The Market Ticker

If Health Care Is A Human Right...

nospam@example.com (Karl Denninger) — 2010-03-22T02:29:36Z

... then why is it that the Chinese who make all our cheap plastic trash that we allow to be imported here without tariffs don't get it?

And... shouldn't we impose tariffs that add up to the cost of said health care - a "Congressionally acceptable package" costing $15,000 a year per worker - to everything that is imported from China until they do?

After all, if it's a human right, it doesn't begin and end at our borders, right?

Just an inconvenient little question for Madame Pelosi....

Bernanke Speaks With Forked Tongue (Again)

nospam@example.com (Karl Denninger) — 2010-03-20T16:22:00Z

Why does this assclown continue to hold his office? Why do we, the people, and Congress (via the people) tolerate this crap?

Specifically:

“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms,” Bernanke said today in a speech in Orlando, Florida. “If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.”

If it is "unconscionable" then you had no business doing it, irrespective of the consequences.

Folks, that's a particularly-severe term - unconscionable. Go look it up. It means "unscrupulous, unreasonable or excessive."

So Bernanke now admits that he took unconscionable acts. Yet, at the same time, he resists this:

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.

The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.

So unconscionable actions taken by Bernanke must then be defended to the point of maintaining secrecy - perhaps so that the true nature of the outrage - that is, the actual impact, effect, and reality of those unreasonable and unscrupulous acts do not boomerang back on him and the rest of the Feral Reserve?

Exactly who is being protected here? The court says the arguments made by The Fed are BS:

The U.S. Freedom of Information Act, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”

How about the truth?

How about the fact that The Fed has overstepped its authority? How about perjury? How about willful and intentional attempts to cover up the actions of a chartered institution?

How about the sort of actions that led President Jackson to dissolve The Second Bank of The United States?

Folks, monetary policy can be controlled and operated by a computer. Or, if we require a "human touch", we can do so by actually enforcing the law!

You know, The Federal Reserve Act, which mandates that long-run credit aggregate growth be commensurate with GDP? The act that The Fed has willfully and intentionally ignored for the last 50 years, and, as a consequence has led us to an over-levered economy with excessive debt burden?

That burden, by the way, is why our economy is not truly recovering and can't. The proper solution to this problem is for Congress to enact an expedited consumer bankruptcy statute that allows the full discharge of indebtedness - and restoration of mark-to-market. While this would (as expected) cause one to become instantly "un-credit-worthy" for an extended period of time (perhaps the whole 7 years for which it can remain in your credit report) the fact remains that this would also result in an immediate clearing of the market and bankruptcy of the lenders who made irresponsible loans.

Or how about "Prompt Corrective Action", the law that mandates that all bank supervisory agencies, including The Fed, not permit an institution to operate while doing things like Lehman did - and which we now have evidence that The Fed was aware of (due to a complaint by Merrill) and in fact Bernanke lied about that very matter, under oath, in front of Congress?

There are no particularly-difficult problems when it comes to banking regulation. "One dollar of capital" stops 90% of the BS and if you lock up every executive that countenances or commits an act of balance-sheet fraud or off-balance-sheet games the rest of the BS disappears too.

Bernanke needs no new authority.

What he needs is for The Fed to lose the authority it has - via revocation of its charter.

How Far Down The Rabbit Hole Must We Go?

nospam@example.com (Karl Denninger) — 2010-03-21T19:27:00Z

.... before our citizens - and government - wake up?

If you remember in October of 2008 I put forward the following:

The Truth is that we now require about $5 of debt to generate $1 of GDP.

The Truth is that the reason you were not asked to approve $700 billion to capitalize 10 new banks, thereby creating seven trillion in lending capacity is that the economy cannot soak up that new lending capacity; each dollar of new debt generates almost no aggregate GDP. If this were not true then that would be the logical and effective cure for the 'credit crunch" - if the borrowing capacity and impact on GDP necessary to help existed. They do not.

The Truth is that you were lied to about the purpose of the TARP/EESA, because what you were sold was mathematically impossible. It is supposed to be unlawful to lie to Congress.

As I pointed out at the time, the reason they didn't create that $7 trillion in new credit issuance is that there was no more capacity to take on new debt in the private sector.

They knew it.

They lied about what "had to happen" for stability to be restored.

They lied because the alternative was that their friends - powerful friends - would have to go bankrupt.

But it gets worse. Some of the other points:

The Truth is that the absolute worst thing you can do when "in the hole" like this is to spend even more on a deficit basis, thereby driving the debt ratio higher and return-per-dollar-of-debt in GDP lower. The last eight years have been disastrous in this regard.

Yet that is exactly what we have done - we have replaced fully 10% of private GDP with public spending, and while the claim was made that this is "temporary" the CBO says it is not, Obama's budget says it is not, and the credit contraction that is continuing in the private economy says it is not.

Bernanke and Paulson, and now Geithner, know that this attempted "reflation" won't - and can't - work. They have put forward this path not because it is the right thing to do, but because the alternative means a lot of people with power and money will go bankrupt and the Government of The United States will have to change how it finances itself, removing the corrupt influences that have been used to "cook" the books - and outcomes - for the last 30 years.

We have blown three trillion dollars since these intentionally-wrong decisions were made, and we will continue to blow more and more money until the entire banking and economic system collapse unless we change course.

Nate has updated the debt-GDP contribution chart that I posted back in 2008 (and which was originally generated by Legg-Mason - it's not difficult to generate it from the Federal Reserve Z1) and it shows exactly what I was predicting - and why the policies of the government and Fed not only haven't but can't work:

Now let's be clear: Essentially all money is debt in our current system. As such attempting to "print" your way out, or attempting to "inflate" out, or attempting any act other than forcing the default of the bad debt in the system results in digging the hole deeper and deeper - that is, depressing private GDP further.

Government's efforts have not helped, they have destroyed the four years we had before "zero hour" was reached. Bernanke's interference in the mortgage market didn't "help" that market, he effectively entirely replaced the private market. The Government's "interference" in the private markets by borrowing and spending $3 trillion over the last two years - more than 9% of GDP annualized - is an attempt to "paper over" the insolvency of private actors in the markets - both borrowers and creditors.

These acts of interference did lead to a huge stock market rally, but just as with all forms of cooking the books they are false dawns and false hopes. They present a picture of "solvency" that does not actually exist. They present a picture of private demand in the economy that does not actually exist.

Since we are now below the "zero line" of GDP-contribution from further debt issuance we simply tighten the monetary flat spin by trying to further print or deficit spend.

The chart in the above link has been updated, of course. It now looks like this:

Despite all the printing, despite all the borrow-and-spend politics each new dollar of currency is representing a decreasing monetary velocity multiplier - that is, we now get less than one dollar for each dollar - the real rate of return is now NEGATIVE.

As in a flat spin in an aircraft, you cannot pull up and live. All pulling up does (printing or borrowing more money) is tighten the spiral. I identified this crossover in December of 2008, and warned of it months earlier.

We have tried it Bernanke, Paulson and Geithner's way and it has failed.

We will strike the ground unless immediate corrective action - that is, pushing forward on the stick - occurs.

Taking that corrective action will cause us to lose altitude faster for a while. If we wait until the ground is "too close", we will strike the ground and (economically) die. The precise point where there is no longer enough time (altitude) is not known in advance, but that we have far less margin now, more than a year later, than we did in December of 2008 is a mathematical fact.

To halt this process we must take the following actions now:

