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Archive for the ‘Timothy Geithner’ Category

Bernanke, Geithner And Company Derelict In Their Duty

Not just Bernanke and Geither but they along with the rest of the clown-car brigade at the NY Fed and Treasury.  The Fed must be stripped of its authority to “supervise” institutions as it has repeatedly refused to perform its legally-mandated duties when it comes to regulating these firms.

Here we again have proof of outrageous dereliction of duty.

The Federal Reserve Bank of New York has informed MF Global Inc. that it has been suspended from conducting new business with the New York Fed.  This suspension will continue until MF Global establishes, to the satisfaction of the New York Fed, that MF Global is fully capable of discharging the responsibilities set out in the New York Fed’s policy, “Administration of Relationships with Primary Dealers,” or until the New York Fed decides to terminate MF Global’s status as a primary dealer.

For those who are unaware the status of “Primary Dealer” is a firm that has a responsibility to maintain an orderly market in the sale of US Treasury securities.  That is, they’re required to bid.  As compensation for this they’re the market makers and of course get their cut from that intermediation activity.

Here’s the problem: MF Global got in trouble by taking on too much European debt, gearing itself too highly, and they had inadequate capitalization to withstand the problems present in Greece and elsewhere in Europe.  The NY Fed and The FOMC, for their part, again failed to do their job exactly as they failed to do their job in 2008 and did nothing about this right up until the firm effectively failed.

Why do I charge that this is the second time around for them?  Because it was and this is a statement of fact.

In 2008 roughly a month before Lehman failed the firm attempted a routine repo transaction with Citibank.  Citibank rejected their collateral and Lehman had nothing else to pledge.  The NY Fed had to know this had occurred because tri-party repos inherently involve the NY Fed as the third party.  Yet the NY Fed did nothing in the context of suspending Lehman, they did not inform the public of this material adverse event, they did not demand that the market be informed despite the fact that this is a requirement of a public listing and certainly merited a Form 8-K filing.  That Citibank knew and thus The NY Fed had to know Lehman was bust well in front of the markets and the public being told was one of the things we learned from the Jenner and Block report into the Bankruptcy of Lehman that was part of the bankruptcy proceedings and is now part of the public record of the events surrounding Lehman’s failure.

In general I have no duty to inform someone else if I find out about some sort of problem with a public company.  If I discover that problem without resorting to non-public information (e.g. by reading their balance sheet) I am entitled to use it to trade on and attempt to make a profit.

But I’m not a regulator — The NY Fed and Federal Reserve are.  The Fed has an overriding duty to the markets and to the public as the primary regulator for these institutions, and post 2008 there is simply no excuse for what amounts to willful blindness.

These people need to be removed from power — at minimum — as they have repeatedly demonstrated an unwillingness to perform their duties with regard to regulating financial institutions.

* * * * *

The Consequences Of Failed Regulators

Now we get to see the consequences of the failed regulation with regard to MF Global.

CME and other exchanges have all suspended the firm’s clearing capabilities.  This resulted in the turnstiles being literally locked for those who were members of the exchange and clearing through MF.

So if you are a floor trader using MF as your clearing firm and went to take a leak, you can’t get back on the floor.  Whatever positions you might have held at that time cannot be hedged or otherwise managed!

This is going to severely hurt — and probably bankrupt — a lot of people through no fault of their own.

Who’s fault is it?

Bernanke’s, the NY Fed’s and Geithner’s (Treasury’s.)

Why?

Because MF should have never been allowed to carry that much exposure on their book without enforcement action taken by the regulators.  The regulators allowed it and the firm is now collapsing.

So be it – those who owned the stock will “get theirs” for their lack of diligence.

But the traders who had no idea what was going on and get reamed as a consequence should be surrounding the NY Fed, The Federal Reserve and Treasury tomorrow morning.  They ought to put on their own “Occupy” movement until this clowncar brigade is removed and replaced for rank dereliction of duty.

