The Market Ticker - Editorial

Oh The Huge Manatee (LIESman .vs. Santelli)

nospam@example.com (Karl Denninger) — Mon, 15 Mar 2010 13:08:00 -0400

You know it's going to get good when LIESman says something like "there is a point in time when ignorance goes from being amusing to being dangerous" to a grizzled trader like Santelli.

Well, Liesman did, and.... (we'll do facts after the video)

Now for the facts:

Any government can pump stock prices of insolvent institutions for a while by allowing them to lie on their balance sheets. The poster child for this is, of course, Lehman brothers. I reproduce for your edification a chart showing two quarterly reports during which Lehman was arguably insolvent (light gray) and then (in pink) a further period of time spanning more than a month when their counterparties knew they had no cash, yet FRBNY and The Fed, including but not limited to FRBNY, Paulson, Geithner and every other bank they dealt with knew they had no money. Yet their stock continued to trade, the company continued along, and Dick Fuld was on CNBS saying he was going to "burn the shorts."

What was the outcome Steve? Was it "all ok in the end" even though for a period of more than six months the stock continued to trade and in fact after that first report went up significantly?

What caused the collapse? They ran out of cash flow.

Now about those other large banks and their balance sheets....

As a corollary to the above governments can also pump markets generally by replacing private demand in GDP with borrowing and spending, just as you can by using your credit card even though your income has been cut off. This can and does lead to huge market rallies - for a while. However, unless you can manage to increase credit in the system generally, meaning that private parties "come back" and take over from government, eventually the government becomes unable to sustain such a practice, just as you become unable to sustain such a practice. In point of fact the government has borrowed and spent ten percent of GDP (in addition to all that it was spending before) for the last two years. This has prevented the recognition of an economic depression in the "statistics" put forward by government, but that replacement of private demand is not, in fact, private demand! Thus you have unemployment and underemployment, even under the government's statistics (among those who want jobs), hovering near one person in five in the economy, and only 60% of the labor force is actually working. The other 40% of working-age, non-institutionalized people, are not working - which means they're drawing on social programs of some sort. This, of course, exacerbates the demand for the government to continue borrowing and spending that additional 10% of GDP.

What will cause this to collapse? The same thing - recognition that the banks are in fact broke (and there are a bunch of them that are), inability to sell or roll over enough debt to satisfy the leaches in society, one of the rating agencies growing a pair of balls and downgrading the United States and more. Indeed, a lockup in the credit markets could easily occur just as it did in 2008, and for the same reasons - a recognition that "heh that jackass over there has no good collateral!"

Can the government keep this from happening forever? No.

Can it do so for "an extended period of time"? Sure, but for exactly how long?

That's the key, isn't it? We're not running an 89% debt-to-GDP ratio, it's in fact over 500%. We're lying just as Lehman was lying, but on a grander scale. Yet when Rick Santelli brings this up, the pump monkeys go nuts.

Why?

Well gee, if you want to sell something to someone that is based on a fraudulent premise, how much luck will you have if the truth is exposed?

'Nuff said.

Blabber Blabber Blabber: Moody's

nospam@example.com (Karl Denninger) — Sun, 14 Mar 2010 21:45:00 -0400

What a load of bull:

March 15 (Bloomberg) -- The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

I can tell you this - while I cannot predict what the UK will do, the US is not going to do jack about its deficits.

The CBO is always wrong - they estimate too positively about fiscal deficits. They always have and always will, and they're projecting another $9 trillion by 2019 added to the debt.

The fact is this: The United States is borrowing and spending about 10% of GDP right now more than it was during Bush's administration. This is clearly unsustainable and Moody's is well-aware of both that and the fact that it is not going to do jack.

If Moody's was an honest ratings agency it would take the government at its word. The government has said (from their own budget!) that they will borrow and spend like mad. That should be all that is required to take a ratings action - a statement of intent to destroy the sovereign balance sheet.

“The emphasis of the market, and our own, will move increasingly away from public finance developments in 2010, towards medium-term consolidation plans and the credibility thereof,” Moody’s said.