All direct taxes must be scrapped immediately. This means implementation of something like The Fair Tax. I fully understand the political ramifications of thousands of lobbying firms and individuals losing their ability to game tax code, and why this sort of reform is unpopular with the political class. Politics must give way to mathematics; the government must align its revenue with the promulgation of actual business success as measured by actual consumer final demand. In addition such a change, while radical, would cause an immediate rush into America for the world's business headquarter locations, and with those businesses would come high-paying executive, administrative and manufacturing jobs. This proposal is an actual bill (HR. 25 / S. 296) which means it can be moved and passed. We just need the political will to do so.
ALL government support for insoluble debt must be removed. This means restoring mark-to-market, barring all off-balance-sheet activities and deeming that loans such as HELOCs behind underwater, non-performing firsts be written to recovery value (which in most cases is in fact zero.) I understand that this will expose the existing insolvency of some very large financial institutions. I also understand this is very politically unpopular for obvious reasons. It does not matter; this has to be done.
Banks must be required to hold Capital Reserves equal to 10% of their outstanding assets that are secured and 100% against all unsecured loans. This will cause even more insolvencies, but it will instantly clean up the banking system. Provide a six month time period for all institutions to come into compliance with (2) and (3), with no extensions, and mandate that any firm that does business in the US must comply - no exceptions. Going forward the 10% capitalization level (for secured assets) must be monitored and maintained as a "warning level" and firms must be liquidated at 6%. This will guarantee in the future that the FDIC will never a take a loss on the deposit insurance fund.
Treasury must then use the existing authority under The Constitution to issue non-debt-backed dollars. This does not require new legislative authority - all existing coins are in fact not debt-backed! Treasury can thus issue fiat, non-debt-backed currency under existing authority - it has simply refused to do so! This use should be restricted to funding FDIC pay-out requirements for the firms that become insolvent under this reform process. This issuance - if limited to FDIC payout coverage - will not be inflationary as it will exactly balance the deflationary force of default on the debt caused by those insolvencies.
An expedited, one-time bankruptcy provision must be made available to consumers so they can enter and process against an expedited Chapter 7 liquidation. It is essential that we permit consumers to de-leverage back to sustainable levels. Points #2-4 will insure that banks that fail as a consequence will have their depositors covered.
Credit-Default Swaps - or any other form of derivative - must be forbidden unless exchange-traded with a central clearing and margining counterparty that exposes all information to the market, including bid, offer, size and open interest. That counterparty must be the buyer for all sellers and the seller for all buyers, as is done today by the CFTC and OCC. Those firms that cannot post cash margin against their open, underwater positions must tear them up within 180 days. Speculation is fine - provided you can prove you can clear the trade! Again, any firm that wishes to do business in The United States must comply in all markets, or be barred from our markets. Once again this may produce insolvencies but point #4 will (again) guarantee that all depositor guarantees are covered.

Government is enacting "health care reform" today not to reform health care, not to provide health care, but rather to impose an immediate tax on all Americans to attempt to pull up even harder on the monetary stick.

It won't work folks. It can't work. More than 18 months ago I identified the primary failure in the path that was being taken, and why. We have tried it Bernanke, Paulson, Geithner, President Bush and President Obama's way now for nearly three years, and yet there has been no resolution of the debt problem, no resolution of the housing market and no actual economic growth. Instead we have papered over insolvency and lied about the health of both our banking and economic systems.

Meanwhile the cracks in the dam continue to grow. Greece is not just "one little problem" over in Europe. Behind Greece is Spain, Portugal, Italy, Ireland and even Great Britain. None of these nations have yet taken the actions necessary to resolve the problem, for the same reason we have not - it is politically very difficult to tell the entrenched banking interests "you must eat your own cooking - even if you choke on it."

We still have time to choose between bad and horrifically awful. We can choose between recognizing the Depression we are already in (private GDP has contracted by more than 10% from the peak, which is the definition of economic Depression) or we can risk Zombieland or Mad Max becoming reality.

Since Europe and the rest of the world show no desire or expectation to do the right thing, we must either firewall ourselves off from their collapse or we will inevitably go down the bowl with them.

We are risking severe civil unrest and the possible destruction of our republic by our continued refusal to face the mathematical facts, not just a "double dip" recession. What Greece and other nations are seeing now is nothing compared to what is on the horizon and will reach us if we do not act.

Mathematics yield to no political desire or arrogance wielded by man or woman. Those relationships described by mathematics inexorably come to pass, unless you change the equations. In a debt-backed fiat currency world continuing to load debt into a system that has too much debt in it related to production is a futile and self-destructive act, just as is an alcoholic deciding to chug yet another bottle of whiskey.

Economically we are facing liver failure and brain cancer unless we stop gorging on our drug of choice - debt. Whether the consequence of ceasing to do so is politically expedient or not is, at this point, immaterial. We are literally gambling with the ability of this nation to continue forward as a going and peaceful, civil concern.

We still have time to act and do the right thing to halt what will befall us should we continue on our present path, but that time is running out.

Has Bernanke Perjured Himself?

nospam@example.com (Karl Denninger) — 2010-03-19T12:28:00Z

Remember, Bernanke said under questioning the other day that "they hid it" in response to a question about whether or not The Fed knew about the Lehman "105" repo arrangements, which appear to have been structured to intentionally mislead the public (and investors) about its liquidity position.

But in the deep of the night Financial Times published an article that resoundingly calls "BS" on that claim:

Securities and Exchange Commission and Federal Reserve officials were warned by a leading Wall Street rival that Lehman Brothers was incorrectly calculating a key measure of its financial health months before its collapse in 2008, people familiar with the matter say.

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less liquid than Lehman.

Beyond the apparent perjury (which our Congress seems to ignore any time a "powerful" person commits it) there is the larger problem in that if the Chairman of The Fed has lied about this, what else has he lied about?

Most critically, what about all those other banks out there with HELOC exposure behind underwater first mortgages that are not being paid on time?

The Market Ticker has reported on the wildly inaccurate and ridiculous treatment of firsts in this environment - people being "allowed" to remain in a home even though they haven't made a payment in a year - and sometimes two, loans that are reported to credit bureaus as having payments made on them "by agreement" when the consumer is not only not paying but has never talked with the financial institution involved about it. A quick look at the 10Qs and 10Ks filed by the big financial institutions discloses that these institutions have literal hundreds of billions of HELOCs and Second Lines on their balance sheets that are behind underwater first mortgages. Each and every one of those loans is worth nothing if the first mortgage it is subordinate to fails to pay.

There is thus every reason to believe that not only did Lehman materially misstate its balance sheet position and financial strength but that this deception is ongoing right here and now.

Further, Diana Olick of CNBS has reported on what I have asserted repeatedly over the last three years:

If the banks really accounted for all the losses in the home loan market, they'd all be insolvent.

I have every reason to believe that not only is there a pattern of conduct here in deceiving the American People as to the "financial strength" of the banks and other financial institutions in this nation but that this deception is willful, ongoing, and reaches all the way to The Federal Reserve Chairman.

This Financial Times report, along with the report on Lehman Brothers (which asserts that The Federal Reserve Bank of NY had the information necessary to discern what Lehman was doing - whether it acted on it or not) makes a prima-facie case of willful and intentional regulatory blindness to balance sheet fraud and intentional misrepresentation of capital positions.

This is not the only regulator against which such charges have been lodged. OTS appears to have intentionally permitted Indymac Bank to backdate deposits - and the firm subsequently failed.

This sort of regulatory malfeasance must not be allowed to stand.

These are not accidents, they are intentional acts.

When multiple people conspire together to break the law you have the very sort of act that the Racketeering Statutes were designed to prohibit - and punish.

The assertion by The Fed (and FDIC) that "it lacks the authority" to resolve large failed institutions is a lie. "Prompt Corrective Action" (Title 12, Chapyer 16, Sec 1831o) of US Code not only provides all the authority necessary to close a bank - any bank - that fails to meet statutory capital limits it mandates that action.

There is no discretion permitted in that statute and The Federal Reserve, as one of the Federal banking agencies, has no right to ignore this section of black-letter law.

Yet it, along with the FDIC, OTS and OCC all have.

The balance-sheet games and holding of loans that have no collateral and are behind non-performing firsts yet have not been written down to their recovery value, which as a matter of statutory law is zero, is an outrage.

We must not permit federal officials, including Bernanke, to come before Congress and thumb their nose at the rule of law, just as we must not permit so-called "federal regulators" to thumb their noses at the black-letter law that not only is more than sufficient to resolve these failed and failing institutions but mandates that these regulators do so.

Jackassery Patrol (Greenspan)

nospam@example.com (Karl Denninger) — 2010-03-18T18:53:00Z

Now here's a good idea:

“The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk-adjusted capital,” Greenspan said in a paper prepared for a Brookings Institution conference today. “Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.”

Banks may need to hold capital equal to 14 percent of their assets, compared with about 10 percent in mid-2007 before the financial crisis, Greenspan said.

Really Alan?

Does the capital have to be real? That's the question, you know. Lehman allegedly had plenty of capital and plenty of cash too - $50 billion worth, in fact, that was allegedly "cash" on their balance sheet.

Oh wait - it wasn't real, was it? Well ok, it was real - for a day. Then it went right back to its lender and the garbage can full of used dogfood that they "tendered" to get the $50 billion came back to them!

This is the general problem with Greenspan's "solution" - all solutions for sound lending require regulators that are not corrupt, so when someone tries to pull a scam like that they get arrested and the scammer is outed so the investing public knows what's going on!

This means that FRBNY (and counterparties!) that become aware of such frauds must have a duty to report them. In this case we know for a fact that counterparties were aware of the problem and we have reason to believe from the narrative that FRBNY was. Yet nothing was done.

But we can't have that! Why if we had that happen then we'd be stuck with firms that couldn't hide risks off their balance sheets, we wouldn't have firms that claimed fictitious levels of cash, and we wouldn't have firms that claim HELOCs are all "money good" when behind underwater and defaulted first mortgages!

