No, that's not a misprint.

Let's say you went to Starbucks and bought a $5 Latte.  You swiped your debit card and didn't have the $5 in your account.

Bank of America would charge you a roughly $30 overdraft fee, amounting to 600% of your purchase for a loan of that $5 for as little as one day.  That's bad enough.

Let's assume you paid that overdraft fee (and the $5) in one week.  There are 52 weeks in a year and the bad news is that when computing the annual percentage rate you must divide the interest charged by the percentage of a year you held the money to get the APR.  Thus, 31,200% interest on an "annualized" basis, assuming you pay it in one week (it's 218,400% if you pay it off the next morning!)

The bank will soon stop doing this, and in fact is mandated to do so without getting permission first for each transaction, as of June 1st.

The question that should be asked is why we should have to wait until June 19th for new accounts, or August 1st for existing accounts, never mind why this sort of outrageous behavior has been permitted in the first place.

Guido on the corner typically will charge you something obscene like 500% interest over the course of a year.

The banksters put Guido to shame.

How much do the banksters make off this?  Some $1.77 billion annually, at last count.  None of which, I might add, will be refunded to their customers.

The banking industry has claimed that changes like this will "restrict credit" to lower-income customers, who allegedly "need" that credit. 

I will simply observe that nobody "needs" a 31,200% interest rate loan except the bank that has been given license to rob the public blind - literally.

If you were wondering who the Congress and Fed work for, it clearly is not you.

The open question, and one that I cannot seem to find a reasonable answer to, is why we, the people, continue to allow both a Congress and Federal Reserve to sit in control of our government and financial system when they permit and endorse actions that constitute financial rape of such an egregious nature that absolutely everyone can understand it.

The idiocy coming from the EU reeks of desperation:

“For Greece, the problem is completely over,” said Prodi, who was also Italian prime minister, in an interview in Shanghai today. “I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.”

Continuing...

Prodi, 70, who headed the European Commission from 1999 to 2004, will teach at the China Europe International Business School in Shanghai. He said budget deficits are “a general problem for almost all the wealthy countries.”

No, really?  You mean having the government be responsible for half of GDP is a problem, when everything that they actually obtain has to come, in the end, by taxing the citizens inside their borders?

The euro has weakened 5.8 percent against the dollar this year as concern Greece will struggle to finance its deficit eroded confidence in the European currency.

“Europe is more than happy,” said Prodi. “For the benefit of the European economy, the decrease of the value has been absolutely positive.”

Bah. 

As in the United States, European nations more-or-less index their entitlement programs to inflation.  And like the United States, they hold most of the costs of these programs off their balance sheet, where that indexing is not visible (directly) to markets, never mind that those are promises for tomorrow, not today.

It is here that the theories of all those so-called "economists" who claim that we "benefit" through currency devaluation by "inflating the debt away" have their thesis run head-on into a brick wall.

In the United States, for example, our "forward liability" for those entitlement programs is somewhere between $60-100 trillion, depending on who you ask.  The on-balance sheet public float of the debt is about $8 trillion.

So let's assume we try to double that over the remainder of the decade (as the economists believe we both must and will) the only way to make that able to be carried is to devalue the currency through money-printing - "monetization", if you will.

But doing so, because of the indexing in these entitlement programs, causes their forward costs to explode.

Let's take an example and run the "forwards" on it.  We will assume that the "current" cost of a set of entitlement programs is $5 trillion, but it is to be delivered in 30 years.  If the forward implied inflation rate is 2%, as Bernanke claims is the "goal" (1-2% annually) then the 30-year forward implied cost of this program can be easily calculated since it is simply the compound growth rate over that time. In this case, that program has a "forward" (or "as delivered in 30 years") cost of $9.06 trillion.

But now let's assume we decide to "inflate away" the debt as "suggested" by the IMF (and on which point, I might add, Bernanke was grilled in his last testimony before Congress) by raising the inflation target to 5%.  That's not all that bad, right?  It's only three more percent!

Well, except for one small problem - that inflation rate drives the delivered cost of this entitlement from $9.06 trillion to $21.6 trillion, well more than a doubling, and what's worse is that this additional cost totally destroys any "savings" in debt payment ability that would otherwise be generated by attempting to inflate away the "on balance sheet" debt amount.

In the case of the United States, of course, the forward cost is already $100 trillion.  Attempting to "inflate away" our $8 trillion (today) of public float, or the $17 trillion that the CBO says we'll have by 2020, would cause that $100 trillion to explode upward.  Indeed, simply trying to get "a bit of relief" with a 5% inflation policy would more than double it, and an actual attempt to inflate it off over the course of ten years (which would require approximately a 7% inflation rate) would cause that $100 trillion forward liability to balloon to more than $300 trillion.

With that it should be obvious that any attempt to play "inflate it away" will simply never work.  It will and must cause the immediate detonation of all forward-promised social entitlement programs, and when you have placed half or more of the population at the time in a position of effective dependence on those programs attempting such a foolhardy path of action is guaranteed to lead to the total destitution of half or more of the populace.

Since it is an essential certainty that a population so-impoverished will inexorably rise in violent revolution there is a clear argument that can be made that any such suggestion or policy, whether made publicly or "in the dark of the House Cloak Room", is in fact a violation of US Code, Title 18 Chapter 115 Sec2385, which provides in part:

Whoever knowingly or willfully advocates, abets, advises, or teaches the duty, necessity, desirability, or propriety of overthrowing or destroying the government of the United States or the government of any State, Territory, District or Possession thereof, or the government of any political subdivision therein, by force or violence, or by the assassination of any officer of any such government; or

 

Whoever, with intent to cause the overthrow or destruction of any such government, prints, publishes, edits, issues, circulates, sells, distributes, or publicly displays any written or printed matter advocating, advising, or teaching the duty, necessity, desirability, or propriety of overthrowing or destroying any government in the United States by force or violence, or attempts to do so; or

 

Whoever organizes or helps or attempts to organize any society, group, or assembly of persons who teach, advocate, or encourage the overthrow or destruction of any such government by force or violence; or becomes or is a member of, or affiliates with, any such society, group, or assembly of persons, knowing the purposes thereof—

 

Shall be fined under this title or imprisoned not more than twenty years, or both, and shall be ineligible for employment by the United States or any department or agency thereof, for the five years next following his conviction.

From The Forum:

Bond Cusip                    60+
ACCR 2007-1 M2 00438QAF1      35.8
CARR 2007-RFC1 M2 144526AF7   48.5
CMLTI 2006-WFH3 M1 17309QAE4  40.3
CWL 2006-10 MV2 12666PAW4     61.0
CWL 2006-18 M1 23243WAE8      60.5
CWL 2006-20 M2 12667HAG6      62.4
CWL 2006-22 M2 12666BAG0      60.2
CWL 2006-25 M2 12667TAG0      62.9
CWL 2006-26 M2 12668HAG5      60.0
CWL 2006-3 M1 126670WC8       57.4
CWL 2006-BC4 M1 12667NAE8     64.6
CWL 2007-1 M2 23245CAG5       64.4
CWL 2007-10 2M1 23246BAM3     56.6
CWL 2007-10 2M2 23246BAP6     56.6
CWL 2007-10 2M3 23246BAR2     56.6
CWL 2007-10 M5 23246BAT8      56.4
CWL 2007-11 2M3 23247LAK4     56.6
CWL 2007-11 M5 23247LAM0      56.3
CWL 2007-7 M1 12669VAF5       56.2
CWL 2007-8 M1 12669WAG1       57.0
CWL 2007-8 M5 12669WAL0       57.0
CWL 2007-9 M1 12670FAF7       57.9
CWL 2007-9 M2 12670FAG5       57.9
CWL 2007-9 M3 12670FAH3       57.9
CWL 2007-9 M5 12670FAK6       57.9
JPMAC 2006-CH1 M2 46629TAG5   37.6
JPMAC 2006-CH2 MV3 46629QAZ9  47.5
JPMAC 2006-CW2 MV2 46629BAU3  65.5
JPMAC 2007-CH2 MV2 46630MAY8  42.2
JPMAC 2007-CH2 MV4 46630MBA9  42.2
JPMAC 2007-CH3 M1 46630XAG3   46.5
JPMAC 2007-CH3 M2 46630XAH1   46.5
JPMAC 2007-CH3 M3 46630XAJ7   46.5
JPMAC 2007-CH4 M1 46630CAF1   42.9
JPMAC 2007-CH4 M2 46630CAG9   42.9
JPMAC 2007-CH4 M3 46630CAH7   42.9
JPMAC 2007-CH5 M2 46631KAG0   46.6
JPMAC 2007-CH5 M4 46631KAJ4   46.6

A random assortment of 2006 and 2007 securitizations from our friends at JP Morgan and Countrywide (mostly.)

The last number is the 60+ delinquency percentage.

A lot of this is Home Equity lines.

Remember my Ticker yesterday and my rant on Blogtalk regarding Barney Frank and the outrageous hidden losses being carried by our banks?  That none of this is being pursued, yet every week we see proof of it in FDIC bank seizures and the loss ratios?  That this sort of book-cooking, were you or I to engage in it in a public company, would lead us to be criminally charged, and in fact this is exactly what Ken Lay and Jeff Skilling were charged over doing?

Folks, this is endemic through the financial system.  The best performing issue in that list has a 60+ delinquency rate of 35.8% and a material number of them have more than half the loans in hard default.

Every home equity line behind an underwater first that is also not being paid is worth zero.  There is no recovery.  This is not like most bonds, where there is a meaningful recovery percentage after the default happens.  This is subordinated debt that is worth exactly bupkis if the senior lien cannot be fully satisfied from a foreclosure on the property.

These bonds are literally everywhere.  They're in pension funds.  They're on bank balance sheets.  They're held by The Fed through the garbage Fannie and Freddie paper they bought.  Foreign governments and foreign banks hold them.

Yet we have banks that are carrying very similar portfolios of loans on their books - second liens, either home equity or "silent seconds" used to get around various ratio requirements such as PMI on loan origination, and essentially none of them are being carried at anywhere close to these levels of loss.

There has been no - and I do mean no - recovery of balance sheets in the United States when it comes to financial companies, pension funds or anyone else holding this crap.  Zero.  Zip.  Bupkis.

Servicers have in some cases, it appears, even co-mingled funds in order to advance coupon payments, which has the effect of hiding these delinquency rates from investors.

For a while.

Cash flow always wins though folks.

I continue to hear "look, the market has a year under its belt now from the low, this means that it's a long-term bull market and will go higher for years to come."

Ok, let me ask you one question, and I will not provide the answer: You will, by doing your own work, because if you don't, then you won't take responsibility for your own outcomes - and if you're in that camp then stop reading The Ticker right now and start watching Jim Cramer on CNBS.

In every previous recession and market swoon post WWII by the time we have gotten a year from the bottom whatever it was that ailed the economy going in had been resolved.  Let's go through a few of them:

The S&L crisis, at this point, was under control - the S&Ls were under FDIC control, people were being sent to prison by William Black (and others), and we had a dimension on the losses and who had done what to whom (those loss estimates turned out to be way low, but at least we knew where they were.)

In the 1970s by this time oil prices had relaxed and the risk of the embargo was over.

Post-1981 recession interest rates were on their way down; the back of inflation had been broken.

Post early-1990s the California military bubble had popped and was mostly mopped up.

By the end of 2003, most of the Internet companies that had no business being in business were gone and buried; their bogus claims had led to their demise, and they had filed bankruptcy.

Now let's contrast this with today:

The credit default swap monster has not been caged.  In fact, there has been no change whatsoever in how these are traded and written.  Nor has anyone in the banks been indicted even when there is evidence of blatant bribery (as in the case of Jefferson County Alabama.)

All of the large banks, and a lot of mid-sized banks have enough second line exposure on their balance sheets written in the bubble states, carried at or near full value, to severely damage their capitalization ratios if not outright force them into receivership.  Not one of these institutions is marking their second line exposure anywhere near what the delinquency rates in these securities implies about their recovery values.  Yet these losses are both real and the overwhelming evidence says that impairment is permanent.

Existing home sales numbers have flattened at an extremely low level, even with the $8,000 tax credit.  This implies that the value of this credit has been reached in the marketplace, and that no actual recovery in housing is or will take place in the near term.  Yet the entirety of the premise that the economy has turned the corner - some 20% of GDP is housing related - rests on the belief that it has.

We are told that the auto industry has "recovered" with an estimated annual sales rate of 11 million cars.  The peak of the auto production cycle was seventeen million.  Even if half of that is recovered it will leave some 17% of that capacity idle and those people who used to man it unemployed.  Where are they going to go for jobs?

The labor employment rate (of all employable adults) is back to levels last seen when we had less than half the consumer and industrial debt in the system we have today as a percentage of income.  This sort of job loss into ramping debt has never happened before in the post-Depression era.  How are the interest payments going to be made?

The lockup in credit markets and economic malaise that followed occurred as a direct result of fraudulent balance sheets - that is, claims that firms had liquidity and assets that in fact were false.  When that falsehood was unmasked they failed instantly, as occurred with ENRON and MCI.  Do we, today, have balance sheets that accurate reflect the valuation of all assets by firms across the economy - not only in banks, but also in firms like GE and CISCO?

The government is literally providing 9% of GDP via deficit spending that exceeds the records set during the 2003-2007 years.  That is, they've replaced a full nine percent of the economy's final demand since 2007, and despite the claim that the economy is recovering the amount of replacement activity they're supplying has increased since the spring of 2009 and continues to do so.  If the government is going to supply this replacement for the indefinite future and that is necessary to avoid the recognition of an instantaneous economic Depression (defined as a 10% contraction in GDP) can the government continue to do so on an indefinite forward basis?

The entirety of the market rally from March of 2009 to today, and its sustainability on a forward basis, is dependent on the above - especially the government being able (and willing) to continue in its new role of providing 9% or more of GDP (beyond what it used to provide!) along with the continuing ability to mark assets that are worth little or nothing well above their actual market prices.

DO YOU BELIEVE that this can and will occur on an indefinite forward basis?

If you do, then you should be fully invested here and now, because indeed, profits will continue to advance, revenues will continue to advance, and the market will continue to advance.  We have a new bull market predicated on The Government legalizing balance sheet fraud and indefinite forward support of nearly half of GDP all-in (add up State and Federal spending - its close to 50% of GDP), with the additional 9% added for the last two years continuing into the indefinite future (and likely expanding too, especially with "health care" reform.)

If you do not then you should be hiding under the desk, because just as occurred in 2000 and 2008 when the breakpoint comes it will occur without warning, without recourse, and without the ability for you to get to the exit in time, and since the amount of the fraud and bogosity exceeds both the 2000 and 2007 levels by far so will the reaction - when it occurs.

Then aim your "demonstrating" at the people who are bankrupting your state - and you personally.

I speak specifically of people such as those that The Daily Illini pointed out - all employees for the University of Illinois.

Let's see what we have here....

The head of the football team - the coach - makes $1 million.  For coaching a college football team.

The "intercollegiate (sports) director makes $600,000.

The President of the University is just $50 large shy of a half-million.

A large number of Deans and Professors make $250,000 - or more.

Indeed, I have to get eight pages into this list before I drop below $200,000.

Oh, we also have two Lieutenants in the Police Department that make $192,545 - each - per year.  Handing out tickets to scooter riders without helmets and issuing University Parking Citations (probably more than $200,000 worth of those) I'm sure.

Now maybe you can justify how it is that these fine bastions of American Government Employment earn these bloated salaries. 

I will point out some demographics to readers for Champaign-Urbana, Illinois, where the University happens to be.

The median home price is $159,900, which the top fifteen pages of these employees can afford to pay cash for with one year's salary. 

The median income for a family is $52,628, while per-capita income according to the BEA is $31,354.  Fewer than FIFTEEN PERCENT of the persons on the University Payroll make equal to or less than the median per-capita income for the city.

Oh, and let's not discuss retirement benefits.  Legacy pensions anyone?  How about medical care once one retires.  And speaking of which, what's the retirement age?

There has been much written about overblown pensions, double and even triple-dipping and similar games.  But this table, nicely sortable by salary, makes quite clear exactly who the system employs and how much they pay - and that the pay is, shall we say, ridiculous compared to the average private-sector prevailing wage.

This much should be clear: If you're curious about why you're being bankrupted with parabolic tuition and fee increases along with demands to take on outrageous amounts of debt to get a so-called "college education", you might discern from the above that the only "educating" you're getting in the UofI system is how to hold still while you're bent over the table and violated.

What you, Dear Student, who is being given the whaaaaambulance treatment by the Administration (the folks making those six-figure salaries that are all radical multiples of the average living wage in your town) do about that "education" is, of course, up to you.

This is simply unbelievable.

Cisco CRS-3, powered by Cisco QuantumFlow Array - a chipset architecture engineered in multiple dimensions of scale, services, and savings.

That's the announcement.  It was the cause of all the hype.  A "new dimension" that works within their existing CRS framework. 

Basically, a faster version of the CRS-1.

CISCO claimed in his hype that:

The San Jose, Calif.-based Cisco had sent out invitations to analysts and the media for a "significant announcement" that it says "will forever change the Internet and its impact on consumers, businesses and governments."

Oh Jesus.

You'd think there was some new technology.  Something that nobody had seen before.  Something revolutionary.

You would be dead wrong.

Now don't get me wrong - more speed is good, of course.  More capacity is good.  More density - an increasing problem for various network folks, is never a bad thing, although there's no such thing as a free lunch - more capacity in a smaller space comes with higher power requirements and heat loading, which in turn invalidates assumptions made by carriers, ISPs and others on the adequacy of power and cooling systems in their machine rooms - sometimes with extremely expensive consequences.

