Archive for December 7th, 2011
There is probably nobody in the political/government scene that I detest more than Ben Bernanke. But this does not mean that politicians showing the mental acuity of a 2-year old should feel free to take false shots at his policy actions and those of The Fed generally.
Yet they have.
Bernie Sanders, for example, has been screaming about “$16 trillion in secret loans” for a while. He can probably technically defend his claim, but to do so he has to perform some rather interesting mathematical gymnastics. For example, if I loan you $100, and the next day you pay me back and then borrow it again, doing this 10 times, how much did I loan you? A reasonable man would say that $100 was lent repeatedly. A media whore looking for headlines would say it was $1,000. The latter is Bernie.
Nor is he alone. Alan Grayson, who started out a very reasonable politician and then went off into the weeds with hard-left socialism (which he couldn’t pay for) has made the same sort of charge and sadly, Yves over at Naked Capitalism has given him ink:
Page 131 – The total lending for the Fed’s “broad-based emergency programs” was $16,115,000,000,000. That’s right, over $16 trillion. The four largest recipients, Citigroup, Morgan Stanley, Merrill Lynch and Bank of America, received over a trillion dollars each. The 5th largest recipient was Barclays PLC. The 8th was the Royal Bank of Scotland Group, PLC. The 9th was Deutsche Bank AG. The 10th was UBS AG. These four institutions each got between a quarter of a trillion and a trillion dollars. None of them is an American bank.
Again, if I borrow the same $100 over and over again….
Alan, you ignorant ass (or mendacious bastard — pick one.)
It continues, of course, but once you find the first intentional (or ignorant) distortion you no longer need to keep looking.
Bernanke, for his part, appears to be rather annoyed and has written a rebuttal aimed at Congress’ Financial Services Committee. He’s right in many areas, but in being right he intentionally glosses over where the real devil-style acts are and have been within The Fed.
Let’s pick on a couple of things:
“The article also fail to note that the lending directly helped support American businesses by providing emergency fuding so they could meet weekly payrolls and on-going expenses. The commercial paper funding facility, for example, provided support to businesses as diverse as Harley-Davidson and National Rural Utilities, when the usual market mechanism for their day-to-day funding completely dried up.“
Notice what’s missing here: Any exposition or explanation on exactly why a firm like Harley-Davidson needs to borrow money to make payroll.
Perhaps most of America (and most of Congress) has never run a business. I have — since I was much younger, both as either a near single-person show, one with a couple of employees, and then one with a bunch. You never, ever borrow to make payroll – if you actually have to do that you’re on the brink of bankruptcy and only through pure luck do you avoid it.
Bloomberg printed their own rebuttal to Bernanke’s screed and within the scope of their original article and the rebuttal spot-on correct. The problem is that they, like Ben, intentionally and studiously avoid the actual issues, save one: The “lender of last resort” function which is a proper central bank function, is supposed to always be at a penalty and yet it is flatly impossible to argue that a 0.01% interest rate is at a “penalty” to a market that is demanding much higher interest rates (or refusing to lend at all) because it believes the entities seeking to borrow are lying.
That, at its core, is the problem, and that is a problem The Fed has been facilitating for a very long time — and is facilitating today.
The real scandal in the 2008 crisis, which has not been stopped, is the fact that there was then and still is now an unknown number of financial institutions that are factually bankrupt and hiding it.
One example will make this clear — Colonial Bank, which blew up.
The bank’s last-filed 10Q, dated March 31st 2009, showed $14.1 billion in alleged “assets” (loans held for sale and investment) with $450 million in loss reserves (expected losses), or about 3% of expected loss. That’s not great, but it’s also not catastrophic.
Here’s the problem – In August, five months later, the bank detonated and was closed. BB&T “acquired” the bank. Their internal “deal book” which was published showed a nearly-identical $14.3 billion in loan assets but $5 billion – not $450 million – in expected losses.
In other words when BB&T came in they found eleven times the losses claimed by Colonial’s 10Q just five months earlier. Put another way 35% of the bank’s “assets” were worthless.
This is the underlying scam that nobody’s talking about: The carrying of alleged “assets” on balance sheets at entirely-unrealistic valuations, which is why credit locked up in 2008 and why it always threatens to do so — the person who you wish to borrow from doesn’t believe he’ll get paid, and the so-called “collateral” you intend to post is worthless.
