Archive for March, 2009

Weekly Commentary March 30 thru April 3

Sunday, March 29th, 2009

This is the third week in a row that the Dow is positive. In fact, the Dow has staged a dramatic comeback, up 21%. And while the Dow is still down 12.25% for the year, being down 12.25% is a far cry better than being down 33.25%. (more…)

Bailout: How the Scam Works

Friday, March 27th, 2009

Full story here. Another great piece from For a non-economics magazine they have put up consistently brilliant authors and experts in the area of investigative reporting on the subject.

“Newspaper reports seem surprised at how high banks are bidding for the junk mortgages that Treasury Secretary  Geithner is now bidding for, having mobilized the FDIC and Fed to transfer yet more public funds to the banks. Bank stocks are soaring thereby bidding up the Dow Jones Industrial Average, as if the financial industry really were part of the industrial economy.

Why are the very worst offenders Bank of America (now owner of the Countrywide crooks) and Citibank the largest buyers? As the worst abusers and packagers of CDOs, shouldn’t they be in the best position to see how worthless their junk mortgages are?

That turns out to be the key! Obviously, the government has failed to protect itself deliberately, intentionally failed to do so in order to let the banks pull off the following scam.

Suppose a bank is sitting on a $10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $2 million as defaults loom on Alt-A liar-loan mortgages and subprime mortgages where the mortgage brokers also have lied in filling out the forms for hapless borrowers or witting operators taking out mortgages at far more than properties were worth and pocketing the excess.

The bank now offers $3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $5 million. (In practice, friendly banks may bid for each others junk CDOs.) The government (that is, the hapless FDIC) puts up 85 per cent of $5 million to buy this, namely, $4,250,000. The bank only needs to put up 15 per cent, namely, $750,000. 

Here’s the rip-off as I see it. For an outlay of $750,000, the bank rids its books of a mortgage worth $2 million, for which it receives $4,250,000. It gets twice as much as the junk is worth.

The more the banks holding junk mortgages pay for this toxic waste, the more the government will pay as part of its 85 per cent. So the strategy is to overpay, overpay, and overpay. Paying 15 per cent is a small price to pay for getting the government to put in 85 per cent to take the most toxic waste off your books. 

The free market at work, financial style.”

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached at

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Spitzer: Feds must investigate AIG & Goldman

Thursday, March 26th, 2009

Full story here from If Mr. Spitzer had kept his ethics in, he’d still be on the case. At least he’s still pointing out the thievery.

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“The AIG scandal is getting ever-more disturbing. Goldman Sachs’ public conference call explaining its trading relationship and exposure with AIG established, once again, that Goldman knows how to protect itself. According to Goldman, even if AIG had failed, Goldman’s losses would have been minimal.

How did Goldman protect itself? Sensing AIG’s weakening capital position through 2006 and 2007, Goldman demanded more collateral from AIG and covered outstanding risk with instruments from other firms.

But this raises two critical questions. The first is why $12.9 billion of taxpayer money went from AIG to Goldman. What risk–systemic or otherwise–was being covered? If Goldman wasn’t going to suffer severe losses, why are taxpayers paying them off at 100 cents on the dollar? As I wrote earlier in the week, the real AIG scandal is that the company’s trading partners are getting fully paid rather than taking a haircut. (more…)

Is the Bailout Breeding a Bigger Crisis?

Thursday, March 26th, 2009

Full story here. From Paul Craig Roberts, former assistant Treasury Secretary under Reagan, writing for I would happily invite him to take back his old job, extricating it from one of Larry Summers’ toady friends. In fact, have Tiny Tim take a hike too. And Paul Volcker can take over Summers’ post. Geez, TWO competent people in the most important area of gov’t right now. Be still my beating heart.

“At his March 24 press conference President Obama demonstrated that he is capable of understanding issues as presented to him by his advisers and able to pass on the explanations to the press.  The question is whether Obama’s advisers understand the issues.

Obama’s advisers are focused on rescuing banks and the insurance company, AIG. They perceive the problems as solvency and paralyzing uncertainly or fear. Financial institutions, unsure of their own and other institutions solvency, hoard cash and refuse to lend. Credit is needed to get the economy moving, and the Federal Reserve and Treasury are doing their best to inject liquidity and to remove troubled assets from the banks’ books.