All of those sins are still occurring.

I agree that "more capital" solves most problems with banks. But the simplest way to do this is to set reasonable standards for excess capital (e.g. 6% Tier 1) and then enforce one dollar of capital (beyond that "last chance" reserve) for each dollar of unsecured lending.

The "last chance" reserve is thus present to cover the liquidation costs and insure that the FDIC doesn't have to cover anything. Bondholders and shareholders are fully exposed to being wiped out, of course.

If you take this approach then the problem disappears. A HELOC behind an underwater first is an unsecured loan, as the collateral is insufficient to cover the paper. Therefore, if a bank wants to hold a HELOC on a home where the first is underwater they must hold one dollar of capital for each dollar out in that HELOC. If the HELOC is then not paid for any reason, the bank is still secure and cannot go bust.

The question we have to ask is this: Do we really want a secure and sound banking system, or do we want a system that has to be bailed out every few years because at the end of the day too many people are crooked and we haven't busted enough of them for the crooks to be concerned about being arrested.

Fed Didn't Know Lehman Was Book-Cooking? Yeah Right.

nospam@example.com (Karl Denninger) — 2010-03-18T15:00:00Z

I suppose they expect me to believe this:

During congressional testimony, House Financial Services Committee Ranking Member Spencer Bachus asked if the Fed was aware of Lehman's "accounting gimmicks."

"We did not have that information," Bernanke replied. The Fed "had only a couple people in the company to make sure" Lehman repaid money it borrowed from the central bank's primary lender credit facility, he said.

That's funny - the report says that FRBNY had all the information. Now they may not have acted on it, but that's not the same thing as not knowing about it.

Oh wait - he did say that:

"We were not charged with supervising the company, clearly it was a very troubled company," Bernanke said on Wednesday. "We had no authority to require them to do anything."

So if you know someone's going to rob a bank, and you sit back and let them do so because you have "no authority to regulate them", and in fact you trade with them, are you complicit in whatever they pull?

Now there's a good question.

An even better one is whether we should hand regulatory authority to someone who refused to blow the whistle on whatever irregularities it may have observed (like, for instance, gaming the PDCF, being told by Citi they had no good collateral - which I presume means they turned immediately to The Fed with the same garbage, and in fact announcing false "test transactions" that were in fact real transactions)?

After all, if you're the "uber-regulator" and the primary institution charged with overall banking system stability and clearing, you don't have any sort of responsibility to blow the whistle when those who are dealing with you are lying, do you?

If The Economy Is Recovering.... (CAT)

nospam@example.com (Karl Denninger) — 2010-03-18T13:43:00Z

... then how come the wire has this story?

Co reports retail sales of machines declined 20% y/y in Feb and sales of reciprocating & turbine engines to retail users & OEMs declined 33% y/y in Feb

Another source off the wire has even uglier numbers:

 Caterpillar Inc Reports 3 month dealer statistics;
 Dec-Feb sales - filing
 - Retail Sales of Machines:

              Feb.10    Jan.10    Dec.09 
Asia/Pacific  DOWN 2%   UP 1%     DOWN 12% 
EAME*         DOWN 22%  DOWN 35%  DOWN 41% 
Latin America DOWN 20%  DOWN 15%  DOWN 24% 
ROW*          DOWN 15%  DOWN 19%  DOWN 28% 
North America DOWN 30%  DOWN 40%  DOWN 46% 
World         DOWN 20%  DOWN 27%  DOWN 35%

Sales of Reciporcating & Turbine Engines 
to Retail Users & OEMS by Business Sector

                Feb.10   Jan.10   Dec.09 
Electric Power  DOWN 26% DOWN 27% DOWN 27% 
Industrial      DOWN 15% DOWN 22% DOWN 44% 
Marine          DOWN 23% DOWN 18% DOWN 29% 
Petroleum       DOWN 47% DOWN 46% DOWN 46% 
Total           DOWN 33% DOWN 33% DOWN 36%

(Hattips to rebeltraders and aztrader)

I thought last February was pretty much "the depths of Hell" when it comes to the economy and heavy industrial orders?

That's what we've all been told, right? That the economy bottomed last winter and spring and it's all sunshine and great days ahead, yes?

Well, then how come we're seeing huge decreases from last February's run rate in one of the leading heavy-equipment manufacturers' sales everywhere except Asia, and there we're not seeing gains - just flat sales.

Various forms of fixed investment are coming back, yes? We don't need anything like big diesel engines or earth-moving machines to actually construct any of that sort of fixed investment, right?

The ToutTV pumpers wouldn't be lying, would they?

(Let's see when this is picked up on CNBS - of course you know the answer, right? NEVER!)

Disclosure: No position in CAT.

CPI: Look Behind The Headline

nospam@example.com (Karl Denninger) — 2010-03-18T12:49:00Z

I'm not particularly happy about this report, although the "street reaction" was that it was "pretty much as expected."

I note with some curiosity that the apparent math error from last month has not been revised out - it's still there (housing.) This month's computation, at first blush, looks ok.

The nastiness inside the report comes from the fact that medical care inflation is alive and well, running 1/2% month-on-month. This is the second month straight of that, which is well beyond the annualized 3.6% being claimed. If it continues, things get very interesting, especially given Obama's Health Care "reform" push.

Offsetting this is a material drop in rent, which is definitely not a bad thing from the consumer's perspective. Of course government-provided "gotta buy 'em" services (water and sewer) are up materially. Fortunately they're not a huge part of the equation.

All-in-all the report is pretty benign, but one has to wonder on the health care issues - is that people jacking prices ahead of Obama's "proposals"? Naw, nobody would ever do something like that.... would they?

GreeceFire On Line 1 Sir!

nospam@example.com (Karl Denninger) — 2010-03-18T12:21:00Z

See, I told you so.....

March 18 (Bloomberg) -- Greek Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package.

Papandreou said he may turn to the International Monetary Fund to overcome its debt crisis unless leaders agree to set up a lending facility at a summit March 25-26.

How about this?

Your nation made the mess, now clean it up!

“It’s an opportunity to make a decision next week at the summit,” Papandreou told reporters in Brussels today. “This is an opportunity we should not miss. When you have that instrument in place, that could be enough to tell the markets hands off, no speculation, let this country do what it’s doing.”

What's wrong with speculation when you give people reason to speculate? More to the point, is it speculation if you get caught lying on your financials and taking intentional actions designed to cover up your true debt position?

I'd call that an educated guess, and it's very different than "speculation."

Greece pinned its hopes on the Brussels summit as German officials voiced qualms about an EU-led rescue, potentially backtracking on a commitment hammered out by finance ministers just three days ago. Greek bonds and the euro fell.

There was no commitment. There was an attempt to jawbone - that is, lie - by politicians who find it easy to lie.

The market, however, calls all bets. It always has and always will. If Greece learned anything from our little market collapse in 2008 it should have been this - remember, Hank (I'm gonna roll the tanks!) Paulson tried this very same game - repeatedly. It didn't work - not with Bear Stearns, not with Fannie, not with Freddie, and not with Lehman.

It didn't take long for the market to decide that he was full of the dark side and press the bet, and as soon as that happened we found out that the "Bazooka" was really nothing more than a fancy form of bankruptcy.

Oops.

If Greece doesn't like the consequences of getting caught cooking the books, one solution would be to stop doing that and come clean with the people - even if it results in your government being sacked.

The "reaction" in Greece to reality poking its head in the tent is instructive, and something that all developed nations that have decided to go down this sort of road with lying about fiscal and banking matters (cough-United States-cough-Britain-cough-Spain-cough-Germany-cough-Portugal-cough-take-your-pick) should pay attention to.

I wonder if it has sunk into the consciousness of Obama and Geithner, along with Congress, that having "replaced" 10% of consumer final demand in the economy in a ridiculous (and doomed) attempt to prevent bad debt from being defaulted, not to mention the lies told about our actual fiscal situation (holding retirement "promises" off book anyone?), we (along with a bunch of other nations that have done the same) are headed down the same road that Greece is.

FHLB San Francisco Goes Where The Cops Refuse To

nospam@example.com (Karl Denninger) — 2010-03-17T20:56:00Z

I'm sure you all remember how clearly I have stated that I believe that mortgage origination, securities packaging and dealing was fraudulent during the housing bubble, right?

I've been saying it now for three years - that credit quality was flatly ignored, appraisals were intentionally rigged and borrower lies were intentionally ignored.

Well now FHLB San Francisco has gone and done what no criminal prosecutor has had the balls to do - it has sued nine securities dealers. Among them are Credit Suisse, Deutsche Bank, JP Morgan and Bank of America. What is FHLB San Francisco alleging in its suit?

“The bank’s complaints allege that the dealers made untrue or misleading statements about the characteristics of the mortgage loans underlying the securities,” according to the statement.

