The Market Ticker

I'm not sure I believe this.

Let's start with that which is market-based.

That's MF Global, a major futures clearing house.  There was an earnings warning out on them yesterday but that price action suggests something far more serious - like insolvency.  Down 40% in one day?  That's a bit more than a "warning", don't you think?

If they - and I stress that I know exactly nothing about the firm in terms of its financials - were to blow up, it could produce absolute chaos in the futures markets.  Many futures contracts are not covered by SIPC protection, among other problems.  Clearing firm bankruptcies are no laughing matter!

Now this may be a street overreaction, but if you remember there were rumors before that turned out to be a "rogue trader" type of event.  Now the stock is back to where it was then, all in one day.  Not good and until clarity is available you have to be cautious on this one.  How?  Good question - who clears your futures trades and how sound are they?

Point being, this is potential "black swan" #1.

President Bush has called for opening offshore drilling (its about damn time) but the response of the Democrats was frightening:

"House Democrats responded to President's Bush's call for Congress to lift the moratorium on offshore drilling. This was at an on-camera press conference fed back live.

Among other things, the Democrats called for the government to own refineries so it could better control the flow of the oil supply."

Oh crap.

Let's start with the facts.  The "crack spread", or the difference between a barrel of oil and what gasoline sells for from that oil, is at all-time narrows.  What causes this?  Simple - refiners know that if they try to get their traditional margin people will buy less and they lose.  So they're narrowing their margins!

What does this means to you?  It means you're paying less for gasoline right now than you should be on historical measures, compared to the price of oil.

Now do you really think that government can do this job at a lower margin?  Pull the other kids.  Government does this and the price of gasoline will probably go up by $1/gallon!

Now there is a "black swan"!

Let me be clear - opening the continental shelf to offshore drilling will not immediately solve our energy problems.  Standing alone, it makes only a temporary dent in the problem.  As I have pointed out before in Musings, we have to put forward and prosecute a full solution to this problem, because whether oil is biotic (as most scientists think) or aboitic (as some believe) the fact remains that we're drawing it out of the earth at a rate which guarantees depletion.  This doesn't mean that "we're going to run out!" but it does mean that the cheap, easy oil has been extracted and the average cost of extracting a barrel from the ground is only going to go higher over time.  Since energy is an absolute requirement to grow and maintain GDP, we better get this sorted out or we are headed for some severe pain.

You want worse?  FHA is (again) trying to kill "down payment assistance".  This needed to die years ago but it keeps on going like the damn Energizer Bunny, and there are "non profits" who have a metric ton of business coming off this lobbying like crazy to keep it.

Absolutely nothing, by the way, has changed a bit with regards to Fannie and Freddie underlying this entire market.  If anything its getting worse, as The Senate appears hellbent on passing their $300 billion "let's bail everyone out" bill.

Mark my words - somehow all this crap will end up guaranteed by the taxpayer.  All of it.  It will blow up and it will result in at least a trillion worth of damage to the Public Balance Sheet.

Huntsman Chemical's deal appears to be blowing up:

"June 18 (Bloomberg) -- Hexion Specialty Chemicals Inc., a unit of Apollo Management LP, sued to cancel its $10.6 billion acquisition of Huntsman Corp. because banks probably won't provide debt financing. Huntsman stock plunged.

Huntsman's net debt has increased and its earnings were lower than expected since the companies agreed to merge in July, Columbus, Ohio-based Hexion said today in a statement. The capital structure for the combined entity is no longer viable and would render it insolvent, the company said."

That's a potential panic trigger too.  Anyone remember 1989?

Have a look at the regional banks.  NCC, BKUNA, WM, FED, DSL, WB, RF, etc.  Pick one.  How many of those stock charts look like an imminent FDIC takeover?  Can the market be wrong?  Sure.  It is all the time.  Is it wrong about all of them at once?  I can't tell you which one(s), if any, are safe and which are not.  Why?  Because I can't dig through their balance sheets sufficiently well with the information we're given as "peons" to know what sort of tomfoolery has been engaged in!

I started writing about this more than a year ago with WaMu, when they reported more "capitalized interest" than actual cash earnings - and in fact their cash earnings were insufficient to support their dividend. 

What's "capitalized interest"?  Its the negative-amortization from "Option ARM" mortgages, basically.  Banks get to report that money as earnings even though they didn't actually receive any cash.  This is all fine and well so long as you will eventually collect that money.  But what happens when the value of the house drops below the outstanding mortgage balance?  Is that "capitalized interest" still "money good"?

Now try to figure out which of the banks has a problem with this.  Good luck.  The market has decided that the answer is "all of them" because they can't separate out the good from the bad.  Have a gander at the volume of PUTs - bets on decreasing stock prices (perhaps to zero!) that are being bought the last few days - those purchases have been ramping at an alarming rate.  Not good.

Next up are the bond insurers:

"June 18 (Bloomberg) -- Bill Ackman was right: the world's largest bond insurers aren't worthy of a AAA credit rating and may be headed for the bottom of the scale.

Ackman, the 42-year-old hedge fund manager who says he stands to make hundreds of millions of dollars betting against MBIA Inc. and Ambac Financial Group Inc. if they go bankrupt, will tell investors at a conference in New York today that losses posted by bond insurers may threaten to breach the capital limits allowed by regulators, making them insolvent."

Sometimes the shorts are right, eh?

Shall we hop across the pond?

"``The Monetary Policy Committee is prepared to take whatever action is needed to return inflation to the 2 percent target and to keep expectations of inflation in the medium term anchored to the target,'' King said in London. ``We believe that a slowdown in the economy is necessary to dampen price and wage pressures.''"

Ah, the good old intentional recession!  Is that good for stock prices?  (As an aside, its almost certainly better for the nation than the stupidity displayed by Bernanke, who has managed to engender a "crack-up boom" in the commodity markets through his insane alphabet soup nonsense trying to prevent a recession that should have been far longer and deeper six years ago!)

