a party to a greater ongoing fraud that will never see the light of day, even if the money is eventually returned. And I have to wonder if anyone of consequence will ever be prosecuted for this, because they simply know too much about this and other things.

This increasingly brazen theft is the consequence of moral hazard from a credibility trap.

I am amazed at how so many people cannot wrap their minds around what is happening in the financial system, as a late stage fraud turns increasingly to blatant looting.

Is this a classic case of cognitive dissonance? No one really wants to hear about it. They look at other things, trivialities. They simply will not see it, until it comes for them. What is it going to take, how far can this go?

If this continues, then nothing you hold in this system is safe.

Jesse’s Café Américain

If you haven’t noticed this morning is downright ugly in the stock market, with the futures indicating a more than 200 point down open on the DOW.

The culprit is Italian bonds, which have accelerated their march higher on yield and now the 2yr has inverted as well.

Note carefully that Italy, in “immediate terms”, does not appear to be in distress. That is, while they’re spending a lot on interest they don’t have a coverage problem (ability to pay the interest) – for now.

The market doesn’t care.  The market has discerned that Italy will not enact the actual government spending cuts necessary to bring revenues in line with expenses.

In the end analysis that is all that matters.  Everything else is arm-waving and obfuscation; if you spend more than you make eventually you go bankrupt.  Period.

All the monetarist claptrap is the product of a deluded mind or worse, an intentional lie.  But none of the armwaving changes the perception of the market, and in the end that perception is all that counts.

The lesson from first Greece and now Italy must not be lost on our clowncar brigade in Washington DC: The government cannot spend more than it takes in via taxes.

Let’s face the fundamental facts folks: Government spending is always — without exception — nothing more than a transfer.

That is, every dollar that the government spends on some program is a dollar that the private sector cannot spend or form capital with itself.  When the government taxes and then spends it removes the money from your wallet in order to make a decision that you would otherwise be able to make.

The premise that government can avoid this fact is false.  If government borrows to spend it simply time-shifts when that taxation will take place — it spends now to pay later, exactly as you would were you to borrow to buy a car, a house, or a refrigerator.

The dynamic is exactly the same.  The “monetarist” view that the government borrows money into existence and this “powers” the economy is nonsense.  “Money” in that sense is merely a token; it does not “come into existence” as a consequence of government printing or borrowing it.  Actual money is the fruit of labor and we use tokens such as paper bills and metallic coins to represent money as a means of lubricating commerce — that is, giving the public a convenient way to exchange produced economic activity with desired consumption.

Credit money spends exactly as does produced money.  In the economic parlance they’re fungible; that is, exchangeable without distinction.  As a merchant you have no idea if the person who walks into your shop bearing a $100 bill obtained it by picking strawberries or hitting the ATM outside your shop with his credit card, promising to repay the $100 later.

The economy is only in balance as long as the amount of produced goods and services equates with the amount of “money”, defined as credit money and produced money summed, is in balance.

We have spent 30 years distorting this fundamental fact.  We have done so through intentional overspending as a nation.  Our government has engaged in an orgy of making promises that the lawmakers know cannot be kept, and they have intentionally goaded private citizens into taking on more and more debt that they ultimately will not be able to pay as well.  Like all delusions and addictions when one begins the side effects seem small and the pleasures large, but in fact the costs are large or even permanent while the pleasures are in fact fleeting.

This charade must end.  Europe is self-destructing over this exact paradigm — promising “social benefits” that cannot be paid with current taxes, relying on the bond market to hand out ever more “cheap money.”

Now the market has discerned that this scheme is in fact a racket and will inevitably lead to massive losses.  It is thus withdrawing its support.

There is no option other than to cease the deficit spending — both there and here — right now.

I know what all the “pundits” tell you — we can’t do that right now, we have to wait until the economy is on a better footing and then we’ll do it.

Sorry, that won’t wash; this claim has been made for 30 years every time the economy turns down.  We have never withdrawn the deficit spending.  Ever.

The fact of the matter is that all we had to do was hold government spending constant with tax revenues in 2000.  We refused, because in 2000 when the Nasdaq market collapsed tax revenues from capital gains (which is where Clinton got his “improvement”) disappeared.  Rather than accept that the government had gotten too big, we instead made it bigger with the excuse that we’d stop once the economic downturn was over.