The dealers made false statements or omitted important information about the loans that backed the securities they sold, the bank alleged in its complaints. The bank claims the dealers failed to disclose that appraisals were biased upward on properties that secured mortgage loans, that underwriting guidelines were ignored by originators and that loan to property value ratios were exaggerated.

Yep. Exactly what I have said for the last three years, and what should, in my opinion, had long since led to criminal charges for alleged fraudulent conduct.

This is the second such suit - as I reported earlier the same bank and the FHLB Pittsburgh bank sued Goldman, JP Morgan and Morgan Stanley last year.

The economic mess we are in will not be resolved until these securities are recognized on bank balance sheets at their true underlying value and, where appropriate, those who falsified credit quality and other information about these securities during their packaging and sale are held to account for what they have done.

Now exactly where are all these securities and at what marks are they being held in the banks across our land?

That's a question we all deserve an answer to.

I'm Gonna Throw Up (Bernanke)

nospam@example.com (Karl Denninger) — 2010-03-18T12:00:00Z

Does anyone remember me ranting at the time of the TARP's passage about an obscure little sentence that allowed Bernanke to set the reserve ratio on the banks to zero?

Well, Bernanke's Congressional testimony yesterday garnered a footnote on the issue, specifically:

Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Right. The cost is that you have to actually have something called "capital" behind your loan book, and you had a velocity limiter as well.

This is simply unbelievable. To call such a thing a "distortion" is the worst sort of outrage to come from a central banker.

Reserve requirements have largely become a quaint subject since Greenspan effectively eliminated them by allowing almost-unlimited marketing and use of "sweep accounts." But nonetheless they remain one of the checks and balances on potential bank runs destroying a firm's cash position without warning.

The sheer lack of recognition and understanding that we're in this mess almost exclusively due to excessive leverage in all parts of our financial system is beyond ridiculous - especially for an agency that now wants to be granted even more power of oversight and "regulation."

"I'm sorry" isn't good enough when you operate from a perspective that someone else (in this case the taxpayer) gets to clean up your messes, and this sort of philosophical idiocy will do nothing but guarantee that we'll have much bigger banking messes in our future.

Now The Truth On Greece Comes Out

nospam@example.com (Karl Denninger) — 2010-03-18T00:15:00Z

And surprise-surprise, it has nothing to do with the Euro - it is, once again, to bail out bad speculative bets made by banks:

"If the country is not stabilised, the next problem will be the banks," Ackermann in a speech to an academic audience on Wednesday, adding that German banks had "billions in the fire."

So once again we have banksters literally putting a gun to government heads and threatening them.

When does this stop?

It's not like Deutsche Bank (and the rest) didn't know Greece was cooking their books and holding debt off balance sheet! They sold them the swaps to enable the deception!

These banksters knew damn well that the nation was in trouble long before there was any public notice of it.

So why were they buying Greece's debt? Why didn't they sell it? Why are they stuck with it?

Is it because their intention was to shove a gun up the nose of the governments in the Euro Zone - just as our banks did here - and threaten to shoot unless they get bailed out?

Let's cut the crap. These "institutions" are, in my opinion, a criminal enterprise. It is my contention that they have engaged in knowing and willful frauds up and down the line, whether it be selling "swaps" that were intended to hide debt (that is, to fraudulently misrepresent an entity's finances), buying debt of nations they knew were in trouble and thus was risky (and now they want to be backstopped) or other forms of scamming as is alleged by the FHLB Seattle in their lawsuit against Deutsche Bank itself, among others.

These acts are common garden-variety swindles wrapped in fancy clothing. People think there's something magical or complex about all this "financial engineering" that led to these losses.

There is not.

The simple fact of the matter is that getting someone to overpay for a thing by lying to them is no different than the shifty used-car salesman who turns back an odometer so you think a car has fewer miles on it than it really has.

We all recognize that as an act of fraud and we arrest those engaged in it.

These actions are no different in type but have stolen from we, the people of this planet literal trillions of dollars, yet it seems to be impossible to find one law-enforcement agency that will press criminal charges against any of these clowns! At the same time if you steal $50 from a convenience store or turn back that odometer you are sentenced to hard time in prison.

This has gone far beyond the point where we, the citizens of this world - not just in The United States - must demand and put a stop to these heists by whatever means are necessary.

If our governments will not bring charges and lock up the executives in these firms then we must shut these institutions down by refusing not only to do business with them directly but by going one step further - we must refuse to do business with any firm or person that is employed by them or uses them for their financial services.

I thus call for this boycott of all banking firms that issue threats of this sort here and now, both directly of the firms and of their customers, to continue until and unless criminal indictments issue for this outrageous and repetitive conduct.

What these people have done is in fact no different than this:

The easiest way to rob a bank is to own one.....

IT IS TIME FOR WE THE PEOPLE TO PUT A STOP TO THIS CRAP!

Swap-writing Banks Charged With FRAUD?

nospam@example.com (Karl Denninger) — 2010-03-17T19:16:54Z

Now we're cooking:

March 17 (Bloomberg) -- Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit were charged with fraud linked to the sale of derivatives to the city of Milan. Bloomberg's Elisa Martinuzzi reports. (Source: Bloomberg)

Oh wait - that's over in Italy, where the government isn't sufficiently bribed, er, bought off.

Now, let's see, where have we seen swaps written here in the US? Oh yeah, I remember - places like Jefferson County Alabama, where there have already been some guilty pleas on bribery related to those swaps!

I wonder if some State AGs could be persuaded to grow some brass between their legs and start bringing these institutions up on criminal charges?

(Yes, they should, and yes, I'd cheer.)

Wait A Second - I Thought Greece Was Done?

nospam@example.com (Karl Denninger) — 2010-03-17T17:38:00Z

Weren't we told Greece was "bailed out", "backstopped", or whatever you care to use? That's all I've heard all week on ToutTV.

So what's this about?

Greece could seek IMF funding to help overcome its debt crisis if its EU partners do not provide "clear support" next week, a government spokesman said Wednesday.

George Petalotis said the March 25-26 European Union summit on how to deal with a potential bailout for Greece will be crucial, as the country struggles to reduce a bloated budget deficit and public debt.

"I believe the summit is when it will become evident whether the European partners want to support a country ... or whether we have to resort to some other solution," Petalotis said.

Doesn't sound "done" to me!

Oh wait - what's this?

“The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy,” Feldstein, an adviser to U.S. presidents since Ronald Reagan, said in a March 13 interview in Geneva. “The alternatives are to default in some way or to leave, or both.”

Of course it's a fantasy. So tell me this - why are the markets going up in the belief that the Greece problem is in fact fixed, when:

Mathematically it is basically impossible to do so given the constraints that exist AND
Germany's Constitution prohibits a bailout using German public funds in any way, shape or form (including a backstop of their banks if they "help privately.")

So now we're back to the old "Bazooka" argument, eh?

“We would like to have a loaded gun on the table and hope never to have to use it,” Papaconstantinou told reporters today in Brussels. “It’s clear that the terms of refinancing the Greek debt improve as the markets and European partners see the determination of the Greek government.”

Ah, the old Paulson argument.

Remember the tape folks and Paulson's "Bazooka":

Remember folks, the "Paulson Bazooka" was good for one hundred S&P 500 handles in less than a month (hmmmm...... isn't that what we've seen here?) but in the end it failed, because as is always the case the market called the bluff.

But this time it's different, so I think you should believe our fine friends over in Greece, even though Germany says they won't violate their Constitution (Merkel has repeated this enough times now that she's got to be blue in the face) and the news reports that trickle out say that indeed, Greece has no deal - not in the bag, not on the table, just plain not.

The Start Of A Trend?

nospam@example.com (Karl Denninger) — 2010-03-17T16:10:00Z

From Western Rifle Shooters Association:

Pistol loaded, openly carried. Rifle unloaded, slung to rear. Bandoleer of magazines containing ammo. All in accordance with rules below. Please note that guidelines below are subject to final coordination with the Department of the Interior:

Participants and attendees are expected to know and abide by all applicable state and federal firearms laws. None of the information provided below is legal advice, and no attorney-client relationship is created by reading or relying upon this information. If you have questions, then you are expected to know the applicable state and federal firearms laws before attending the event.

Anyone prohibited from possessing a firearm by state or federal law may not possess a firearm at this event.

Participants and attendees may not bring any firearm prohibited by state or federal law.

This is a lawful muster and protest to be, apparently, carried out on Federal land.

This is the first I've seen of this type, and as a peaceful and lawful protest - an expression of individual rights and a peaceful demand that our government recognize our rights and enforce existing laws - including the existing laws that forbade the sort of fraudulent conduct in out financial markets that not only led to the collapse of 2008, but continues today - it is a good thing. While I am not involved in this protest personally (I don't belong to the group involved) it goes right to the heart of the matter - the peaceful and lawful exercise of our first and second amendment rights.