Post-Lehman, when the NY Fed and Federal Reserve did the same damn thing there is simply no excuse for what happened to these innocent parties in this instance.  While I know it won’t happen and the government will (of course) claim “sovereign immunity” the fact of the matter is that the officials involved should be held personally responsible for the harm these individuals suffer as a consequence of their malfeasance.

* * * *

Ah, Our Fine Regulators (MF Global – Again)

Here we are once again, with the fine federal regulators who do their job keeping track of primary dealers and properly looking at the health of the firms are the core of our financial system.

What began as nearly $1 billion missing had dropped to less than $700 million by late Monday. It is unclear where the money went, and some money is expected to trickle in over the coming days as the firm sorts through the bankruptcy process, the people said.

But regulators are examining whether MF Global diverted some customer money to support its own trades as the firm teetered on the brink of collapse. If that was the case, it could violate a fundamental tenet of Wall Street regulation: Customers’ money must be kept separate from company money.

Such a finding would move the discussion from sloppy internal controls at MF Global to something more troubling. While the investigation is in its early days, it raises the specter that regulators could sanction the firm or the employees responsible.

That’s right, “sanction” the firm.  And with what they would they pay any such “sanctions”?  Hmmm…. what’s going to happen to their customers?

Oh yeah, that’s right – they’re screwed, right?

Ps: Not all funds are SIPC covered, and this is going to come as an ugly surprise to a large number of people, I suspect….

Throw Bernanke’s and Timmy’s ass in the dock on this one; there’s absolutely no excuse for allowing this to occur.

Period.

The Market-Ticker

The only effective regulation is FAILURE.  Unfortunately only the little people are allowed to fail, and at the same time, they are being forced to bail out those who are ‘Too Rich, Powerful, and Big’ to fail.

I suspect things are about to get a bit warm over toward Athens….

Geithner preached the lessons of the emergency banking support provided by the Treasury and Federal Reserve in reaction to the collapse of Lehman Brothers Holdings Inc., mixing it with criticism of Europe’s crisis-management coordination.

Uh huh. And those lessons are?  Has our economy recovered?  Has debt contracted to appropriate and manageable levels?  Has the federal government’s “temporary” support program of borrowing and blowing 12% of GDP concluded?

Or is the truth, Timmy, that fraud as a business model has now been extended to government and you’re smugly patting yourself on the back for preventing an explosion by pulling the burning wick out of the box a bit further, forgetting that (1) you’re still carrying the box and (2) there’s a dozen pounds of TNT in there and the wick still goes inside!

The imagery that comes to mind when Turbo speaks of such things reminds one of Wile-E-Coyote and his inveterate attempts to blow up, smash and otherwise kill the Roadrunner.  But like the cartoon although Wile-E is often seen with dining apparel in hand nobody every explains how he’s going to actually eat a blown up, smashed to dust, or buried under tons of rock Roadrunner, should he some day succeed despite his repeated display of “genius.”

Europe projects an image of “ongoing conflict” between national governments and the central bank, hampering efforts to put the economy on a sounder footing, Geithner said at a banking conference in between euro meetings.

“Your financial challenges in Europe are eminently in your capacity to manage financially, you just have to choose to do it,” he said.

And how would that be?  See, this is the problem – Germany exports lots of hard goods (like cars, for example) to Europe which then consumes them.  But Europe has consumed them by borrowing, not by producing.  Greece, for example, has a monstrous welfare state, as does the United States.  But consumption in those European nations is how Germany manages to put up the numbers it has economically.

Unfortunately Germany has stoked it’s “growth” with false expectations, as has most of the rest of the western world.  Rather than build a sustainable model in which people produce, pay taxes from that production for government services (that’s redistribution – let’s call it what it is), spend however much of the rest they wish on consumption and save some part of the remainder (that’s called “capital formation“) the entire European continent joined the rest of the western world in believing that we could continually borrow more and more money to sustain consumption!