Oh, those two hedge fund managers at former Bear Stearns who were the "heads" of of the funds that started the entire credit crisis?

They're under indictment this morning according to reports on CNBC and in the WSJ.  While there is an element of "scapegoatism" in these busts, and I'm sure that is how many will characterize them, I would instead call these prosecutions "a good start."

Why?  Because there has been a tremendous element of crookedness across the board in lending over the last decade.  The "consumer impact" came with the housing bubble, but the same sort of hucksterism and fraud infused the entire tech bubble as well.  As a businessowner in the middle of that mess I saw it on a daily basis - the number of hucksters that came through my offices trying to get me interested in this or that sort of scheme (all of which, on analysis, came down to "con the public/shareholders/investors out of their money, and hope you can make a profit some time down the road") were rampant.

While many people call this "animal spirits" and an essential part of the capital markets, I call it fraud because the projections upon which these "deals" were based are intentionally overinflated compared to any sort of reasonably-likely outcome and, in many cases, compared to what is mathematically possible on a sustainable basis.

The Wall Street Journal is now putting forward opinion on the "housing bailout boondoggle", noting that Countrywide will be one of the big beneficiaries - and that Dodd got "special" customer treatment:

"If borrowers and lenders take full advantage of this new federal program, and Countrywide loans go south at roughly the same rate as those from other lenders, this suggests a potential taxpayer bailout of more than $25 billion for Countrywide-originated loans.

....

Meanwhile, Mr. Dodd continues to insist that, though he knew he was a "special" Countrywide customer, he didn't think he was getting any special financial benefit. But a $75,000 reduction in mortgage payments is no small matter for anyone living on a Senate salary of $169,300. Why else would he be known around Countrywide as a "Friend of Angelo" – Angelo being Countrywide CEO Angelo Mozilo.

.....

That's an excellent idea, in addition to a Congressional and Justice Department probe of Countrywide, Fannie Mae and the favors they seem to have spread around Washington. American taxpayers need to understand more about who they're being asked to bail out here, and why.

Ding ding ding ding ding.  The Journal gets it, and I just renewed my subscription as a consequence.

Unemployment claims came in at 381,000 down slightly from last week, and continuing claims is down to 3.06 million.  The futures oscillated a bit but didn't move much overall.  Nonetheless, they are up somewhat this morning, leading to the likelihood of a bit of a rebound at the open - the question is, can any sort of bullishness this morning hold up?

Dimon's words about Bear Stearns, cited on CNBS.

Then the $30 billion JP Morgan had guaranteed by the taxpayer can be withdrawn right here and now, yes?

No?  Why the hell not?  If they got such a "great deal" then why should the US Taxpayer continue to take risk on Morgan's behalf?

And more importantly, did you just admit to something that might lead to a few lawsuits?  You know, all those people who were long the stock and got rammed by a forced "buy-under" that you said under oath you wouldn't have done absent that Fed guarantee?  I don't know if there's an actionable statement in there but I bet a bunch of securities lawyers are gonna be sleeping on it over the next few days.

Or is this just double-speak - that's a long way to say "lies" - coming out of your mouth Dimon?  After all, we've seen plenty of that lately, with virtually every firm on the street saying they don't need more capital - days before they go out and raise it.

Our wonderful CONgress is unlikely to act on this latest revelation of skulduggery, as they all seem to be far too busy making calls to Angelo Mozilo to refinance their latest investment property at favorable rates.

If you think housing is going to bottom this year, have a look at this:

 Maybe you can explain how?

See, this (hattip to Provega on the forum) is the 30 year rate.  Its gone from 5.6% to 6.3% in the last two months.  To put this in perspective your purchasing power has been cut by roughly 7.2% - in the last two months.

Why?  Bernanke.

Price inflation fears (justified), Bernanke's attempt to create a "positive slope yield curve" so his buddies at the banks can "recapitalize" and the Treasury's issue of new government debt to fund your "stimulus check" have driven up the long end of the yield curve.  This in turn drives up the cost of 30 year money, and which is reflected in the mortgage rate.

That is in turn inversely reflected in how much house you can buy.

Oh, and if you already own a house, it is also reflected in its value.  That's right - your government and The Fed have devalued every home in America by over 7% since Bear Stearns was bailed out, and arguably, as a consequence of bailing out Bear Stearns.

Still think Ben has done a "great job"?

Well, how about you look at what a Haaarrrrvaaaarrrddddd education is worth - or more precisely, what it says about your intelligence to have that claim on your resume:

"House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.

House prices are unlikely to continue rising at current rates. However, as reflected in many private-sector forecasts such as the Blue Chip forecast mentioned earlier, a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year."

This is a direct quote from October of 2005 - at the near-exact top of the market.

Now was Bernanke practicing intentional deception (a simpler word is lying), or was he really that wrong?  If the former, Harvard should revoke his degree for a rank violation of any reasonable definition of ethical behavior.  If the latter, how the hell did he earn it in the first place? 

The bigger question is that if Bernanke was this wrong on the housing mess, is anything he wrote in his famous thesis worth more than a wooden nickel?

In any event this sort of horsecrap, on the record, will certainly give me pause as my daughter gets closer to college age should she decide she'd like to attend one of these "Ivy League" joints.

Oh, speaking of housing, The Senate appears to have a "deal" on their bailout package. 

Are you going to stand for this America? 

$300 billion we do not have when Congresspeople got "VIP" treatment for their mortgages, at the same time they were supposed to keep you from getting screwed?

"U.S. Senate leaders have agreed to a bipartisan bill to establish a $300 billion rescue fund for troubled mortgages and a new regulator for Fannie Mae and Freddie Mac, lawmakers said on Tuesday."