Achieving the fiscal consolidation necessary to avert a downgrade will test “social cohesion” and may involve rewriting the “social contract” between governments and their people, Cailleteau said. “People have to decide what level of pain they are willing to accept to have a healthy economy.”

Answer from our government: NONE.

This is nothing more than a jawbone as Moody's lacks the balls to do the right thing - which is to take action based on the printed and published budget of the Obama Administration - a budget that the CBO projects will more than double the public float over the next nine years, while at the same time Social Security will be trying to redeem their "special T-Bills" as they will be in deficit as well.

This line of BS reminds me of this (thanks to Widgeon on the forum for finding and sticking it in my face!)

Timmy Must Be Fired, Or Obama Must Be Impeached

nospam@example.com (Karl Denninger) — Sun, 14 Mar 2010 16:38:00 -0400

The Jenner and Block report on Lehman just keeps on giving.

Today I am going to focus on FRBNY's culpability in the apparent Lehman fraud - that is, the role that FRBNY (and thus Tim Geithner) played in keeping an insolvent institution afloat through the use of fraudulent artifices.

We must look first to what the PDCF, or "primary dealer credit facility" was created to be. The report does this for us:

Under the PDCF, the FRBNY would make collateralized loans to broker‐dealers, such as LBI, and in effect, act as a repo counterparty. Unlike a typical counterparty, though, with the creation of the PDCF, the FRBNY was generally understood by market participants to be the “lender of last resort to the broker‐dealers.”5332 Reflecting the fact that broker‐dealer liquidity had become increasingly dependent on overnight repos to obtain short‐term secured financing,5333 the PDCF was structured as an overnight facility.

Pursuant to the Federal Reserve Act’s requirement that a Federal Reserve Bank lend only on a secured basis, and according to the convention in repo lending, the FRBNY advanced funds against a schedule of collateral. Collateral accepted by the PDCF initially consisted of: Treasuries, government agency securities, mortgage‐backed securities issued or guaranteed by government agencies, and investment grade corporate, municipal, mortgage‐ and asset‐backed securities priced by clearing banks.5334

The FRBNY set the lending rate for PDCF advances equal to the rate charged by the Federal Reserve’s discount window, available to depository institutions.5335 In fact, the PDCF was frequently analogized to the traditional discount window, or viewed as expanding the discount window to securities broker-dealers.

In short, the PDCF was essentially an extension of the overnight repo market set up to deal with a very-specific circumstance - Bear Stearn's near collapse, despite having valid and good, market-recognized marginable collateral that could be posted for overnight repos.

The problem is, as I noted at the time, that broker/dealers used the PDCF not as it was intended and announced but rather as a scheme to post illiquid or even trash collateral that nobody else would take in exchange for liquidity - that is, cash.

Indeed, at the time I said:

These banks could take dogsqueeze, put it in a box and slap a $1 million price tag on it, and given the utter lack of prosecutorial supervision of the law - existing law - they'd get away with it literally forever.

They could then make loans against this "value" and yet what they actually hold is worth zero.

When they ran low on cash they'd then tender that dogcrap to The Fed for a TAF or PDCF loan, and that's ok too - our Congress simply doesn't give a damn as the hundred million dollars in bribes, er, "campaign contributions", insure that blatant violations of The Federal Reserve Act are not only tolerated but cheered whenever Wall Street needs more "slop" for its pigtrough - at your expense.

This was, at the time, an educated guess. Now we know it was much more - it was fact:

Lehman did indeed create securitizations for the PDCF with a view toward treating the new facility as a “warehouse” for its illiquid leveraged loans. In March 2008, Lehman packaged 66 corporate loans to create the “Freedom CLO.”5347 The transaction consisted of two tranches: a $2.26 billion senior note, priced at par, rated single A, and designed to be PDCF eligible, and an unrated $570 million equity tranche.5348 The loans that Freedom “repackaged” included high‐yield leveraged loans,5349 which Lehman had difficulty moving off its books,5350 and included unsecured loans to Countrywide Financial Corp.5351

Lehman did not intend to market its Freedom CLO, or other similar securitizations, to investors. Rather, Lehman created the CLOs exclusively to pledge to the PDCF.5352 An internal presentation documenting the securitization process for Freedom and similar CLOs named “Spruce” and “Thalia,” noted that the “[r]epackage[d] portfolio of HY [high yield leveraged loans]” constituting the securitizations, “are not meant to be marketed.”5353 Handwriting from an unknown source underlines this sentence and notes at the margin: “No intention to market."