The economic term for this is malinvestment.  That is, rather than invest from saved capital (the economic surplus from produced goods and services) people were provided incentives to instead borrow on the promise of producing more tomorrow.

The problem is that not everyone can produce more tomorrow and nobody can do so on a compounded growth rate into the indefinite future.

Consider the athlete.  He runs a 4:10 mile.  He might be able to improve his time by 4% or so in the next year with training, and in doing so cross the “magical” 4 minute mile barrier.  But he cannot continue to improve at a rate of 4% a year forever; that is a physical impossibility.

This, however, is what we’ve been sold.  We’ve been sold it in investments (the “8% annual return” meme that is still being run today) we’ve been sold it in terms of economic growth (the mythical “5% GDP”) and we’ve been sold it in virtually every other phase of our life.

This cannot continue for the simple reason that it’s physically impossible.  Yes, there will be major improvements from time to time in productivity.  We know of many throughout the last couple hundred years – first the introduction of large-scale steam power into industry, then electrification, then communications (e.g. telephone and telegraph), mechanization of farming and transport (e.g. the development of practical internal combustion engines of various sorts) and data processing (e.g. first large-scale computing through several iterations, then combining that with communications via the Internet.)

These have all “shrunk” the apparent size of our world.  This is good, not bad.

Have you ever noticed that the worst credit bubbles tend to come at the same time as we experience these improvements in productivity?  There’s a simple reason for this, of course: The growth in output occurs and people are led to believe that’s a durable change and will continue – not in fits and starts, but on a continual and annual basis.

They’re wrong, of course, because that’s not how the physical world works.  The monster growth spurt in the Internet occurred with the release of Windows 95 in August of that year.  The “monster” part was over within 12 months.  It then tapered off, but that was sufficient to produce a bubble in stocks that took nearly four years to pop, and when it did it destroyed the apparent wealth of millions.

I say “apparent” because that “wealth” was never real.  Oh sure, there were people who did produce durable wealth from that time, myself among them.  But MCSNet never took a nickel in forward financing of any sort.  Saul (the bank President where we did business) kept lamenting the fact that I refused to borrow money from him, choosing instead to grow the company from retained earnings – that is, excess capital after all costs of producing the services we sold were paid.  That growth was real, it was durable, and it was “mathematically” less than it would have were we to have employed massive leverage – if I had been wise enough to know exactly when the bubble would pop and get out first.

Ah, there’s the problem grasshopper – are you smart enough to know with certainty when that is?  No you’re not, and the wise man recognizes this fact and therefore chooses not to play.  The inveterate speculator on the other hand risks blowing up everything he built every day by entering that casino and it is luck, rather than skill, that allows him out before his head takes its turn in the economic guillotine.

The real problem that the Eurozone faces is that it has allowed banks to lie about the value of bonds on their balance sheet, just as we have.  It has not forced them to mark those instruments to the market nightly, just as we have not.  The market has correctly deduced that in the event these “temporary” and “market-based” losses represented by current offered price crystallizes into actual economic loss, such as through a Greek default, many of these financial institutions will be rendered instantly insolvent.

The error is not in failing to bail out Greece, or bailing out Greece.  The error is in a continued promotion of economic policy that violates the laws of the physical world we live upon.  The premise of borrowing to consume and speculate must always end badly, because continued compounded growth is mathematically impossible on a sustainable basis, and yet this is what the system requires to operate perpetually when it is allowed to run in this fashion.  Rather than build economic progress on capital formation – that is, the economic surplus of individuals after they pay the expenses of their lives, we have instead turned the world on its ear and bought into the bankster’s siren song that one can have today and produce tomorrow.

Without explicit government support of fraud these excesses cannot happen over an extended period of time.  If you force honest accounting and reporting to take place under penalty of criminal sanction and deny these firms the ability to claim their assets are “covered” when there is no proof of ability to pay all of the gamesmanship disappears and the bubbles cannot expand to dangerous levels.