Opportunities still exist for our nation to do the right thing. To investigate and put a stop to the fraud in our financial markets. To force those hiding losses to admit to them and eat them - even if it drives them out of business. To allow the housing market to correct to the point that average Americans can afford to own homes again.

To, as I have said repeatedly:

STOP THE LOOTING AND START PROSECUTING

Huge (53%) Tax Increase On SAVERS

nospam@example.com (Karl Denninger) — 2010-03-17T15:52:00Z

If you were wondering where the hidden taxes are in "Health Reform", guess what - President Obama has just given you something to sit on.

The forced march to pass ObamaCare continues, and all that matters now is raw politics. But opponents should go down swinging, and that means exposing such policy debacles as President Obama's 11th-hour decision to apply the 2.9% Medicare payroll tax to "unearned income."

That's what savings and investment income are called in Washington, and this destructive tax wasn't in either the House or Senate bills, though it may now become law with almost no scrutiny.

This is unbelievably destructive to capital formation.

For the person who is "short-term trading" (e.g. daytrading, etc) this is a relatively small tax, an increase of about 7% in the tax (2.9% applied to the 39.6% maximum rate on "ordinary income", which short-term capital gains are.)

But for the person who is INVESTING for the long haul, that is, who is holding stocks for more than one year, this takes the marginal rate from 15% to 17.9%, an increase of almost 20% in the tax owed.

This, of course, comes on the back of President Obama's fraudulently engineered "rally", which was created through Congressional intervention to permit - surprise surprise - legalized accounting fraud through "mark to model."

So you got your stock market rally, and now President Obama and The Democrats are going to cram a 20% tax increase down your throat if you profited from it - and at this point, being 2010, there's not a thing you can do about it.

It gets better. Since ordinary investors can only write off $3,000 in capital losses, when you lose you don't get a tax credit. Oh yeah, you get to carry forward the loss to future years, but you paid the tax on the gains already - this is a putative future credit back.

Oh, and let's not forget that there was already a huge tax increase coming this year - the long term capital gains rate goes to 20% at the end of this year anyway as the Bush tax cuts expire.

So in fact the rate goes from 15% to 22.9%, a fifty-three percent increase in the tax rate.

And oh, if your AGI goes over $200,000 by even a dollar you are subject to this tax from the first dollar of your investment income.

A fifty-three percent increase in taxes on long-term (that is, capital-forming, long-term investment) capital gains - exactly the sort of investment activity you want to form businesses and invest for the long haul in America's future, not to mention generating jobs by forming those enterprises.

That's slammed the door on any interest I might have in forming a new business as I did in the 1990s - ever - and I suspect I'm not alone.

When this goes into effect my capital, other than that which I can shelter from taxation, is no longer going to be put at risk in the markets. I'd rather live in a nice little cottage on the beach and simply expend what I have rather than contributing to capital formation in any way, shape or form under a punitive system like this.

Why?

Because if Congress demonstrates that it will put 53% on the capital gains rate once I've already committed my capital (thereby destroying my return) I will not take the risk of them doing it again and making the rate even more punitive.

The Debt Bingers Are Stuffed

nospam@example.com (Karl Denninger) — 2010-03-17T14:22:00Z

Mortgage applications fell last week:

The Mortgage Bankers Association’s index decreased 1.9 percent in the week ended March 12. The Washington-based group’s purchase gauge fell 2.3 percent, while its refinancing measure declined 1.7 percent.

The lack of demand even as borrowing costs dropped signals a sustained housing recovery will be slow to develop this year. Federal Reserve policy makers yesterday cited stagnant home construction, declines in commercial real estate and a lack of jobs as risks that continue to face the world’s largest economy.

The problem is rather simple to understand - despite record incentives (such as the "homebuyer tax credit" and similar games) there are simply no more people who are willing and able to gorge themselves on more debt.

The cash-out refinance is dead, as there's no equity to extract. The use of the home as an ATM machine powered the last "expansion" in our economy, but that was a false expansion - it was not made up of production increases and general weal, but rather with debt.

There is no real demand for housing at today's price. At 1x or 2x incomes the housing stock would clear immediately. That's where the market "wants" to go. But doing so causes all the banks who made those imprudent loans at 5x or even 10x incomes to instantaneously detonate. Rather than make people eat their own bad decisions and thus learn from them (a great deterrent against sinning a second time!) The Government has instead chosen lies, obfuscation and intentional gimmicking of the accounting rules so that the consumer gets screwed but the institutions who made the imprudent loans are bailed out - in effect charging the consumer twice.

As an example of how badly screwed up our economy (still) is, I present an anecdote that is loosely changed from an actual person who presented themselves to a professional in the mortgage business not long ago.....

Mike, a driver of a piece of heavy construction equipment, became a first-time home buyer in 2004. His home cost $145,000 and his total mortgage payment was $1,046. He was making about $50,000 a year, so he had a nice safe, conservative "front end" ratio of about 25% - and with his only other debt being a car loan and a small credit card balance, his back end ratio was a reasonably-conservative 35%. He was easily able to afford his loan - and his life.

But now it's 2009. This client comes back to the original mortgage broker and calls in desperation. Work has evaporated and his income has roughly been cut in half.

He should have some equity in his home - after all, he bought before prices really took off. So we look at refinancing the debt - after all, rates have come down some, right?

What we find when credit is pulled is the ugly truth. Mike has done two cash-out refinances in the last five years, as well as taking out a HELOC. His total payment is now up to $1650 and the total indebtedness on the house is $216,000 - but the house is only worth $180,000.

When asked about the refinances Mike says that he was enticed by how easy it was to roll credit-card debt into the first refinance - he turned to this as a means to finance living somewhat-modestly beyond his income. He kept thinking - and was told repeatedly - that he'd be able to keep coming back to the same brokers for another refinance - after all, prices only go up on real estate.

After much consternation (after all, Mike can't really do much being this far underwater - other than try a modification or lose the house) Mike calls the lender and is "offered" a modification. His "trial" cuts the monthly payment to 31% of his (now reduced) income, but in doing so the term is extended to 40 years and the loan is essentially interest-only for the first several years. This "modification" means that Mike will never really own his house, as it will be a decade or more - assuming prices stabilize here - before he has any hope of reaching positive equity.

So Mike does this for a year - after all, he does like the house - and after a year the phone rings. The lender has denied his permanent modification. Who knows why - but what a pull of the credit report now shows is that the lender has been reporting the difference between the "trial" modification payments and the original as delinquent amounts to the credit bureaus! Mike's credit is now destroyed - he's $7,000 behind in mortgage payments, nearly $50,000 underwater, and has a credit score under 500.

Mike is screwed.

What could Mike have done differently?

Well, first, he could have not debt-binged. But that's water over the dam - he did debt-binge, and the debt is still there. Once the hangover hits it's too late to decide that the last bottle of Jack Daniels' was a bad idea.

Second, Mike could have done what I've advocated since this whole mess began. He could have not believed the snake-oil salesmen from the banks and finance companies and instead called up a good bankruptcy lawyer and enrolled agent (CPA authorized to practice before the IRS), got them both in a room, laid $250 or so on the table between the two of them for an hour of their time and figured out what his liability would be if he told the bank to stuff it.

He might have wound up in bankruptcy or foreclosure, but with proper guidance and a plan he would have almost certainly been in better shape than he is now. With the foreclosure or bankruptcy behind him, his credit would start to be rebuilt immediately. He would have contributed to the system clearing (even if he lost the house) rather than contributing to the balance sheet lies of the major financial institutions. While his credit would have been ruined, it's ruined anyway, he's still going to lose the house, and all he's managed to do is help the banks lie to the American people and perpetrate a scam upon everyone else.

And if, as I suspect, the housing market continues to tank for the next several years Mike would have been in a position to possibly buy a similar house - for cash - at some point in the next few years. Yes, this would require some pretty-severe austerity measures in Mike's household, but then again, the original goal was to own a house free and clear, right?

Mike listened to the crooners on CNBS and so-called "professionals" in the banks - people who's interest is not aligned with his - instead of hiring his own experts at his own expense to navigate a circumstance that, admittedly, was of his own doing - but from which he DID have choices.

There are millions of Mikes who have been seduced by the dark side of credit and then serially abused by the banksters and their minions. Until the market clears these moribund consumers' debt from the system, an act that can only occur two ways (through the passage of the aforementioned forty years - or bankruptcy of both borrower and lender) we cannot have sustainable economic recovery.