I guess we the people haven't (yet) made the phones ring off the hook about MortgageGate, have we?

Oh, and lest you think I'm just banging a drum for profit, otherwise called "talking my book", you might want to read this:

"The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets."

And this:

""We see striking similarities between the transatlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe," said a report by Morgan Stanley's European experts."

Gee, someone's been reading The Ticker eh?  Or is it simpler - a few people picked up this device called a calculator, and did the math.

Its not that hard.

Any more questions?

FedEx told the truth and got hammered:

June 18 (Bloomberg) -- FedEx Corp., the second-largest U.S. package-shipping company, reported a fourth-quarter loss of $241 million, reflecting rising fuel costs and a writedown on the FedEx Kinko's unit.

The net loss was 78 cents a share, compared with a year- earlier profit of $610 million, or $1.96 a share, the Memphis, Tennessee-based company said today in a statement. Revenue rose 7.8 percent, to $9.87 billion. Shares fell in early New York trading as FedEx predicted a ``very difficult'' environment and gave an earnings forecast below analysts' estimates.

No kidding?  The futures didn't like that one bit, but again, exactly why should this have been a surprise?  "The economy sucks and high oil prices are a major problem" is news?  Where have people been, under a rock?

Time to choose folks. 

The Wall Street folks and Politicians don't give a damn about you.  They never have, despite their claims, and now you have proof.  The only question is whether you're going to continue to be good little sheep, going to work like zombies every day and letting yourselves, your spouses, your children and grandchildren be savaged from the rear every morning and night by these modern-day robber barons, or whether you will take decisive - legal, peaceful, but decisive - action to stop it.

One final thought - you can't rape the willing. If you consent, whether by overt act or silence, then the financial boning you're taking isn't rape - its consensual sex.

None of this, however, changes the fact that its 5 minutes to midnight.

So Lehman's Fuld says he's "confident" in the firm's outlook:

"Lehman rose in New York trading after Fuld, in his first public appearance since April, said the company had fairly gauged the market value of the assets, as his finance chief laid out more details on the stakes than previously disclosed. Lehman, the fourth-largest U.S. securities firm, today reaffirmed that it lost $2.8 billion in the quarter. "

Yeah, right.  We should believe this because?  Did you tell the truth the last two times?  Three?

More importantly, however, is "how do you make money going forward Mr. Fuld?"  Proprietary trading?  Not exactly a core business, right?  Lending?  To whom and based on what collateral?  SIVing and Slice-n-Dice?  Is that part of the market ever going to return?  I wouldn't take that bet.  Advising on LBO deals?  How many of those will there be?

Oh, and as to that "takedown" of your leverage ratio.  How, exactly, was that accomplished?  There are rumors floating around (hattip "Naked Capitalism") that Lehman may have self-financed yet more SIV-style games, effectively shifting "assets" over to subsidiaries that they ultimately are supporting and controller, while owning as much of it as they possibly can without triggering "consolidation" rules.  True?  No idea, but absolutely nothing surprises me any more.

This is the problem with "earnings releases" as things stand today, you see - the 10Q is not available when the "earnings" are released, so analysts (and investors) can't try to suss this sort of thing out.  And, surprise-surprise, no questions on this sort of thing were asked in the conference call.

Hmmm.

Oh, the Mortgage-gate story is getting more legs:

"Congress also needs a full accounting of the contacts between Countrywide and the politicians receiving favors from the lender. Did Countrywide ask for and receive assistance from the Friends of Angelo? With Senate Banking Chairman Dodd at the center of the scandal, ranking member Richard Shelby (R., Ala.) and House Financial Services Chairman Barney Frank (D., Mass.) will have to lead the inquiry.

But taxpayers should not have to wait for the results of an investigation. Democrats in Congress are trying to pass a bailout for mortgage borrowers and lenders like Countrywide, and they have been holding reform of Fannie Mae and its cousin Freddie Mac hostage to get President Bush to agree. Mr. Dodd is one of the main hostage-takers. It is time he and Mr. Frank dropped this political ransom-taking and finally subjected Fannie and Freddie to tough oversight. This means giving a regulator the power to set their capital ratios and portfolio securities limits, so that taxpayers have some protection against their potential losses."

No kidding?  Seeing this from The Journal warms the cockles of my heart.

In other words its about damn time.

The insanity of these Congresscritters claiming "they didn't know" isn't amusing.  And since when is getting a loan that isn't offered at any rate (as is alleged to have taken place in one case) "not a special favor"?

Speculation is now running rampant about whether Ben's Fed means what it says, or is full of liars.  See, they've made all sorts of noise about removing liquidity - raising rates - to control price inflation.

Well, an article in the WSJ says nuts:

"There is so far little evidence that either underlying inflation or the public's long-term inflation expectations have reached a danger point. Mr. Bernanke and most other officials believe inflation expectations remain under control. The pace of inflation, excluding volatile energy and food prices, has remained near the top of the Fed's preferred range of 1.5% to 2%, based on its preferred price index. "

Ha! 2% my ass.  First, we all buy that pesky food and energy. I know I do and you do too.  Of course in the Ivory Tower World of Bernanke, these things don't matter.

In truth Ben doesn't seem to give a damn if your purchasing power is shredded.  But he should, because it is purchasing power - discretionary spending - that powers our economy and ultimately GDP.  Cripple that and you get a nasty recession - or worse.

Arthur Burns, er, Bernanke, simply doesn't give a damn about you. 

Let's look at the history here - Bernanke sat back and allowed the housing bubble to take place, he allowed $500,000 mortgages to be written by banks he has regulatory authority over to McDonalds' workers making $35,000 a year, and he is currently sitting with nearly $300 billion in slosh - about $250 billion more than normal - tamping down interest rates so the banks can be "recapitalized" on the back of your gasoline bill which is now, in most parts of the nation, north of $4/gallon!