This perception of the problem and the “remedies” being applied, might be causing a greater problem for which there is no solution. Obama’s approach, and that of the previous administration, requires massive monetization of debt by the Federal Reserve and massive new debt issues by the Treasury. (more…)

Toxic assets from the shadow economy

Wednesday, March 25th, 2009

Full story here. Even the Wall St. Journal has pointed out that funny money is coming from a black hole. Gasp–what was Rupert thinking? Must’ve been a rogue journalist, telling the truth like that.

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“The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous “toxic assets” on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.

Today’s global crisis — a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months — cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they — and all other assets — are printed. If we don’t restore trust in paper, the next default — on credit cards or student loans — will trigger another collapse in paper and bring the world economy to its knees.

If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone’s property.

Ever since humans started trading, lending and investing beyond the confines of the family and the tribe, we have depended on legally authenticated written statements to get the facts about things of value. Over the past 200 years, that legal authority has matured into a global consensus on the procedures, standards and principles required to document facts in a way that everyone can easily understand and trust.

The result is a formidable property system with rules and recording mechanisms that fix on paper the facts that allow us to hold, transfer, transform and use everything we own, from stocks to screenplays. The only paper representing an asset that is not centrally recorded, standardized and easily tracked are derivatives…”

This is becoming akin to having someone buy real things like houses and food with monopoly money, and, when he’s even short on monopoly money, he can come take some of your present (and future) ‘real’ money (which is moving closer to monopoly money status daily) to make good on his bets. These CDSs are not insurance per se, since many, if not most, of these purchasers of CDSs didn’t own the underlying item being issued. But we couldn’t necessarily know that because the parties involved with these contracts don’t broadcast what they’re doing, prices, naming names, etc. But the counterparties come out of the woodwork when an insured item goes down. Would you feel safe living in a world where Ashley from Investment Banking (or perhaps Guido with no neck and hair on his thumbs) has bought 100 insurance policies against your house catching fire–and that he could use monopoly money to buy them? And when it burns down (there was never a question of if), not only will Ashley or Guido end up getting paid back–in real dollars– but the insurance company that did insure your house probably won’t have enough money to pay for the reconstruction costs. Now multiply this scenario by about 10 million and you end up with more money than there is on earth.

Of course, the real solution would be to no longer accept monopoly money or to pay for illegal or fraudulent insurances. This is not an ‘easy’ solution since those formerly boring and trustworthy insurance companies and banks were spending like a coked-up Vegas gambler, with avergage Joe’s annuity, whole life policy, other tangible insurances and mortgages all intertwined in this festering tumor. Which means there’s going to be a lot of blood spilled to cut this out, but it must be excised now. Otherwise we succumb to a world where a few own every single thing in the world and the rest of us become dispossessed slaves.

Weekly Commentary March 23 through 27

Sunday, March 22nd, 2009

Is this really the end to the bear market and the start of a bull market, or is this just a bear market rally? That is the question of the day that everyone wants to know. Can we buy stocks again? (more…)

Tourniquets, please!

Wednesday, March 18th, 2009

Full article here. From Brad Setser at the CFR. Gads the money inflows/outflows are gawd awful, again.

 ”Indeed, the real legacy of the crisis has been an enormous contraction in long-term flows, with a corresponding increase in the United States reliance on short-term financing. And also a shift away from risk assets.

One striking fact is that foreign investors now consider Agencies to be a “risky” asset. Over the last 12ms, foreign investors –in this case, primarily central banks, as they were the main foreign buyers of Agency bonds– concluded that the Agencies aren’t a safe long-term store of value.

Another is that demand for US equities has disappeared. Over the last 12 months of data, foreign investors have only purchased $24 billion of US equities. The impact of the fall in foreign demand for US equities though has been offset by an equally sharp fall in US demand for global equities. Indeed, Americans have been net sellers of the rest of the worldâ??s stocks over the last 12 months.

See those two wonderful bubbles in 1999 and 2004? Bubble go ‘pop’ now…actually with how fast it’s deflating it’s more like an airlock being opened up in space, proving that old addage that the Bulls go up the stairs but Bears go out the window.

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Weekly Commentary 16 March through 20 March

Saturday, March 14th, 2009

Mark to Market?…We don’t need no stinking rules.

This week, Robert Herz, head of the FASB, told lawmakers that those banks who screamed loudest about fair market accounting practices were the very same banks that collapsed because regulators would not allow them to wipe millions of bad loans off their books. (more…)

Deep Capture

Friday, March 13th, 2009

Full story here. From the story Deep Capture by Mark Mitchell. If only this were a soap opera, I could stand the level of lies, deception and general histrionics this informative and lengthy article brings up. Please read it all at the link above.