Oh sure, there will always be speculation, and people will make or lose money predicated on that speculation.  There’s nothing wrong with that in the general sense.

But there’s plenty wrong with Geithner’s claims that we can keep playing this game on an indefinite forward basis and never have to pay the check engendered by doing so.  That has never worked over time because it mathematically cannot, and yet our government refuses to accept and acknowledge that fact.

It appears that Europe is starting to “get it.”  They’ve come to the conclusion that nations cannot run deficits on a perpetual basis that exceed economic growth.  The “3%” rule appears reasonable assuming that economic growth can reach 3%, and it probably can over material periods of time.  While a better rule is “0%”, simply because the natural evolution of all economies is a mild deflation (due to productivity improvements) this is certainly better than our situation today – or theirs.  Such a rule would limit the United States to a $450 billion deficit inclusive of financing costs, which means that functionally our operating deficit limit would be about $200 billion today, dwindling toward zero the longer we kept it up.

Greece, for its part, appears to know the gig is up too.  Papandreou has apparently decided not to meet with the IMF and Geithner this weekend, choosing instead to return to Greece.

The pyramid that has sustained the “rally” in risk-asset prices over the last two years appears to be about to have its legs cut out from under it.  A couple of weeks ago I said that I expected you’d have one more chance to get out of the market if you were stuck long risk assets.

That opportunity may in fact be about to expire.

We now know exactly how much Turbo Timmy had to pilfer, er, “borrow” from various things (like government worker retirement accounts) in order to not run out of money while the debt ceiling was frozen, and it’s not a pretty picture.

The August 1st DTS

The magic number is $14,293,975

Now the August 2nd DTS:

The magic number there is $14,532,332

That’s $238.357 billion.

Remember, May 16th was the “official” day the debt ceiling was hit.  So Turbo has been running roughly $100 billion in the hole a month.

That sounds like about $1.2 trillion, but in fact it’s worse.  Why?  Because June is a heavy deposit (tax payment) month due to estimated taxes.  How big of a deal is this?  Pretty big – June saw receipts of $108.372 billion, while July saw just $54.069 billion – about half.

Oh, the debt limit increase deal added $400 billion immediately.  After taking care of the theft, er, “borrowing” that had previously occurred there is now just $162 billion remaining.

Anyone care to bet on whether Congress will get its act together before two more months run?  At current “burn” rates, and considering that September is also a estimated tax deposit month, that $162 billion should just about get us through September – and that’s all.

You have to wonder.

Two and a half years ago, with our country on the edge of a second Great Depression, we met with the president in the White House to discuss whether to move in those first months of his administration to legislate fundamental reform of the financial system—or wait until we had put the crisis behind us.

The president made two key decisions. First, he chose to move forward, knowing that the forces of opposition to reform would grow stronger as the memory of the crisis receded. And second, he asked us to write draft legislation rather than propose broad principles. The president did not want the new rules to end up being written by those who brought us to the edge of catastrophic financial failure.

Really?

So…. he asked you to help write it, yes?  And what did you do while at FRBNY [Federal Reserve Bank of New York]?

Besides cheating on your taxes, that is.

Well, it appears you sat there and allowed the playing of derivatives by firms who had no money, yet promised to pay.  They couldn’t, of course, and when that became apparent the entire world blew up.

But that wasn’t bad enough – oh no, you then had to rescue them.  And rescue you did – in fact, that was the gist of everything wasn’t it?

See, it wasn’t about the money per-se – it was about the lies.  Lies that still continue to this day.

Like, for instance, the lies that enabled the market to bottom in 2009.  Remember Kanjorski and his little committee meeting?  Either allow the banks to mark to whatever they think they can defend, whether it’s real or not, or we’ll force it with legislation.

Yeah, I remember that.