Don't let these clowns get away with the claim that "there was nothing they could do" to prevent the housing bubble from taking off and ramping into your face. 

That's a bald-faced lie. 

Both Congress and The Fed had every ability to stop the securitization of loans that were demonstrably unsound. 

We now know about "Friends of Angelo", and that explains much of the Congressional blindness towards the lenders who systematically wrote paper that under any reasonable set of standards was objectively unsound.

They didn't care and they still don't.

They talk tough but they also trade on inside information, because for them, its not illegal.  They can (and do) leak information to lawmakers and the media, and that media is now saying that Bernanke has no intention of draining the swamp.

To be blunt Bernanke and Congress both think you are too stupid to wake up and stop them through political pressure and/or direct action.  They're quite sure you won't mount organized protests and shut down industry.  They're quite sure you won't vote them all out of office.  They're quite sure you won't all go to the bank and withdraw your money, banking in "The Bank of Sealey" and refusing to use credit, as an act of protest. 

In short, they're quite sure you are a sheep and that they can shear you repeatedly, time after time, and the history of the last thirty years suggests that they're right - you will whine and complain but you will not only go to work (instead of going out on a "general strike") but you will also continue to spend more than you make until your credit cards are all literally declined!

Oh, and before you say "oh those poor bastions of Capitalism" Goldman beat handily today, posting over $4/share in profit in the current quarter.  So much for them "needing" Bernanke's "recapitalization" eh? 

The truth is that you, Dear Reader, are being systemaitically screwed by both Burns-cum-Bernanke and Congress, and until you do something about it the screwing will continue.

Dickey Durbin was on CNBC this morning crooning about "eeeeviiilllleee speculators" in the energy markets.  Bah. 

The reason you're paying $4/gallon for gasoline is because Congress and The Fed looked the other way while the housing bubble was being blown, utterly refusing to do their job of regulation, and now they are both allowing Bernanke and Pals to artifically tamp down interest rates so you can be screwed AGAIN while Goldman makes $4.50/share this quarter and buys back more than a million shares of its own stock!

YOU are paying for this in the form of seventeen percent annualized producer price increases and $4/gallon gasoline.

Until you are willing to organize your friends and neighbors and literally shut down cities - drive at 5mph through the streets of major cities on the freeway and stop commerce, refuse to show up for work, refuse to borrow and spend more than you make, show up in Washington DC with a million of your neighbors and literally shut down The Capitol you WILL be bent over the table on a daily basis. 

YOU have demonstrated time and time again that your only response to this is to say "go ahead and rape me again if you must, but please don't cut off my credit cards!"

Examples?  Which ones would you like me to list?  Huge numbers of people are against the Iraq war, right?  You were promised the Democrats would cut off the funds as soon as they were put in office.  Did they?

No.

What did you do?  A half-dozen people showed up at a congressional hearing and interfered, being carted out by Washington DC police.

That's it.

Half the nation wanted their elected representatives to cut off the money, were told they would, were lied to and then those very same people who said this was the most important issue in the last election couldn't be bothered to show up in DC and clog up the city to the point that it couldn't function.

ONE HUNDRED MILLION PEOPLE claim they were pissed, but A DOZEN showed up in a congressional hearing and were arrested.

One dozen.

If just one percent of that claimed 100 million - 1 million people - had showed up in DC and simply sat down in the middle of the roads, making it impossible for commerce or government to function, the funds would have been cut off immediately and what you claim you wanted - an immediate end to the Iraq war - would have happened.

And now you wonder why Bernanke and Congress take their "special loans" and throw $300 billion in slosh into the system, generating $4/gallon gas prices?

You have repeatedly demonstrated that you will say "thank you" when you get screwed by these people!

Goldman Sachs just reported over $4/share in a profit which they earned in no small part from their commodity trading activities.

In other words, as a direct consequence of what you have allowed them, through Congress and Bernanke, to do to you. 

That money came straight out of your pocket and you said "thank you."

On the prosecutorial trail it appears that we might be about to get some action there:

"Federal prosecutors and the U.S. Securities and Exchange Commission may bring criminal and civil charges in a probe of Bear Stearns Cos. hedge funds whose collapse ignited the subprime mortgage crisis last year, people familiar with the investigations said.

....

Indictments against Cioffi and Tannin may be just the start of a U.S. probe of the credit crisis, Frenkel said.

``We're likely to see cases from the top all the way down to the mortgage brokers,'' he said. "

Hope springs eternal.

PPI up 7.2 headline year/over/year, up 1.4% on the month. 

Up 1.4% on PPI headline annualizes to nearly seventeen percent.

Core up 0.2%?  Ooook. 

Housing starts down 3.3%.  Oh, and do you remember that "multifamily" surge that caused the cheering last month?  This month, down 8%.  Yeah.

And the futures?  All they care about is that Goldman (and the rest of the bankers) have succeeded in robbing you through a producer price inflation index that is up seventeen percent on an annualized basis last month, and you, so far, are bending over the table and saying "you have permission to rape me again but please leave my credit cards alone!"

"America, the land of the free and the home of the brave" has turned into "America, the land of the fool."

SEVENTEEN PERCENT PRICE INFLATION IF YOU ANNUALIZE LAST MONTHS NUMBER.

Do you remember the 1970s? 

They're back.

Now, given the facts, are you going to be a good sheep and bend over the table for your daily dose of financial rape, or are you going to get off your ass and stop it?

Let's talk about Political Candidates for a second...

Over the weekend Senators released their financial disclosure documents.

The following ought to raise alarms among voters - or perhaps not, given how silly we all are as Americans when it comes to personal financial management:

"Senators John McCain and Barack Obama released their Senate financial disclosure statements on Friday, revealing that Mr. McCain and his wife had at least $225,000 in credit card debt....