It gets better. Not only was Lehman aware that it was gaming the system it gamed public disclosure and FRBNY was aware what was going on:

Given that the press has not focused (yet) on the Fed window in relation to the [Freedom] CLO, I’d suggest deleting the reference in the summary below. Press will be in attendance at the shareholder meeting and my concern is that volunteering this information would result in a story.

So we have the company intentionally avoiding public disclosure of "a material event." Securities laws are supposed to prevent this sort of thing - if they're enforced.

Did FRBNY know of this? It sure looks that way:

The FRBNY was aware that Lehman viewed the PDCF not only as a liquidity backstop for financing quality assets, but also as a means to finance its illiquid assets.

But wait a second - that's not what the PDCF was intended to be. So here's a clear statement that FRBNY knew that Lehman (and perhaps others) were in fact gaming the system and yet they did nothing about it.

Who ran FRBNY at the time? None other than Tim Geithner.

It gets better.

Remember the "tests" of the PDCF from that time? Those were lies too:

Lehman drew on the PDCF facility sparingly prior to its bankruptcy. Lehman accessed the PDCF seven times in the liquidity stress period that followed the Fed brokered sale of Bear Stearns to JPMorgan.5368 Both internally, and to third parties, Lehman characterized these draws as “tests,”5369 although witnesses from the FRBNY have stated that these were not strictly “tests,” but instances in which Lehman drew upon the facility for liquidity purposes.

And again, FRBNY and Tim Geithner allowed to be promulgated to the market false information about the character of the use of this facility.

Nor does it end there. FRBNY and Tim Geithner appear to have countenanced and sat silent while Lehman deliberately and intentionally was counting assets that were encumbered in its liquidity numbers! Specifically:

The FRBNY knew that Lehman included pledged assets in its liquidity pool, but as Lehman’s lender rather than its regulator, the FRBNY took no steps to compel Lehman to disclose the discrepancy between Lehman’s reported liquidity pool figure and the actual, smaller number.

FRBNY, however, is both a regulator and a lender. In addition the distinction may be immaterial; if you are a party to a violation of the law and do nothing about it, you can be held accountable as an accessory before or after the fact. In this case these false statements by Lehman appear to be nothing more than a garden-variety fraud, and it certainly appears that Tim Geithner and FRBNY were both fully-aware of what was going on and intentionally said nothing.

The report makes clear that the market was misled, and relied on the misleading statements. Specifically:

On the basis of Lehman’s reported liquidity pool, specifically its reported size and composition of easy‐to‐monetize assets, market participants formed positive opinions of Lehman’s liquidity profile. Certain influential participants, and rating agencies in particular, cited Lehman’s liquidity pool as the basis for concluding that Lehman’s liquidity position was sound.

...

“The basis for Moody’s assessment of Lehman’s liquidity,” the report continues, “is the strength of their overall funding framework, which includes an ample liquidity cushion of high-quality unencumbered assets."

While private parties may have no obligation to "rat out" misperceptions of the market, it is my position that a government agency or actor, irrespective of what other hats they wear, DOES have such an affirmative obligation.

The SEC has concluded:

Post earnings announcement on September 9[, 2008], Holdings’ liquidity decreased . . . from $41 billion to $25 billion – $16 billion of which was required by clearing banks at the start of the day and approximately $7 billion of which was in liquid securities that became near impossible to monetize immediately in this extremely stressed market environment -primarily because of a loss of repo capacity.

As a result, . . . ”free cash” available intra day was less than $2 billion.

With LBIE facing a projected cash shortage of $4.5 billion on September 15, Lehman had no choice but to place LBIE into administration because of potential director liability. This resulted in a cross‐default of and triggered the filing [of LBHI] on September 15.