Our government has committed itself to the balance sheet lies and screwing Mike - as many times and as roughly as they can get away with. Sadly, so far, the American People are watching American Idol instead of recognizing that while they're culpable for listening to the siren song of "must have it nowitis", the banksters actions were anything but honorable - indeed, they both have been and remain outright predatory in nature.

If you want to know why Japan never got out of its slump more than two decades after their debt bubble burst, this is the reason. The debt was not forced through the system by defaults, with the government instead protecting imprudent lenders. They, like us, strung along borrowers for as long as possible, both deepening and prolonging the damage to their financial lives and futures. Instead of recovery these policies produced a nation of debt-zombies - a state of affairs that persists to this day.

We're stuck in the same trap, having learned exactly nothing from those who went before us as little as a decade ago.

Where's The Morphine?

nospam@example.com (Karl Denninger) — 2010-03-17T01:25:00Z

The NY Times puts forward the following sob story:

FLINT, Mich. — Carol Y. Vliet’s cancer returned with a fury last summer, the tumors metastasizing to her brain, liver, kidneys and throat.

That's very bad, by the way.

As she began a punishing regimen of chemotherapy and radiation, Mrs. Vliet found a measure of comfort in her monthly appointments with her primary care physician, Dr. Saed J. Sahouri, who had been monitoring her health for nearly two years.

She was devastated, therefore, when Dr. Sahouri informed her a few months later that he could no longer see her because, like a growing number of doctors, he had stopped taking patients with Medicaid.

For what purpose was she being put through Chemo and Radiation "therapy"?

Look, I don't mean to sound callous, but there are times we must be objective. This is one of them.

Let's talk about the monetary issue here before we get back to the patient issue. Specifically:

If she takes too many Medicaid patients, she said, she cannot afford overhead expenses like staff salaries, the office mortgage and malpractice insurance that will run $42,800 this year. She also said she feared being sued by Medicaid patients because they might be at higher risk for problem pregnancies, because of underlying health problems.

Do you understand what this means?

Let me explain it to you:

If you are not on Medicaid you are paying part of the Medicaid patient's health care bill every time you walk in that doctor's door.

You are literally being held up at gunpoint, without even being told, to pay someone else's bill. This happens because you had the temerity to get sick.

This is at the core of what is wrong with so-called "health care" in America. Your price is not my price, for the same procedure performed on the same day in the same clinic or hospital.

If you pay cash, you probably pay the most. If you have a "health insurance plan", it pays something less. And if you are on Medicare or Medicaid, it pays less still.

Now here's the part you're really going to like: If you're an illegal invader or flat broke, you will pay nothing at all.

In each case those who pay less force those above them to pay more. This happens because doctors and hospitals are immune from anti-trust laws, which generally bar this behavior. They lobbied hard for this "right" to screw you blind - literally - rather than acting as every other business in every other profession does.

Oh, and as they did, prior to these changes in the law.

Your "local physician" and "local hospital" is not a "victim" of this. He, she, or it is a willing, intentional malignancy in fomenting this distortion and, unless you're one of the "privileged" (that is, on Medicare, Medicaid, an illegal or broke), is screwing you blind.

This is why your health insurance premiums are going up 20% or more a year. It, along with what comes next, is the precise reason that costs are out of control.

Now let's get to the other part of it.

I feel for Ms. Vliet. But this view of entitlement to medical care and (extremely expensive) treatment, when there is no ability to pay or any reasonable medical chance of a cure (metastatic cancer that has spread to multiple locations is nearly always fatal - we're arguing over time here, not outcome), while the patient does not have the means to provide for that care, is a problem.

This is the discussion - the debate over what you're entitled to as a matter of social responsibility and law - that nobody wants to have.

But we have to have it.

See, there is only $X to spend on health care. We cannot spend the last dollar to wring the last minute of life from every person. Our nation, and indeed no nation, has the wealth to do so. This isn't about compassion, it is about reality.

This does not mean we shouldn't provide comfort. We deign not to do that either, and that's flatly wrong. We're so "scared" of someone getting addicted to heavy painkillers that doctors are afraid to prescribe them to people with illnesses like this lest the DEA come knocking and threaten them with either arrest, the loss of their medical license, or both!

But this much I can tell you - we can't afford to provide "every last option" for those who have no resources to spend of their own, yet have contracted an illness that we cannot, within reasonable medical certainty, offer a cure for.

Indeed, the line is probably further back from there - although we don't want to admit it.

Nonetheless, it is.

This is a fundamental debate around our medical policy we simply must have. We as a nation believe we're supermen and superwomen, and we're distinctly uncomfortable with our own mortality. This must change.

We can either change it by choice, or fiscal realities will change it by force. The latter will be far more traumatic, and less-pleasant, than if we do it voluntarily.

A Very Serious Warning To Nancy Pelosi

nospam@example.com (Karl Denninger) — 2010-03-16T22:50:00Z

I know you're not going to listen to me.

I'm going to say it anyway, because as a concerned citizen of The United States of America, I must.

You are making a grave, perhaps nation-ending mistake.

Attempting to "deem" the Health Care bill passed when it has not actually been voted on is not Constitutional. Article 1, Section 7:

All bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.

Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by Yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.

This is the black-letter law of the land.

There are millions of Americans who are extraordinarily pissed off right now. Some of them, like me, write scathing columns on The Internet or we rant on Talk Radio and Television (such as Judge Napolitano)

But some just smolder. Some remember the other founding document of our Republic, The Declaration of Indpendence, which says, in part:

That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

That doesn't sound so good. What has tempered these people is largely what always has in all nations, that is:

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed.

Indeed.

Neither you or I know where the line is for that cross-section of the citizens in this land. I cannot speak for them, for I am not inclined toward the sort of actions that they are, nor do I countenance them. As such I'm not exactly on those folks' "A list".

In fact I fear the day they decide to express their disgust, for while in singular number those expressions are horrifying, as a group such actions harken to a time I hope we would never revisit in this nation.

But I do understand, and see, that they are seething in anger at what has befallen this once-great country.

They have watched as thirty years of corruption in Washington DC has turned our economy and government into a bad joke.

They have watched their jobs go overseas to a Communist Nation for the benefit of a handful of corporate oligarchs, while Washington chortles.

They have watched banksters do everything in their power to imprison them in debt, including bribing Congress to remove usury laws, "reform" bankruptcy so as to render a significant percentage of the population under effective indentured servitude (allegedly prohibited by the Constitution) while the very same banksters declare bankruptcy at the drop of a hat and stick lenders with losses, and while these very same banksters peddle fraudulent securities, cook their balance sheets and generally defraud everyone in the nation - then force the taxpayers, at gunpoint (quite literally, if you remember the fall of 2008 - you were in the room with Bernanke and Paulson when they threatened tanks in the streets) to bail them out.

Finally, they have watched Health Care turn into a monstrous mess, with cost increases of 10, 20 even 30% or more a year. These costs are expanding at that rate because ambulance chasers like former Presidential Candidate John Edwards make millions while Congress has passed laws forcing Americans to eat the development expense for every advanced medical technology over the last 30 years. Congress has refused to demand that medical practitioners bill everyone the same price for the same procedures and drugs. Congress has passed laws exempting medical providers and insurers from anti-trust law, so those aggrieved cannot sue in private causes of action for these abuses. And finally, Congress has forced all of us to eat the cost of care for illegal invaders who commit their first crime with their first step over our national boundary. All of these abuses and more could be addressed, but none of them are in the bill you wish to advance, and that, Madame Speaker, is intentional.

But all of this, while it has been outrageous and even criminal, has been, for the most part, Constitutional. It may be the stuff of a Banana Republic, and it may violate equal protection of the law (a founding principle and in fact a guaranteed right), but Congress has never cared about any of that in my 47 years on this planet.

Witness all the laws you, Madame Speaker and the rest of the Government (including this Health Care plan) do not have to obey while the rest of us do under pain of fine or even imprisonment.

What you propose to do now, however, is not Constitutional.

Rather than negotiate, advance and pass something like my four-point plan that would, along with dropping anti-trust protections and ending the practice of preventing reimportation of drugs and devices, attack the problem at the source, you instead are putting forward the Senate's 2200-page monstrosity.

You are doing so because this bill is not about Health Care at all. It is about revenue, and you know it. It is about the fact that The Federal Government is running into a wall at warp speed trying to furiously cover up all the fraud and scams in the financial system while at the same time spending over $1.5 trillion we do not have to replace collapsed consumer demand.

You must raise revenues, and you know it - or this ship called "The USS Treasury" sinks beneath the waves, and the first sacrifices to go overboard will be all the Seniors on Medicare and Social Security - not by choice, but by force of fiscal insolvency.

In short, this is just another Washington scam.

But this time you're going too far, and you're taking a horrific risk.

You must not, Madame Speaker.