The bulk of the McCains’ obligations stemmed from a pair of American Express credit cards that are held in Cindy McCain’s name. According to the disclosure reports, which present information on debts in a range rather than providing a precise figure, Mrs. McCain owed $100,000 to $250,000 on each card.

Another charge card, held by what was described as a “dependent child,” had also accumulated debts of $15,000 to $50,000. In addition, a credit card held jointly by the couple was carrying $10,000 to $15,000 in debt, the filing indicated, at a stiff 25.99 percent interest rate. "

Good God.

At least $225,000 in revolving debt, with at least some of it carrying "subprime" rates?  By the way, that $225,000 is the minimum - it could be as high as $565,000, but the Senate does not require exact disclosure - just ranges.

What in the Sam Hell is McCain doing?

And how can you possibly service that with the base salary as a Senator of $169,300 per year, before taxes?

Now to be fair, the McCains' have quite the income, with Mrs. McCain drawing over $300,000 as chairwoman of Hensley (a beer distribution company founded by her father), and John receives an annual pension as a Navy Officer of just over $58,000.

But the sheer size of this debt on credit cards is astonishing.  American Express truly loves the McCains - they should be spokespeople.

More to the point, however, is whether such a person is qualified to manage the financial health of the nation with the largest GDP in the world.  Clearly, having lots of debt, and plenty of it on revolving accounts, doesn't bother the McCains.

Well it bothers me.  I have nutty credit lines and use 'em regularly, but they are also paid off in full at the end of every month.  I haven't paid a nickel of interest on any of those charge accounts in the last ten years, and if I was reporting my debt on revolving accounts I would (accurately) describe it as "zero".

What's worse for McCain, however, is his ties to Phil Gramm. 

Mr. Gramm was the architect of the repeal of Glass-Steagall, the Depression-era law that held apart investment and commercial banks.  I've referenced this before; you need to go back and read this entire entry, as the section on Mr. Gramm's involvement (about halfway down) details the former Senator's lobbying as recently as this last December.

Now we get this; the more I learn, the more I dislike.  The concept of a President that thinks its perfectly fine to carry around somewhere between $250,000 and $500,000 in debt on credit cards ought to scare the hell out of every American, especially when we as a nation are nearly $100 trillion in the hole!

"Fiscal responsibility" and "McCain" can't be used in the same sentence.

The G-8 summit released a statement that said:

"Finance ministers from the Group of Eight nations said surging food and fuel prices have replaced the credit squeeze as the biggest threat to the world economy.

``The predominant concern is the inflationary effect that oil in particular and also food prices are having,'' U.K. Chancellor of the Exchequer Alistair Darling said yesterday after G-8 officials ended talks in Osaka, Japan. Deputy German Finance Minister Thomas Mirow said oil's rise to a record means ``an enormous withdrawal of purchasing power.''"

This would be funny if they weren't serious - but they are.

The idiocy of refusing to address the reason we are seeing a tremendous price surge in commodities astounds.

Once again, this has happened as a direct consequence of The Federal Reserve's policies in The United States, specifically, The Fed's unwise and unwarranted dumping of excess liquidity into the system in order to tamp down short interest rates.

The underlying problem in the economy was not weak demand for which excess liquidity and thus lower short-term rates might be appropriate.  It was in fact the very provision of that excess liquidity and unreasonably-low interest rates in the first place which led to a credit bubble of unprecedented size.

You can't fix a junkie by giving him more heroin! 

You must force them to withdraw by removing the drugs.

Bernanke's "alphabet soup" does exactly the opposite in that it swaps used toilet paper for Treasuries, which are then Repo'd for cash.  This is the worst sort of "heroin fix" for a junkie (Wall Street Banks) that have proven time and time again that they cannot behave well.

Since Bernanke's Fed has done precisely the wrong thing in their insane bid to "bail out" their buddies in the banking system we now are faced with negative real interest rates across the entire yield curve when one factors in actual price inflation.  This causes investors to look for something that cannot be debased at the whim of a cocksure Fed Chairman, and what they have decided upon is commodities.

Again, the reason for this is clear and obvious if you have even the first hint of intelligence - a barrel of oil will always and forever return about 20 gallons of gasoline and another 10 of diesel fuel.  Always.  No man can debase the inherent value of that barrel of oil; the number of BTUs in that barrel is a constant and thus the amount of physical work that can be performed utilizing it is also a constant.

Bernanke's error is in thinking that he can play "Ivory Tower Professor" and preach to the market, telling it that "you will treat Treasuries as money-good assets." 

Uh, no Ben. 

You can ask but you can't force.

When you act in a directly opposite manner to your proclaimed intentions, debasing your holdings at The Fed to the point that you replace half of your balance sheet with used toilet paper, you should not be surprised when the money leaves that asset class and goes looking for something that you cannot destroy the inherent value of!

If you want this to stop, the answer is to remove the "excess liquidity" from the system and disgorge the garbage on your balance sheet, putting the Treasuries back. 

Force the Junkie to undergo his DTs and detox.  If it kills him because he's ingested too much toxic waste, then it does.  That's unfortunate but it is not avoidable.

The sad part of this whole saga is that the destabilization of world commodity markets that Bernanke has caused could easily result in civil wars breaking out and lead to the sort of serious geopolitical instability that the world has been notably free of for the last fifty years.

Let's hope that we don't go down that road.

Speaking of Bernanke's Fed and the believe that "they can fix it", you need to pay attention to the H.4.1 data release.  The last one came out on the 12th and it has some really ugly numbers on it.  Let's go over a few....

Notice that the current holdings of Treasury bills is $25 billion.  This is down from some $250 billion a year ago, or a net reduction of 90%.

If you remember, I have in past Tickers talked about how The Fed isn't buying any more Bills when they are issued, and that this has contributed to the lack of interest in these issues over the last couple of months - while Treasury has been issuing them like madmen to fund the "stimulus" checks.