In other words, essentially the entire liquidity pool was tied up in security agreements with various firms, and this was the proximate cause of the bankruptcy filing.

The paper makes a clear case that FRBNY was aware of both the encumbrance and Lehman's lack of disclosure of this fact to the investment community and did nothing about it.

Here is the bottom line folks: Tim Geithner, then-head of FRBNY, is responsible as the chief executive for everything that went on there. Whether he had personal knowledge or not is immaterial, although it is extremely difficult to believe that he would not know about the most-important issue facing the markets in the summer and early fall of 2008.

The record is clear, however, that while the NY Fed knew that (1) Lehman was gaming the PDCF with assets that other banks refused to repo against (in fact Citi called one of them "garbage") and (2) it was encumbering its so-called "liquidity pool" with security agreements and as a consequence there was in fact no liquidity available FRBNY did nothing to alert the SEC or investors of this fact.

This paper appears to set forth several prima-facie cases of violations of Securities Laws, both on a civil and criminal level.

The further question, however, is whether culpability extends to both FRBNY and the banks with which Lehman was doing business with. The paper also makes a prima-facie case that both FRBNY and these other banks were fully-aware of what Lehman was up to and intentionally looked the other way, deeming it "not their problem."

This, I believe, is false.

I cannot have constructive or actual knowledge that you have the intention of robbing a bank (breaking the law) and yet drive you to the bank. If I continue with assisting you in the furtherance of your scheme once I become aware of it I am subject to being charged as an accessory or even as a primary criminal actor in the case.

How is this different?

Further, how is it that we can have a Treasury Secretary who, it appears, had either full or constructive knowledge of the gaming that Lehman was undertaking and yet did nothing about it, leading directly and proximately to the market meltdown in 2008.

Literal trillions of dollars were lost due to this malfeasance and misfeasance, along with millions of jobs. Yet one of the "watchdog" agencies involved in banking clearing and regulation knew about it, did nothing, and the head of that organization now runs Treasury.

It has been my contention that Geithner was largely responsible for willful blindness in the lead-up to this mess since it began. We now have a "smoking gun" making a clear and nearly-impossible to refute case.

I call upon prosecutors both at a State and Federal level to look into this for potential prosecution under both civil and criminal Racketeering statutes, including their counterparty banks and FRBNY.

Tim Geithner must be fired by The President. If he refuses, then following the election in November, when I fully expect that Republicans will re-take both the House and Senate, impeachment proceedings must be brought against President Obama for his willful and intentional refusal to remove the person who this paper makes clear could have put a stop to the collapse for nearly six months and yet failed to do so.

Bombshell: We Now Know What Set It Off (2008)

nospam@example.com (Karl Denninger) — Sat, 13 Mar 2010 21:31:00 -0500

The Jenner and Block report on Lehman has of course brought out many comments about Lehman and its management, along with what appears to be clear culpability of both management and government actors. I wrote about these factors and raised serious questions as well.

Today, however, I want to focus in a different direction.

It is rare that we learn the precise reasons behind a collapse in the markets. What set people off in 1987, for instance? We'll probably never know. Nor do we know what the precise cause was of the 1929 crash.

The Jenner and Block report, however, lays out something very disturbing: As early as July 31st it appears Citibank knew that Lehman in fact had no cash - nor any liquid collateral to post for repo transactions.

Repo transactions are what makes the world go 'round. They're the "oil" in the engine, so to speak. When two financial parties have various trades they're settling for one another (as Citi was for Lehman in the FX markets) the posting collateral to obtain short-term cash is how one secures the clearing of these trades. There's nothing magical about them, but without them the common, every day occurrence of transactions in the marketplace simply stops.

Specifically:

Contributing to the difficulty of finding collateral that was agreeable to bothparties was the fact that Fleming told Citi that Lehman repoed out for cash all of the marketable securities in its liquidity pool.

That one sentence right there says it all.

Now let's overlay a few things. First, the S&P 500 chart from the time in question:

It went on for a while, didn't it?

Now Lehman:

That went on for a little while too. About a month, to be exact.