But "forever change the Internet and its impact on consumers, businesses and governments"?

HORSECRAP!

This reminds me of the hype when the CISCO 7xxx carrier series routes were introduced in the 1990s.  These were "going to change the Internet forever" too.

But that was a forced upgrade CISCO was able to capitalize on due to their near-monopoly position in the core routing space at the time.

What was only known to people who understood the Internet at the time (myself included) was that the reason that device garnered instant acceptance and huge order flow was that the Internet's routing table was exceeding the storage capacity of the CISCO AGS+ which was, at that point, mostly at the core of the network.  Carrier routers were literally crashing as a consequence of running out of memory, and the architecture of the AGS+, which was roughly-based on the VME backplane architecture and the Motorola 68xxx processor line, did not allow for expansion of the address space.

In other words CISCO had painted itself into a corner and its response was to come out with a new, improved architecture that didn't have those limits - and the Internet's address space expansion effectively forced every ISP in the United States to buy their 7xxx series gear almost immediately.

But this is a different matter entirely.  There is no "forced corner" that CISCO can exploit here, there is no monopoly position in the marketplace as there was with the AGS+ 20ish years ago and while this is obviously a step forward in performance-per-unit-of-density the firm's claims are, in my opinion, dramatically overblown.

I used to have respect for John Chambers.  Not any more.

That John Chambers sees it necessary to resort to this sort of over-the-top hyperbole unfortunately causes me to have flashbacks of 1999 - when every "technology company" had their stock pumped day after day by releasing utterly overblown and outrageously hyped press releases, while the actual market impact of what made it to market was more akin to a mosquito biting an elephant's ass.

Let's hope what follows for those who buy into this bilge isn't March of 2000.

Disclosure: No position.

PS: Would you mind disclosing the particulars and performance of the off-balance-sheet financing you're carrying back for people - and the terms on that financing?  (p63.)  I'm just curious if there's been some, uh, "deterioration" in the credit quality in that nice black box.  Thanks in advance for what I expect will be a non-answer.

... suddenly politicians "get religion" about making damn sure it has no bullets in it:

“We’re of the opinion that a quick implementation of actions in the area of CDS has to happen,” Merkel said. Citing “ongoing speculation against euro-region countries,” she called for the “fastest possible” implementation of new rules. Europe must “do everything to avoid unhealthy speculation,” said Juncker, who heads the euro-area finance ministers group.

Where 'ya been Angie?

Oh, and you too Papandreou:

“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system,” Papandreou said yesterday in a speech in Washington.

And, of course, Sarkozy.

Note that I've been calling for these things to be either exchange-traded with central counterparty "blinding" (on purpose) as is the case with the regulated option and futures markets or be torn up since The Ticker began publication.

Why?  Because it is my position and remains so that unless you have this sort of market these contracts are all a scam. 

They are a scam because:

1. The counterparty cannot pay in aggregate for the exposure they have on.  This, in turn, "allows" them to write these swaps at an uneconomic price, which means that in effect these are all "side letter" deals.  That is, they're intended to cheat regulatory capital requirements as everyone involved knows there is no possibility of actual performance.  In these cases everyone involved should be rotting in prison - the buyer for purchasing a knowingly-bad "insurance policy" against an event that they know can't pay off for the singular purpose of defrauding a government regulatory agency (and/or the shareholders!) and the seller for putting forward a contract they know they are incapable of performing on.
   
   
2. The entire purpose of off-exchange trading of these instruments is to severely-damage the purchasers of these swaps in the retail market by obscuring the essentials of the transaction, including the bid and offer from other participants.  This also has the effect of allowing collusion, either active or passive, among sellers - nearly all of which are big banks and financial institutions.  This collusion, by the way, either is or should be a felony violation of anti-trust laws.  Finally, concealment of the market's opinion on price and activity allows outright bribery and other very-unlawful acts such as allegedly occurred in Jefferson County, Alabama.

The solution to this is simple, it's elegant, and I've been railing about it since The Ticker began publication, but there's no time like the present to re-state the demands and make sure they're clearly communicated to everyone.

In short, we must make all of these derivatives, including interest rate, currency and credit swaps:

1. Trade on public exchanges where blinding of counterparties takes place.  This is exactly identical to what is done with the OCC for listed options and the CFTC for listed futures.  If I buy a PUT on a company I have no idea who sold that PUT in the market, and further, if I exercise a long PUT the person who originally sold it may not be the one who gets assigned - that's handled by lottery among all who are short that contract.  This makes abuse of these contracts by the buyers, who then seek to destroy the sellers, extremely difficult as they have no idea who to target.
   
   
2. Have the exchange is the buyer for every seller and the seller for every buyer.  Since the transaction is effectively "blinded" from the counterparties the exchange is thus in the position where it must make certain that anyone who is short has the capital posted and held as margin to guarantee performance or the exchange will wind up insolvent.  The exchange has nothing to gain and everything to lose by allowing people to "game" collateral and margin requirements - thus, it doesn't happen.  Further, as volatility rises the exchanges tend to increase margin requirements in order to protect themselves against sharp and unexpected moves - exactly what would be expected of a prudent counterparty.  In short this process makes the market "safe" for both buyers and sellers, and even in times of extreme stress such as the 1987 crash nobody has ever had a regulated futures or options contract fail to be honored.
   
   
3. Break up those "custom" contracts that are so esoteric that only a handful of people want to trade them into standardized contracts that a lot of people want to trade.  Let's say that someone wants a custom derivative that is comprised of the price of oil and the price of John Deere's stock.  Perhaps they're a major farming interest that is concerned not only about the possibility of Deere failing (they have combine orders stacked up that would be VERY expensive to replicate on the spot market) but also the price of oil since they have to fuel those combines.  That's a custom contract that almost nobody would want to trade, but it can be deconstructed into a PUT on John Deere and a short on the oil futures.  In essentially every case these "custom" contracts can be deconstructed into two or more things that lots of people will want to trade, which immediately destroys the argument for "custom" OTC contracts.

For those financial parties who "resist", the solution is simple: either relent or those contracts which you refuse to migrate to such an exchange are torn up as void ab-initio as you have refused to demonstrate both ability and intent to perform.  They are thus not valid contracts - end of discussion.  If the buyer wishes they can (and should) go sue to seller for return of their premium, since they bought something that was sold under false pretense.

Congress must take this action now, and if it will not, then the executive must by whatever means are necessary - including executive order.  It's all the better if Merkel, Sarcozy and others on the world stage have finally come to realize what I've been saying now for the last three years when this mess first began:

These over-the-counter derivatives are an outrageous-destabilizing force and, in many cases, are outright fraudulent instruments as the selling entity lacks the capacity to perform as agreed.

The essence of the AIG mess was that the company lacked the financial capacity to perform.  It really is that simple.  Knowingly entering into hundreds of billions of dollars of financial commitments without the ability to perform should be treated as a felonious act, but apparently we have no cops anywhere in the world interested in massive and outrageous acts of this sort, as I have yet to see hundreds of perp walks up and down Wall Street.

Well, if the next-best thing is to prevent it from ever happening in the future, I guess we'll have to settle for that - even though it is, on balance, wholly-insufficient when one considers the damage that these people have caused to the global economy and financial system.

In this case, on Galbraith father's foreskin.  We would have been spared this intellectually-bankrupt and fallacious bit of spooge:

The Simpson-Bowles Commission, just established by the president, will no doubt deliver an attack on Social Security and Medicare dressed up in the sanctimonious rhetoric of deficit reduction.

....

But what would be the economic consequences if they did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.

Now that is Grade "A" hyperbole.  Let's examine it and see if there's any reasonable basis behind the claim.

To put things crudely, there are two ways to get the increase in total spending that we call "economic growth." One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that's basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors--public deficits or private loans--has to be in action.

Well, no.

There is only one way to get an increase in total spending that is sustainable: you must increase net production of "stuff", whether that is goods or services.

Wealth is not debt.  It is production.  It can only be mined, manufactured or grown. The only free lunch that is available is the power of the Sun, and that's only 'free" because we are too puny to measure in astrophysical time scales (if we weren't we'd realize that even the Sun's energy is in fact neither free or inexhaustible!)

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand.

.....

But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don't control the currency in which they owe debts--as Argentina owed dollars or as Greece now (it hasn't defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept.

That's the biggest load of bilge I've read in years.

While it is technically true that a government that has control of its own currency can print as much as it wants, it is not true that printing that currency with wild abandon is cost-free, and the more inter-connected one's economy is with other sovereigns that also have control of their currency the more dangerous unbridled printing is.

Weimar Germany had control of their own currency, and we all saw what happened to them.

Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid.

This is true but also intentionally misleading.

The issue is not whether the debt will be paid off - it is that the interest payments are not under the issuing nation's control.  Demanded rates are a function of perceived ability to tax from the citizens the revenue necessary to cover that interest coupon.

Due to inefficiency in the economy (again, back to thermodynamics principles - no transfer of anything is ever 100% efficient) the money "printed" will fail to be entirely transmitted to the citizens in a form and fashion that can be taxed.  Indeed, they must spend some of it in order to survive.  This leads less than all of it available to be taxed away to cover those interest payments.

Nor is that interest a solvency threat. A recent projection from the Center on Budget and Policy Priorities, based on Congressional Budget Office assumptions, has public-debt interest payments rising to 15 percent of GDP by 2050, with total debt to GDP at 300 percent. But that can't happen. If the interest were paid to people who then spent it on goods and services and job creation, it would be just like other public spending.

Galbraith assumes that the interest is owed to US Citizens.  It is, to a large degree, not.  Those interest payments drain the economic vitality and future of the nation to foreign nations, as a vampire drains its victims blood.

So the fact that we're buying a lot of goods from China simply means we have to be more imaginative, and bolder, if we want to create all the jobs we need.

Really?  How does one compete with a wage of $1/day (in yuan, of course)?  Why by destroying one's standard of living, that's how.  This in turn destroys the tax base and we're right back where we started - without the ability to pay interest except by destruction of the currency, which in turn forces the cost of imports higher.

That in turn ruins the citizen's discretionary purchasing power as the most-sensitive import to currency depredation is petroleum, which we (due to our own idiocy over the course of more than 30 years) are effectively forced to purchase from foreign interests. 

But petroleum is in literally everything.  It is not only in things that are obvious (e.g. gasoline and fuel oil) but is an essential component of literally everything we buy.  Our modern food production system is dependent on petroleum for planting, fertilization, irrigation, harvest, processing and transportation.  Every item in your home or office that contains plastic or rubber contains petroleum, from the wrapper for your meat at the grocery store to your computer monitor, television set, the shingles on your roof and the tires on your car (not to mention its interior!)

But right now, we don't have functional big banks. We have a cartel run by an incompetent plutocracy, with its long fingers deep in the pockets of the state. For functional credit to return, we'll have to reduce the unpayable private debts now outstanding, to restore private incomes (meaning: create jobs) and collateral (meaning: home values), and we'll have to restructure the big banks.

You can't restore that which wasn't there.

Home values were false - fraudulently so.  They were pumped by charlatans pushing cheap credit and bogus appraisals.  The utility value of a home is to give you a place to hang your hat, take a dump and stick your bed where you won't be eaten by mosquitoes while you sleep.  This value is, and should be, able to be purchased for an average family for the price of somewhat near or less than one year's family wage, free and clear, without ongoing tax encumbrance.  Consider this: What did the settlers of this nation have to pay for their house?  On the prairie they were "raised" by the local community in a day or two, then finished by the family over time.  Were there 250 man-days that went into raising such a house?  Nope.  Yet that's the definition of one year's family income, right?

Over time we have thought of homes as financial assets, but they're not.  They're shelter.  They perform an essential function and as such allowing the nation's banks and other financial wonks, like Galbraith, to get their teeth into them has been incredibly lucrative - for the wonks.  For the rest of the nation it has spelled ruin every time it has occurred - 1873 (and before), 1929, and now in 2007.  In each case "real property" became the object of monstrous speculative froth unrelated to the utility value of the asset, and in each case economic malaise inevitably followed.

We need to break them up, shrink the financial sector overall, expose and prosecute frauds, and create incentives for profitable lending in energy conservation, infrastructure and other sectors.

That indeed is necessary.  But doing so will inevitably cause the speculative froth to come out in all of these asset classes.  Homes will contract to no more than 3x incomes on average, and likely lower.  If we contract homes to utility value they'll shrink in price to between 1x and 2x incomes, and property taxes will disappear. 

This, of course, is anathema to federal, state and local governments, not to mention the very institutions that were responsible for the speculative froth and fraud.  It is therefore perhaps a bit disingenuous to call for that which you know must happen while at the same time stating that we must restore bubble values to certain asset classes, for both cannot happen at the same time.

Either way, until we have effective financial reform, public budget deficits are the only way toward economic growth.

Deficit spending is not economic growth.  If I lose my job and use my credit card to sustain my lifestyle, I have not experienced "economic growth."  Quite to the contrary, should I represent to anyone - including myself - that my economic situation is stable or improving through such a display of abject stupidity all I have done is perpetrate a fraud upon those who I communicate such a claim to.

The sort of vacuous nonsense that Galbraith displays is why we're in this mess.  For the good of our nation this sort of stupidity must be banished in favor of embracing the truth: we have not lived in a nation of economic progress based on innovation and production for three decades, and we cannot return to a stable economic condition until the speculative froth - and the debt it engendered - is removed from our financial and economic system.

Remember this Ticker from a few days ago?

I am constantly amused by those people who claim there is some vast "conspiracy" in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.

There is no conspiracy.

It is, in fact, "in your face" fraud.

Well, one of the people on the forum emailed The FDIC to ask about what I had alleged.  This was their response:

That’s the value the bank had them on their books on their year-end financials, but the true value is much less. It is similar to someone in Las Vegas saying that their house is worth $300,000 because that’s what they paid for it three years ago, but the reality is, if they had to sell it in today’s market, they’d only get $250,000 for it. The FDIC has to sell assets in today’s market.

--db

Or tomorrow's market.

The simple fact of the matter is that there it is, right in front of you.

A raw admission that the banks are carrying these loans at dramatically above their actual value.

Yes, this means that essentially all balance sheets must now be considered fraudulent, and thus the valuations assigned by the market to them are also fraudulent.

Extending this to the stock market as a whole you now have a market that is intentionally overvalued as a direct and proximate consequence of fraud, permitted and endorsed by the government, of somewhere between 25-40%.

Now you know why the market rallied off the SPX 666 lows to where it is now.  1139 (where we are now) * .60 (a 40% haircut) = 683.40, or awfully close to that 666 bottom.

Of course this "valuation" expressed in the market can only be maintained for as long as the fraud is.  If the ability to maintain that fraud is lost for any reason then values will instantly collapse back to reflect reality.

Still sleeping well with your investments?

From Huffington Post:

Congress should act immediately to abolish credit default swaps on the United States, because these derivatives will foment distortions in global currencies and gold. Failure to act now will only mean the U.S. will be forced to act after these "financial weapons of mass destruction" levy heavy casualties. These obligations now settle in euros, but the end game is to settle them in gold. This is so ripe for speculative manipulation that you might as well cover the U.S. map with a bull's-eye.

She then continues with information I was unaware of:

U.S. credit default swaps currently trade in euros. After all, if the U.S. defaults, who will want payment in devalued U.S. dollars? The euro recently weakened relative to the dollar, and market participants are calling for contracts that require payment in gold. If they get their way, speculators on the winning side of a price move will demand collateral paid in gold.

WHAT?!

OK, that's enough.

Congress must ban all credit derivatives that are not:

• Sold over an insured interest, that is, if you don't own the bond you can't buy the "insurance" AND
  
  
• Are not sold by an entity with proved, marked to market night ability to cover each and every contract sold.

That is, these things must be treated as insurance and regulated as insurance.

What we have now are literal hundreds of trillions of dollars of fraudulent paper contracts to pay a sum that the writer does not have, written for speculative (or worse, regulatory avoidance) rather than hedging purposes.  These contracts are destabilizing, they are impossible to perform on without government backstop (as we saw with AIG) they are being sold at dramatically less than their true economic value (otherwise we wouldn't have had to bail out AIG) and they're being sold and used for either speculative purpose or worse, as a means of fraudulently avoiding regulatory constraints.

Congress must act to stop this crap now.

Will this man ever take responsibility for what he does?

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: "Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans."

How did that happen Mr. Frank?

Oh yeah, I remember!  Your committee pressured FASB to drop "mark to market" accounting requirements last year!

That is, YOU were personally responsible for this crap.

Remember the subcommittee hearing chaired by your fool-in-chief Mr. Kanjorski?  I remember that circus show of horrors well.  In case you've forgotten, let me help jog your memory:

Washington, DC – Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today announced that the Subcommittee will hold a hearing to examine the mark-to-market accounting rules that many contend have exacerbated the current troubles in the financial industry and in the broader economy. The standard requires companies to value assets they hold at current market values. For assets that are frozen and have a diminished current market value but may recover value in the future, the standard has proven problematic. Companies are then forced to write-down billions in assets, which can lead to further write-downs elsewhere.

Like second mortgages, for instance?

Yeah.

This hearing was what prompted those banks to mark those loans to fantasy values, a practice they are still continuing to this day, even though if the first is underwater and goes into foreclosure the second is in fact worth zero. 

Therefore, a first that is both underwater and is late by 60 days or more is almost certain to either short sale or foreclose ultimately, and under mark to market rules the second would have to be written off.