Well, The Fed doesn't want to cause a major bond market selloff, you see, and Bills are by definition very short-term instruments (less than one year.)  They typically are 4, 13 and 26 week instruments - that is, they mature on roughly one, three and six month terms.  I have a fairly sizeable amount of these myself through Treasury Direct; its a nice safe place to park cash and so long as you don't need it back with less than 4 weeks notice (if you're in the 4-week bills) all at once you can "ladder" into these so you have the ability to pull your cash on anything from a 4 to 26-week schedule - you simply allow them to "peel off" as they mature and take the funds out, not rolling them over.

This is what The Fed has done - as their bills have matured they've taken the money and used it to fund the slosh and other facilities - to the tune of $225 billion worth in the last year.

They are doing the same thing with notes and bonds (maturities of up to 30 years but longer than one year) but the redemption cycle on them is, of course much longer.

So why not just sell off the notes and bonds?

In short, because doing so would unleash a panic in the bond market.  If you wait for them to roll over and redeem them, there is not much of a net impact in the market's price, and thus the interest rate paid on them.  If The Fed were to start dumping bonds, on the other hand......

So what does this all mean? 

Bottom line: They are out of low-impact ways to swing the market around.

Yes, the Fed could sell off notes and bonds, but doing so would spike the yield curve and destroy what is left of the housing market, since mortgage rates are linked closely to the 10 year bond's interest rate.

They can allow more notes and bonds to mature, but that's a slow process - it doesn't get them funds now.

And in the short-term bill department they have only $25 billion left, and then it is gone!

Those of you who pray at "The Fed is Omnipotent" altar are fixing to get a really nasty surprise - soon.

Now does all The Fed "jawboning" of the last week or two make sense? It should. 

They don't have much in the way of actual firepower left, and they're hoping that idiots in the market will ignore the facts and believe they are omnipotent, when in fact their power is limited by their checkbook just like you and I.

The truth is that their checkbook of low-impact instruments with which to tamper with the market is almost empty, having been consumed by their various bailout initiatives!

And it gets better.  Hattip to "Great Depression 2006":

Hmmmm.... Some of the security CUSIPs I recognize the prefix of, and know who they belong to.  CBASS, for example, is the infamous super-SIV that caused all the trouble for Radian and MTG when they were planning to merge.  Most of these CUSIPs look to be from the infamous folks in the subprime arena.

Go read the entire article.  Who is that organization throwing this party? On behalf of Wells Fargo as Trustee of these instruments being auctioned.  Is this one of those "extra special" SIVs, or is there a window involved somehow, somewhere?

Finally, anyone know where Soros is these days and what he's up to?  He's known for taking a cheap shot at a currency - or a central bank - when they have their backs up against the wall.  All for profit of course.

If you think he won't do it again (this time to us) you're very wrong.  He both can and will, and just like Britain the last time our politicians will discover that Bernanke really isn't omnipotent.

If I had to bet, my money would be on him targeting the bond market, not the dollar - simply because the balance of risks suggest that he could easily back Treasury and Bernanke into a corner if he was to get aggressively short, especially if The Fed depletes its bill supply.  I personally think Soros' politics suck, but when it comes to the currency markets he's sharp (less so when it comes to equities; he lost a buttload getting involved in tech right in front of the explosion in 2000!)

AIG's CEO got blown out by the credit mess. 

"Willumstad, who replaced Martin Sullivan as CEO yesterday after record losses tied to subprime loans, said he plans to review all of AIG's operations, which include offices in more than 100 countries and more than $45 billion of hard-to-value assets. AIG gained 4 cents to $34.22 in German trading."

Another one bites the dust!

Lehman released their actual results; I found the press release amusing.  The most important thing in there, from my point of view, is that expenses - including compensation - increased while they managed to lose more than $5/share.

How you can possibly justify paying people more when they produce these sorts of "results" is beyond me, but the initial reaction in the market was to move the stock up a buck a share.  So long as shareholders refuse to punish companies that continue to pay executives at an insane rate when they lose billions, this sort of stupidity will continue.

Finally, a topic I've been banging the drum on for months is getting some press - that stocks are expensive relative to return:

"Profits are declining as U.S. companies' input costs rise faster than they can pass them on to consumers. At the end of March, producer prices including food and energy rose by 6.9 percent, compared with a 4 percent increase in consumer prices, according to quarterly data compiled by Bloomberg.

The last time U.S. companies had so little pricing power was in 1975, after the Middle East oil embargo ushered in a decade of stagnant growth and price increases known as ``stagflation.''

Ding ding ding ding ding.

Empire Index was down to -8.68 .vs. -3.23 last month.  This is the NY area manufacturing index, and to be blunt, it sucked.  This appears to be the reason for the dump in the futures right around 7:15.

As an update on The Ticker over the weekend, both Dodd and Conrad spoke about their Countrywide mortgages:

"U.S. Senators Christopher Dodd and Kent Conrad denied getting advantageous loan terms from Countrywide Financial Corp., the lender criticized by lawmakers over policies blamed for spurring the subprime crisis."

There were reports that Conrad wrote a $10,000 check to charity to "remove any appearance of impropriety", but that has curiously disappeared from later updates.  Now both of them are out vehemently denying they received "special treatment."

Well guys, from where I sit that dog ain't gonna hunt.  If your loan goes through a "VIP" program and you got a better rate than an ordinary person who applies with the same sort of credit score and earnings profile then you got special treatment!

And since this was a firm that had engaged lobbyists to do work for them in trying to keep Congress out of their hair, the appearance of impropriety is certainly there, along with the what sure looks to me like a clear violation of Ethics Rules.  The only question there is whether there was awareness of the better terms. 