But we didn’t.  We instead expanded government and cut tax rates at the same time.  We went from “hold spending to tax revenues” to a point where government had to contract in size by about 20% in 2007.  Then the collapse came and now on a gross numbers basis it looks like we need to shrink the government by 43% – a doubling in less than four years.

But in truth it’s more than 43%, because when you stop the overspending the follow-through effects will depress tax revenues (and employment) for a time as well. 

This is the death spiral that has taken hold in Greece, where commerce and tax collection has essentially ceased, and now it is threatening to occur in Italy. 

If we do not act now we will cross that line here in the United States — and nobody knows exactly where it is, myself included.  All we do know is that it’s out there and we’re perilously close to the point of no return and may already be beyond it.

Nonetheless we must stop the deficit spending now and try to avoid the cliff.  If it’s too late then it makes no difference whether we act or not.  But if it’s not too late then we must save ourselves while we’re still able.  Today, I believe we’re still able.

Please understand that there is no solution found in tax hikes.  You could literally tax all income over $250,000 (yes, at 100%) and not close the budget deficit.  The primary entitlement programs currently consume all tax revenues — Social Security, Medicare, Medicaid, Unemployment and Welfare/General Assistance (of its various programs) leaving nothing to pay the light bill say much less than dozens of additional departments in the Government.  Nor have tax revenues covered the interest on the national debt.  Worse, Medicare and Medicaid (medical) are growing in cost at 9% a year and have been for the last two decades — which cannot continue as that chart of cost looks like this over the next 40 years, starting with $10,000 per person, per year:

There is no way anyone is going to come up with nearly one million dollars per person per year for medical care, but that is exactly what you are being promised.  It was and is a damned lie.

I understand that today’s Seniors and those who will become Seniors (your author here is pushing 50!) were promised these benefits.  I was promised them too.  That promise was an intentional lie used to buy votes.  The AARP should not be running ads on TV telling politicians “we’ll vote you out if you don’t give us a pony!” they should be calling for Seniors to occupy the Washington Mall and encircling the Capitol building right now demanding heads on plates for the lies that were sold to its members in exchange for votes — political power – over the last three decades.

That which cannot happen won’t happen folks, no matter how many babies some politician kisses or how many slick lies he tells you while wearing a $3,000 suit.  Arithmetic does not care about politics or votes; it just is.

We must stop this charade right now.  Jim Cramer is screaming that “they need to buy some time” over in Europe.  We cannot play the “buying time” game any more; there is no more time.

We must, right now, cut off the deficit spending. 

Now.

Today.

Not promise to do it tomorrow, not promise to do it when unemployment comes down, not in the “intermediate term” and certainly not as was “promised” by Ryan over the next 10, 20 or 30 years.

It has to happen right now; we must accept that the promises made were lies, that the output in the economy over the last three years was false as the government has been borrowing and spending 12% of GDP and this cannot continue.

We must accept that the economy has to be allowed to adjust to the actual output of our people.  This will be a massive and painful adjustment but it is unavoidable. 

As just one further example GM’s pension system is underfunded by more than $10 billion — that’s money that doesn’t exist and won’t.  State and local pensions are in similarly bad condition.

We must accept the truth ladies and gentlemen.  There is no other choice.

But at the same time, there are things we can do to help.  We can fix trade policy.  We can fix immigration policy.  We can collapse the college and medical cost bubbles.  We can fix tax policy so that America earns a place for corporate headquarters to relocate to rather than one firms flee from, thereby bringing us good-paying white-collar jobs.  And we can fix our energy policy allowing us to rationalize our defense spending.

None of this is easy.  But all of it is possible.  And while this may sound like a broken record, and to some degree it is, you can read it all here in the more than 4,000 articles I’ve written over the last four and a half years, or you can find those prescriptions in the book on the right sidebar..

But if we don’t act — and act now — it’s not going to matter what we do, as the choices will be made for us by market forces we cannot avoid.

Oh, how the mighty have fallen.  In just a matter of days, two of Europe’s most venerable leaders have been toppled.  George Papandreou was the third member of the Papandreou dynasty to be prime minister of Greece.  Silvio Berlusconi had dominated Italian politics for nearly two decades.  But now they are both heading out the door and the international media have been reporting on their resignations with the kind of enthusiasm that is normally reserved for sporting events.  “Down goes Papandreou!  Down goes Berlusconi!”  If you didn’t know better, you would almost be tempted to think that some of the recent news reports were describing a boxing match.  But this is what happens when debt problems spiral out of control.  It is the leaders who take the fall.  So will the resignations of Papandreou and Berlusconi help anything?  Of course not.  Europe is still headed for a financial collapse of epic proportions.