But your committee, which sits over the subcommittee on Capital Markets, effectively bludgeoned FASB into legalizing the accounting fictions that you now complain about.

Indeed, the testimony of FASB was that:

The fact that fair value measures have been difficult to determine for some illiquid instruments is not a cause of current problems, but rather a symptom of the many problems that have contributed to the global crisis, including lax and fraudulent lending, excess leverage, the creation of complex and risky investments through securitization and derivatives, the global distribution of such investments across rapidly growing unregulated and opaque markets that lack a proper infrastructure for clearing mechanisms and price discovery, faulty ratings, and the absence of appropriate risk management and valuation processes at many financial institutions.

None of which, I might add, your Committee has bothered to address.

Having done nothing but bleat and ram down the throat of FASB changes in accounting standards that have legalized outright balance sheet fraud, you now have the temerity to complain about the results, when I and many others said at the time this would be precisely what would happen.

The solution to the problem is, of course, to reverse the outcome of that idiotic hearing and restore mark-to-market accounting forthwith for all bank assets.

Go look in the mirror Mr. Frank - you made this mess yourself, and while you're at it drag that clown-car occupant Kanjorski with you.

Naw, they'd NEVER do that, would they?

International finance-industry estimates have Dubai's sovereign debt load, thanks to the off-balance-sheet debt, exploding to nearly four times its originally reported $80 billion, as other government-backed projects have gone bad after Dubai World's default in late November.

....

This is how the Greek debt has grown 12 times over the initial numbers it had on the books with the European Union. Iceland and Dubai are the test studies for how the Europeans may deal with the idea of socializing private debt through public funding.

....

"I am seeing many sovereign defaults for the PIIGS as well as in Eastern Europe and the former Soviet satellite countries running into 2011," Chapman added.

Isn't it great to do things off-balance sheet?  Why you can lie, cheat, and steal from investors, who believe you are far more credit-worthy than you really are.

Who else has done this?

There aren't any big American banks with a trillion or so (each) off balance sheet in SPVs, are there?  Oh wait - there are!

America doesn't have somewhere around $80 trillion off balance sheet in Social Security and Medicare "promises", does it - nearly six times GDP?  Oh wait - it does!

Why is this sort of thing a problem again? 

In what I can only describe as a self-serving piece for keeping banking "exactly as it is" (which is inherently unsustainable and thus can't be) IRA tries to refute the value of mark-to-market with a stunning piece.

Finally, on April 2, 2009, FASB allowed banks to use "cash flow" to value bonds when the market was illiquid - exactly like Bernanke said last week. This fixed the immediate problems in the system, and the economy and financial markets have been on the mend ever since. In fact, the stock market bottomed on March 9, 2009 - the very day markets found out that Representatives Barney Frank and Paul Kanjorski would hold a hearing to force FASB to change the misguided accounting policy.

No it didn't.

Remember FHLB Seattle again?  Their "at market" losses on a portfolio of trash, er, loans was some $300 million.  They claimed that the real loss to be realized over time was in fact $12 million, using model-based accounting.  After all, these loans, while deeply underwater, weren't really impaired.

Or so they told Congress.  I remember the testimony well.

But now, one year later, they are suing the banks that packaged up all this dog squeeze.  Among the pieces of trash being sued over are the very same securities against which they said that a model-based valuation system showed a tiny $12 million loss.

Are they suing for $12 million?

No.

That "tiny $12 million loss" in fact is some $311 million - almost exactly what the market price predicted it would be.

Remember, this was in the "depths of hell" time period too - March of 2009.  It was when the entire world was coming apart, Satan was chortling at the fate of our financial system and the S&P 500 traded - literally - at 666.

Yet that view - that market view - was correct.

To the regulators, it does not matter if the loan is still being paid on time. And it does not matter if the lower valuation of the collateral will force an already stressed borrower to come up with more cash. Regulators have decided that they want banks better capitalized and the way they can do that is to reduce the value of a bank's assets and then force these banks to raise money from shareholders.

It shouldn't matter to the regulators.

As I wrote months ago, the solution to this problem is One Dollar of Capital:

The solution is very simple, but you will notice that Jamie doesn't bring it up.  That's because he finds it unacceptable.

What's that solution?

Prohibit as a matter of Federal Law, and enforce it vigorously under pain of immediately dissolution, THE LENDING OF MONEY UNSECURED THAT EXCEEDS THE FIRM'S CAPITAL.

This is in fact the only way you can both end "too big to fail" and not constrain size or influence.

It is also the definition of sound lending.

It is also how lending was done prior to the banksters corrupting the government and literally usurping the sovereign credit of The United States.

This is what the regulators are trying to back into.

It is the right thing to do, because it is the definition of sound banking.

ONE DOLLAR OF (EXCESS) CAPITAL FOR EACH DOLLAR OF UNSECURED LENDING.

You enforce this, the problem with systemic risk disappears.  Banks can fail without harm to anyone else.  Banks can take all the risk they want - with their shareholders and subordinate bondholders money - but never with depositors or secured bondholders money.  At the point those bets go bad and deplete their excess capital the bank is closed - right then and there.

All secured lenders to the bank get their money back. 

All of it.

All depositors get their money back. 

All of it.

The shareholders and unsecured lenders to the bank take a haircut, which is determined by the actual over-time performance of the outstanding unsecured lending.

The FDIC Deposit Insurance Fund loss, if this regulatory framework is applied and enforced, is always zero.

This regulatory regime exactly matches the bank's lending risk with the expected risk of lending money to the bank.  Those who lend unsecured (e.g. shareholders and subordinate bondholders) have lent money with the expectation that they might lose it.  The bank in turn has lent out capital with the expectation that it might not be repaid.

The secured lenders to the bank - senior bondholders and depositors - lent their money with the expectation that it was a secured loan.  The bank in turn lent that money out secured by an asset that is valued (each and every day) at or above the loan balance.

Statutory law sets a reserve ratio (cushion) between secured lending out and secured capital in.  This gives the market room to move against the bank on the valuation of those secured loan assets without causing the bank to fail.  Management is free to increase that ratio should it desire, but not to dip under it (if they do, the bank gets closed.)

But for each dollar of unsecured lending that is out there from the institution, that bank must hold one dollar of excess capital beyond statutory requirements.

If it does not, at any time, then the bank is closed, haircuts may happen, and the bank's management loses their jobs.

This is the only stable fractional lending system that can be constructed folks. 

It remains difficult or impossible to find support for it precisely because it is so simple and yet it absolutely prevents the playing of "Heads Management Wins, Tails Taxpayers Lose."

If we want a stable financial system, we must impose this, and I call upon IRA, along with the other folks in the private and government sector, to wake up and smell the math.

Iceland's voters took the first step toward the right thing:

Ninety-three percent voted against the so-called Icesave bill, according to preliminary results on national broadcaster RUV. Final results will be published today.

The next step would be to quash any talk of a "new accord."

There is exactly one accord to take: Tell the Netherlands and British to stick it.

They decided to step in on their own without the consent of the Iceland population when Iceland's version of the FDIC ran out of money.  It was their decision, not the Icelandic people's to do so.

Voters rejected the bill because “ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers,” said President Olafur R. Grimsson, whose rejection of the bill resulted in the plebiscite, in a Bloomberg Television interview on March 5.

That's correct.

The people didn't cause the bankers to do the irresponsible things that led to this, just as the people in the US didn't cause our bankers to do so.

The bankers, with superior knowledge and all their grand mathematical models, took a bet. 

The bet was that they could intentionally make bad loans and intentionally fail to disclose risks, and if the bet turned out poorly the people, who did not consent to be stooges, would bail them out.

Iceland's people have said no.

That should be the end of the discussion.  The Netherlands and British should bear the costs - all of them - of their own decision to bail out their citizens.  That decision was uniquely theirs and did not come with the consent of the Icelandic population - a consent that was belatedly sought and now has been overwhelmingly rejected.

That is the beginning and end of the discussion.

If that decision is not respected, and Iceland's parliament continues to try to subjugate the people to pay for an act they were not responsible for, then the people must rise and put a stop to it, in its entirety.

By whatever means are necessary.

To the people of Iceland:

You have my full and unwavering support.  Do not knuckle under.  These banksters - these criminals - attempted to steal your economic futures, dreams and hopes. 

They intentionally and with malice aforethought put together financial programs they knew could not succeed in the long term, believing they could saddle you with the costs while keeping the benefits to themselves.

You have repudiated that belief.

You are a beacon of light in a world of darkness.

Now finish the job and send these jackals - these robber barons, brigands and thieves - packing.  Eject them, and the ruin they bring, from your nation now and evermore, replacing them with sound, local, and accountable financial institutions that are not run for the sake of bubbles and cute mathematical models but rather on sound principles such as ONE DOLLAR OF CAPITAL.

May this vote be the start of an international citizen revolt - peaceful revolt - against the brigand-style fraud rained down upon the word by the pinstripe-wearing scam-meisters known as "banksters."

Gee, who would have thought a communist dictatorship would pull something like President Obama has, but on a grander scale?

March 8 (Bloomberg) -- China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

Ain't it grand to run a dictatorship?  You can take a legal guarantee and nullify if with the wave of a hand.

Oh wait - Obama did that with GM and Chrysler too, didn't he?  Hmm....

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.

You mean "the great Chinese recovery" has been a scam?  It was nothing of the sort, but instead was simple papering over the economic collapse with government-sanctioned borrow-and-spend without regard to ability to pay?

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local-government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

$3.5 trillion of trash eh?  Why that's about equal to our government's entire budget for a year, isn't it?

Wen also warned of “latent risks” in China’s banking system as he pledged to continue a moderately loose monetary policy and a proactive fiscal stance.

Moderately loose?  You mean outright fraudulent lending is now "moderately loose"?  Well then I guess our housing bubble and the bogus creation of securities wasn't loose at all, and China won't mind one bit if we tell them to stick their Fannie and Freddie paper (if they still have any) right up their tail.

See, the fraudulent credit creation isn't just a "capitalist" thing.  It extends to communist dictatorships too.

Or is it that we're getting closer to them than they are to us in terms of how our governments actually operate?

One wonders.

I am constantly amused by those people who claim there is some vast "conspiracy" in this country when it comes to banks, balance sheets, and fraudulent lending and accounting.

There is no conspiracy.

It is, in fact, "in your face" fraud.

The FDIC does us the courtesy of explaining it virtually every Friday night, right on their web page.

I am simply going to take last night's bank closures, which numbered four.  One of them has no "deposit insurance fund" estimated loss available, because they didn't find someone to take the assets - they're just mailing checks.  But the other three do.

• Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits.  They were "underwater" by $800,000, right?  Wrong:  Estimated loss, $51 million.  That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.
  
  
• Bank of Illinois, Normal IL: $211.7 million in assets, $198.5 million in deposits.  They were "underwater" by $13.2 million (which is why they were seized), right?  Wrong: Estimated loss $53.7 million.  That is, the the assets of $211.7 million were overvalued by more than 25% at the time of seizure.
  
  
• Sun American Bank, Boca Raton FL:  $535.7 million in assets (so they claimed anyway), $443.5 million in total deposits.  Heh, why did you seize them - they have more assets than liabilities?  Oh wait: Estimated loss: $103.8 million, so the actual assets are worth $443.5 - $103.8, or $339.7 million.  That is, the assets of $535.7 million were overvalued by a whopping 37% at the time of seizure.

This isn't new, by the way.  In August of 2009 I went through Colonial Bank's failure based on BB&T's presentation to its shareholders on the "merger" - and gift it was given by the FDIC.  It too showed that Colonial had been carrying assets on their books at a ridiculous 37% above where BB&T ultimately marked them as a whole.

Folks, your bank is being assessed deposit insurance premiums to pay for these losses.  You are paying these losses through increased fees and interest expense on your credit cards and all other manner of borrowing.

You are paying for outrageous, pernicious and endemic balance sheet fraud.

There is no conspiracy.  It is right under your nose.  One of these three banks, based on their balance sheet, wasn't even underwater - it was "to the good" by nearly $100 million dollars.

The balance sheet was a flat, bald-faced lie.

You want to sit for this?

Why should you?

Now let's ask the inconvenient question:

Are the big banks - specifically, Citibank, Bank of America, Wells Fargo and JP Morgan - all similarly overvaluing their assets?

Why should we believe they are not?  You can go through more than a year's worth of FDIC bank seizure information and in essentially every single case you will find that overvaluations of somewhere from 20-50% have in fact occurred, yet not one indictment for book-cooking has issued.

So let's be generous and assume that the "big banks" are over-valuing their assets by 25% - the lower end of the range of what the FDIC says is, through actual experience, what's going on, and add it all up.

Bank of America shows $2.25 trillion in assets.

Citibank shows $1.89 trillion in assets.

JP Morgan/Chase shows $2.04 trillion in assets.

And Wells Fargo shows $1.31 trillion in assets.

This totals $7.49 trillion smackers.

The FDIC's experience with seizing banks thus far suggests quite strongly that all four of these entities are lying about these valuations, and that were they to be seized the loss embedded in them (and for which you, the taxpayer would be responsible) is somewhere between $1.49 and $2.99 trillion dollars.

Incidentally, neither the FDIC or Treasury happens to have either $1.49 or $2.99 trillion laying around, and it is highly questionable if they could raise it, should that become necessary.

Now of course neither you or I can prove this is correct.  However, we can look at the FDIC's own published bank closing statements, and derive from them a pattern stretching back more than a year now that has disclosed that in essentially each and every case the banks in question have overvalued their assets by anywhere from 20-40%, and that as of the day of the seizure such an overvaluation was in fact a continuing and ongoing practice.

Back in the beginning of 2009 we had people argue that "mark to market" was invalid - that in fact the market-based pricing losses that were being claimed were ridiculous and would never happen.  One of the claimants was the Federal Home Loan Bank of Seattle, which said that the $300 million in mark-to-market losses would not actually happen - that the real loss was only going to be $12 million dollars.

FHLB Seattle recently filed suit against the bundlers of this trash, claiming, surprise-surprise, that the real loss is not $12 million, not $300 million, but $311 million - on that bundle of trash alone.  In all they are seeking $2 billion in damages.

We have now learned, a year into this "experiment" with mark-to-model promulgated at gunpoint by Congress that:

1. The banks indeed have been lying about asset valuation and the proof comes in the form of the FDIC seizures, which in essentially case have documented massive and outrageous overvaluation of assets on bank balance sheets.
   
   
2. The claimed "mark to model" losses, which were tiny compared to the market-price losses, were in fact fictions, to the point that the poster child of the "mark to model" argument is now suing the purveyors of the instruments supposedly not to be marked to the market for losses that exceed what the market-based loss was back in March of 2009. 

If you wish to argue that the economy and banking system are recovering their health, you must deal with this.  If indeed large bank balance sheets are concealing a deficiency of somewhere between $1.5 and $3 trillion in losses not only will the economy and lending environment not recover it can't as the large banks all know the truth.

I believe this is why those very same banks are hoarding cash.  I believe they know that at some point in the future - a point not under their control - the truth may come out and if it does an instantaneous run would occur - not just on their bank, but on all banks.  Such an event could be defended against only with a huge cash hoard - a hoard that, if they lend out said cash, would not be available to them.

The Federal Reserve knows this too.  I believe this is why there is nearly $1 trillion of "excess reserves" sitting at The Fed, up from nearly zero prior to the crisis - it is these large banks' "backstop" against a potential run should the truth of their balance sheets reach public conscience.

The political and regulatory bottom line is simple: As I have repeatedly maintained for nearly three years, we now have the facts from our own government agencies, most particularly the FDIC: The banks have been and still are cooking their books in a manner that intentionally overstates their asset valuations - an act that is exactly identical to that which brought down ENRON.

Something to think about on this fine weekend.

Now this is getting interesting; we appear to have a police department that has invited an 42 USC 1983 lawsuit:

The district even set up a secure Web site so the police could have access to pictures and other information, according to attorneys in the case.

"Quite honestly, the police knew about these devices," said Marc Neff, a lawyer representing Perbix. "They were not in the dark about the fact that these computers were being tracked."

Policemen don't have the authority to issue search warrants.  Only judges have that authority.

Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress, except that in any action brought against a judicial officer for an act or omission taken in such officer’s judicial capacity, injunctive relief shall not be granted unless a declaratory decree was violated or declaratory relief was unavailable. For the purposes of this section, any Act of Congress applicable exclusively to the District of Columbia shall be considered to be a statute of the District of Columbia.

Good luck to the local police department - they may need it, along with the school district.

Active cooperation of the school and police department to violate 4th Amendment rights against searches without a warrant having issued is a potentially-huge problem.

It's bad enough when the school attempts to arrogate to itself the right to search your home.

It's even worse when they conspire with the local cop shop and "don't bother" to get a judge involved to sign a search warrant.

Never mind the school who tried to claim originally that this was "just a little IT thing" used for internal purposes to find stolen laptops.  Now we discover that the cops had their own little backdoor into the spying system, courtesy of the school administration and IT department, all used without lawful search warrants.

Hint to the lawyers: Sometimes it's better to keep your mouths shut.

*CBO SAYS DEFICIT THIS YEAR TO AMOUNT TO $1.5 TRILLION
*CBO SAYS PUBLICLY HELD DEBT TO GROW TO 90% OF GDP BY 2020
*CBO SAYS OBAMA BUDGET WOULD PRODUCE $9.76 TRILLION IN DEFICITS

Not a snowball's chance in hell we get to 2020 doing this.

Oh, that's $1.4 trillion more than their last guess, mostly on lower tax collections (no really?)

Here's the problem with this new CBO number - it more than doubles the public Treasury debt float over the next nine years.