Everyone talks about “market confidence” but in point of fact there are two sorts of “confidence” — the confidence that the market will remain “orderly” and thus you’ll get paid (in which case the so-called collateral is a formality and nobody really cares if its used dogfood) and the confidence that the claimed asset values you post via that collateral actually has the value claimed so the loan you’re taking out is really secured.
Why am I banging on this drum? Because it’s still going on.
There is no way you are ever going to get me to believe that Colonial lost 35% of its asset value in five months’ time post the collapse itself — if you remember, “mark to lie” became legal post Kanjorski’s hearing and thinly-veiled threat to FASB, which folded like a cheap suit.
Indeed it was that hearing that effectively “made legal” what Colonial and every other firm was doing and must be presumed to still be doing, as even a cursory examination discloses that these same sorts of games are almost-certainly still occurring to this day.
Earlier this year CreditSights claimed that US banks have $147 billion in outstanding home equity lines behind underwater firsts — that is, entirely unsecured borrowing as a HELOC gets zero recovery should an underwater first default. Bank of America has some $47 billion, JP Morgan $41 billion, Wells $39 billion and so on.
Note that Wells’ latest 10Q shows $88 billion in total second-line exposure – in other words according to CreditSights 44% of that total is impaired and in a default is worth zero. Yet Wells claims just $893 million in reserves against this portion of their portfolio – or 1/43rd of the unsecured and thus, if the first defaults, worthless loan balance.
That is ridiculously inadequate and yet this is today — not 2005, 2006, 2007 or 2008. It is going on right here, right now, in the present tense.
Wells is not alone — they’re just easy to analyze as their 10Q isn’t cluttered with a hundred different subsidiaries and similar things that make analysis difficult. You can look at any of the big banks and you will see the same sort of game being played — and it’s entirely legal under current US law.
This is why the market locked up in 2008 and the problem has not been fixed. Until it is there is no actual solution and any demand for actual good collateral that arises will result in an immediate resumption of the credit lockup of 2008 and a “new” financial crisis.
If you want to know why the banks and government are so desperate to try to stop the inexorable decline of home prices, this is the reason. But there’s no way to fix this problem in the main other than through defaults as the loans that were made had no foundation in the actual ability to pay. Defaults, however, expose the truth of these balance sheets — the loans in question are worthless behind an underwater first and that $39 billion is more than a quarter of Wells’ equity value in home equity lines alone!
Note that we’ve not dug into the commercial real estate lending, which is a problem as well — all the strip malls and other commercial property that was built out during the bubble and yet has no realistic lease-out prospect at anything that comes close to amortizing construction and operating costs. Some are managing to roll due to ridiculously suppressed interest rates but that will and must eventually end, and when it does the fact that these loans are deeply impaired will float to the surface and start stinking up the financial system as the dead fish that they are.
The Fed claims that it lent only to “sound” financial institutions that were “solvent.” On any sort of objective analysis this must be declared a bald lie — only through the making of utterly fanciful marks could such a claim be sustained and that was the entire point of the spring 2009 hearing — bludgeoning FASB with the full force of Congressional threat.
But making the telling of lies legal does not change the fact that they’re lies; all it does is prevent you from being thrown in the slammer for telling them. As we saw with Colonial the fact is that the claimed “asset values” were fantasies and just a few short months later that fantasy detonated. The truth – a monstrous loss for the FDIC and BB&T’s examination and publication of their “deal book” for the acquisition — then became apparent and what I and a few others had been saying for more than two years at that time was vindicated as factually correct.
The problem is that this same dynamic and set of facts must be assumed to be in place at all of the existing large financial institutions and it is an utter impossibility for the FDIC to cover 35% losses against the balance sheet of even one large financial institution, say much less all of them in a cascade failure.
The politicians on both sides of the aisle are demagoguing Bernanke and The Fed — on one side we have those claiming that Ben loaned out wild multiples of what was actually outstanding at any point in time (a lie) and on the other we have people claiming (including Bernanke himself) that Ben loaned only to sound institutions and that doing so “prevented a Depression” but that is a lie as well as there is absolutely no reason to believe that the claimed “asset values” on these balance sheets in any way reflects reality. The so-called “aversion” of a Depression and chain-reaction collapse is due to nothing more than backstopping liars — a temporary condition that amounts to doubling down every time you lose at the Blackjack table in the hope that you’ll get good cards before you run out of money.