As I wrote about recently, it has been the fumbling of the Greek debt crisis by European leaders which has set the stage for the burgeoning financial crisis in Italy to go to a whole new level.

Once the Greek debt deal was announced, I warned that it would shatter confidence in the sovereign debt of the rest of the PIIGS and it would cause their bond yields to soar.

That is exactly what has happened.

The yield on 10 year Italian bonds (probably the most important financial number in the world at the moment) is now up to 6.7 percent.

Never before in the euro era has the yield on Italian bonds been as high as we have seen this week.

So why is this important?

Well, the reality is that Italy simply cannot afford to service its massive national debt when yields are this high.

We are officially in the danger zone.

Carl Weinberg, the chief economist at High Frequency Economics, recently said the following about what would happen if Italian bond yields go up into the 8 to 10 percent range….

“If it has to pay those yields to finance itself, Italy is dead, and the sovereign crisis just blew up”

So watch that number very carefully over the next few months.

Italy is being called “too big to fail, too big to save”.  There is no way that Europe can afford Italy to crash, but there is also no way that the rest of Europe can put together enough money for a full scale bailout of Italy.

So there is panic in the air.

The Italian government is in a state of near chaos and over the past couple of weeks we have seen Berlusconi’s coalition break down.  Now Berlusconi has agreed to resign, and the future of Italian politics is murky at best.

The following is how a Reuters article described the agreement for Berlusconi step down….

Berlusconi confirmed a statement from President Giorgio Napolitano that he would step down as soon as parliament passed urgent budget reforms demanded by European leaders after Italy was sucked into epicenter of the euro zone debt crisis.

The votes in both houses of parliament are likely this month and they would spell the end of a 17-year dominance of Italy by the flamboyant billionaire media magnate.

Many believe that the departure of Berlusconi is going to pave the way for brutal austerity measures to be imposed on the Italian people.

Suddenly, it very much feels like we are watching a replay of what has happened in Greece over the past couple of years.  Just check out the following excerpt from a recent article in the London Evening Standard….

The Italians feel they’ve been humiliated by having to accept that monitors from the IMF will be arriving in the country this week to oversee a rise in pension ages, a sell-off of state assets and new rules to make jobs less secure.

Does that not sound like exactly what happened in Greece back near the beginning of their crisis?

In Greece, brutal austerity measures demanded by the EU and the IMF plunged the country into a depression, tax revenues plummeted, Greek debt exploded to even higher levels, bond yields soared into the stratosphere and the EU and the IMF demanded even more austerity measures be implemented.

Is the same sad story going to play out in Italy?

The Italians are definitely going to agree to some pretty significant budget cuts.  But if bond yields keep rising, they are going to wipe out all of the savings from the budget cuts and then some.

This is why I keep preaching about the horror of the U.S. national debt over and over and over.  If you don’t deal with it when you can, eventually interest rates rise to unbearable levels and a horror show quickly unfolds.

Anyway, right now Italy has a debt to GDP ratio of 118 percent.  If they keep expanding that debt it is going to result in a financial nightmare, but if they try to implement strict austerity measures it is also going to result in a financial nightmare.

They are damned if they do and they are damned if they don’t.

Of course we should not forget about Greece.

The EU has been freaking out for quite a while about what to do about tiny little Greece.

Now that George Papandreou has been kicked to the curb, it looks like Lucas Papademos is going to be the next prime minister of Greece.

Papademos previously served as the governor of the Greek central bank, as a vice president of the European Central Bank and as a senior economist at the Federal Reserve Bank of Boston.

In other words, he would be the ideal choice of the international banking community.

Not that anyone is going to be able to do much for Greece at this point.  Greece is a financial basket case, and unless someone gives them gigantic piles of money for free that is going to continue to be the case.

A year ago, the yield on 2 year Greek bonds was a bit above 10 percent.  Today, the yield on 2 year Greek bonds is over 100 percent.

If you want to see what a financial meltdown looks like, just check out what is happening in Greece.

The rest of Europe is in panic mode too.  For example, France is desperate to keep their AAA credit rating.  In an article for the Telegraph, Ambrose Evans-Pritchard described the austerity measures that France is implementing in an attempt to head off a debt crisis of their own….