Here's the problem - Lehman was functionally bankrupt at that particular instant in time. It was trying to post less than $4 billion in collateral and couldn't come up with anything acceptable.

Would you press a short bet knowing this? You damn sure would. Indeed, you'd be insane not to.

Let's consider the unfortunate reality of how this sort of circumstance develops:

This sort of circumstance happens when firms have huge amounts of securities that are marked at values that have no reasonable relationship to reality within the marketplace. The issue is not "liquidity", as anything that has an agreeable value in the market can be repo'd out for cash on a short-term basis.

Now consider this: What are the banks holding right now, and have the actions of government made another run at this problem more or less likely?

They have hundreds of billions of dollars of "illiquid" HELOC and other Second Line exposures on their balance sheets. Like Lehman, they're valuing most if not all of this in the 90s. But the market for them is literal pennies - any of these loans behind an underwater first is worth zero if the first stops paying and forecloses. Thus, the letter from Barney Frank.

The actions of early last year when FASB changed the rules are exactly backward. By allowing this trash to remain on balance sheets with fantasy marks FASB and our government has set up a potential Lehman in every one of our large financial institutions.

These fantasy marks effectively remove this collateral from that which can be used for routine daily operational purposes. That in turn makes the available liquidity a smaller percentage of the firm's balance sheet, and drives it closer to insolvency.

Remember what Lehman did at earnings time: They made it appear that they had a smaller balance sheet than was real, and that they had more cash than really existed. Why? Because their liquidity looked larger as a percentage of the balance sheet than it really was, which was intended to lead the market to believe that they were "healthy."

Well, what are we doing here? By intentionally expanding asset valuations beyond true value we're doing the precise same thing!

Does this mean that we're going to get a blow-up tomorrow? Of course not. But it points to a severe danger - when one's assets are impaired - whether due to being "infrequently traded" or because you're carrying them well above a market price - you're asking for it. All it takes is for the securities you can pledge to be drained and you're doomed.

Now take a look back through the last few Tickers. I keep seeing evidence that the banks are not only holding things above reasonable recovery value in the HELOC space they're doing it everywhere else too, whether it be not foreclosing on homes, making bogus reports to credit bureaus about payments that are not being made or accepting ridiculously small payments that are a tiny fraction of even "interest only." Why? There's only one reason that makes sense - to claim (falsely) that their assets are worth more than they are - that they're "performing", "have collateral value of X" or "paying" when in fact they're not.

How long will it be before the next large financial institution goes to post a repo and has no good collateral?

I have no idea.

But this I do know: If it happens again "they" won't be able to stop the crash with promises and BS. In fact, they won't be able to stop it at all.

Washington should step in here right now and demand honest marks. If this means taking the big banks into receivership then it does.

I know nobody wants to talk about it any more, but we have to. If it's done now, in a controlled fashion, it will be expensive.

If we have another Lehman, we won't be able to cover it. The cost of a disorderly event will easily exceed $1.5 trillion for depositor claims alone, and we simply don't have the money and won't be able to raise it.

This can't be left alone folks. Valuations are not coming back any time soon on these loans. Not for years - maybe a decade or more.

We simply don't have that long before someone else has "an accident."

A Disturbing Pattern? (Bank Loans / Helocs)

nospam@example.com (Karl Denninger) — Fri, 12 Mar 2010 11:53:00 -0500

In conjunction with what I wrote on this morning, the potential for massive hidden losses in our banks, I keep getting the following sort of anecdotal reports, all in relationship to the banking giants.

"My property foreclosed in <bubble state> and <Big Bank X> had written a $200,000 HELOC, which was drawn down. The first lender foreclosed and is holding the property in inventory (it is not listed.)

<Big Bank X> reported the account as charged off in my credit report, but has a notation that "debtor has an arrangement to make partial payments."

I have not even spoken with <Big Bank X>.

