Archive for November 27th, 2012
Gee, who’s been talking about uncollateralized lending and the inherent fraud that is created by such transactions in that they are effectively a naked short on the currency involved?
Swaps that will be allowed to remain outside clearinghouses when new rules take effect in 2013 will require traders to post $1.7 trillion to $10.2 trillion in margin, according to a report by an industry group.
The analysis from the International Swaps and Derivatives Association, using data sent in anonymously by banks, says the trillions of dollars in cash or securities will be needed in the form of so-called “initial margin.” Margin is the collateral that traders need to put up to back their positions, and initial margin is money backing trades on day one, as opposed to variation margin posted over the life of a trade as it fluctuates in value.
This, my friends, is the amount of margin in the amount of actual hard funds that is supposed to be tied up in the form of collateral to back these bets but currently is not.
Oh, and if you’re wondering how that compares against the actual amount of “un-cleared” swaps? That’s “estimated” at $127 trillion, which means that the ISDA thinks it’s perfectly reasonable for people to have somewhere between 12 and 75 times leverage in these things.
That’s utter and complete crap but it is what passes for an alleged “cleanup” of this “market.”
Bernie! Oh Bernie! Is that you Made-Off?
European finance ministers eased the terms on emergency aid for Greece, declaring after three years of false starts that Europe has found the formula for nursing the debt-stricken country back to health.
In the latest bid to keep the 17-nation euro intact, the ministers cut the rates on bailout loans, suspended interest payments for a decade, gave Greece more time to repay and engineered a Greek bond buyback. The country was also cleared to receive a 34.4 billion-euro ($44.7 billion) loan installment in December. Greek bonds rose and the euro reached a three-week high on the accord.
See? All have to do is pull out a hand grenade and threaten to pull the pin! Even though doing so would blow you to bits along with everyone in the room you’ll get whatever you demand as nobody has the balls to call the bluff.
“This has been a very difficult deal,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels after chairing a 13-hour meeting that ended early today. “All initiatives decided upon today will bring Greece’s public debt clearly back on a sustainable path.”
How do you know Luncker, uh, Juncker, is lying?
That’s simple: His lips are moving.
There is no realistic way for Greece to pay what it owes. This means that the only real solution is for it to default, but that’s unacceptable because it means people have to take losses, and a large chunk of those losses would fall in places that can’t take losses — like the ECB.
“Official” losses would destroy credibility in the capital base of these institutions, including the ECB. That in turn could (and probably would) provoke capital flight, which would instantly destroy the ability of the ECB to “manage” interest rates and possibly even impair its ability to clear transactions.
That’s the real problem in a nutshell — the ECB and IMF made loans that they should have never made, all under the premise that “the Euro is inviolate.”
Such a declaration is functionally identical to declaring that the crazy aunt you have who is drug-addicted and steals anything that isn’t nailed down cannot be ejected from your home and is an “inviolate” part of your household, despite the fact that she’s draining you to the tune of over $1,000 a month in “stuff” that’s being pawned off to feed her habit!
You either cut that crap out or you’re (eventually) hosed.
More-ominously the Shanghai stock market broke a key technical level last night, declining into territory last seen in 2009. While we’re not yet at the nadir seen in ’08, the Shanghai market is threatening to head there — another ~30% down from here. There are some rather troubling analogues between China and Japan’s Nikkei all-time top, and the premise that China will continue to be in a position to power the debt-financing games that it has over the last decade or so looks to be on increasingly-shaky ground.
But the largest problem today is here in the United States. There is no realistic outcome given the positions of the Republican and Democrat parties in Washington today. The simple fact of the matter is that we have gotten to the point where we’re spending 30+% more than the government taxes through both parties, and to correct that both parties are going to have to accept that government simply cannot provide services that the people will not fund with current taxes.
That sounds easy, but it isn’t for two reasons: The ridiculous monopoly-style ramp-job in medical spending and the penchant for both political parties to lie about economic growth through the deficit spending of the last two decades.
In short $600 billion in deficit spending creates $600 billion in demand that otherwise does not exist in the economy. So is $1.3 trillion in deficit spending. The former was about 6% of GDP at the time (Bush’s Presidency) and the latter is about 8% of GDP, which are huge numbers.
Cessation of that spending is not just a political problem with the handouts that won’t happen, or with the lobbyists that will get told to stuff it, particularly in the health care arena. It is also a matter of admitting that we’ve been covering up a terrible economy for more than 10 years through these manipulations and that we must both accept reality and vow to sin no more.