You must instead face this nation and tell the truth.

We cannot fund the scams and frauds any more. Those who committed them must go to prison, even if they're campaign contributors.

We cannot borrow 10% of our GDP and spend it forward, as the CBO projects we will try, in a futile and permanent attempt to replace consumer demand.

If we do not stop this idiocy we will soon be unable to fund Social Security, Medicare and Welfare in all its forms, leading to an immediate and critical breakdown of our society.

The mad reach for revenue, Madame Speaker, is why you're in such a hurry - and you know damn well I'm right.

If you succeed, we will get your tax bill now and the promised health care never.

That's a fact.

There is a bright white line for every person in this country who has taken an oath to uphold our Constitution. It is in different places for each of those individuals, but you had better believe it exists.

For some it will be crossed if you try to disarm Americans, as was attempted after Katrina.

For some it will be crossed if you try to occupy their homes.

And for some, it may be crossed if you attempt to "deem" this bill passed, when The House has not actually passed it.

I pray this evening I am wrong, and that for no material number of people - indeed, for no one person - that is where their personal line is.

But I am reasonably certain that this prayer will be offered in vain.

Therefore, the choice is yours, not mine, for all I can do in furtherance of my hopes (and abeyance of my fears) is pray.

You, Madame Speaker, on the other hand, can act to quell this idiocy.

Or you may tempt fate, you may tempt the millions of people who have swore an oath to defend and uphold The Constitution and, having done so, went to war throughout our history. Many of those people, along with millions more who never wore a uniform stand today in defense of that "quaint" old piece of parchment - but not in defense of you, nor any other person.

You may also provoke States to assert their long-dormant 10th Amendment rights for real, not in some quaint "one off" regarding intra-state weapons manufacturing. That, Madame Speaker, harkens back to a time I'd rather not revisit as well.

You will almost certainly lose your Speaker's Gavel come November, as the mortal sin against the Constitution of deeming a bill passed without actually voting on it is so inimical to a republican form of government and displays such gross arrogance that you have forfeited your right to wield that gavel by mere contemplation of the act.

I am quite certain that I stand with millions of other Americans who are willing to put forth whatever effort is necessary to see that occurs come November - at the ballot box - whether you proceed with your abhorrent plan or not.

But what I pray for this evening, as I complete my day and offer homage to God before retiring, is that your office, and those of your fellow Democrats who are about to violate your sacred oaths willfully, intentionally, and with malice aforethought - is all you lose.

Oh The Huge Manatee (LIESman .vs. Santelli)

nospam@example.com (Karl Denninger) — 2010-03-15T17:08:00Z

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.

More Color On The HAMP Ticker - Macro Level

nospam@example.com (Karl Denninger) — 2010-03-16T15:37:00Z

Let's put a bit more color on my morning HAMP Ticker - this time at a more-macro level of the economy.

To recap, here's the table in question:

From this we can "back in" to the median annual income of these completed mods. If $837.86 is the median home payment and post-modification it is 31% of gross income (Front end ratio) then we get $2,703 a month in median income, or $32,433 a year.

This is gross income - that is, before taxes.

As I pointed out such a person will pay (monthly) $206.70 in FICA and Medicare tax (the half they "see" in their check) and will have another $300 or so a month withheld in federal income tax.

So we start with a "baseline" of $2,196 monthly that comes in the door (ex payroll and federal withholding taxes, but not accounting for state income tax.)

We know, however, that these people have 59.8% of their gross income that goes to all debt service (house and all other mandatory debts), which means that they have $579.30 to spend on everything other than that mandatory debt service a month.

Now realize this: "Mandatory" debt service only includes minimum payments on revolving accounts such as credit cards! Making a minimum payment on a credit card, while charging nothing new, results in a pay-down period of many years. But most people will charge back up at least the principal paid down (which isn't much when paying the minimum especially if you have a 29% interest rate!)

Diane Olick and other analysts say that 2 million homes have "started" HAMP. Of those only something like 16% have wound up in permanent modifications - under 200,000 - which is what the above represents. In addition, another 2 million+ people have gone delinquent since the HAMP program began.

The remainder of the HAMP "starts" either have not or will not lead to permanent modifications. That is, their internals are either worse than or equal to the above - it is almost impossible they are better, or they'd be permanent modifications.

Let's put color on this. According to Diane Olick 7.5 million homes are either delinquent or in foreclosure. 23% of those delinquent properties have been so for more than a year yet have not foreclosed.

These are people who are spending in the economy, propping up GDP and economic numbers, because they are making no payment on their house at all.

Let's remember that when these loans "resolve", no matter how they do, that spending power will instantly evaporate in the economy. Whether their loan is modified into a "sustainable" one (ha!) or whether they are ejected from their house and become renters either way the more than $1,000 a month they are not paying for their mortgage, but are instead dumping into consumer spending will evaporate as they will be forced to spend that money on housing once again.

This is not an inconsequential amount of money. If we assume the "average" amount not tendered in mortgage (and spent into the economy) is $1,000 per month per home, this is $7,500,000,000 - or $7.5 billion a month (that is, $90 billion a year) that is being "contributed" to the economy falsely and will come back out - one way or another. It simply must. This is a bit more than 1/2% of GDP - hardly insignificant - and that consumer spending fuels economic activity with a multiplier effect (the money these people spend at Starbucks pays the employees of Starbucks, who then spend THAT money into the economy.) There is much argument about the multiplier effect of various government spending programs, but there is less dispute that private spending always has some multiplication factor associated with it. Therefore, the $90 billion number is understated - the gross GDP "goose" from these defaults may be as high as double that $90 billion, or 1% of GDP!

To this we must add the positive impact of credit-card and other defaults. The paradox is that failing to pay down debt - that is, defaulting instead of paying as agreed, actually increases GDP, because such a refusal to pay down debt while the money is spent elsewhere causes consumption to be supported.

This, along with the "fiscal juice" from running $1.5 trillion in deficits, are two of the biggest issues facing a "sustainable" economic recovery. The refusal to understand this dynamic is responsible, in large part, for the (false) belief that our economy is in fact recovering.

You can't really blame most of the ToutTV and media idiots for their lack of thinking in this regard. It requires analysis, which none of these folks actually do, in order to suss out what's going on. We haven't had a debt-overhang-fueled recession for 70 years - the last one was The Depression in the 1930s. Literally none of the current reporters and pundits was alive and trading in the markets or anywhere else the last time it happened, and all we have is a (biased) historical record - an incomplete recollection.

How many people think that the 1920s - the "Roaring 20s" - were a time of fiscal reason and a booming economy? Nonsense. The "Roaring 20s" were a time of rampant speculation and debt-binging. The illusion of prosperity was bought, paid for and maintained the same way it was this time in the 2000s - with debt. Yet if you read "history" you will find scant if any mention of this fact.

We're not out of this one folks, and we're not going to get out of it either, so long as we keep pretending that loans that aren't performing - and can't - are "money good." Further, the temporary and ethereal "boost" to consumption and thus GDP that comes from debt defaults will dissipate. It mathematically must, as eventually creditors run out of cash flow to maintain the illusion that they have "performing" assets when payments are in fact not being made.

HAMP: A Colossal Failure Of Leadership

nospam@example.com (Karl Denninger) — 2010-03-16T13:14:00Z

Mark Hanson (of Hanson Advisors) once again digs up a gem.

He's been on the HAMP/HAFA nonsense since it began, but today I would like to focus on one snippet out of his latest missive, to be found right here:

Uh, yeah.

Gross debt-to-income ratios of 59.8% after modification?

Folks, do you understand what this means? The average gross income of these folks is $2,702, or $32,433 annually. But their debt-service ratio, or amount of debt post-modification, is 59.8%.

That means they're spending almost as much on their other debts as they are on their house payment, even after modification.

Let's break this down.

The person with a $2,702 monthly income has the following "come out" of their check:

Their debt service of $1,616, of which half, roughly, is their (modified) house payment.
FICA and Medicare tax of 6.2 and 1.45% respectively, or $206.70.
Federal withholding of approximately 10% (slightly more, actually) assuming a married person, or approximately $300. (If single head-of-household it is somewhat higher, if married with dependents it is somewhat lower.)

This "average person" has $579.30 once their mandatory debt service and withheld taxes are deducted, and from this they must pay:

Electrical, water, sewer, and garbage disposal services.
Health costs, if any (including deductions from their paycheck, co-pays, etc)
Automobile insurance for their car, along with gasoline.
Food
Hazard insurance on the house (if not included in the back end ratio, and it frequently is not.)
Any other expenses (e.g. clothing, school supplies if there are kids in the home, any sort of recreational activities, etc.)

All on $600 a month for a family of four? You're joking, right?

Good luck just buying your food and paying the electric bill on what's left!