Then there's stuff like this from the forum:

"My home in CA was purchased for $685k in May 2006. Because of 14 months of unemployment, a mortgage payment hasn't been made in months. Mortgage holder just had the property appraised and the value came in at $319k. After the appraisal was completed, I was told by the mortgage holder not to worry about foreclosure proceedings beginning. I've also been told by the mortgage holder that they have "many" internal plans for modifying loans and that they would continue to work with me until we found a suitable "solution" enabling payments to resume."

That's the general gist of these emails. Another said that they were "offered" payments on a massively-delinquent first that were well under 1% on an interest-only basis. Like under $100/month on a loan that should have even an I/O payment of several times that amount.

The obvious question is whether these "charged off" and "How about you pay us $50/month, which is a tiny fraction of even an I/O payment" loans are being manipulated so that they can be considered performing assets on these bank balance sheets.

And if that is the case, then the obvious next question is how many of these loans are there, and what sort of material misstatement does this all add up to when one looks at these balance sheets as a whole?

If I had received one or two of these sorts of anecdotes over the last year or so I wouldn't be so alarmed. But that's not what's happened. Instead, I've received a bunch of these over the last few months and I suspect I'll get even more now that I'm "outing" that I'm getting these emails on a regular basis.

Unfortunately I can't verify any of this since I can't pull someone's credit - but why would borrowers send me these sorts of claims if they weren't true?

If they are true then the obvious question is whether the sort of "Repo 105" deal Lehman was running is just a tiny bit of the balance sheet fraud that is going on in these big banks?

Folks, this sort of thing makes no sense. Reporting payments that aren't being made to credit bureaus in the "comments" field (while showing "charged off") has no probative value for the bank - unless it's to please an auditor or government official who is questioning whether that loan is in some way "performing" and/or has some sort of recovery value, thereby supporting an intentionally-false mark!

Folks, this whole cesspool stinks like dead fish, and the disclosure of what Lehman was up to makes clear that the banks believe they can pretty much do whatever they want when it comes to balance sheets and get away with it - provided they can find someone will will give them an opinion that its legal (even if the "someone" isn't in the US!)

A Random Look at RMBS And The Economy

nospam@example.com (Karl Denninger) — Tue, 09 Mar 2010 13:22:00 -0500

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.

When The Gun Is In YOUR Mouth.... (CDS / Merkel)

nospam@example.com (Karl Denninger) — Tue, 09 Mar 2010 10:14:00 -0500

... 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:

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.
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:

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.
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.
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.

Sheepskins Should Stay On Foreskins (Galbraith)

nospam@example.com (Karl Denninger) — Mon, 08 Mar 2010 10:13:00 -0500

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.

Captain, We Cannot Withstand Another Attack

nospam@example.com (Karl Denninger) — Fri, 05 Mar 2010 09:18:00 -0500

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.

Paul Krugman's Universe of Stupidity

nospam@example.com (Karl Denninger) — Fri, 05 Mar 2010 08:25:00 -0500

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:

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.
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.

Bove: You Can't Fix Stupid (Him)

nospam@example.com (Karl Denninger) — Wed, 03 Mar 2010 17:39:00 -0500

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.

Whadda 'Ya Mean It's Not Over?

nospam@example.com (Karl Denninger) — Wed, 03 Mar 2010 08:35:00 -0500

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:

The crisis of 2008 was predictable. Unless we go far beyond current legislative proposals the next crisis is inevitable.

146 pages of rather dry reading, but worth it.

I have only one argument with the paper's base premise, and that lies here:

This cycle will not run forever. One day soon, we’ll have the boom and bust phases, but when we try the usual bailouts, they won’t work. The destructive power of the down-cycle will overwhelm the restorative ability of the government, just like it did in 1929-31, when both the financial shock and the government capacity to respond were on a much smaller scale. The result, presumably, will be something that looks and feels very much like a Second Great Depression.

The error is in thinking that the "restorative power" of government has worked this time.

It has not. Instead of being a restorative power, it has instead been simple hiding of the facts - or, if you prefer a more-simple word for it, lies.

We have hidden, rather than fixing, balance-sheet deterioration. We are permitting insolvent financial institutions to continue to operate in the belief that they can "earn their way out of the hole" over time, effectively imposing a monstrous (more than $1 trillion annually, or 7% of GDP) tax on the economy. Then we have imposed another 9% tax on the economy in the form of government borrowing to paper over the lack of final demand.