Then of course there’s the derivatives.  They’re still traded over the counter.  The so-called “clearing houses” do nothing to prove nightly margin, nor to prevent chain risk.  And yet those two things are the key items in how we found ourselves on the wrong side of that mess.  To be blunt, Brooksley was right (along with other few who said you, and the entire bankster business, were certifiably insane) and yet I haven’t heard an apology from you in that regard, nor one from Greenspan.  Why not?

Of course you continue to pat yourself on the back for things that are, well, not real.  Averting a second Great Depression?  More like covering one up that’s still going on.  After all, when you deficit spend 12% of GDP, well, GDP is 12% higher than it would otherwise be – plus the knock-on effects.  I don’t call that “avoidance”, I call it a scam because there is no credible plan available to stop that deficit spending.

But stop it will.  At roughly six times present GDP growth it will end soon too, and in a rather dramatic fashion.  We still can change to some extent exactly how it happens, but that optionality will not exist for long, and the Congress seems to be ignoring you these days Turbo – with good cause.

After all, it was Hanky Panky who promised us tanks in the streets just a couple of years ago, and then of course we got more of the same from you and Obama if we didn’t “help the banks.”  But the so-called recovery you claim is happening isn’t reflected in the employment numbers, nor in those for food stamps.  We have fixed nothing with trade balance, particularly with China, since both you and Obama have spent your time knob-jobbing the Communists instead of protecting American jobs and imposing sanity on a mercantilist regime.

As for Fannie and Freddie, you’d done nothing.  Those firms debt never had a guarantee – it’s right on the front of the page.  But you never met a billionaire you wouldn’t perform an obscene act upon, have you Turbo, and neither has your boss.

That’s ok Turbo.  This isn’t under your control nor Obama’s.  It’s under the control of immutable mathematical facts, and when they come to the fore, as they are over in Europe and soon will be here, the time for you to act in a reasonable and sound manner will have expired.

We’ll all be in much worse economic shape for it, but the good news is that you won’t be able to escape responsibility, nor will your boss.

This far into the term, you own it Timmy.

Bon appetit.

The government borrows about 40 cents of every dollar it spends at present.  This means two things:

• There is more than enough money coming in to pay the debt and interest that matures. Therefore, a default would be an intentional act by Tim Geithner, much as it is when you decide not to pay your mortgage (despite having the money to do so.)  Selective default is a choice, but it is a freely-entered into choice. What Geithner is doing is threatening an intentional, strategic default if he doesn’t get his (and Obama’s) way.
• If the government does not get its debt increase it must immediately balance the budget. This is good, not bad, in the intermediate and longer term.

The problem is that this situation also exposes the truth, which nobody wants to face in Congress: Whether you raise taxes or cut spending the economic impact is the same – 12% of GDP disappears.

Greenspan was also pessimistic about the U.S. deficit talks, saying he didn’t think Congress would reach an agreement on raising the debt ceiling by the Aug 2 deadline.

“We’re going to get up to Aug 2 and I think on that night, we are not going to have the issue solved,” he said.

If that happens, he said, the U.S. would have to continue paying debt holders or risk major damage in global financial markets. As a result, “we will default on everything else.”

Chris Whalen says “No Downside” to Not Raising the Debt Ceiling

The U.S. Congress has a little less than two months to raise the $14.3 trillion debt ceiling or possibly default on its debt. Treasury Secretary Timothy Geithner says not allowing the Treasury to raise the debt limit would be “catastrophic” for the economy.

Geithner is crying wolf according to Chris Whalen, a banking industry analyst and co-founder of Institutional Risk Analytics. Whalen argues Congress should vote against raising the debt ceiling unless they agree to major spending cuts. “Congress has the right to say ‘no’ and the people of the United States have a right to say ‘no’ we don’t want to issue more debt,” he tells Aaron Task in the accompanying clip.