Maybe yes, maybe no.  But if you're "sophisticated" (and if you're on these committees I hope you are, as you're writing regulations for this part of our nation's economy!) then I would certainly hope you were smart enough to know that you got a better than you'd expect interest rate and terms.

Now whether there is a violation of the law is a far murkier matter - to be a bribe there has to be a quid-pro-quo somewhere, and so far, nobody has established one.

But I do find Angelo Mozilo's "kid glove" treatment during his latest appearance on The Hill curious; indeed, most of the reps and senators "questioning" him were apologetic that he was there.  That never did make sense to me when I was watching the televised hearings, but it sure as hell makes plenty of sense now!

The more serious matter from my point of view, however, is not whether a bunch of Senators and Reps got "better than normal" terms on their mortgages.  That's good-old garden-variety favoritism, and is old as is our Republic.  It should lead to sanction but in terms of the potential impact on our nation this is relatively mild.

The more important issue is whether or not these Reps and Senators were and/or are participating in the "Bubble House" games of either flipping property or cash-out refinancing!

The latter is probably not a violation of ethics rules, but it sure as hell puts some color on what the real motivations are behind these "bailout" bills!

If these Senators and Reps indeed were cash-out refinancing property they own then there is an extremely serious matter afoot as these individuals are trying to save their own skins and are proposing to spend half a trillion dollars, with $160 billion of it already gone, to do so!

THAT is the real issue here, and is the question I want answered.

You're not going to believe this about Countrywide:

"Senators Christopher Dodd, Democrat from Connecticut and chairman of the Banking Committee, and Kent Conrad, Democrat from North Dakota, chairman of the Budget Committee and a member of the Finance Committee, refinanced properties through Countrywide’s “V.I.P.” program in 2003 and 2004, according to company documents and emails and a former employee familiar with the loans.

Other participants in the V.I.P. program included former Secretary of Housing and Urban Development Alphonso Jackson, former Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and assistant Secretary of State Richard Holbrooke. Jackson was deputy H.U.D. secretary in the Bush administration when he received the loans in 2003. Shalala, who received two loans in 2002, had by then left the Clinton administration for her current position as president of the University of Miami. She is scheduled to receive a Presidential Medal of Freedom on June 19.

.....

"According to company documents and emails, the V.I.P.'s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value. For V.I.P.'s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free “float-down” to the lower rate, eschewing its usual charge of half a point. Some V.I.P.'s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.

Unless they asked, V.I.P. borrowers weren’t told exactly how many points were waived on their loans, the former employee says. However, they were typically assured that they were receiving the “Friends of Angelo” discount, and that Mozilo had personally priced their loans."

You have to be shitting me.

Is that illegal and/or directly in violation of both House and Senate rules?

The issue is not just that closing costs and points were waived - it is the "float down" provision and even a reduction in interest rate.  Grab your trusty computer (e.g. Quicken) and run the difference on an amortization schedule over 30 years of a 1/4% interest rate change, then tell me what you think.  The "benefit" involved here adds up to tens of thousands of dollars.

I'm not surprised by a bit of this.

Rumor is that Countrywide had an entire department that dealt with these "FOA" (Friends of Angelo) loans, and I'll bet that a few well-placed subpoenas will show that these loans were disproportionately handed out to people with political influence.

You think that's bad?  Take a look at what MSNBC's reporting said Countrywide objected to:

"In a statement Friday, Countrywide did not address questions about the VIP program, but said it regretted the impact its disclosure may have had on customers. The company said it was "very concerned about the improper disclosure of confidential customer information. Protecting customer privacy is of utmost importance and we are aggressively undertaking measures to prevent further disclosure of private customer information." "

Oh, so they're very concerned about the disclosure of private customer information even when those "private customers" are United States Senators and Congresspeople, and they got favored rates because of their political connections?

And this from a company that has its franchise and is regulated directly as a consequence of Federal Laws passed by that very same Congress?

Does this constitute bribery on a massive scale? 

You be the judge; I ain't qualified.

Here's something to help you make up your mind (Senate Ethics Rules):

1. (a)(1) No Member, officer, or employee of the Senate shall knowingly accept a gift except as provided in this rule.

(2)(A)A Member, officer, or employee may accept a gift (other than cash or cash equivalent) which the Member, officer, or employee reasonably and in good faith believes to have a value of less than $50, and a cumulative value from one source during a calendar year of less than $100. No gift with a value below $10 shall count toward the $100 annual limit. No formal recordkeeping is required by this paragraph, but a Member, officer, or employee shall make a good faith effort to comply with this paragraph.

(B) A Member, officer, or employee may not knowingly accept a gift from a registered lobbyist, an agent of a foreign principal, or a private entity that retains or employs a registered lobbyist or an agent of a foreign principal, except as provided in subparagraphs (c) and (d).

(b)(1) For the purpose of this rule, the term "gift" means any gratuity, favor, discount, entertainment, hospitality, loan, forbearance, or other item having monetary value. The term includes gifts of services, training, transportation, lodging, and meals, whether provided in kind, by purchase of a ticket, payment in advance, or reimbursement after the expense has been incurred.

"I didn't ask" isn't a defense; you can't accept anything worth more than $100.  Oh, and Countrywide spent plenty of money on lobbying, so the "private entity" appears to apply here.

Let me be clear on this - there is nothing generally wrong with a company having a "VIP" program.  Firms do that all the time.  Where the line gets crossed is when you provide "special perks" to persons who are in a position to influence your business as a result of their position in public office (whether they are an actual elected or appointed politician or one of their staff.) 

This is, in my opinion, a bright white line that you simply do not cross, and the lion's share of the problem in terms of "trouble afoot" here is with Congress, not with Countrywide. 