Taken together, this is a 16%-of-GDP tax addition to the tax burden already imposed, and there is no evidence that it will abate.

The report talks of raising capital requirements to somewhere between 15-25% of assets for financial institutions. But that's a chimera too - not all assets are the same. As I wrote in my piece of November 13th of last year, there is a much simpler way to compute capital requirements that is not subject to regulatory arbitrage or games: do not permit institutions to make any loan that is unsecured unless the unsecured portion of that loan is backed, dollar for dollar, by a dollar of actual capital.

Regulatory arbitrage is better thought of as bribery. The solution to eliminating bribery is to eliminate all the places where one can stuff a pile of cow dung under the carpet. If the decaying fish is on the kitchen table for all to see, and the stench cannot be concealed, then it becomes extremely difficult to buy people off.

This means an end to all credit derivatives that are not exchange-traded (not "registered"), so that nightly mark-to-market accounting is enforced by a real party at interest - the exchange which has to make good on them. It means an end to "naked shorting" in all of its forms. It means an end to the creation of synthetic instruments unless the person you sell them to receives a prospectus disclosing why and how that derivative came into existence - and at who's behest it happened.

At the core of this problem, along with essentially every banking crisis in the past, is a refusal to speak publicly about the truth of financial institutions: they provide no actual constructive contribution to GDP.

That is, they produce nothing.

Financial intermediation - when it works properly - is by definition a function of matching buyers and sellers of money. That is, by definition it is a parasitic function that draws its "income" off the transactional stream of commerce.

But a parasite is only "successful" if it is able to remain healthy without significantly impairing its host. The most-obvious violation of this principle, of course, is a parasite that kills its host - that organism has failed in its essential purpose if it fails to reproduce before the host dies.

In terms of economic systems failure is more graduated. Certainly a financial system that kills the underlying economy has failed in its essential purpose. But one that imposes regressive and ridiculous effective tax rates - even when not called a tax - has taken the intermediation function and turned it into a death-spiral of vampirism.

Such is the system we have today. Banks are considered an economic force in their own right - not because they add something to GDP (they're incapable of doing so) but because they are able to control the rise, fall, birth and death of others. The financial intermediation function has become an end in of itself, instead of being a necessary piece of "lubrication" for commerce to proceed. This in turn has led to ridiculous and even outrageous acts, such as the SEC Complaint alleges occurred in Jefferson County, Alabama:

Charles LeCroy and Douglas MacFaddin, the two former managing directors, privately agreed with certain County commissioners to pay more than $8.2 million in 2002 and 20)3 to close friends of the commissioners who either owned or worked at local broker-dealers.

3. Although labeled as payments for work on the transactions, their true purpose was to ensure that County officials selected the broker-dealer, J.P. Morgan Securities Inc., as County bond underwriter, and the bank, JPMorgan Chase Bank, N.A., as County swap provider.

The common word for what is alleged, my friends, is bribe.

Yet when these sorts of things are uncovered the government, in an attempt to "not upset the apple cart" of the vampiric Wall Street mechanism, sues - instead of prosecuting! As with most of these suits this one will likely to be settled with a fine, where if you or I engaged in the same sort of corrupt practice alleged here we'd be sitting behind a set of bars for a decade or more.

The solution to these problems is not found in incrementalism. Rather, it is found in formal and legal recognition of the essential purpose of financial entities - and enforcing the boundaries of same.

In short, financial institutions are intermediaries. Their purpose and function thus inherently must come with fiduciary duty, since without that duty they have no purpose in the economy at all.

Breaches of that duty must be dealt with through harsh sanction, as the essence of their purpose and action cannot inherently come from a desire to profit, but rather their purpose is to help others profit through productive enterprise.

Viewed in this context there is nothing difficult about regulation of these entities.

They must be forced to hold one dollar of capital against each dollar of unsecured lending that is outstanding, no matter to who or on what terms.

They must be held to a fiduciary duty of care with all of their clients, irrespective of which "side" of a transaction they, or their client, happens to be on.