Two words you’ll never hear in Washington DC make this very difficult: “I lied.”
But a refusal to tell the truth doesn’t change anything — it just makes you a serial liar, and arithmetic always eventually asserts itself. The bad news is that economic damage such as this compounds over time, and as such what was a 10% problem in 2000 turned into a 20% one in 2007 and now is approaching a 40% problem (in terms of government spending reductions) that are required to restore balance.
I’m sure you can figure out from that progression what happens if we don’t cut the crap, and soon.
Perhaps the “recovery” is a Mind Trick played on the weak-minded.
Those with vested interests in the Status Quo tout data that supports the claim the “recovery” is now “self-sustaining,” meaning that the economy is now expanding fast enough to fuel new growth. In this view, the Federal Reserve’s extraordinary policy interventions (zero interest rate policy, $23 trillion in support provided to the global banking system, 3.4% mortgage rates, etc.) and the Federal government’s unprecedented fiscal stimulus (borrow and blow $1.3 trillion a year) have done their job; the economy is now “self-sustaining,” meaning that it can continue growing as Federal deficits shrink and the Fed trims its quantitative easing policies.
The data favored by the Status Quo interests are GDP (which rises when the government borrows and blows trillions of dollars), housing sales (still low compared to 2006, but better than 2011) and consumer confidence, which is hitting multi-year highs. Consumer confidence is a quasi-quantitative measure of the critical “animal spirits” that Keynesians look for to drive more borrowing and spending: if you feel wealthier for whatever reason, that confidence arouses your “animal spirits” to rush out and buy something, preferably a house and a car.
Those looking at fundamentals such as household income/debt and sales see more of a Mind Trick being played on the weak-minded. If you can convince me the economy is expanding and inflation is rising, I will be more likely to risk borrowing and spending more than I can afford. The “real” economy might be sputtering, but my belief in the “recovery” will support my confidence in the wisdom of leveraging more of my (shrinking) income into debt-based consumption.
This debt-based consumption (according to the Keynesian Cargo Cult) will spark so much “growth” that the expansion will become self-sustaining. Corporations will see the rise in sales and become confident enough to make capital investments and hire more workers, who will then spend their paychecks consuming more stuff, and so on.
So the task of the Status Quo shifts from actually expanding the economy to persuading us the economy is expanding. If the Mind Trick works, then maybe the unleashed “animal spirits” will actually spur real-economy growth.
It appears a certain number of buyers are convinced housing has bottomed, and this confidence (misplaced or not, no one yet knows) has persuaded them to buy real estate. This has indeed fueled a self-sustaining growth cycle in some areas, as people waiting for the bottom are jumping in, pushing prices higher and drawing in more converts.
On the other hand, if household incomes continue weakening, then the confidence of all those real estate investors in rising rents and 100% occupancy might not align with reality as well as they anticipate.
All debt and consumption is based on income. Consider these charts:
Notice that the only age bracket with rising incomes is the 65 and over cohort; everyone younger than 65 has seen their income slashed.
As I have observed many times before, the middle class filled this gap between rising costs and stagnating wages with debt.
Income for every age group other than 65+ seniors has declined sharply:
The income of those in their peak earning years 45-54 have been slammed:
With debt levels still high and income sagging, where is the higher income needed to support higher debt and spending? Lowering the interest rate has enabled higher debt, but now that interest rates are negative (below the rate of inflation),they can’t go any lower: the Status Quo has run out of “stimulus” and now must rely on manipulation and artifice–Mind Tricks–to persuade people a stumbling, stagnant economy is growing robustly enough that they should risk their future prosperity on debt-based consumption in the present.
Self-sustaining recovery or Mind Trick? We may not know for some time if the Mind Trick worked or not, but the real economy could rise up and shatter the illusion at any time.
Charles Hugh Smith – Of Two Minds
I was thinking about titling this post “Fire Jamie Dimon.” I changed my mind because this article is much, much bigger than Mr. Dimon. This is really an article about the current climate of fraud, negligence and incompetence that is accepted as the new normal. Dimon and JP Morgan Chase are just the larger-than-life faces of the profound problems that are not getting fixed. JP Morgan is the nation’s biggest bank; so, for the sake of simplicity, I just want to use JP Morgan and its CEO, Jamie Dimon, to illustrate what is really stopping the economy from getting better. This is the 8,000 pound elephant in the room that nobody wants to even acknowledge.