Unfortunately the housing market shows no signs of actually bottoming — and it won’t until we get back to much lower prices, perhaps as low as 1x annual incomes on an average basis. The collapse of the tax base on a municipal and state basis along with the lies on these balance sheets will eventually be exposed. We have built a debt pyramid that requires ever-increasing amounts of debt to keep the balls in the air but the ability to service more new debt has been exhausted.
This is not supposition — it is a fact that cannot be argued against as we reached the point in 2007 where more than $6 in new debt was being put into the economy for every $1 of “growth”; returning to this state of affairs is mathematically impossible and attempting to evade the inevitable consequences futile.
For four and a half years I have pointed this out and have called for the truth to be exposed and the results accepted. Our government had to shrink by some 20% in 2007 in order to accomplish this, along with dealing with the resolution of the large financial institutions in the United States. Instead of doing so we have “doubled down” on deficit spending and lies on balance sheets, and people like Bernanke and Paulson have repeatedly claimed that their actions have “avoided” a Depression. Today, four years into the lie parade, we have now managed to pile up a need to shrink the size of government by half to restore balance and that required shrinkage grows each and every day that we refuse to accept that which must occur.
Unfortunately for those who argue otherwise there have been repeated examples in actual realized bank failures that have validated my position — that these balance sheets are lies and that the firms involved are all deeply underwater, remaining operational only through intentional and willful aversion of lawfully-required regulatory oversight.
I’m no fan of Bernanke and in fact have plenty of ugly things to say about him in this regard, but we do nobody any good in attacking him on a false premise. Go after him on the actual sins he has committed and the intentional and willful lies of regulators and executives — there’s plenty of “red meat” there and on that foundation you will find solid support in both history and fact.
Did you know that we buy about a half a trillion dollars more stuff from the rest of the world than they buy from us? The U.S. balance of trade is not only mind-blowingly bad – it is the worst in the world. It is being projected that the U.S. trade deficit for 2011 will be 558.2 billion dollars. That would be an increase of more than 11 percent from last year. As I have written about previously, the United States is the worst in the world at a lot of things, but as far as the economic well-being of our nation is concerned, our balance of trade is particularly important. Every single month, far more money goes out of this country than comes into it. Tax revenues are significantly reduced as all of this money gets sucked out of our communities. The federal government, state governments and local governments borrow gigantic piles of money to try to make up the difference, but all of this borrowing just makes our debt problems a whole lot worse. In the end, no amount of government debt is going to be able to cover over the fact that our national economic pie is shrinking. We are continually consuming far more wealth than we produce, and that is a recipe for economic disaster.
The “current account balance” is one key indicator of how a country is doing economically. The following is how the CIA World Factbook defines “current account balance”….
This entry records a country’s net trade in goods and services, plus net earnings from rents, interest, profits, and dividends, and net transfer payments (such as pension funds and worker remittances) to and from the rest of the world during the period specified.
If someone were to ask you what countries in the world have strong, thriving economies right now, what countries would you think of?
Would countries like China, Germany, Russia and Saudi Arabia come to mind?
Well, all of those nations have huge positive current account balances. In fact, China has the best current account balance in the world at +$305 billion.
So who is on the other end of the scale?
The following information comes directly from a CIA World Factbook chart….
190 Turkey $ -48,420,000,000
191 Canada $ -48,500,000,000
192 India $ -51,780,000,000
193 France $ -54,400,000,000
194 United Kingdom $ -56,190,000,000
195 Spain $ -63,650,000,000
196 Italy $ -67,940,000,000
197 United States $ -470,200,000,000
The United States is rated dead last at number 197.
Just take a close look at those numbers for a minute.
The U.S. had a current account balance of negative 470 billion dollars in 2010. That figure was almost 7 times worse than the next worst country (Italy).
Not only does the United States have the worst current account balance in the entire world, the truth is that no other country is even in the same ballpark as us.