“…the Securities and Exchange Commission has published a list of more than 300 companies whose stock has been sold but never delivered in excessive quantities. In other words, a significant fraction of the stock sold in more than 300 companies is phantom stock. If you think you own shares in one of these companies, the chances are that a broker has sold you air to satisfy a crooked hedge fund client. The computer might say that you own stock, but in reality, you do not.

In addition to the 300-plus companies on the SEC’s list, as many as 1,000 companies have already been wiped off the map by illegal short-selling, according to some experts.

Short-sellers’ collusive behavior and dubious tactics might have contributed to the demise in March, 2008, of Bear Stearns, America’s fifth-largest investment bank. The Chairman of the SEC recently told the U.S. Senate that the SEC is investigating precisely this possibility. The consensus among economists is that if the Federal Reserve had not intervened, the fall of Bear Stearns would have triggered the collapse of the American financial system. Similarly collusive ‘bear raids’ contributed to the great crash of 1929.

SEC officials fail to prosecute the criminals even as they suggest that miscreant short-sellers have put the American financial system at morbid risk.

Clearly, this is a scandal of epic proportions.

Which raises the question: Where the hell is our media?”

Me again. “Where is the media?” Answer: they are in bed with the crooks and are providing the suckering and needed distractions in order to pull this scam off. If you needed a reason to hate Jim Cramer (apart from empirical ones) this will do it for you.

The article also suggested that the “cleanup” for such a massive quantity of non-existent stock could run as high as $1 trillion. Gads, I had hoped to avoid concluding that Spam, gold and silver (and possibly toilet paper) were the only things that would preserve humanity, but I’m having trouble burying that nagging doubt.

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About the banking crisis response

Wednesday, March 11th, 2009

An eeeeeexcellent conversation at Naked Capitalism on the banking crisis, lousy, weird and stupid responses, and some good comments and comebacks.

“…In any banking crisis, the central question always is: which financial institutions now operating are insolvent, how can we identify them and remove them from the system, and how can we recapitalize the remaining institutions in a way that restores confidence to the system generally? Therefore, any response by policy makers must address three separate issues:

  1. Confidence in the system. This is the first question to be addressed because no fractional reserve banking system can function without confidence in its integrity. Is Citigroup going to be nationalized?  Are the regionals sitting on massive commercial real estate time bombs?  Does Wells Fargo have a fatally large exposure to California-based HELOCs?  If BofA goes bust will I get my money back at the ATM? No one knows the answer to these questions definitively. As a result, each and every institution in America is subject to suspicion about its solvency by depositors, debt holders, commercial paper investors, and transaction counterparties.  The whole system comes under a cloud. In short, doubt breeds fear and fear creates systemic risk.
  2. Identification of insolvent institutions.  This is the tricky bit for a number of reasons.  First, I should note that Warren Buffett has said Wells Fargo has a pre-tax earnings power of $40 billion.  That is enormous.  While one should be suspicious whether Buffett is talking his own book, it points out the fact that any bank can ‘earn its way out of insolvency’ if given enough time. Nationalization is but one option.  (John Hempton has noted that the Japanese banks actually did not have the benefit of time as their spread margin was so small due to the infamous zero-interest rate policy – you need a steep yield curve).   But, ultimately, it is liquidity that is at issue for many bankrupt financial institutions – a loss of depositor or creditor faith.  Their credit lines are pulled (Bear Stearns) or bank customers flee (Northern Rock). So, when we ask whether an institution is insolvent or bankrupt, it is a trick question because many failed financial institutions suffer a lack of liquidity — a circumstance which presages insolvency (see my take on this issue here).  Identifying whether an institution is fundamentally insolvent depends crucially on the true value of its asset base as well as future loan losses and credit writedowns.
  3. Recapitalization of solvent companies.  Once one determines whether a financial institution is insolvent, the remaining solvent institutions might still be so fragile as to succumb to liquidity pressures. They must be adequately recapitalized in order to preserve confidence in the system as a whole.  How one goes about doing so is less important than doing so. Moreover, it is crucial that government not recapitalize insolvent institutions lest they be confused with solvent entities, re-creating the loss of confidence which created the panic and crisis to begin with.”

Go read the whole article. And go ShadowTrade while you’re at it.