Whalen first made his thoughts known about the debt ceiling in a Reuters opinion piece Why Congress should vote no on raising the debt ceiling published in April.

“My view is that Congress should vote down any debt ceiling measure unless President Obama agrees to sign the balanced budget amendment. Even if Secretary Geithner has to run the US government on cash, like the good people of Iceland and Ireland today, it will be a good thing for America’s political debate to default — at least for a few weeks. Then people will know that the once unthinkable is very possible.”

At the time, Whalen’s comments were viewed as radical, and some say still are. However, in recent weeks, he seems to be gaining more support from some of Wall Street’s heavy hitters. For example, in a recent interview with the Wall Street Journal hedge fund billionaire Stanley Druckenmiller echoed some of Whalen’s rhetoric.

No one knows what will happen if the Congress does not raise the debt limit or if there’s even a good chance of it happening, but Whalen is holding out hope: “If we don’t have consequences in politics then we end up with what we’ve seen in the last 30 years, which is a permanent political class.”What If the U.S. Treasury Defaults?

The WSJ article referenced above is What If the U.S. Treasury Defaults?

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.

“I think technical default would be horrible,” he says from the 24th floor of his midtown Manhattan office, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” meaning Washington’s spending addiction.

Widely credited with orchestrating Mr. Soros’s successful shorting of the British pound in 1992, Mr. Druckenmiller also built his own fund, Duquesne Capital, into a $12 billion titan. He announced plans last year to close the fund and now reports, “I have no clients.” He is still managing his own money, which Forbes magazine recently estimated at $2.5 billion.

Whatever the correct figure is, it would be significantly larger if Mr. Druckenmiller hadn’t given away so much of his wealth. The online magazine Slate reported last year that Mr. Druckenmiller and his wife gave away more money in 2009—over $700 million—than anyone else in the country. Over the last two decades, he has been the largest benefactor of the Harlem Children’s Zone, a community service organization featured in the movie, “Waiting for ‘Superman.’”

In a May 2 letter to House Speaker John Boehner, Mr. Geithner warned of “a catastrophic economic impact” and said, “Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

In a Monday speech at the New York Economic Club, Mr. Boehner fired back, saying that “It’s true that allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without simultaneously taking dramatic steps to reduce spending and reform the budget process.”

So the moment couldn’t be better to consult Mr. Druckenmiller, who almost never gives interviews but is willing to speak up now because he thinks that fears about using the debt-limit as a bargaining chip for spending cuts are overblown—and misunderstand the bond market. “The Treasury borrowing committee letter speaks about catastrophic financial crises, comparing it to Fannie and Freddie. That’s not what we’re talking about here,” he says.

He contemplates the possibilities for bond investors if a drawn-out negotiation in Washington creates a short-term problem in servicing the debt but ultimately reduces spending:

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.

The Upside and Downside

To suggest there is “No Downside” is a bit inaccurate. A better way of phrasing the setup is there is “no NET downside” to not increasing the ceiling without significant budget cuts.

The downside is a temporary default. Interest rates may go up if that happens. Some parties maybe harmed in the process. Thus, the downside is a temporary delay in payments and the small mess that might entail.

The upside is a potential permanent reduction in US spending. From my perspective, that is a massive upside potential, for a bit of short-term downside.

Risk of Greek-Style “Solution”

It should be crystal clear that Congress and the administration need to do something about budget deficits before the market imposes a “Greek-Style” solution on the US.

I mentioned that possibility in my recent Yahoo Finance video appearance: Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands?

How You Can Help

Please pick up the phone, call your Congressional representatives, and insist on “Major” budget reductions now “Not in the Future”, before agreeing to hike the debt ceiling.

Here is the Online Directory for the 112th Congress

It is time Congress call Geithner’s and the President’s bluff.

The way to make that happen is to insist your representatives recognize something must be done NOW, not 10-years from now about the budget crisis.

Mike “Mish” Shedlock
Global Economic Analysis