It also "predicts" that China and other investors will increase their holdings of US Government debt from their current $7.5 trillion (the current marketable paper) to $20.3 trillion by 2020.  And under the CBO's optimistic view, interest payments would "only" quadruple, to some $900 billion annually.

Yet if GDP rises at a compound rate of 4% for the entire ten year period (no more recessions!) the tax base upon which to assess taxes to pay that quadrupled interest expense will expand by only 48%.

Best-a-luck on this one folks - we won't make it to 2020 on that trajectory before someone who has done the math (we're talking basic math here too folks, not grad school stuff) calls BS on this one.

I did, I did tee a jumpsuit!

TUSCALOOSA, Ala.—Former Birmingham Mayor Larry Langford was sentenced Friday to 15 years in federal prison for taking some $235,000 in bribes in return for lucrative bond work.

But investment banker Bill Blount pleaded guilty to making the payments, and lobbyist Al LaPierre admitted being the middleman. Mr. Blount, the former state Democratic Party chairman, last week was sentenced to more than four years in prison. Mr. LaPierre, the former executive director of the state Democratic Party, got four years. Mr. Blount also was ordered to pay $1 million to the government, and LaPierre $470,000.

Wait a second....

How come Blount and LaPierre only got four years?

And how much did these guys - and these banks - get?

Mr. Langford was accused of telling major Wall Street banks J.P. Morgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp. and the now-bankrupt Lehman Brothers to include Blount's investment banking firm if they wanted to handle the county's bond work.

They just got sued, right?

Yep.

Just a "cost of doing business"? 

Kinda like Pfizer and the Federal Reserve Board of NY?

No wonder these banksters keep at this crap - we prosecute and lock up the people they screw around with, but the banks themselves, just like the big drug companies, get fined in tiny amounts that amount to one percent or less of their market cap.

Yeah, that's a deterrent against criminality.

... about fixing housing finance through a completely redesigned system instead of trying to "fix" Fannie and Freddie (I know, believing a politician is not lying is always dangerous) I offer up the following suggestions.

1. Put Fannie and Freddie into run-off via formal receivership.  Leave them outside of the government and withdraw all support.  Whatever the RMBS return, they do.  Whatever the bondholders get back, they do.  No support.  The face of the prospectus was clear and everyone, including Bernanke, knew it.  Honesty and fair dealing starts with telling the truth.
   
   
2. Leave the mortgage market alone for 90%+ of the transactions.  That is, no government involvement whatsoever.
   
   
3. With that said, there are two places I recognize a reasonable place for the government to get involved.  The one I cannot argue against is the VA mortgage program - I believe this is a perfectly-legitimate benefit of military service and should be maintained.  The other is for very specific and targeted FHA loans for low-priced housing.  Both should be limited to homes in the lowest quartile of price irrespective of location, that is, with no "escalator" for "high priced" areas.  We live in a nation with freedom of movement and association - if you find the place you're living in to be too high cost, then move!

However, if we're going to leave FHA and VA loans in place (and we can do the issuance via Ginnie Mae, which already exists) we need to seriously restore underwriting standards.  Specifically, the following are minimums I believe we must demand:

1. NO automated underwriting and no use of FICO scores at all.  FICO is not useful for longer-term obligations, which a mortgage is.  Instead, all files must be manually underwritten.
   
   
2. 28% front-end ratio and 36% back end (DTI) ratios must be enforced.  No exceptions, no ifs, ands, buts or maybes.  High-ratio loans are still being made and they're the #1 reason why these loans default.  This has to stop.
   
   
3. No VA or FHA refinances permitted for cash-out, without exception.  If someone wants a cash-out loan they need to get it on the private market.
   
   
4. 10% down payments in cash required, seasoned funds.  No kickbacks, no funny games, no seller funding, no "loans from Dad."  Cash means cash.  If you can't come up with it you don't need to own a house.  This isn't being cruel - it's being honest.  Roofs needs repair (I'm putting one on my place this spring), water heaters leak and need to be replaced, things deteriorate over time or simply break.  You have to be able to save up enough money so that you're not dependent on credit cards if and when something like this happens.

Task the DOJ with enforcement of all statements on mortgage loan applications and paperwork.  You lie, you go to prison.  Period.  End of discussion.  No more "fraud for housing" .vs. "fraud for profit" - fraud is fraud, you go meet Bubba and lose your house.  Investors have to be able to fairly evaluate what they're buying and so does the government!

In the private market I would radically revamp the securitization system such that:

1. Any bank that securitizes debt cannot offload liability for breached reps and warranties.  You issue it, what you represent and warrant is in the package is yours, without exception or disclaimer.
   
   
2. Credit derivatives on RMBS are absolutely banned (thereby preventing the formation of synthetic CDOs that are purposeful value destroyers by hedge funds and others.)  Any true hedge + the underlying (if the hedge can perform) will return less than a Treasury of similar characteristics - as such it makes no sense at all to buy such a thing except to perform regulatory arbitrage, which must be prevented to stop future financial market disasters.
   
   
3. All off-balance sheet, "Level 3" or other-than-marked to the market  "holding pens" for such vehicles are banned.  If you want to hold these assets you have to do it where people can see them, without exception.  That is, it's perfectly ok for investors to buy these for investment purposes but the practice of using them as speculative trading vehicles in hinky legal structures has to be stopped.

That would be a good start.

PS: As I write this the pumptastic CNBS crooners claim that Barney Frank has repudiated his statements.  Even though he apparently made them originally in public.

Mr. Frank, did you truly wake up and decide to do the right thing or not?  I think you owe everyone an answer.

Now this is interesting...

March 5 (Bloomberg) -- Fannie Mae and Freddie Mac bondholders shouldn’t assume the government will make them whole on their investments as Congress retools the companies, House Financial Services Committee Chairman Barney Frank said.

Heh, who's the biggest individual bondholder?

Mr. Bernanke, the bond market is on line #1!

Frank continues:

A “whole range” of options is being considered for investors in the two government-seized companies, “from paying nothing to a haircut to whatever,” said Frank, whose committee oversees Fannie Mae and Freddie Mac.

Nothing?  You mean zero, zilch, bupkis? 

That would be rich.  After Bernanke stepped in and bought some $200 billion of their debt, to have it "marked to zero" would be the ultimate slap in The Fed's face for buying that which I have argued is impermissible under the law.

What an elegant solution to a difficult problem - "oops - tear 'em up jackass - you should have known better than to buy something that you weren't allowed to and was patently worthless!"

The irony of that outcome would be delicious.  Yes, I know I'm dreaming here - or am I?

“Please don’t think this is federally guaranteed, I don’t think it is, I don’t think it should be, I don’t feel any obligation to bail you out,” Frank said. Congress will “certainly not” extend any new protections to bond and mortgage-security investors beyond what exists, Frank said.

Oh.  You mean that the face of those prospectuses mean what they say?  You mean this is real?

Uh, the market is kinda ignoring that right now, isn't it? 

Yes, I think it is.

How about this for a clear statement?

“We’re not remaking Fannie and Freddie,” Frank said. “We’re going to start from scratch and do housing finance.”

Go ahead folks, keep buying.  This is spelled "opportunity", thank you very much.  Now please excuse me while I go put a few chips on "red."

PS: Why are these stocks still listed again?

Yes, that's sarcasm:

The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”

That's exactly what I said would happen more than two years ago.

EVERY LOAN.

If there was appraisal fraud OR

If there was income fraud OR

If there was DTI fraud OR

If the automated underwriting was gamed OR

If there was asset fraud

THEN the bank gets rammed with a repurchase demand on the bad paper - paper that is 90 days+ and, in essentially every case, dramatically underwater.

The "dream" that this will result in "only" $7 billion in losses (30% of the repurchased amount) is a fantasy.

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

Ding ding ding ding ding ding.

The truly ugly news isn't found in these mortgages.  It is found in the second lines - HELOCs and "Silent Seconds" - that are behind these agency mortgages.  Those are worth zero once the first defaults, and when the repurchase demand is perfected the auditors are going to force these loans to be recorded at their likely recovery value - which is zero.

There are literal hundreds of billions of dollars worth of that trash on all of the big banks balance sheets, and all of it is being carried under assumptions that nearly every one of those loans is "money good."  80% of the dollar value of these HELOCs and Seconds are in the bubble areas and of those virtually all are behind an underwater first.

The assumption that these loans are "money good" is blatantly and intentionally false.  It is a fiction that our regulators, examiners and auditors have foisted upon the public, and if you rely on it, you will get burned.

Oh, JP Morgan's net income for all of 2009?  $11.7 billion.

They recorded $1.6 billion last year for this "expense", and I'm willing to bet that it's double that or more for the coming year, not to mention the impairment or outright write-off of the seconds.

That would be roughly 20% of their net earnings - not exactly an immaterial amount of money.

PS: $21 billion is tiny compared to the tsunami headed these folks' direction.  In the end every piece of this bad paper is going to head back to the securitizers and originators.  All of it - and the seconds behind that paper are all going to wind up marked to zero, because they are subordinate to an underwater first.  It is simply a matter of time before the people who hold these RMBS and the more complex securities structured on top of them decide to come after the banks and, to the extent that they can prove malfeasance or misfeasance, these banks will eat it.

Hmmmm....

Resentment of the U.S. government and suspicions over the 9/11 attacks have surfaced in writings by the Californian identified as the gunman who shot two Pentagon police officers before he was mortally wounded in a hail of return fire.

Oh, that's not a right-wing thing - that's a lefty paradise!  Specifically:

Signs emerged that Bedell harbored ill feelings toward the government and the armed forces, and had questioned the circumstances behind the Sept. 11, 2001, terrorist attacks.

The user named JPatrickBedell wrote the Sabow case was "a step toward establishing the truth of events such as the September 11 demolitions."

Demolitions eh?

Ah, a 9/11 Troofer.  Got it.

The mark of the hard left, who are convinced that Dick Cheney ordered the towers blown up with explosives as a way to goad the United States into invading Iraq - all for that evil Texas Tea, of course.

I wonder how long it will be before we see the bastions of the left in the mainstream media call this what it is - home-grown terrorism conducted under the banner of the "troofer" who are convinced that our government killed 3,000 of our own citizens on 9/11.

"What is never, Alex."

Such intellectual honesty you have, Mr. Media Man.

And hereeeeeeeeeees..... CENSUS!

Krugman sharts once again with an amazing bit of partisan hackery:

But while the blockade is over, its lessons remain. Some of those lessons involve the spectacular dysfunctionality of the Senate. What I want to focus on right now, however, is the incredible gap that has opened up between the parties. Today, Democrats and Republicans live in different universes, both intellectually and morally.

Ah, here we go - an appeal to morals.  Why did I know - right in the second paragraph (and why did you bury the leade, Paul?)

Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.

But this makes an assumption Paul, and one that you and the rest of the Democrats have refused to face (to their credit, the Republicans haven't faced it either!): This sort of "bridge" or "pump priming" only works if there is underlying final demand that can come back.

But here's the problem - the so-called "stimluls" didn't do much in the US.  Why not?  It stimulated China!

The Senators have singled out a particular wind project in Texas for criticism. China's Shenyang Power Group, the U.S. Renewable Energy Group and a Texas company called Cielo Wind Power are involved in a joint venture to build a 648MW wind farm. The Senators says the project is on the verge of receiving $450 million in grants, despite the fact it uses Chinese-made turbines, and that the lion's share of jobs it creates are in China.

Yeah.

In point of fact, that 1603 "green" recovery act stuff has, thus far, diverted eight out of ten dollars outside of the United States.

This belies the real issue that underlies all of this.

Take Chicago.  It used to be home to the Zenith picture tube plant in Melrose Park which, as you might surmise, made television picture tubes.  It had been there for a long time.

But in 1998 it was announced that the plant would close, as the company was losing $300 million annually trying to compete with offshored production by people working in near-literal slave conditions with no environmental laws to add cost to the product.  Thousands of good-paying local jobs disappeared.

I used to drive by that plant on a regular basis, the proud sign of American manufacturing throwing its illumination on I-294.  My parents owned a Zenith television when I was growing up.

That's a microcosm of what's happened.  We've offshored our production, by and large, to places like China.  What has replaced these jobs are positions in finance, which is a parasitic enterprise - that is, it obtains the money that is "earned" not from producing things, but from siphoning off cash flow from everything it touches.

Such a shift is inherently destabilizing.  We made up for it by running our credit cards to the moon, both figuratively and literally.  We blew a bubble first in Internet stocks and then in housing, which allowed people to then "access" (the true word, "extract", is so ugly isn't it) the faux value that we claimed it.  We, on balance, did so and spent it.

The error in Krugman's analysis is that he believes that all this "pump priming" will do the job and the economy will recover, allowing us to pay back what he avers is an effective loan.

My question to Paul and all those like him: How?

We can't support a financial system that consumes 1/4 of every dollar that goes into the economy, siphoning it off.  The margins are not there to permit that.  They never were, but refusing to attend to this, as Paul and his cohorts have done (and to be fair, the Republicans are no better in this regard!) is how we wound up with a debt bubble.

So what's the solution?

As much as you don't want to hear it there are only two answers:

1. Drive manufacturing back to the United States.  There is only one way you can compete with someone making $2/day unless you're willing to make $2/day, and that is government interference.  We have a constitutional mandate for such a thing - they're called tariffs.  Yes, I know all about Smoot-Hawley.  Guess what - trade imbalances are at their core behind a lot of depressions, and the founders were smart enough to leave us with the hammers to pound down those nails.
   
   
2. Accept a much lower standard of living for huge swaths of the American Population.  Essentially, if you're not a rocket scientists (or his equivalent) you're going to pound nails for minimum wage - maybe.

Both of these outcomes require that the financial system's "grift" shrink dramatically.  It cannot be otherwise.  But #2 means the end of the social program "backstop" that we currently have, because it cannot be sustained.

We cannot spend $1.3 trillion more than we take in via taxes for these "support programs" indefinitely.  Krugman thinks we can, but he's wrong.  Iceland thought this, Greece thought this, Argentina thought this.

You know what happened in the former and latter, right?  The middle nation in that list might meet the same fate.  Their so-called "austerity measures", from my back-of-the-envelope calculation, won't work.  It's nowhere near enough!

Now let's look at what did happen to Greece.  Their 10 year bond offering went off at 6% - double what Germany is paying to borrow for the same amount of time.

What happens if our bond carrying costs double?

We carry, today, $8,026 billion (that's $8.026 trillion) in publicly held debt in the United States.  Ignoring the $4.482 trillion in "intergovernmental holdings" (that's fancy speak for Social Security and Medicare "current issue" promises that we won't keep, as those "promises" back 20x that in claimed benefits for the next 75 years!) if we were financing the debt at our current 10 year rate we'd pay $289 billion a year.

Of course we don't do that - some of it is longer duration, some shorter.  Last year it cost us about $180 billion in total, mostly because of the collapse in interest rates.

Now let's assume that we have a "Greecefire" here in the US and our Ten Year rate goes to 7%.  Interest costs would go from $289 billion to $562 billion.

But that assumes we don't add to the debt, and we are.  In fact, we added $1.4 trillion last year and will add $1.7 trillion this year.  If we keep "pump priming" through the end of the decade (as the CBO says we will given their projections - and they are projecting GDP growth in the 4% range for the entire period!) we will go from the current $8.02 trillion to approximately $14 trillion in public debt by the end of the decade.

That figure, at 7%, would produce an interest cost of close to $1 trillion a year - or about half of all federal tax receipts.

So which is it Paul?

At some point we have to face the facts: We can't continue to spend more, as a nation or as individuals, than we make.  We cannot make promises that are impossible to fund, instead putting it off with more borrowing.  We must face the imbalances we have fostered in our economic system, along with the trade imbalances that we not only have fostered over the last 20 years but are feeding with so-called "stimulus" that instantaneously flows overseas instead of helping Americans.

There's plenty of blame to go around, but what is not helpful, and solves nothing, is ranting about how Jim Bunning's demand that these extensions in unemployment payments be offset with federal spending cuts somewhere else, or that they be taken from already-budgeted funds such as the TARP.

That, Mr. Krugman, was his objection.  Not that the benefits were being extended, but rather that they were not paid for.

The liberals are always quick to pull out the national credit card.  They've been doing so for the last 30 years.  But this sort of spendthrift approach to everything that ails us has left us with a severely-imbalanced economic structure that no longer produces enough to carry its own weight.

The (credit) drunk needs a stint in detox Mr. Krugman, not another bottle of whiskey.

So now we have Senator Dodd saying:

"I can't write regulations, this is way beyond the competency of Congress"

Really Mr. Dodd?

How about "Bankruptcy Reform"?

How about the CARD act, which as you can see from my Ticker yesterday, was instantaneously circumvented by the banks.  Instead of "jacking interest rates" they simply put a CALL feature into their account disclosures, which now means you get raped by having the entire balance on your card due and payable literally on demand.  (As an aside, how hard would it have been to say "no adverse actions" as a consequence of universal default, instead of what  was actually done?  Oh, and did banking lobbying interests recommend the language you did adopt?)

"The business community needs certainty on this issue," he said. "We ought to leave it to them to make the recommendations."

Really?  Like the business community "recommended" OptionARMs, automated underwriting, blacklisting appraisers that didn't participate in outright fraud on property valuations, bankruptcy "reform", Credit Default Swaps, Synthetic CDOs and more?

Who's on the other side of the table?  What other voice is there on input into this process?

None.

Now let's look at results.  I would have no quarrel with a wildly business-friendly environment if it produced prosperity.

But it did not.