Now let's go on to another piece from that same MSNBC article:

"Conrad obtained a $1.16 million loan from Countrywide in 2002 to buy his vacation home, then refinanced twice through the company. Portfolio reported that an internal e-mail from Mozilo instructed an employee to give Conrad a 1-percent discount off his interest rate on his 2004 refinance of $1.07 million, a savings of about $10,000 a year in interest payments."

Ah, now we're getting somewhere. 

Are you beginning to understand how there could be a desire to insure that people can play "bubble house" present in Congress?

What if a bunch of Congressfolk in fact have a bubble house and/or serially refinanced, and thus are underwater themselves?  How does that change the calculus of what they're doing in Washington DC?

The bills coming out of Dodd .et.al. are allegedly intended to provide "relief" for American homeowners, never mind that the 80% of Americans got nothing out of the bubble years, did not refinance, and did not participate in the speculation but will get screwed by the debt bomb that is and will go onto the nation's balance sheet as a consequence of these "bailout" proposals!

$165 billion so far in "stimulus" has been blown on this endeavor and another $300 billion or more in Chris Dodd's bill is under consideration - for a total larding up of the public debt by nearly half a trillion dollars - to "work to fix the housing mess", at least in part.

I have to wonder - might not the truth be that some of these Congressfolk are in fact underwater on their homes which, of course, we're not being told about!

Is Congress trying to save you or are they trying to save themselves?

I believe we need to see investigations and, if warranted, indictments and prosecutions.  We need a special prosecutor.  This investigation must reach members of both the Legislative and Executive branches who may have abused the public trust in this and related matters.

I have documented in previous Tickers that Congress was directly warned before it repealed Glass-Steagall that this sort of abusive practice in the lending and banking system would happen, and they repealed the act anyway. 

Dodd is at the forefront of trying to "bail out" people.  Oh yes, he filed a bill that would be "adverse" to some lender's interests, but his solution always seems to be "spend more public money", when you get down to it. 

The "Examining Proposals to Mitigate Foreclosures and Restore Liquidity to the Mortgage Markets" preamble from him is just one example; spend, spend, spend, and bloat up the FHA's balance sheet.

That's nice. 

Now Mr. Dodd, would you please explain your "special" loan terms, and further, explain why we the people should put up with you filing bills to spend $300 billion in public funds that we do not have, along with exactly what sorts of conflicts of interest you and those around you in the House and Senate have in this regard? 

Perhaps you can tell us how you, as the Banking Committee Chairman and presumably highly-knowledgeable in matters of finance, could have possibly gotten this "deal" on your mortgages without realizing that they were in fact "special" terms that were not available to ordinary people - and further, how you could possibly not know that these "special terms" added up to a net benefit of more than $100, and were therefore not allowed under the Senate's Ethics Rules? 

I'd really like to know how you justify that, and I believe the rest of America would too.

In addition I think we the people should know if you, and anyone else in Congress, either as Representatives, Senators, or staffers, "own" one or more homes that are underwater and whether any of these people serially refinanced and withdrew equity - that is, are you as our "elected representatives" trying to save us, or are you trying to save yourselves with our money - and we're an afterthought?

The former head of HUD?  HUD pushed lenders to make "affordable housing" a priority, that is, to make subprime loans.  Of course the bet was that the good times would continue to roll forever. 

Mozillo, by the way, took more than $100 million in 2007 out of Countrywide in stock options as his company's stock price and prospects were collapsing.

I'd say his "Friends" program paid off quite well - for him.

How well did it work out for his shareholders or the millions of American homeowners who either have been foreclosed upon or are now facing same?

Do you remember how every time Angelo Mozillo showed up to "testify" on The Hill he was pitched softball after softball?  Anyone remember his testimony months ago where Reps and Senators were literally apologizing for having him there and saying before they started asking questions that they were "not going to grill him"? 

Now you know why!

Are you one of those people who got rammed up the chute by these lenders?  Did you get a subprime mortgage?  Did you pay points, closing costs, and a higher rate? 

Well guess what - "Friends of Angelo" apparently didn't, and some of them appear to have been the lawmakers and regulators that dealt with this company and were supposed to insure that the company didn't screw you as a consumer!

Of course Dodd and others wasted no time denying they "asked for any special consideration."  No surprise there.  But that's not the test Mr. Dodd, as I'm sure you're aware.  In case you've forgotten and can't find your copy, I included the relevant portion of the Senate Ethics Code up above.

I believe the bottom line is clear - it certainly appears to me that you and a number of other people in Congress received a benefit that is a clear violation of Senate Ethics rules (and, I assume, the House's version of same) and as you sit as Chair of the Committee that is responsible for much of the regulation in this space this is a particularly egregious matter as it pertains to you.

That conflict of interest is sufficient for me to call for your resignation.

I want the truth on this, and that means a full federal investigation complete with subpoenas and public disclosure of who got these "Friends of Angelo" loans.

All of them.

Every last one.

Haven't we had enough with William Jefferson (D-Lousiana) who was allegedly caught with $90,000 in "cold hard cash" in his freezer? 

He's still in office!

As if that's not enough, it appears that "unnamed government officials" are "worried" about the reaction in the bond market to Lehman's ouster of two officials.  See, normally default spreads (implied risk of bankruptcy) would widen, or increase.  But yesterday, following the announcement, they instead contracted.

Why is this important?  Because it signals that Wall Street now believes that the government will prevent market failures - that is, bankruptcies - due to foolish acts, and also sends a clear signal to to the company that they can take risk with impunity, as they will be "saved" if necessary.

Well golly-gee, this is a surprise after Bear Stearns?  I think not.

How do you fix this?  Simple - a public statement that there is no government or Fed backstop on any institution beyond FDIC coverage, and an immediate withdrawal of the PDCF.

Golly gee, that's difficult to figure out. 

Not.

Heh, I wonder - did Bernanke get his mortgage from Countrywide's VIP program?  Hmmmmm....

Call Congress folks. 

Its your government. 

Take responsibility for it.