We are bleeding wealth so fast that it is hard to even describe it.
But perhaps a real life example can help put this all into perspective.
One 22-year-old Saudi Arabian student has a collection of sports cars that is worth more than 12 million dollars. Reportedly, his collection includes at least three Lamborghinis, five Ferraris and five Porsches.
And guess who paid for it?
Every month, billions of dollars go out of the United States to help pay for the insane lifestyles of the ultra-wealthy oil barons of the Middle East.
Meanwhile, dozens of major U.S. cities are degenerating into hellholes.
Once upon a time, Detroit was one of the greatest industrial cities that the world has ever seen. It was the envy of the entire globe.
But now Detroit is an utter nightmare….
*An analysis of census figures found that 48.5% of all men living in Detroit from age 20 to age 64 did not have a job in 2008.
*If you can believe it, the median price of a home in Detroit is now just $6000.
*Only 25 percent of students in Detroit graduate from high school.
So what happened to Detroit?
Well, just as has been happening in so many other U.S. cities, industry has been leaving at an astounding pace.
Overall, the U.S. has lost a total of more than 56,000 manufacturing facilities since 2001.
This country is bleeding middle class jobs profusely, and neither major political party seems to care.
American family budgets are being stretched tighter and tighter these days. There are not nearly enough good jobs to go around and yet the cost of everything just seems to keep going up.
Many families are going into massive amounts of debt in an attempt to make ends meet. According to a recent CNN article, credit card use in the United States is experiencing a major upswing once again….
Purchases made with credit cards rose 8.2% in the first quarter of 2011, 9% in the second quarter and 10.6% in the third quarter, according to First Data.
Of course American consumers were out in force on Black Friday once again this year. They gleefully filled up their carts with cheap plastic crap made overseas, and many racked up huge credit card balances in the process.
But most of us never stop to think about those that make all of these cheap plastic products for us.
Thanks to the globalization of the economy, big corporations and corrupt governments can make stuff in countries where it is legal to pay slave labor wages and then ship their products into the United States for free.
It is important for all of us to learn what actually happens to these people that are working so hard for slave labor wages. The following comes from a recent article in the Guardian….
At the Hung Hing factory the researcher found that the 8,000 workers put in up to 100 hours of overtime a month, far in excess of the legal maximum. Workers say they have to sign a document agreeing to work additional overtime on top of the legal maximum. The basic wage was £132 a month (up to £250 with maximum overtime payments) but wages were paid up to three weeks late.
Workers complained of inadequate training with the factory machines and last year one worker died when he fell into a machine. They said there were frequent injuries and concerns over the chemicals used. There were also complaints about the standard of the dormitories, where water for washing and flushing toilets is turned off at 10pm.
How in the world are American workers supposed to “compete” for jobs at those wage levels?
As I have written about previously, Professor Alan Blinder of Princeton University is warning that 40 million more U.S. jobs could be sent offshore over the next two decades if nothing is done to stop this.
But instead, our “representatives” in Congress just keep pushing more “free trade” agreements as the answer to our problems. Congress has passed new free trade agreements with South Korea, Colombia and Panama, and the Obama administration has made “the NAFTA of the Pacific” a very high priority.
Well, if “free trade” is supposed to create so many jobs, then why was last decade the worst decade for the creation of jobs since the Great Depression?
If you can believe it, zero jobs were created between 1999 and 2009. The following comes from an article in Washington Monthly….
“If any single number captures the state of the American economy over the last decade, it is zero. That was the net gain in jobs between 1999 and 2009—nada, nil, zip. By painful contrast, from the 1940s through the 1990s, recessions came and went, but no decade ended without at least a 20 percent increase in the number of jobs.”
But our leaders don’t care about us. In fact, even the members of Obama’s “jobs panel” have been shipping jobs out of the United States at a very rapid pace.
The U.S. has run a negative balance of trade with the rest of the globe every single year since 1976. During that time, the U.S. has run up a total trade deficit of more than 7.5 trillion dollars with the rest of the planet.
That 7.5 trillion dollars could have gone to support U.S. workers and U.S. businesses.
But it didn’t. Instead, it went out of the country and it made foreigners wealthier as our own cities slowly rotted.
Now we are actually passing laws that encourage wealthy foreigners to come in and buy up pieces of the United States.