The belt-tightening plan — the second package since August, taking total cuts to €112bn — include a 5pc super-tax on big firms, a rise in VAT on restaurants and construction, and cuts on pensions, schools, health, and welfare. It is the latest squeeze in a relentless campaign of fiscal tightening across the eurozone.

In the end, all of this is too little, too late.

Europe is heading for a date with destiny.  They have spent themselves into oblivion and now they are going to pay the price.

Some members of the financial community fear that a full-blown crisis could erupt at any moment.  For example, according to Business Insider, Colin Tan of Deutsche Bank recently said that he believes that it is possible that “we could be in full crisis mode” by the time the week ends….

Its not inconceivable that we could be in full crisis mode by the end of this week. The situation with Italy feels increasingly like one that has little chance of materially improving until some
extreme pressure is put on someone to act. It may not come to a head this week but the signs are not good that we can avoid an extreme situation emerging soon.

For those of you that are freaking out about now, don’t worry too much.  A full-blown crisis is not going to happen this week.

But time is running out.

And when Europe comes apart, it is going to have a dramatic impact on the United States as well.

According to an article in the Financial Post, the Federal Reserve made the following statement in a report about a survey that it just released….

“About one-half of domestic bank respondents, mostly large banks, indicated that they make loans or extend credit lines to European banks or their affiliates or subsidiaries”

Big U.S. banks have a lot of exposure to European debt and to European banks.  When the financial dominoes start to fall, a lot of those dominoes are going to be in the United States.

One of the biggest dangers to be concerned about are all of the credit default swap contracts that U.S. banks have written on European debt.  Just check out what a recent article posted on the website of MSNBC had to say about that….

U.S. banks have written about $400 billion in CDS contracts on European sovereign debt, according to the Bank for International Settlements. Those payouts would be triggered if Greece or Italy defaults. Because financial institutions are not required to report their CDS holdings, little is known about which banks or investment firms are on the hook, and for how much.

As I have written about previously, there is a very good chance that the world could be facing a massive derivatives crisis at some point in the next five to ten years.

If you hear the news talk about a “problem with derivatives” or a “derivatives crisis” then you will want to pay very close attention.

Over the past 30 years, the global financial system has constructed a gigantic mountain of debt, risk and leverage unlike anything the world has ever seen before.

At some point the whole thing is going to come crashing down.

When it does, it is going to affect the entire globe.

A huge storm is coming.

Get prepared while you can.

The Economic Collapse

We’ve heard a lot of apologists claiming alternatively that “Capitalism” failed, and some try to distinguish what we have from actual Capitalism by calling it “Crony Capitalism.”

But that’s a false name.

“Crony Capitalism” implies that your friends have it between you, and everyone else has something else.  That’s false.

So what do we have?

What name do you have for someone saying to you “Here, buy this box of 10 chocolates, all prime grade AAA, just $10!” but unknown to you there’s two chocolates in the box and 8 pieces of dog turd that were painted with a thin veneer of chocolate?  You, believing the label to be truthful buy the box and all is well until you bite into one — at which point you discover that you were sold literal crap.

That’s theft, right?  Your money was stolen under a false pretense.

Well?  We have an under-oath admission in front of the FCIC stating that is exactly what the “fine and upstanding” Wall Streeters did.

So let’s stop with the sophistry intended to blunt what people did, beginning with what it’s called.

It’s not Crony Capitalism.

It’s a swindle.  It’s theft.  It’s a scam.

Or, if you want a one-word replacement that fits the offense and starts with a C since it was done to humans by humans?

Cannibalism.

Stunning interview with Citigroup’s CEO, Vikram Pandit.  Now, perhaps he might want to address how he perjured himself in front of Congress….but I digress….  From Bloomberg:

Vikram Pandit, chief executive officer of Citigroup Inc., talks about the financial crisis and the outlook for the bank and its Citi Holdings division, which contains assets marked for sale. He speaks with Charlie Rose at the Securities Industry and Financial Markets Association’s annual meeting in New York.

“When you go back and think about what brought all of this on, it was leverage. We’re still living through the impact of leverage: consumer leverage, bank leverage, government leverage. It seems wonderful to borrow just a little bit more when things are going good, but invariably the history of crises [show] leverage is at the heart of it. We learned it yet again what happens to the world when leverage rises to levels that are unsustainable, and we’re still living through that today in the form of what is going on with the governments, including our own, but not only our own. Certainly we’re all watching what is going on in Europe.”