It instead produced asset-stripping, fraud, scams of various dimension, a huge housing and credit bubble and threatened the nation, if Hank Paulson is to be believed, not just with economic depression but literal martial law.

If I in concert with others took actions that threatened the destruction of our government by force, and thus gave rise to an argument that martial law would have to be declared, I would (justifiably) be held on charges of seditious conspiracy.  Can someone explain why firms and individuals, acting between themselves in a fashion that leads them to effectively demand a $700 billion bailout lest the tanks roll, fails to meet this definition under the law?

We keep talking about how the government "saved us" from the depths of Hell - literally - with their "extraordinary measures."  Whether it is Congress, The Administration or The Fed, all are credited with keeping the nation (and perhaps the world) from going over the cliff and straight down into the land of brimstone and sulfur.

But are we actually standing on terra firma, or are we playing Wile-E-Coyote dangling in the air?

Let's look at the facts.

• We claim to have "decent" growth now, running about 3.5% (expected) for the full year of 2010.  But that growth is false; Government is borrowing and spending an additional 9% of GDP beyond what it was before the disaster began, it has been doing so now for two years, and there is no inclination that it is going to slow down or stop.  Indeed, there is every reason to believe that the government can't stop, lest the economy instantly implode, as final, true demand simply has not recovered.  It is, in fact, at depression levels - right now.
  
  
• We supposedly prevented a monstrous cross-default credit default swap explosion.  Or did we?  Did we get rid of the credit-default swaps?  Have we proved that everyone currently "short" them has the ability to pay?  Can I reasonably expect that if there is a default in some bond issue that the counterparty is good for it?  Nope - none of the above.  In fact we have every reason to believe that the threat of a cross-default explosion is larger today than it was in September of 2008.
  
  
• The centroid of this mess is claimed to be housing.  Has housing recovered?  No - yesterday's existing home sales figures strongly suggest that the recent "tax incentives" have in fact worn off - they no longer do anything to spur sales!  The scary possibility, of course, is that they are effective, which means when they expire later this year sales will utterly collapse.  We'll find out which is the case here in a few months.
  
  
• Do we have reasonable transparency in bank balance sheets?  Nope.  Not only do we know that Wells and Citi have over $1 trillion in off-balance sheet exposures each (and we have absolutely no clue how much either of those exposures is worth "at the market" today) we also know that the Federal Home Loan Bank of Seattle, the poster child for mark-to-model which claimed only about $10 billion of expected "loss" on what was a mark-to-market loss of $300 billion is now suing for the entire $300 billion.  In other words, the "model" folks were wrong, and those such as myself who insisted that we had to mark to the market and that market prices reflected actual loss levels were (and are) right.  If that "ten times worse than we claimed" projection for embedded losses is anything close to typical the entire banking system is still insolvent.
  
  
• The states are going broke.  Fast.  California is "firing" 15,000 San Francisco employees, then "re-hiring" some of them but holding down hours.  The Illinois and California university systems are imploding, and major protests are occurring (apparently the students involved failed their middle-school math classes.)  The states have made pension promises they are bound by state constitution (in many cases) to keep, but which mathematically can't be kept, and some of them result in payouts of $200,000 or more annually with retirement permitted at 55 (for the math-impaired this results in a likely pension of more than $6 million smackers!)  New York and New Jersey have critical state funding shortages.  Sales tax receipts remain in the toilet, despite the repeated claims of "a turnaround in economic activity."  Public-sector unions, including police, firefighters and teachers have responded to calls for them to take the same sort of 20% or more cuts in pay and benefits that have been widespread throughout the private sector with threats.  We have allowed public sector employees to define for themselves growth in their costs that exceed growth rates in the productive economy.  Mathematically, this cannot continue.
  
  
• Treasury yesterday claimed "There is no government guarantee for big financial firms."  This is a lie.  By definition any bank that can come to the government and say "help us or the economy will suffer critical damage" has such a guarantee, whether Treasury admits it or not.

Now consider this: There is neither the capital or the political will to go through another bailout cycle.  Not now, not any time in the foreseeable future.

IF a sovereign nation starts a chain-reaction default (e.g. Greece, Spain, etc), IF there is a massive fraud discovered at one of the big banks, IF there is a speculative attack on a currency, any of a thousand IFs.

We won't be able to stop it.

Not The Fed, not The Government, not anyone.

We have been given the ability - a gift really - to pull the fuse on this mess.  To lock up the nuclear financial weapons away from the kids.  To let the adults in the room.

So far, we've not only done none of the above, we've gone further to concentrate and increase systemic risk.

We cannot withstand another attack.

Everyone wants to talk about health care.  Sorry folks, that's a misdirection.  A scam.  It is simply a way to try to get more tax revenue - right now - to stave off a possible federal funding crisis.  Treasury knows it, Obama knows it, and Congress knows it.

They won't tell you, but they know the truth.

We cannot withstand another attack.

We must break up the large financial institutions that caused this mess.  What sort of act is more anti-competitive than going to the government and threatening it with economic armageddon if it does not hand you billions of taxpayer dollars?  Whether it's a loan or a handout makes no difference - the very issuance of such a threat is a declaration of trust behavior banned under The Sherman Act, among others.  We need no new laws to deal with this situation - we simply can and must enforce the existing ones.

We cannot withstand another attack.

Stiglitz, in a remarkable display of truth, said today that The Federal Reserve System is corrupt.  He's right, of course.  What other explanation is there for an institution that literally sat back and watched more than $10 trillion in fraudulent credit creation take place - all so a bunch of banksters could make billion-dollar bonuses?  This must change - here and now. 

We cannot withstand another attack.

But we're gonna suffer one, and soon, if we don't pull the fuse.

The Credit Default Swap monster has to be caged.  I know I sound like a broken record, but it has to happen.  Now.  Today.  I don't give a damn if the banks like it or not.  I don't care if bankrupts all of them.  It has to happen now.

The off-balance-sheet crap has to be exposed and valued, along with everything else, at the market.  Yes, I know it will cause major problems for the banks.  I don't care.  It has to be happen now.

We have to get control of federal spending.  We cannot spend $1.3 trillion more a year than the government takes in via taxes.  We just can't.  We're getting away with it right now because everyone is scared that Greece is about to blow the Euro Zone to pieces.  But once that either happens or the fear recedes, the speculators will point their weapons of financial destruction here.  We have either fixed the problem before then, or we're next. 

And finally, we must know what The Fed is holding, what they've bought, what they've monetized, who got paid off and what sort of trash is hidden in the black hole known as their balance sheet.  This means full audits - now and evermore in the future.  No exceptions.

If you remember back when Paulson's "bazooka" was first discussed I said that the market calls all bets. 

It did. 

Within days.

We're there again folks, about to witness the market calling our leaders' bet again, and we are enjoying a respite only because there are other hookers in the room of nations with a worse case of crotch rot than we have.

But that's not a sign of strength - it is a sign of danger, for our own particular financial STD has not been cured.

We're running out of time to take the penicillin.

What's this crap?

The rating company said GMAC commingled cash flows from multiple bonds in a single custodial account, Moody's said in a statement. This allowed GMAC to use cash from loans in one bond for principal and interest payments on another, it said.

By allowing the commingling, it "increases the likelihood that some RMBS deals may not be able to recover the amounts 'borrowed' by the servicer to fund advances or another RMBS deal if a servicer bankruptcy were to occur," Moody's said.

What?

Is that permitted?  Legal?

When is a servicer not a fiduciary (effectively, a trustee) for the bondholder?  It appears the answer, in this case, is whenever they feel like shuffling around funds and paying one bondholder with money that came in from a different deal.

Oh, we bailed them out too. 

Several times.

So far.

Next question: Who else is doing this sort of thing?  Or maybe the better question is "who's not doing this sort of thing?"  The latter may be the shorter list.

How's this for "undisclosed risks"?

Gee, how do you like the rape job that the banks just served up on you?

(Click to enlarge)

Read that white part carefully, and then make sure you read the inverted part.

If you:

• Exceed your credit line.
• Do not pay on time (even once)
• The bank believes you will be either unwilling or unable to pay because of "information they receive" (like, for instance, because your credit report discloses you didn't pay someone else?)

The bank can immediately close your account without notice AND DEMAND YOU PAY THE ENTIRE BALANCE ON THE ACCOUNT IMMEDIATELY.

Oh, and when you can't (because you thought you had time to pay) you are then in default again for not paying "on time" and they can sue and add attorneys fees and costs.

I thought this crap was going away?

This, by the way, is from Chase, I have the entire section of the statement (all pages), and is claimed to be effective on 22 February.

So much for the CARD act banning practices like this, eh?

This is effectively a "CALL" option on your credit card.  This "feature" is why when I ran MCSNet I refused to ever accept a bank credit line for any purpose whatsoever for the company - they all had this sort of tricky crap in them somewhere.  Every one.  In each and every case such a clause gives the bank the right to force you into bankruptcy if you ever actually use the credit for anything other than as a cash-management tool (that is, as a means to pay for something over time), as they can declare the line in default any time they'd like and accelerate repayment, demanding the full balance.  You either have it (in which case you didn't really need the credit, right?) or you're bankrupt - at their sole discretion.

TELL THE BANKSTERS TO SHOVE THIS CRAP UP THEIR BUTTS - WITHDRAW YOUR MONEY AND REMOVE YOUR BUSINESS FROM ANY LENDER WHO HAS SOMETHING LIKE THIS IN THEIR AGREEMENTS - ALL OF IT.

I warned people a year ago to get out of debt, especially revolving debt or any other sort of credit where the terms could be changed on you, in my "Ten Things" Ticker of June 8th of 2009.

This sort of trick is why.

Never mind the man behind the curtain, who won't utter the word:

The Labor Department reported Thursday that productivity jumped at an annual rate of 6.9 percent in the fourth quarter, even better than an initial estimate of a 6.2 percent growth rate. Unit labor costs fell at a rate of 5.9 percent, a bigger drop than the 4.4 percent decline initially estimated.

In the real world this means:

• Work harder and get more done.
  
  
• Get paid less.
  
  
• Suck it up, don't complain, or you're fired.

That's all.

And by the way, reduced pay per unit of work spells DEFLATION.

Now here's the problem: We have huge public-sector labor unions that are resisting this force.  Yet this force is exactly what has to happen in order to bring the economy back into balance.

We have "advanced" promises made to these people - $200,000+ pensions and other similar obscenities - even though doing so is a ponzi scheme that is impossible to maintain.  We have continually cow-towed and pandered to these unions, including educators, police and fire and all other manner of public sector employees with wage increases that exceed growth in aggregate output per-person when one counts both salary and benefits.

This, of course, cannot continue.  It is yet another example of the expanding gap that opens up between two exponential functions - for those who have forgotten my favorite pair chart (two exponential curves, one with a slightly-higher exponent than the other), here it is again:

I understand that everyone wants to avoid taking the pain.  I understand that everyone claims that "its not fair!"

None of this changes the facts.  You cannot continually offshore your better-paying labor to China for the purpose of being able to have a $30 DVD player, destroying the $40/hour skilled job base and replacing it with $7/hour burger flippers and espresso-shot-pullers, and maintain the ability to commit compound annual growth rates of 5, 6, 7% or more to public-sector employees.  Doing so inevitably destroys the tax base necessary to meet those commitments, and once the destruction has occurred it cannot be un-done.

You cannot falsely-report "growth" that is in fact no such thing, but rather is simply the addition of more debt, thereby creating false demand that never existed on an organic basis, and continue this process forever.

The person who loses their job can continue to spend as if they have not - for a while.  They can run up the credit cards - for a while. 

They can do so until the credit card company discerns that the ex-employee has no money, and thus will never pay them.  Once that happens the credit card is cut off.

States, municipalities and nations are no different than people in this regard.  We have played this game for 30 years.  We have promised people they could have unlimited health care, unlimited prescription drugs and unlimited, compound increases in salaries and benefits.  At the same time we have permitted our corporations to send their labor base overseas, destroying the income base to purchase these products and the tax base required to pay those benefits.  All of this has been "facilitated" by a financial system that grew from about 7% of the marketplace to well north of 20% (in 2007) before it all fell apart.

Instead of allowing it to fall apart and return to a 5-7% of the market, which would be sustainable, politicians instead created false final demand of about 9% of GDP (~ $1.2 trillion annual increases in deficits on a $14t GDP) and then added $13 trillion of "guarantees" in the form of funny money to the financial system to prevent it from imploding (roughly equal to the entire financial debt in the system, which currently stands around $16 trillion.)  This "prevented" the immediate recognition that the derivatives written by these firms were nothing more or less than a gigantic fraud, as there was no ability to pay - not at origination, not at maturity, not ever.

But none of this game-playing changes the mathematical fact that:

• The money to pay these bets never existed, and never will.  It was a fraud, but our politicians refuse to direct law enforcement (which reports to them) to enforce the law against fraud, as that would "hurt" their campaign donors (they'd go to jail!)
  
  
• The offshoring of our production has destroyed both incomes and the tax base.  "Replacing" that with more borrowing is exactly identical to an unemployed person using their credit card to maintain their standard of living.  It will fail - we are simply arguing over when, not if.
  
  
• Public sector employees are inherently parasites.  It cannot be otherwise.  The policeman, fireman and teacher do not directly produce anything.  Their employment and the wages and benefits they can collect must therefore inexorably track the actual productive output of the nation.
  
  
• Finance in all it's forms, whether banking or insurance - produces nothing either.  Every dollar of such "activity" comes about only as a parasitic drain on production.  It cannot be otherwise.  Further, speculative activity in all of its forms produces losers in exact proportion to winners - if Goldman makes $100 million speculating on oil prices, someone else loses the same $100 million.  The net benefit to our nation's economy?  Zero - we merely moved money from one hand to another.

The actual private sector production worker is now being forced to recognize this.  He's being told to work harder and longer for less money (per hour) or lose his job.  That's what the statistics say.  This sort of movement in the private labor force is unprecedented - it in fact exceeds that which formerly was accomplished with computerization in the 1980s and 1990s - and this time it's actual labor, not the introduction of new technology.

The first step to solving problems is admitting to what they truly are.

The recent pronouncements and announcements out of both the new governor of New Jersey but also California, where they have attempted to play "extend, pretend and charge-it-up" more and worse than anywhere else in the nation make clear that the credit line has run out and we either face the facts - like it or not - or we get the clue-by-four upside the face.

As usual, the politicians thought they could extend, pretend and lie until after the election.  As in 2008, they're wrong, and if they don't cut it out we'll get a repeat of the 2008 disaster but this time around it will be much worse.

Welcome to 2010.

In Huffington Post.....

Wall Street got bonuses, taxpayers paid the bill, America got a deep recession, and the world got the worst financial crisis in history. Financial holocaust deniers obstruct solutions that can help prevent the next crisis and would stick taxpayers with the bill again.

Yep.... listen to the shills try to deflect the voice of reason....

Disgusting, isn't it?

Tell their advertisers what you think.  It's the only way to be sure....

Greece is now whining that their "austerity" should bring gifts - from Germany:

“We have fulfilled to the utmost all that we must from our side; now it’s Europe’s turn,” Papandreou told his ministers, according to an e-mailed transcript. “It is a historic moment for the European Union.”

No it's not.

Honest accounting is its own reward.  So is fiscal prudence.

You're owed nothing Greece.

More importantly, there's no money.  Not just there - here too.  Witness the layoff/hirebacks in California and New Jersey's new governor - the latter who told the truth for the first time by a state politician in 30 years.

You wouldn't know it from the pumper brigade on Tout TV, of course.  They claim it's all getting better.

Really?

Borrowing and spending 9% of GDP by the government to falsely inflate final demand is "getting better"?

No, it's hiding the truth, and while it can continue for a while, just as you can do the same thing if you lose your job, continuing to run up your plastic until your credit card company figures out that you lose your job and will never pay them back, so can governments.

Unfortunately instead of solving the problems in our economy and financial system - which would have resulted in the bankruptcy of some very powerful people and firms - we decided to lie.

Just like Greece, just like Italy, just like the rest of the world.

Politicians are very good liars.  Indeed, it's pretty much all they do.

But irrespective of how much you want to lie, or how much you do lie, at the end of the day when there is no money left what your "balance sheet" says you have is immaterial.

Only cash pays the light bill my friends, and the cash is insufficient to cover the demands of those who want to suck on that government tit.

This is math - not politics.

If you remember just a short while ago I reported on what certainly appears to be a very clumsy scam pulled by the BLS in their so-called "inflation" reading published on the 19th of February - where the numbers they presented simply didn't add up, and as a consequence put forward a false CPI, or inflation number.

Curiously, we haven't heard anything from the BLS on this "error".

This, of course, is only an "error" in that it is not the actual means by which the BLS is "supposed" to report "inflation."

But the BLS has twice in the last 30 years revised their methodology, both times with the intent of understating "inflation."

Why?  Well, a big part of the reason is that the law says that various benefit programs are supposed to be indexed to inflation.  By intentionally understating inflation Senior Citizens and others on various fixed-income entitlement programs funded by government get intentionally screwed.

The Senate yesterday rejected a $250 one-time check to Seniors and others who have been so-screwed for the last two decades:

President Barack Obama has called for Congress to approve the payments to make up for their benefits not increasing this year, but the Senate defeated it 50 to 47.

....

Social Security payments for the elderly and disabled will stay flat this year for the first time since 1975 because they are tied to consumer prices, which decreased amid the worst economic recession in 70 years.

Of course the real problem doesn't lie here.  As is usually the case the media won't talk about the fact that the current inflation rate, if measured under the "old" methodology, never went anywhere near zero.