For example, there is actually a bill in Congress that would automatically give residence visas to any foreigners that are willing to spend at least half a million dollars to buy houses inside the United States.
The idea behind the bill is that this will get the housing market moving again.
There aren’t enough Americans with good jobs to buy houses, so we have now decided to beg foreigners to buy them.
How bizarre is that?
Until our horrendous balance of trade is fixed, the employment situation in this country is going to continue to get worse.
Any politician that tries to sell you on a “jobs plan” that does not address our balance of trade is either totally incompetent or is straight out lying to you.
The economic infrastructure of America is crumbling a little bit more every single day. If something dramatic is not done, we will continue to bleed businesses, bleed jobs and bleed wealth.
Please share this information with as many people as you can. The American people need to understand what is happening to the economy. We need to work to wake up as many people as we can before it is too late.
One of the forum members pointed out something that was obvious to me when I wrote this morning’s Ticker, but might have gone over your head.
I want to make absolutely sure it doesn’t go over your head because if you’re wrong about this you could lose everything in your bank and investment accounts — every single dime.
FDIC / SIPC insured or not.
Recently Bank of America transferred a bunch of derivatives into their banking arm. “A bunch” means somewhere around $80 trillion worth.
Now pay very careful attention, because part of the bankruptcy “reform” law in 2005 placed derivative claims in front of depositors in a business failure – including a bank failure.
What JP Morgan is claiming in the MF Global case is that the derivative trade (which is exactly what a “Repo to Maturity” trade is – it’s a derivative) is entitled to preference in the case of MF Global over those who had cash there for safekeeping either as a margin deposit or just as free cash as you would hold free cash in a bank.
If a major bank blows up this very same claim, supported in existing Bankruptcy Law with the changes signed by George Bush in 2005, will be used to steal the entirety of your bank account, and if you detect the impending blowup shortly before it happens — say, 90 days before — you’re still exposed to the risk through clawback!
I have often referenced how that “reform” law in 2005 was used to screw you blind as a consumer, all under the name of the “ownership society” and “responsibility.” The truth is that this “reform” law was a raw example of financial rape that was intended to and did assault you, the common consumer in America, for the explicit purpose of benefiting large financial institutions.
Don’t run any crap about FDIC insurance in this sort of event either — in the singular case of Bank of America we’re talking about $77 trillion in face value of derivatives. While “notional” values are wildly beyond what anyone would have to pay (as that figure assumes the reference all goes to a literal value of zero) the fact remains that with even a 5% loss the amount of money required would be roughly equal to the entire US Federal Budget, which the FDIC clearly does not have — nor could it acquire.
A cascade failure of several large banks would easily result in loss claims that would exceed the entire US GDP; for obvious reasons virtually none of that would actually be paid or recovered and in the case of you, the average person, your reasonable expectation of recovery in such an event is zero.
There is a fairly cogent argument to be made that what BofA did is tantamount to intentionally placing an armed financial nuclear device in the center of the board room table and then daring anyone — including the government — to come tamper with it and risk setting it off, knowing full well that if it explodes it is utterly impossible to contain the damage to our economy and financial system.
Oh, and just in case you missed it, this risk is not limited to Bank of America. Go look at any of the large banks and their derivative book of business’ notional value and then tell me that it makes a bit of difference which institution we’re talking about at any instant in time.
If this risk has not sunk into your brain by now despite my incessant table-pounding you need to go for a psychiatric examination stat. This is not to say that you’re about to have the entirety of your savings accounts, CDs and similar disappear, because nobody knows exactly how much risk lies where with what in the US banking system (say much less the European one) and thus the odds of such an event cannot be qualified in any meaningful way.
But as we have seen since 2007 executives will lie with impunity about their exposure and level of risk in this regard and despite Sarbox, which allegedly makes such lies (when reduced to writing in a quarterly or annual report) a crime nobody has been prosecuted for doing so and it is quite clear to me that the US Department of Justice is intentionally running the clock on the statute of limitations so those who did and do so get away with it.
The bottom line is this: The risk is very real as customers of MF Global have now discovered “the hard way” and if you’re sticking your head in the sand at this point you have no right of complaint when and if it happens to you.