Look no further than this past year. There are big examples that come to mind that should have brought some criminal charges against bank personnel, or at least been grounds to fire Mr. Dimon. Most recently, JP Morgan and Credit Suisse paid nearly $417 million (combined) to settle civil fraud charges by the Securities and Exchange Commission (SEC). Reuters recently reported, “JPMorgan will pay $296.9 million, while Credit Suisse will pay $120 million in a separate case, with the money going to harmed investors, the U.S. Securities and Exchange Commission said. Both settlements addressed alleged negligence or other wrongdoing in the packaging and sale of risky residential mortgage-backed securities . . .” Of course, both JP Morgan and Credit Suisse didn’t admit guilt, and no individuals were charged criminally. The Reuters story went on to say, “On a conference call with reporters, Robert Khuzami (SEC enforcement chief) said it is hard to bring cases against individuals over ‘structured’ financial transactions because different people work on different aspects, making it hard to pin blame.” (Click here for the complete Reuters story.) It was the same story in 2011. According to Reuters, “JPMorgan had in June 2011 agreed to pay $153.6 million to settle a separate SEC fraud case over its sale of mortgage securities to investors, also without admitting wrongdoing.” Anybody see a pattern here for JP Morgan or government prosecutors?
Hey, you know what else makes it “hard to pin blame”? Lots of cash donated to both parties by banks like JP Morgan. So much cash that the boss will come down hard on prosecutors who bring charges. One thousand financial elites were successfully prosecuted in the wake of the S&L crisis 20 years ago. It was 70 times smaller than the 2008 financial meltdown that was caused by greedy bankers. The “$296.9 million” paid by JP Morgan didn’t even come with an apology, let alone criminal charges for individuals. This certainly didn’t fix anything, but it did let bankers and Jamie Dimon off the hook–once again. Is this the business plan that Jamie Dimon condones?
Remember the $2 billion “London Whale” trading loss Mr. Dimon apologized for back in May just before shareholders approved a $23 million pay package for him? That $2 billion loss turned into more than $6 billion. That’s triple the original amount Dimon himself announced! He missed by more than $4 billion! Did he mean to mislead or is he just incompetent? Was Dimon negligent as a CEO for allowing these kinds of losses? Now, JP Morgan is suing its own former employees involved in the scandal, and JP Morgan will not comment on the lawsuit. A recent New York Times story reported, “Since announcing the problem in May, JPMorgan has worked to reassure skittish investors. The bank has broadly reshuffled its management ranks and united some of its business operations.” (Click here for the complete NYT story.) Shouldn’t Mr. Dimon be “reshuffled”? I mean, just before a big payday, he told shareholders the loss would be $2 billion when, months later, it turned into more than $6 billion. Why didn’t Dimon know about this? Where was his supervision? This is one of the nation’s top bankers, and he doesn’t know if a loss is $2 billion or $6 billion?
What about the LIBOR (London Inter-bank Offered Rate) interest rate rigging scandal that erupted earlier this year? Once again, JP Morgan is involved. I wrote about this back in July and said, “The Libor interest rate rigging scandal is being called the biggest financial fraud in history. Libor is a key interest rate that is used globally to set as much as $800 trillion in transactions. It is used to set interest rates for things such as credit cards, student loans, mortgages, corporate bonds and hundreds of trillions of dollars in derivatives.” (Click here for the complete post.) In August, the Huffington Post reported, “Pretty much everybody in the world with subpoena power has hit JPMorgan Chase with requests for information in the Libor-rigging scandal. . . . JPMorgan also said it was the subject of a large and growing number of lawsuits coming out of the Libor mess. State and local governments, for example, are suing banks for keeping Libor too low, hurting the value of interest-rate swaps they bought to protect against rising rates.” (Click here for the complete Huffington Post story.) Again, Dimon does not know what is going on in his own bank, or is this part of the business model that he condones?
All the above mentioned stories happened in just the last year or so. The thing they all have in common is that Jamie Dimon was and still is–in charge. When the captain of a ship keeps running aground and the ship owners keep patching the hull, when is it more practical to replace the captain? Hasn’t Dimon run the bank aground on several occasions? Aren’t the other banking executives crashing their boats into the rocks? Don’t get me wrong, I think Mr. Dimon should be fired, but that’s not going to happen. The mainstream media will not criticize Dimon or any the CEO of a big bank despite their dismal track records. If any reporter did, I think they would be fired. The public accepts this behavior, and our own government officials enable the fraud, negligence and incompetence to go unprosecuted and unpunished in the banking industry. The economy will never truly recover against this kind of financial backdrop.
Greg Hunter – USA Watchdog