How much does this "count"?  Tremendously so.  Over a ten year time frame understating inflation by 7% results in your Social Security payments being half of what they would otherwise be.  If the understatement is by just 3% you get a 35% underpayment at the end of a ten year period.

Of course what the media reports is the "one time" payment was rejected, but what they don't report is that seniors have been screwed for three decades by intentional book-cooking in the government.

And by the way - no, there is no possibility of the government "fixing this" and paying what the law says they should.  The money doesn't exist.

But this scam, along with dozens of others, is how our fabulous government managed to run its Ponzi Scheme for as long as it has - a Ponzi that is now collapsing, irrespective of what you're being told by the vacuous bobbing heads on national television.

If you're a senior and been paying "membership dues" to AARP, you might want to ask them why their much-vaunted "lobbying" and "public education" campaigns haven't focused on this for the previous 20 years - and why they sold you down the river.

Hope you like your kids (and they like you) Seniors, because the government tit is rapidly running dry.

In a nice rant intended to be an attack on AG Cuomo (who would like a "better job", natch) Dickie once again leads me to ask: "Did you pay extra at God's brain handout desk for the vacuum between your ears?"

Dick, let me ask a few "pertinent" questions....

If the "primary business" in a given state was selling crack, would you propose that doing so should be ok because, well, it's the primary business?

What if it was ripping off little old ladies?

What if it was selling swampland as "pristine real estate"?

What if it was marketing drugs that were laced with cyanide?

Or faulty cars (exploding Pintos anyone?)

If the company doing any of those things was the dominant employer in a given state, then the AG should give them a pass, right?

Oh I know, that's not what you meant.

It is, however, what you said.

If you want to go after Cuomo's record with regard to HUD, that's a valid area to explore, and Bove started there.  But Fannie and Freddie's mess is not, in the main, due to subprime mortgages, nor did HUD have anything to do with OptionARMs and all the other tricky crap.  Indeed the primary problem is the garbage securitizations - most of which had nothing to do with the GSEs, along with synthetics and other dubious piles of dog refuse dreamed up by Wall Street.

But arguing that an Attorney General, who's charge is to enforce the law no matter who is committing the crimes - that is, bring suits and criminal charges against people who do bad things as the laws of a given state proscribes, should exempt certain big and powerful corporations and/or individuals from those laws because they employ lots of people and/or bring in lots of tax revenue is, in effect, to demand that a State's AG partner with the Mafia!

Some of us - hopefully the dear readers of The Ticker - are too smart for that sort of rank endorsement of outrageous (and perhaps criminal) conduct and instead believe (and demand) that the correct thing for Wall Street to do is behave both ethically and lawfully.

If they do that - behave ethically and lawfully - they have nothing to fear from Mr. Cuomo - or anyone else.

This is rich....

BRUSSELS, March 3 (Reuters) - Spain wants the European Union to use a planned public prosecutor's office for the region to protect the euro currency against speculators, Spanish attorney general Candido Conde-Pumpido said on Wednesday.

Do the prosecutors have a mandate to go after all the nations - perhaps including Spain - that cooked their books?

Why do I already know the answer to that question....

"Doubtless if there were a public prosecutor and there was a combined attack against the single currency, the prosecutor could coordinate the legal response vis-a-vis that attack."

Doubtless: Up yours.  Stop lying and the problem won't present itself.

Oh wait - that would mean you'd have to close a bunch of your big banks, right?  Care to return the AIG pass-through payments?

That's crickets I hear, crickets....

Now this is hubris:

Today most hacked PCs run Microsoft's Windows operating system, and the company has invested millions in trying to fight the problem.

That's because the operating system was designed for backward compatibility with Windows 95 and 98 first (and 3.1 before it) which had no concept of permissions or privileges.  It was (until Windows 7) thus inherently insecure and even Vista (and Win7) can be told to be insecure to deal with all those "legacy issues."

In short, these machines are infested (not infected, infested) because their operating system has historically been full of security holes (this has improved, especially in Windows 7, to be fair.)

So what does Microsoft propose?

So who would foot the bill? "Maybe markets will make it work," Charney said. But an Internet usage tax might be the way to go. "You could say it's a public safety issue and do it with general taxation," he said.

That's nice.

Sell an insecure operating system and then get someone else to pay a tax because they bought an arguably-defective product you sold?

How about this instead Microsoft?

For each computer infested, the publisher of the operating system sold to that user is assessed a fine of US $100,000 by the Department of Justice.

I bet that would get you to improve security quite a bit - or bankrupt your ass.

PS: Total number of viruses and other malware found on my rather-high-profile Freebsd servers in the last ten years?  ZERO.  Put that in your pipe and smoke it sir.

Medivation, if you've been under a rock this morning, announced bad results for an Alzheimer's drug (which Pfizer was involved with as well) and was destroyed this morning to the tune of 70%:

A quick check of option transactions yesterday shows that a lot of people were placing bets.  Zerohedge put forward the premise (as did Livevol) that there was massive insider trading.

Maybe.

But it was Livevol's time & sales report that caught my attention.  Specifically:

This sure smells bad.  But that it was a spread does not necessarily mean that the trade was taken on inside information.  Indeed, it might mean the opposite.

Consider that if both positions were sold then the trader got $14 + $17.50 = $31.50 per contract, assuming a 1x1.  It actually looks like, however, a 1x2 (2x PUTs) with about 8,000 calls and twice as many PUTs.

So how does the trader win or lose?

Let's plot it out, assuming these contracts were sold:

This actually looks like a fairly reasonable trade going into a binary event like this.  It loses under $13 or over $79, roughly, and makes the maximum profit at $40, with a couple of weeks to go.  Yes, it has the potential to make $30 million smackers, which sure isn't shabby!

As of right now, with the stock trading $13.21 (as I wrote this), the trade is profitable - barely.

Insider trading or smart trading?  Heh, that's a pretty good range!  Even if the drug had hit, would it really have spiked up over $78 - and on a miss under $13?

Well, the trader probably thought not.  So far he's right.

But a quick analysis of this trade doesn't appear to show a clear directional bias, which would have, given the money involved, been pretty clear evidence of inside information.  Indeed, the "centroid" of the spread was right near the closing price yesterday.

This looks like a probability trade to me, which is exactly what you want to do when there's a news event and you think the options are rich at their implied volatility given what you think is going to happen.  Indeed, I remember the Dendreon (DNDN) AC decision a couple of years ago during which I was doing spread trades like a madman, and made some nice coin doing it.  I no more knew anything about the outcome of the AC than did the man in the moon but I saw an opportunity with a complex option spread and put it on.  As the trade I put on had a defined risk I figured out how much I was willing to lose and stuffed size on as the decision approached - it sure looked big, but the net exposure, when it was all said and done, was reasonable.

I'm the first one to jump on an insider-trading scam if I see one, but this time, without more information to make me suspicious, I don't.

Disclosure: No, that trade wasn't mine - no position.
Disclosure #2: Nice analysis software eh?  ThinkOrSwim folks.  Really.  And no, they don't pay me to say that :)

The latest non-manufacturing ISM is out, and schizoid is the best word I can use to describe it.  Here's the table, appropriately highlighted:

Activity and production slowed its rate of acceleration slightly.  New orders, however, accelerated a bit from their former "above replacement" rate.

The amusing part is that inventories are being drawn down, which is congruent with this.  So all is right with the world, right?

Well, no.  Inventory sentiment is that there's still too much inventory in the system.

So non-manufacturing (services) businesses are advancing order and production activity, while at the same time they think they have too much in inventory.

Uh......

In addition on the manufacturing side the current month showed deterioration both in production and new orders, and a SLOWING rate of change in inventory draw (instead of a quickening one.)

Uh, yeah.

Schizoid we be, trying to figure out whether we're actually going to see real final demand show up or if, as I have maintained for the last year, this is all a chimera of government borrow-and-spend - a chimera that is soon to come to an end and stick producers with huge amounts of unmarketable inventory.

CNBS' Kudlow and the rest of the "financial media" are desperate to get you to believe it's not the second.  That "demand" - organic demand - is improving.  This despite the raw mathematical fact that between Fiscal 2009 and Fiscal 2010 we're going to spend $3.1 trillion more than the government takes in, which incidentally is about $2.7 trillion more than was being "overspent" before the collapse.  Put another way, that is about 10% of GDP which is not actual final demand but instead is comprised of the government borrowing money and showering it on the economy.

Ben Bernanke's helicopter?  Nope - try Nancy Pelosi, Harry Reid and President Obama, and let's not forget that there is a sizable percentage of the population that not only believes that "President Obama is gonna pay my mortgage!" now, but that he'll continue to do so - and that he can continue to do so - forevermore.

Uh huh.

On that point, incidentally, don't talk to people in government contracting.  I am hearing repeated reports of major shifts coming after the end of the quarter - that is, March 31st.

The Tinfoil brigage is out in force on this, claiming that we're about to have a "catastrophic" forced dollar devaluation.  If that happens I'll eat my Wall Street Journal (part of a page anyway) on webcam for you all.

No, what's coming folks is major cutbacks in government budgeting, and it's not voluntary.  Folks are putting in commitments on the current fiscal year to spend NOW rather than into the 3rd and 4th fiscal quarters.

This is normal coming into September 30th because of how the government does things.  If you don't spend all of your budget, that which you "didn't need" will be stolen back for the next fiscal year.  Thus there is always a mad rush to commit funds before the end of the Federal Fiscal year - always.

For this to happen now, with an end-of-second-quarter deadline, means that the government foresees either a major realignment of budgetary spending (and everyone is thus protecting claimed budgets by spending them NOW lest they be clawed back for other purposes) or worse, they foresee a problem with the bond market.

This also feeds into the manic desire to pass "health care reform" now, even though there will be no benefits to you, even as claimed by government, until 2013 - but the tax increases will start right now.  The truth is that the "benefits" will come never and this entire "plan" is simply a scam to try to scare up more revenue that the federal government desperately needs, as the tax receipt numbers have absolutely gone through the floor.

You hope we don't get a bond-market blowup folks.

Really.

See, I told you so....

In the report, the panel, that includes Rob Johnson of the United Nations Commission of Experts on Finance and bailout watchdog Elizabeth Warren, warns that financial regulatory reform measures proposed by the Obama administration and Congress must be beefed up to prevent banks from continuing to engage in high risk investing that precipitated the near collapse of the U.S. economy in 2008.

The report warns that the country is now immersed in a "doomsday cycle" wherein banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management – and when the risks go wrong, the banks receive taxpayer bailouts from the government.

As the report says:

Gee, how come all this didn't happen a year ago - or two?

“News has surfaced that investment banks based in the United States have funded firms that created the financial indexes and other information needed to trade against the possibility of a sovereign default overseas—after selling debt to those countries in a way that kept that debt secret from the public,” Rep. Maloney said. “These reports, if true, are a shocking echo of the financial crisis that faced the U.S. in 2008—whose reverberations are still being felt today, in the worst recession in decades.”

No really?

You mean just like those wonderful "CDOs" that Goldman (and others) created that were in fact fully synthetic instruments and which came into being ONLY because someone wanted to SHORT your house?

Exactly why weren't these instruments banned when traded "in the dark"?

Off-balance sheet?  ENRON didn't make clear what happens when people hide things?  After all, nobody ever hides good news, right?

Carolyn, it's nice to hear you come out for this sort of hearing.

But this leaves open the question about the raw theft and blatant destruction that the fine "firms" headquartered and operating in New York - right up your back yard - are and have been promulgating, and why it is that there hasn't been any serious attempt to put a stop to it - until now.

Indeed, the same BS games are still going on today.  Wells Fargo and Citibank both have well over one trillion dollars off balance sheet in "God knows whats", worth God knows even less, and investors have exactly no knowledge of precisely what sort of trash is in there.

Municipal governments?  Jefferson County Alabama anyone?  How many more Jefferson County's are there?  We know these sorts of "deals" were written literally everywhere, and that in at least one case the underlying bond issue allegedly "protected" was never made, so this deal was nothing other than a raw bet on interest rates - made by a municipal government that was goaded into it by these very same banks.

“It’s like buying fire insurance on your neighbor’s house—you create an incentive to burn down the house.”

It's only insurance Carolyn if the person who wrote the policy can pay and the buyer has an insurable interest.

If the seller can't pay because they don't have the money or the buyer doesn't have an insurable interest, it's either a garden-variety scam or an inducement to commit financial arson.  When the latter is done "off exchange" where the trades are not made public and accessible then the incentives for someone to run around with a can of gasoline become nearly insurmountable.

Perhaps the fine Congresswoman can explain why is it that nobody's in jail for this yet - and why our government still allows this BS to continue.

Ambrose Evans-Pritchard is entirely off the deep end with this mess:

The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive. Yet the Fed and the European Central Bank are letting credit contract.

Letting credit contract?

Of course there's the famous 2002 Bernanke Speech, also displaying an amazingly one-dimensional view of reality:

Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.

Amazing.  Here's a man with a mandate to manage credit aggregates and he's talking about one of the effects of credit aggregates - price.

Yet when you read through Bernanke's so-called "seminal" helicopter paper you find even more evidence of one-dimensional thinking.  For example, tidbits like this:

Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value.

The implication, of course, is that if one has inflation then the repayment of debts is "easier".  But as I will explore and explain here, that premise is dangerously false.

We must first agree on a few principles which I have espoused for the entirety of the time that The Market Ticker has been in publication (and before, if you find my earlier writings.)

The first and most important of these principles is that nobody works for free.  That is, no business intentionally runs at a loss, and nobody handles a financial transaction of any sort without being compensated in some form.

This is similar to the physical world and the laws of thermodynamics which, in essence, boil down to TANSTAAFL, or "There ain't no such thing as a free lunch."  That is, in the physical world if you wish to convert energy from one form to another, there will be some sort of loss in the conversion, no matter what you do. 

Such is an inescapable reality of the physical world, and it applies to the financial world as well.  While there are certainly isolated cases in which people appear to work for free or a negative cost, when looked at in aggregate the economic world looks an awful lot like the physical world as seen through the lens of thermodynamics.  To put it simply every element of economics has "slippage", or inefficiency, inherent in each and every transaction that takes place.

The general principle of slippage is what makes attempting to use inflation to "reduce debt" a pointless exercise.  Let's take an example.

Let's assume that Joe has $5,000 in credit-card debt.  He makes $30,000 a year.

Bernanke "decides" he is going to implement a policy of debasing the currency by 5% to try to "help" the economy by making it easier to pay debts.

What happens to Joe?

Joe's employer makes widgets.  These widgets have raw materials, energy and labor as inputs and are sold on the marketplace.

When Ben implements his policy the single-dimensional view of the world is by devaluing the currency by 5% means that Joe now "makes" $31,500 a year instead of $30,000, and thus has an "extra" $1,500 to make his debt payments with.

But that sort of single-dimensional view is in fact wrong!

When Bernanke implements his policy the following things happen:

1. The interest rate Joe gets charged goes up, if the interest rate can adjust.  The reason for this, of course, is that the person who loaned Joe the money is unwilling to accept a negative return.  If he can, he will thus immediately adjust upward the demanded interest rate.  We see this in floating-rate credit cards that are tied to various market rates (e.g. the Prime Rate, etc.)
   
   
2. Joe's employer gets a nasty surprise.  Some of the raw materials that go into the widgets contain petroleum.  The price of oil goes up immediately in anticipation of this policy change, and it rises by far more than 5%.  Why?  Because the dollar is the world's "reserve currency" and the oil exporters, as a consequence, hold a lot of dollars.  The price of oil thus adjusts to both reflect the forward risk of even more devaluation and to recover the embedded market loss on the reserves the oil exporters already hold.  So the price of oil goes from $35 to $80 - more than a doubling - in the space of months.
   
   
3. Joe's employer tries to raise prices so he can recover the increased (nominal) costs he is experiencing.  But he runs into a problem - virtually everything that people have to buy contains oil, either directly or indirectly.  Further, all those firms compute profit as a percentage, not as a number of dollars, just as Joe's employer does.  Therefore the price of those necessities rise, and this reduces discretionary income for consumers, making very difficult a 5% increase in price for widgets.  If Joe's employer cannot sustain an increase in price and also cannot operate profitably without it, Joe will be laid off (and now have zero income instead of his $31,500 mythical imputed income Bernanke believes he will obtain.)
   
   
4. Joe's employer, assuming he can manage to get a 5% increase in the price of his widgets to stick, has a further problem.  He wants to make money.  Joe therefore will get something less than a 5% raise, simply because Joe's employer must compensate for the forward risk of further devaluation and the uncertainty of his input costs.  Again, the inherent inefficiency in economic decisions makes this necessary.  Therefore, Joe likely only gets a $1,000 raise, not a $1,500 one.  Thus, Joe "sees" only a 3% increase in his gross wages, while the general price increase predicted by the monetary inflation is 5%.  Joe is now behind.
   
   
5. It is often said that inflation "taxes savers."  The truth is that it taxes everyone because all economic decisions have a time component to them and time has a price associated with it both in direct cost and uncertainty premium.  The oil-rich firm holding dollars has a "time horizon" on their reserves that is imputed into their holdings, as does the vendor who quotes steel for delivery three months from today.  Due to the reality of slippage - both the uncertainty represented in time value and the inefficiency of all business activity - this causes the pass-through as "desired" and "expected" to always fall short.  In short, the "inflation tax" screws everyone.
   
   
6. Finally, the ignobility of the government comes in.  The income tax system is progressive.  Joe's "raise" pushes him into a higher tax bracket, and in so doing his "raise" is further diluted.  Sometimes the government indexes taxes for inflation - but not always.
   