This inherently bars all proprietary trading activities by these institutions since doing so is an inherent and inseparable violation of that fiduciary responsibility toward the persons whom they serve. It cannot be otherwise.

Incidents of bribery, blackmail and dishonesty - irrespective of the form it comes in - must be dealt with both quickly and severely, since all such acts inherently damage the very persons who they have that fiduciary duty toward.

If we had taken this approach to financial entities there would have been no ENRON, no LTCM, no Internet Bubble, no Housing Bubble, no Greece, no AIG, no Lehman and no Bear Stearns Hedge Funds.

All of the financial crises since the 1980s - each and every one of them - would not have happened.

The answers to the problems are simple, if we choose to open our eyes and consider the only actual function that financial entities perform in our economic picture.

If you're wondering why employment is not rebounding, why The Federal Reserve's own data shows collapsing government tax revenues along with final demand in the toilet while spending is skyrocketing, you need only look at the financial system's vampiric behavior and our government's refusal to deal with those acts as they should for the answer.

For as long as we fail in this regard we will condemn ourselves to an ever-increasing "duty" or "tax" that is diverted by these institutions. This is an inherently unstable configuration and, as the financial system's effective tax rate is now reaching toward 40% of the economy as a whole (including the inputed taxes from bailouts and handouts) we are rapidly moving toward the "over-center" point (50%) where the cycle becomes self-reinforcing - and collapse becomes inevitable.

The time to do the right thing has basically run out.

Speculative Premium - And Why The Markets Will CRASH

nospam@example.com (Karl Denninger) — Mon, 01 Mar 2010 11:34:00 -0500

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.

I've Seen This Movie Before (Bailouts & Greece)

nospam@example.com (Karl Denninger) — Sun, 28 Feb 2010 23:34:00 -0500

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?

These Are Our Friends, Trading Partners AND BANKERS?

nospam@example.com (Karl Denninger) — Thu, 25 Feb 2010 20:49:26 -0500

What the hell is wrong with the leaders of this nation?

CBS 60 Minutes has a video you must watch.

Watch as a Department of Defense employee is caught on tape selling military secrets to a Chinese spy. 60 Minutes' Scott Pelley reports, Sunday, Feb. 28, 7 p.m. ET/PT. (click above)

The tape shows a Chinese spy obtaining the list of weapons that we intend to sell to Taiwan. This, of course is rather topical, seeing that this little dust-up just happened - remember?

BEIJING (Reuters) - Senior Chinese military officers have proposed that their country boost defense spending, adjust PLA deployments, and possibly sell some U.S. bonds to punish Washington for its latest round of arms sales to Taiwan.

WHY IS IT THAT WE, THE PEOPLE OF THIS NATION, PUT UP WITH THIS CRAP?

I'm not willing to pay down one damn nickel of the so-called "debt" that China holds. Not one nickel.

They can blow me.

All of them.

Espionage with your "best friends" and "trading partners" eh? With those that you claim to have an "important relationship" with?

I think not.

I think it's war, and it's time we recognize it for what it is.

In fact, I'm so sure it's war that I think we, the people of this country, should demand that our Treasury Department tell the Chinese to stick their bonds up their ass. All of them, including those they're buying through British banks.

And if Treasury won't, and President Obama won't, that's fine.

We should refuse to buy anything that comes from China.

Yes, I know that's hard these days. You know what? I don't care.

These people are not our friends. They are murderous thugs who are stealing our military secrets - so they can use that information to point weapons at us. Terrible weapons. Nuclear weapons.

And we're giving them the money and the power to do it every time we go to WalMart and buy more of their Chinese-made crap.

I say f^#k no to that.

You should say it too.

We should all demand that our government say no, or we'll say no for them to Chinese products and we'll say no TO them - the politicians directly - in November.

It's that simple.

When you owe the bank $10,000 you have a problem. We owe them $2 trillion dollars. As a consequence the problem is theirs and the solution ours - tear those bonds up, declare 'em worthless with the stroke of a pen.

Do it Washington - or we boycott Chinese products and do it for you.