   
7. To make it worse, government cooks the inflation numbers.  If steak is too expensive they substitute hamburger under "hedonic adjustment" (after all, they're equal because they're both beef, right?)  They count "owners equivalent rent" for housing instead of house prices, even though more than 60% of people are homeowners.  In short the government intentionally and willfully understates price inflation - which it then, of course, bases things like inflation-indexing of taxes upon.  This screws Joe even further (not coincidentally it really screws Joe's Grandfather, who is on Social Security!)

The "one-dimensional" economic theorists such as Bernanke believe that this 5% devaluation will "flow through" to Joe, giving him $1,500 more a year to make debt payments with. 

But the seven effects above, along with many more that are not accounted for in this simplified analysis, show that one-dimensional thinking is Ivory-tower garbage! 

In the real world Joe experiences a decrease in his disposable income in both nominal and real dollars.  He gets creamed from all sides - his interest expenses rises immediately to compensate for the devaluation plus the risk that Bernanke will "do it again", suppliers of things he must buy (energy in all its forms) jack up their prices to compensate not only for the devaluation but also to recover their reserve currency holdings FX loss, his tax expense rises due to the progressive nature of income taxes and to top it off his employer is an imperfectly-efficient firm (as are all) and as such he only got a $1,000 raise instead of the $1,500 that the idealized one-dimensional model says should happen.  Worse, the longer the view those who Joe deals with have (e.g. his health insurance company) the more uncertainty such a change introduces, and as a consequence the higher the premium that is charged for that uncertainty goes.

Joe gets squeezed and his disposable income margin - the amount of money he has every month after he makes his mandatory expenditures - is destroyed. 

What if we instead allowed or forced increases in currency valuation - that is, monetary deflation.  Well, that would be undesirable too, on-balance.  Again, while interest rates would drop, inefficiency says that Joe would lose once again, because not only is the drop in interest rates inefficient (that is, the lender won't give him the entire 5%) but in addition the drop his employer experiences in input costs won't be efficiently transmitted to him either!  Because his employer is not a perfectly-efficient business he will not contract Joe's earnings by 5%, he'll probably contract them by 10%.  Joe once again gets screwed, and while the interest rate on his (variable rate) debt will come down, it will not do so to the same extent as does the deflation.

If, from this analysis, you deduce that there is no solution to excessive debt to be found in monetary policy you are correct. 

Due to inefficiency in the economy it is not possible to tamper with monetary policy without introducing harm to everyone involved.  The only monetary policy that does no harm is one that has zero inflation - that is, one in which the currency's value is free from tampering, and where the aggregate credit is matched as precisely as possible to the actual performance of the economy in output.

Since both measurement and execution of policy decisions are imperfect such an exact match cannot be obtained - but it should, nonetheless, be the only goal of a central bank or monetary policy body within the limits of ability.

This, incidentally, is rather close to what "Swarm USA" is trying to accomplish.  I have some issues with the finer points of the plan, but the top-level view is spot-on.  Specifically:

b. Create controls that tie overall money quantity to PRICE of ALL asset classes. Target ZERO price inflation and adjust quantity of money spent into existence without debt. Interest rates are set by the free market. This means no more long term inflation or deflation.

Hopefully you now understand by Ambrose-Evans is wrong, why Bernanke is wrong, why Paulson is wrong, why Geithner and Summers are wrong, and why Krugman is wrong.  Why their single-dimensional views of the world are not only inaccurate they're dangerous, as they promote not economic stability and growth but rather the destruction of the economy over the intermediate and long term, presenting a false "prosperity" through serial asset bubbles that are both mathematically unsustainable and must burst, destroying value in each and every instance.

We must do better, and we can.

IRA popped up this morning with an article that makes some of the points I've been harping on for a year or so now....

Even as bank securities holdings are rising in aggregate, loan portfolios and assets overall are shrinking at an accelerating pace - evidence, we believe, that deflation remains the chief threat to the global economy. As we said two weeks ago, when the Fed embraces a zero rate policy, what they are telling investors is that bonds and other rate-sensitive financial assets have no value. We've been talking about the shrinking bank balance sheet for more than 18 months and thankfully this key statistic is starting to get broad attention.

Right.

The problem with this premise is that not only does it destroy the asset base (think savings accounts, CDs, etc) that banks require to have a healthy lending environment, it also drives funds in two corrosive and destructive directions:

1. It encourages carry trades which are inherently destructive because the capital lent leaves the nation where it was borrowed.  That is, it is put to work somewhere else, instead of in the borrowed currency.
   
   
2. It forces people out the risk curve and while at the same time it destroys bank capital bases it exposes the capital that wants a low-risk (or "risk free") home into risk assets where it can be destroyed.

When you look at credit quality of these "assets" (especially MBS) you see a truly frightening picture.  The Fed's intentional overpayment has masked an enormous valuation:coupon disconnect; the internal credit quality in these things continue to go to hell, yet the coupon has been stable rather than rising to reflect this deterioration.  That shouldn't happen in a rational market, but there is nothing rational about The Fed's interference.

Now consider the lowly retail investor who is in a money market fund with his "must not lose" money.  He is earning zero, and many of these funds are at present absorbing fees.  This is causing them to run at a net loss, as any attempt to post a negative interest rate to investors will result in an instantaneous run on the fund.  Yet ZIRP makes it effectively impossible for these funds to return a positive yield.

Remember, without these funds there is no lending base and thus no credit growth.  The perverse impact of ZIRP is that it destroys bank capital bases, as over time people will simply not sit for a zero yield - effectively or otherwise.

As I have noted for the last three years (and which IRA also notes in their paper) the only solution to a debt-overhang economic dislocation is to force the excessive and unpayable debt to default.  These defaults bankrupt the institutions and borrowers that were imprudent, but in doing so they also clear the market.  This also forces yields to rise to reasonable levels, restoring a yield curve that reflects duration and inflation risk, yet allows the capital base of the sound banks to be rebuilt, as they are able to attract deposits, especially time deposits, with reasonable yields on these instruments.

In other words, it attracts capital to the financial institutions - not debased currency or credit.

Only loaned (and thus borrowed) capital promotes economic growth.

The Fed's puerile thought process is that "all yield is the same", "all borrowing cost is the same", and "all credit source is the same."  This is a chimera.  The Fed is incapable of producing capital, even by printing.  It can produce credit and it can debase existing money, diluting all existing currency, but it cannot create capital.

Capital is created only by real production in the economy.  No other action creates it.  Yet the loan of capital is what gives rise to the granting of credit without debasement of all existing currency.

The Fed is powerless to do this, but it can destroy the conditions necessary for capital to be lent.

ZIRP does exactly that by ruining the incentives necessary for those with actual capital to be induced to lend that capital.

The Fed should have learned this from Japan, but refused to look at the evidence under their nose.  Instead, Bernanke has continued down a ruinous ivory-tower path born out of his own fertile imagination in relationship to how markets and incentives actually work, conflating the concepts of "money", "credit" and "capital."

Addressing this problem and correcting it requires admission that both Paulson and Bernanke, along with Summers and Geithner, were wrong.

In the world of Washington DC where "I screwed the pooch" are four words you will never hear a politician utter, such a sea change will require that either President Obama grow a pair of balls or that he be shackled by a massive shift in power in Washington DC - and those who come in to do so actually understand the difference.

Odds on that event were unavailable at presstime.

Yes, I said CRASH, and I meant it.

Why?

"Events" like this:

SINGAPORE/CAIRO, March 1 (Reuters) - Copper is likely to
climb when trading starts on Monday, lifted by uncertainty over
supply after the world's top copper producer Chile was pounded
by a massive earthquake, analysts said over the weekend.

The front-month contract opened up more than 8%.

This, despite the fact that the earthquake was hundreds of miles away from the mines in Chile and there was zero damage to them.  Some were offline for a few hours due to power failures, but none suffered any physical or structural damage, nor did their export points and the transportation network between the two.

So why did price spike more than 8% even though all this was known by the market before it re-opened for trading?

No part of the markets are trading on fundamental values, nor on forward business expectations.  They are instead trading as "hot money" repositories where speculators rotate in and out of various instruments literally on a minute-by-minute basis.

This is how crashes happen.

When there is no fundamental value underlying a market there is no floor on price.  Price then becomes one thing and one thing only - the number at which you can find another sucker to take your position from you.

This is how tulip bulbs went nuts in Holland, it is how houses went nuts in California in 2005, it is how tech stocks went nuts in 1999 and it is how oil went nuts in 2008.

But now literally everything has gone this way.

Take European national debt.  We now know that Italy, for example, was cooking their books as early as 1995.  This means that bond buyers overpaid for their bonds and took less coupon than they should have.  This should have resulted in an immediate destruction in the value of those bonds when discovered, but it did not. 

Why? 

Because there was still a bigger fool.

Tech stocks were the same thing in 1999.  These "companies" claimed the global GDP some 100 times over between the IPO-issuers in 1998 and 1999.  This, of course, is impossible.  Yet people kept buying even though mathematically 99% of them had to lose all their money.  Ultimately, they did exactly that.

Oil went to $150 in 2008 even though demand was cratering.  It then collapsed to under $40.  It is now double that, even though we have a record supply on hand, to the point that tankers are sitting around full of crude with nowhere to unload it to, and nobody to buy at the price paid.  Yet the price continues to go higher.

These conditions, historically, always produce crashes.  Each and every time.  Go ahead and look back through history with a dispassionate eye.  Find me a market that displayed a complete disconnect with fundamentals such as this and did not crash. 

You can't.

The issue for investors, of course, is that it is almost impossible to determine who will finally stand up and blow a whistle that others listen to.  These manias go on longer than anyone would think possible.  Always.  I was stunned in 1999 as the Nasdaq doubled.  Likewise in 2009 I was stunned as prices went straight up on companies that based on any dispassionate analysis are worth zero - for example, every large bank with undisclosed off-balance-sheet exposures (that would be most of them.)

The overnight move in Copper is yet another confirmation point.  Big banks leasing oil tankers to fill up and moor somewhere "waiting for price to go up" was the first indication that this mentality had taken hold last year.  Stocks were the next, of course, and now we have it in copper.

That the "animal idiocy" came just months after the 2008 crash tells me that we've learned exactly nothing.  That the idiots in places like CNBS, including most especially people like Kudlow and LIESman, who have seen enough dances to both know and be able to identify this pattern, refuse to discuss what's going on borders on criminal journalistic misconduct.

If we had indications in the real economy - that is, other than government borrow-and-spend - that we were turning the corner, I'd be a bit more sanguine.  Unfortunately no such indication has appeared, despite literally six months of claims from the media that it's "just around the corner." 

No it's not folks.  What's around the corner is another collapse, worse than the 2008 one, because the bad debt has been stinking up the joint even more as it decays into a putrid mess.

A dead fish doesn't get more palatable the longer you leave it out on the kitchen counter.  We've learned nothing collectively or in the government regulatory apparatus from the last three years - indeed, government has become drunk on the premise that it can borrow and spend over $1.5 trillion annually to present a false veneer of prosperity and economic improvement. 

But borrowing money doesn't make your economy more prosperous.  It indeed makes it less so, because you not only have to pay that money back some day, but for the duration of the time you have it outstanding you must also pay interest.

When I see a nation rocked by a massive earthquake and one of its major exports spikes upward by 8% in price when it is known to the market that disruption to that nation's production of that commodity from the event was zero, that's the bell being rung to tell you to be damn careful if you think "happy days are here again" - right here, right now.

Oh no. ENRON was small potatoes. Now we have evidence that this sort of game was played by nations, including Italy. When one cannot trust a balance sheet, one does not lend. We'll explore this and the implications for the Euro, the Pound, and the markets.

Join us at 3:30 today (Monday, 3/1) for a lively discussion of this subject and more.

Funny how the numbers seem to line up:

Real disposable income decreased 0.6 percent in January, in contrast to an increase of 0.2 percent in December.  Real PCE increased 0.3 percent, compared with an increase of 0.1 percent.

Yeah, we're not making anything in actual income, but the government is forking up billions in things like unemployment and such.

The fun part of this, of course, is that the only thing that has held up the economy is that deficit spending.  But for it, as I noted in my missive of Feb 23, we've borrowed and spent 14% of GDP over the last 18 months - or roughly 10% annualized.

The premise behind all of this is that if you can "prime the pump" it will lead to sustainable growth.

The error in the premise is that borrowing has to pick up but we never destroyed the excessive debt leverage that was in the system originally.  As such there is no borrowing capacity - recall that one must have both a willing lender and a willing and able borrower.

There is no recovery.  Buffett is on CNBS this morning talking about a "slow recovery" but he's being intentionally misleading - or he's gone insane.  He talks a good game about "strong medicine" but in point of fact he then says that he's seen little evidence of an actual turn-up in the economy as a whole.

Well Warren, which is it?  Either there's no recovery coming - the economy is simply being propped up until the government becomes unable (or unwilling) to continue to spend at double its tax inputs, or you're wrong.

Me?  I go with the data, which says that not only is the government "stimulus" not working to produce sustainable output gains, it can't work because the excessive debt that led us into this mess is still there as a direct and proximate consequence of our government refusing to allow those who made bad loans to go out of business - both on the borrowing and lending side.

Oh, look at what the Zerohedge cat dragged in this time!

Yet a 2001 report prepared by Gustavo Piga, in collaboration with the Council on Foreign Relations and the International Securities Market Association, not only fits that particular smoking gun description, but the report itself was damning enough of another country, a country which used precisely the same off-market swap arrangement to end up with an interest expense of LIBOR minus 16.77% (in essence the counteparty was paying Italy 16.77% of notional each year as a function of the swap mechanics), in that long ago year of 1995. The country - Italy (for confidentiality reasons referred to in the report as Country M), was at the time panned as the Enron of the European Union due to precisely this kind of off-balance sheet arrangement by the Counsel of Foreign Relations. The counterparty bank: unknown (at least in theory, since the swap was highly confidential, and was referred to as Counterpart N), but considering the critical similarities in the structuring of the swap contract to that used by Greece in 2001, and that ISMA cancelled Piga's press conference discussing his findings out of fear for the academic's life, we can easily venture some guesses as to which banks value their recurring counterparty arrangements more than human life.

Uh, Libor minus 16.77%?

A hedge huh?

This was identical to you walking into your bank and taking a cash advance on your VISA card - at a rather high interest rate - and concealing it for the explicit purpose of being able to show a wad of cash at the end of the year on your books.

That is no hedge, it is a loan.  It was done to cook the book and, in my opinion, falsely present the "health" of the nation - in this case Italy - involved.  It was done over the counter with no paper trail or exchange trading for the explicit purpose of secrecy, so that nobody would discern that the government in question had borrowed the money.

The problem should be obvious here.  If I cannot trust the balance sheet of a sovereign government because I have discovered one "tricky deal" such as this, I have no means to know how many more "tricky deals" there are, what the liabilities might be, what the credit exposure is, and whether I will ever get paid back if I loan that government money.

The allegation is made that Goldman was on the other side of this deal.  That, if true, raises a further question: how many more of these hinky lending deals is Goldman involved in?  (Note that FT seems to think it was JP Morgan.  Not that the identity matters, by the way - the point is that the institution involved knowingly made a loan in a form that was intentionally designed to mislead those not involved in the transaction.)

The entire report by Zerohedge is well worth reading, although it's fairly thick.  The essence of it, however, is that these deals were loans and were written "off balance sheet" using hinky derivative transactions for the explicit purpose of misleading investors about the strength of the nation involved - and that, unfortunately, directly implicates the Euro as a currency.

Buckle up folks.

I seem to remember once upon a time when Charlie Gasbag-a-rino would come on CNBS virtually on a daily basis, with the DOW down 200, and announce that Ambac, MBIA or both were "about to be bailed out" - attributed to "sources."

Only one problem with this, you see - it never happened.

Then there were the claims that Warren Buffett was going to buy, well, the world.  That never happened either, but it was always good for a pump here and there in the markets - only when they were in danger of really tanking, of course.

And now we're seeing it again, this time with Greece.

Over the weekend we have seen multiple competing reports of some sort of "deal", starting right near the close of the US market on Friday.  It was undoubtedly responsible for the near-meteoric rise of the futures into the lock-up - nobody would want to hold short into the weekend with such a thing happening, right?

Well now Angela Merkel has said - once again:

"there is absolutely no question of it".

"We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty," Merkel told ARD public television.

Right. 

Maybe.

But let's look at the facts here.

Is this really about bailouts?

Or is this just more criminal manipulation of markets, with certain privileged players placing bets in the marketplace, then starting rumors?

After all, the blatantly-obvious front-running of the famous August 2007 Discount Rate cut wasn't investigated - or prosecuted, even though a three-year old could look at the chart for the day before and see that obviously someone (or a group of someones) knew in advance that Bernanke was about to do that - and they traded on it.

Then there were the AMBAC/MBIA rumors, the incessant Buffett rumors, the shorting ban (which was also traded on in front of the announcement by an afternoon) and more.

Not one of these has led to a formal investigation, yet all trades are trivially traceable.  If the government gave a good damn about prosecuting this sort of information leak and front-running, all of which is illegal by the way, the records do exist.  All they have to do is look.

This sort of corrosive and pervasive scam destroys confidence in our capital markets.  I am convinced that a huge part of the reason that we had the collapse we did in 2008 and early 2009 - the reason it was so violent and essentially impossible to control - was that confidence in the markets had been destroyed by months of outrageously unlawful conduct in this regard.

When the "triggering thing" happened - Lehman - it just all came apart at once, since nobody trusted anything any more.

What makes anyone believe this is over?

The scam machine is still running.  The rumor-mongers are still plying their wares, getting in front of the alleged news (even though it is repeatedly faked) and stealing investors money - time and time again.

We have learned nothing.  Our law enforcement agencies and politicians have not only learned nothing, they have put in place the very same instabilities that led to the collapse last time.

It will happen again, and probably sooner than anyone expects.

Our SEC is a joke and the international regulators are even worse.  We have no desire among those people to investigate the outrageous actions of these scam-meisters and lock them up.  We should, but we don't.

Your memory should be good enough to remember what happened the last time.  It should also be good enough to remember why it happened the last time.

We've changed nothing.

Are you insane enough to believe that the outcome - having done the same thing - will in fact be different?

No, it's not that they don't teach history - even though the rendition of "history" given in government (and private) schools is questionable at best (how many, for example are taught the underlying truths of Thanksgiving, and how all the colonists almost died under a nearly-pure socialist structure?)

No, it's not that many of our schools start kindergarten with an exercise in socialism, even though they do - by asking the parents to buy all manner of supplies which are then, either in whole or part, aggregated - that is, "from each according to his ability, to each according to his need" - in the first hour of class.  Isn't that sweet - straight out of Karl Marx's mouth to your five-year old's ears.

It's not even that these same government schools in many cases will hand out "awards" at the end of the year, or the end of a student's time there, in which literally everyone is considered "outstanding", destroying the value of the word - and the motivation to excel.  After all, not everyone can be "outstanding", right?  If everyone is, then nobody is - whatever that level of performance is, it's "normal".

No, it is that we fail mathematically.

To succeed a young person needs to be able to do three things - read, write, and understand mathematics.  The fourth ingredient is that the innate desire to learn must not be destroyed in their first few years of school.

All children start life wanting to learn.  Ever watch a baby?  It's a curious being, is it not?  It reaches, it fondles, it touches, it experiments.  We put plastic caps in our electrical outlets because one of the experiments a significant number of babies and toddlers will perform is inserting a kitchen fork into said outlet, with bad results.

So how do we go from that to a surly vegetative kid at the age of 9, 10 or 12?

We do it by failing in the essential purpose of education - giving our children the foundational understanding they need, and then getting the hell out of their way!

We want to mold educational experience.  To teach "as we want them to learn", instead of "as they wish to synthesize." 

We're fools.  You, I, our school systems.  All of us.

But in the midst of our mind-numbing and creativity-destroying "education system" we do something worse - we ignore, for the most part, the single most-important concept that our children must learn in order to be citizens.

I speak of the function shown in this graph:

This is our friend the lowly (and so-often forgotten) exponent.

It is not that we do not teach our children about this basic function of mathematics - we do.  Ask your kid in sixth or seventh grade if he or she understands exponents, square's, etc - they do.

No, it is that we fail to teach the fact that any time two or more exponents are in play, one of them always "runs away" from the other. 

Always.

We fail to teach the fundamental truth that you can never let this happen.

Anywhere.

Because if you do, it is simply a matter of time before wherever you let that happen with comes to ruin.

And yet these functions are literally everywhere.  Think about it.

They govern population growth.

They govern energy consumption.

They govern monetary growth and inflation.

They govern economic growth.

They govern growth in the production of food.

They govern growth in housing.

They govern growth in earnings by corporations.

Literally everything around us in our daily lives has a compound function associated with it. 

Everything.

And yet wherever two or more inter-related compound functions are in play, if one of them has a larger exponent than the other, it is inevitable that they will "run away" from one another and lead to a ruinous crash of some sort, whether it be by overpopulation, by inability to produce that which is necessary to sustain the other, or in the form of an economic depression.

In each and every case where this interrelationship exists if you allow this situation to develop you create a circumstance where something dies - either economically or literally.

We can argue over when such a calamity will occur, but not if it will, because under the laws of mathematics, IT MUST.

We do not teach our children this.  We do not drill this as the essence of what they must understand.  We do not make clear that the above must never be allowed to occur and continue, and that in each and every case where it is detected, it must be stopped immediately.

Jimmy Carter lost his job because he went on national television and spoke the truth above.  That red line represents a 7% compound growth rate.  It was what he was speaking of in his famous address in which he said that if we continue to grow our energy consumption by 7% annually in ten years we will consume more than has been consumed in the entire history of the United States.

"The world has not prepared for the future. During the 1950s, people used twice as much oil as during the 1940s. During the 1960s, we used twice as much as during the 1950s. And in each of those decades, more oil was consumed than in all of mankind's previous history." - President Carter

He was right, by the way. 

The American People fired him for uttering a fundamental mathematical truth.

Our school boards, administrators and teachers, including math teachers, willingly and knowingly put together school budgets, including salaries, that have "percentage growth rates" in them.  Those salary growth rates exceed both GDP growth and the growth of incomes in their district. 

They willingly and knowingly pass and support the above double-exponent graph - a graph that they know (at least the math teachers do) will lead to ruin. 

They do it anyway.

These same people do not teach our children that such a pattern in the growth of government, in the growth of money, in the growth of energy consumption, in the growth of population - all will eventually lead to the same ruin and for the same reason.

Why do they fail in this regard? 

I'll tell you why.

Because if they didn't our teens - our high school graduates - might literally be rioting in the streets, burning those school board offices and government buildings to the ground.

They might do so because our young people would have the tools to recognize that these very same teachers, administrators and government officials have intentionally and with full knowledge of the consequences destroyed their futures.

That it is mathematically impossible for them to receive Social Security and Medicare as promised.

That Medicare Part "D" was passed by their parents and grandparents howling even though it would inevitably lead to the destruction of The Federal Budget and their future.

That "health insurance" premiums growing at 10% or more annually while economic output grows at 4% will inevitably collapse the economy, and that providing "free all you can eat" care to both illegal alien invaders and senior citizens (including those retired teachers) is mathematically impossible over the long run.

That it is mathematically impossible for us to continue to grow energy consumption at 3, 4, 5, 7% annually while we grow production at effective zero due to refusing to build nuclear plants and exploiting the energy resources we have in this nation.  Indeed, our schools teach that growth in the production of energy is evil.

That it is mathematically impossible to grow earnings, production or both at 4, 5, 6, 7, 10% annually while the population consuming your output grows 1%, and thus the stock markets must eventually crash to bring earnings and production into accord with population.  We simply argue over when that will occur, not if.

That it is mathematically impossible to grow credit - that is, debt - at 8% annually (and we have on average since the 1950s) while GDP grows at 5% annually and population at 1%.  Pursuing such a policy, which our leaders have and our educators espouse as "healthy" and "their goal", inevitably leads to either a massive debt-default episode (e.g. a deflationary depression ala the 1930s) or collapse of the currency.   Not coincidentally, that's close to the above graph - and is why our "economic problems" are not over.

That it is impossible to grow population forever at any compound rate since the rock we live on is fixed in size and resources.  Since one must inevitably have more people to consume more "stuff" (e.g. GDP) over a sufficiently long period of time all compound growth fantasies have a "use by" date at which they must end.  Again, we argue only when, not if.

Our youth would recognize that none of what has happened - our energy dependence, our abuse of the land by "big farming", the abusive and outrageous conduct of Wall Street, the bogus and fraudulent promises made, and ridiculous growth in spending beyond our means by our Local, State and Federal Governments - is an accident.

Rather, all of it has been by design and intent and the consequences of that design and intent will fall on THEM.

They would be pissed that "we the people" - their parents, their teachers, their school administrators, their governments from the city council on up to Congress and The President - have intentionally and willfully screwed the world in which they must live for their own puerile fantasies, and that they have done so with both knowledge and malice aforethought as to what the inevitable consequences would be - consequences those very same youth will have to pay.

They would raise hell, and in doing so would be both justified and appropriate in their actions. 

But for our youth to do so, they'd have to understand how the power function - the lowly exponent - rules almost literally everything in their daily life, in the life of this rock we call "Earth" and in their future, both economic and otherwise.

To prevent that from happening so we can loot the future of our children and grandchildren, we intentionally refuse to teach them these fundamental mathematical relationships and in fact gloss over and obfuscate any such discussion, debate, or path toward understanding how this basic concept intertwines with and in fact controls virtually everything in our - and their - daily lives.

Indeed, it is obvious on its face that so-called "education" is not the goal of our government schools - or the private educators either - at all.

Those who claim that "private education is better" need to think long and hard about this.  Parochial and other private school environments - how many taught this fundamental truth?  The school I attended - a high-brow college-prep private academy (at the time) - didn't.  A local religiously-oriented (and well-respected) private Christian school does not - I know this for a fact, as I know several students both past and present who attend there.  Our local government school system does not.

Let's cut the crap America. 

The above is the central understanding that every citizen must have in order for any society to have a chance at stable, long-term prosperity rather than a bogus and fraudulent existence predicated on one bubble after another, intentionally blown for the purpose of stepping on the people's necks through the stripping of their prosperity in all of its forms.

Wake up while there is still coffee to smell.

Now that I've had to time to read the entire AIG 10Q there's a nasty ditty in here that in my opinion goes materially beyond the "going concern" language.  It's here:

A deterioration in the credit markets may cause AIG to recognize unrealized market valuation losses in AIGFP's regulatory capital super senior credit default swap portfolio in future periods which could have a material adverse effect on AIG's consolidated financial condition or consolidated results of operations. Moreover, depending on how the extension of the Basel I capital floors is implemented, the period of time that AIGFP remains at risk for such deterioration could be significantly longer than anticipated by AIGFP.

A total of $150.0 billion in net notional amount of the super senior credit default swap (CDS) portfolio of AIGFP as of December 31, 2009, represented derivatives written for financial institutions, principally in Europe, which AIG understands to have been originally written primarily for the purpose of providing regulatory capital relief rather than for arbitrage purposes. The net fair value of the net derivative asset for these CDS transactions was $116 million at December 31, 2009.

So AIG "understands" that $150 billion of credit-default swaps were written by AIGFP to European Institutions (no note by the way as to exactly what's in there - or who owns them) for the explicit purpose of getting around capital requirements - either by banking regulators or (possibly worse) EU sovereign regulations.

When did they come to "understand" this?  Did they write these swaps originally knowing that their essential purpose was to evade capital requirements, or was this a "recent" revelation of some sort?

Indeed, the section goes on to say:

In addition, although AIGFP receives periodic reports on the underlying asset pools, virtually all of the regulatory capital CDS transactions contain confidentiality restrictions that preclude AIGFP's public disclosure of information relating to the underlying referenced assets.

Isn't that nice?  So AIG insists that we trust them, and in addition, that everyone else trust them, as to the precise composition of these "assets", their performance, and who is on the other side of the transaction.

Oh, it gets better.  The weighted average maturity of these transactions is 1.35 years, we can't tell what's left in there, and we also can't know who's on the other side of the transaction, but what we are told is that the essential financial purpose of these transactions was to evade regulatory capital requirements.

Net notional?  Oh, that's nice.  Since the claimed underlying "net derivative asset" is essentially nil against this "notional", one wonders what the real risk is on the table here in terms of the firm.  Seeing as it's in the "risks" section of the 10Q, it has to be material to results, right?

Why do I smell sulfur?

Gee, who saw this coming... oh wait - not in the press release, is it?

NEW YORK--(BUSINESS WIRE)-- American International Group, Inc. (AIG) today reported a net loss attributable to AIG common shareholders of $8.9 billion for the fourth quarter of 2009, or $65.51 per diluted common share, compared to a net loss of $61.7 billion or $458.99 per diluted share in the fourth quarter of 2008. Fourth quarter 2009 adjusted net loss was $7.2 billion, compared to an adjusted net loss of $38.5 billion in the fourth quarter of 2008.

Blah blah blah blah look at the 10Q filed with the SEC:

 AIG has been significantly and adversely affected by the market turmoil in late 2008 and early 2009, and, despite the recovery in the markets in mid and late 2009, is subject to significant risks, as discussed below. Many of these risks are interrelated and occur under similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence, or exacerbate the effect, of others. Such a combination could materially increase the severity of the impact on AIG. As a result, should certain of these risks emerge, AIG may need additional support from the U.S. government. Without additional support from the U.S. government, in the future there could exist substantial doubt about AIG's ability to continue as a going concern. See Management's Discussion and Analysis of Financial Condition and Results of Operations — Consideration of AIG's Ability to Continue as a Going Concern and Note 1 to the Consolidated Financial Statements for a further discussion.

Oops.

That's not a sentence you ever want to see in a quarterly report.  It winds up in there because the auditors essentially make you do it - that is, the bean counters think you're a few beans short of a box.

Or maybe a lot of beans.

Mishkin is on CNBS this morning crowing that "clearly the recession is over."

Uh huh.  And your buddies over at the NY Fed, along with The Fed in DC and CONgress, haven't fixed a damn thing. 

Therefore the recession didn't do what recessions are supposed to do - that is, clear out crap companies and return balance to the economy.

Instead, we've subsidized, we've lied, we've cheated, and we've kept the debt in the system, all of which are disastrous going forward because unlike inventory recessions this has been and is a "balance sheet" recession.

That, by the way, is typical CNBS misdirection too.  Words mean things.  A "balance sheet recession" is a liars way of saying there is too much debt in the system, not too much inventory.

Of course the fix for a recession caused by too much inventory is to work some of the inventory down. 

The fix for a debt recession is to default the excessive debt.

We have done everything in our power at all levels of government to avoid doing exactly that, and it is for this reason that you're going to continue to see the stress levels rise instead of fall, irrespective of the manipulation, until that excessive debt is extracted from the system - one way or another.

Our machinations have hidden an actual, ongoing depression.  More than $2 trillion in direct spent support by the government - borrowed beyond tax receipts in the last 18 months, constitutes 14% of annualized GDP.  On an annual basis this is about 10%, and a 10% top-to-bottom contraction in GDP is the economist's definition of Depression.

This is math, not pumper jizz games and makes clear what's actually happened.  Any person who has lost their job and desperately clawed their head above water on a temporary basis by taking cash advances and using their plastic for a $2 bottle of soda at the local gas station "gets it" - you can play this game for a while, so long as your credit line holds up.  You "win" that game if you manage to keep your head above water long enough to find a new job before your debt service requirements exceed your income - even with the new job.  You "lose" if your card comes up "Really Declined" before then and are forced into bankruptcy, or if you wind up with so much debt that even finding a new job doesn't allow you to make the payments.

Nations don't quite do things the same way.  Instead of "bankruptcy" they are forced into severe austerity measures when they are unable to borrow at attractive rates in the marketplace.  If nations go too far down the hole and are unable to implement those measures the political system fails by either peaceful means (elections that sweep out the old ruling class and in a new one) or violent (mass civil unrest, revolt or war.)

So far that has not happened.  But the machinations of The Fed have been met lockstep by Congress, which has absorbed and subsumed every penny of credit that The Fed has extended, neutering the ability of The Fed to stimulate the economy, and instead of stimulating the economy with its programs Congress has instead propped up failed businesses, effectively burning the money instead of putting it to work.

AIG is symptomatic of the fraud-laced financial disease in our nation - a disease that will soon enough consume us if we don't excise it from our economy.

Sadly not only does our government refuse to do this but the people of this nation refuse to recognize the bare mathematical underpinnings that are staring them square in the face.

With each passing day we go further into that hole, and at some point the ladder will no longer be tall enough to be able to climb back out.

Disclosure: No position; it is my considered opinion, however, that AIG was a zero two years ago - and still is a zero.

Gee, what took you so long?

McLean, VA – Freddie Mac (NYSE: FRE) announced today that on or about September 1, 2010, the company will cease purchasing and securitizing interest only mortgages, including Freddie Mac Initial Interest^SM fixed-rate and adjustable-rate mortgages. Additional information will be provided to Freddie Mac Seller/Servicers in an upcoming Single-Family Seller/Servicer Guide bulletin.

Interest only mortgages, including Freddie Mac Initial Interest mortgages, provide for interest-only payments for a specified period of time beginning with the first monthly payment after the note date, and principal and interest payments on a fully amortizing basis for the remainder of the mortgage term.

These "vehicles" are an outright scam for 99% of all borrowers.  Their exclusive proper use is as a bridge loan.

Let me explain.

Let's say you have a $500,000 house you wish to buy.  An I/O loan for the first two years (for example) at approximately 3.5% (currently) would have an interest-only payment of $1,458.

But when the two years is over assuming the interest rate does not change you now have a 28 year amortizing loan and the payment jumps to $2,329.70 - an increase of about 60%.

This is damn near what you have with an "Option ARM", which is similarly explosive when it has an initial "teaser rate."  For example, the same loan with a 2% "initial teaser" interest-only has an initial payment of $833.33, but jumps to the same $2,329.70 if it resets to 3.5% once the "teaser" is over.

Note that these ARM rates are very cheap too - if rates go up it gets worse - much worse.  Indeed if the rate resets to a fixed 5% then the amortizing P&I on the remaining 28 year term is $2,756.38.

Good luck making that payment if you qualified on the "interest-only" term's expense.

Freddie (and Fannie) had no business getting involved in these toxic self-immolation devices in the first place as they are intended to do exactly one thing - asset-strip the borrower by forcing him or her to come back after the interest-only period and refinancing.

In an environment where home prices are not advancing, however, such refinancing is of course impossible, which leads immediately to foreclosure.

The not-amusing part of this is that it was the market's collapse that forced government supported enterprises to stop looting the American citizen.

Say thanks to the government - both past and present administrations - for conspiring with our banks to literally flense the American Citizen for the benefit of Wall Street.