These people are economic zombies. HAMP has utterly failed to change the outcome for these individuals nor can it because their total debt load is impossibly high.

What these people need is an expedited bankruptcy procedure that clears their balance sheet - but our lawmakers refuse to do that because that would force the LENDERS to eat their irresponsible loans at the same time the consumer went through Chapter 7!

We cannot solve this problem until home prices are allowed to contract to the point that people can afford them - and the rest of their debts are similarly defaulted!

These statistics show that of those who are in the HAMP program most of them are over-levered all the way across the board. There is no "solution" for them - they were enticed by (and bit on) the bogus claim that they could "have it all" throughout their lives, and as such are deeply in debt.

Remember, these are averages. That means that a large percentage of the people coming out of "HAMP" are in worse shape!

A person with $30,000 a year in income that is carrying eight hundred dollars of non-housing related mandatory debt service has, typically, a moderately-priced "new car loan" and a couple hundred bucks of mandatory credit-card payments (totaling some $5,000 in debt.) They can't afford this - not with a house payment of some $800 on top of it.

Not a prayer in hell.

The issue isn't just excessive debt in their house - it is excessive debt everywhere. We keep hearing bleating about how "underserved" and "lower income" people need "more access" to credit.

This report proves that's utter and complete nonsense, and that the actions of our "financial institutions" have been outrageously predatory - acts that should be felonious.

What that "access" the banking industry demands has gotten them is a one-way ticket to a crushing debt load they simply cannot afford and will NEVER be able to pay.

This problem is not confined to the housing market, it is literally everywhere and allowing the financial institutions that have KNOWINGLY AND INTENTIONALLY marketed this credit to people THEY KNOW CANNOT PAY to receive "help" from the taxpayer to avoid THEIR OWN BANKRUPTCY FOR MAKING OUTRAGEOUSLY IRRESPONSIBLE LOANS MUST STOP NOW.

Senator Kaufman Throws Down The Gauntlet

nospam@example.com (Karl Denninger) — 2010-03-16T12:36:00Z

Is this just words? A glimmer of light flickers on in the dark halls of 535 fools....

Mr. President, last Thursday, the bankruptcy examiner for Lehman Brothers Holdings Inc. released a 2,200 page report about the demise of the firm and which included riveting detail on the firm’s accounting practices. That report has put in sharp relief what many of us have expected all along: that fraud and potential criminal conduct were at the heart of the financial crisis.

Exactly. I've been writing about this for three years; indeed, it was recognition of fraud in large financial firms that led me to begin writing The Market Ticker.

Lehman structured its repo agreements so that the collateral was worth 105 percent of the cash it received – hence, the name “Repo 105.” As explained by the New York Times' DealBook, “That meant that for a few days – and by the fourth quarter of 2007 that meant end-of-quarter – Lehman could shuffle off tens of billions of dollars in assets to appear more financially healthy than it really was.”

It was a little more than that. Lehman accounted for these transactions as a sale, when in fact they were a loan. There's a hell of a difference between the two - in one case you remove an asset from your balance sheet and replace it with cash (and that change is permanent) and in the other you exchange an asset for a liability, and the net impact on your balance sheet is in fact negative, not positive (since you must pay interest on a loan.)

First, we must undo the damage done by decades of deregulation. That damage includes financial institutions that are “too big to manage and too big to regulate” (as former FDIC Chairman Bill Isaac has called them), a “wild west” attitude on Wall Street, and colossal failures by accountants and lawyers who misunderstand or disregard their role as gatekeepers. The rule of law depends in part on manageably-sized institutions, participants interested in following the law, and gatekeepers motivated by more than a paycheck from their clients.

Second, we must concentrate law enforcement and regulatory resources on restoring the rule of law to Wall Street. We must treat financial crimes with the same gravity as other crimes, because the price of inaction and a failure to deter future misconduct is enormous.

Third, we must help regulators and other gatekeepers not only by demanding transparency but also by providing clear, enforceable “rules of the road” wherever possible. That includes studying conduct that may not be illegal now, but that we should nonetheless consider banning or curtailing because it provides too ready a cover for financial wrongdoing.

Everything that went on leading up to the crisis, and most of what went on in "managing" it, was unlawful under already-established black-letter laws. Some examples should make this clear:

AIG sold credit-default swaps (a form of insurance, even though we don't call it that) with no capital behind them - that is, no ability to pay. Entering into a contract with full knowledge that you have no ability to perform is a fraudulent act - you are representing to someone that you have capacity to pay under the loss scenario, when you do not.
Purchasing "protection" of this sort at below the market rate of risk as determined by the spread is an uneconomic act. That is, the essential purpose of such a purchase is not to buy protection against the adverse event, but rather to intentionally misrepresent to regulators that your assets are "covered" and thus of better quality than they are, for the explicit purpose of not having to hold reserves against them. I argue that this is an act of fraud. The essential point is that nobody works for free - it is therefore impossible to buy a Bond that has a risk spread over Treasuries (of equivalent duration) of 3% plus a credit-default swap to cover it for less than the same spread. A seller of protection who does not charge at least the risk-adjusted spread will not have sufficient capital to pay, and a seller who does charge at least the risk-adjusted spread (and thus can pay) leaves you with a trade, in total, that yields less than the Treasury! If you desire a risk-free trade it makes no sense to purchase the more-risky bond and credit-default swap, as your total return will be lower than just buying the Treasuries!
Mortgage origination and rating was rife with fraud up and down the line. The breaches of representations and warranties are not accidents or oversights - they are frauds. The most-carefully-negotiated set of terms in any offering document (for anything) is always the reps and warranties; as a seller of a business in the past I can tell you with absolute certainty that this is the case, because it is the section by which you can be hung if you make false statements. The Securitizers represented to the buyers of these mortgage-backed securities that the credit quality was of a certain caliber in the loans that were made, when in fact post 2004 it was known that the majority of "ALT-A" loans contained some element of misrepresentation.
Carrying second lien loans on the books of a bank that are behind a 60+ delinquent first that is underwater at any material value is, in my opinion, a fraudulent act. By black-letter law these second-position liens are entitled to exactly nothing until the first mortgage is fully paid. In the case where such a loan is underwater and not performing they have no economic value whatsoever. Current statistics are that virtually all 60+ delinquent mortgages will ultimately foreclose or sell short. 80% of the dollar value of HELOCs are in the four bubble states (Nevada, Arizona, California and Florida) and the majority of these lines are behind an underwater first. ALL of the big banks are currently holding a massive number of these loans (tens of billions individually and hundreds of billions in aggregate) on their balance sheets at or near par value, that is, 100 cents on the dollar. I can come up with no reasonable argument for these claimed valuations, and yet they are allowed to persist. Packages of these loans currently trade on the second market for literal pennies on the dollar.

Why is this allowed to continue? I have, for the last three years, asked repeatedly "Where are the cops?"

I have also asked a more-serious question, and one with unpleasant implications for our society as a whole: Is the government a felon itself?

I believe these questions are fair. You speak in your letter of FERA, The Fraud Enforcement and Recovery Act. Well, if we're supposed to be enforcing the law against fraud, where are the cops sir? All I've seen FERA do thus far is fatten the officers at the local donut shop.

As I said more than a year ago: "At the end of the day, this is a test of whether we have one justice system in this country or two. If we don’t treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole 500 dollars from a cash register, then how can we expect our citizens to have faith in the rule of law? For our economy to work for all Americans, investors must have confidence in the honest and open functioning of our financial markets. Our markets can only flourish when Americans again trust that they are fair, transparent, and accountable to the laws."

The American people deserve no less.

We may deserve no less, but so far we the people have received zilch, all in the name of "not disturbing the so-called recovery."

But in point of fact we've not only refused to prosecute, we've allowed these financial institutions to try to cover the holes blown in their own balance sheets as a consequence of this fraudulent activity with fees and interest charges assessed on the people!

This is akin to not only looking the other way when the robbers show up and commit their heist, but then in addition assessing the victims a tax to pay for the robber's getaway car!

The Grand Chinese Fraud

nospam@example.com (Karl Denninger) — 2010-03-15T13:59:00Z

Wen "cats in the kettle" Jaibao spouted:

“I don’t think the renminbi is undervalued,” Wen said yesterday at a press conference in Beijing marking the end of China’s annual parliamentary meetings, using another term for the yuan. “We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”

Oh really?

It's time that we stop the the BS here with regard to China.

The entire premise of so-called "Free Trade" with the Chinese was predicated on the belief that if we opened our borders to their products on a "no tariff" basis that we would, over time, change their political system. That is, we would import cheap Chinese plastic junk and export democracy. More or less.

Well, we got all the cheap DVD players but they didn't get any democracy. Quite to the contrary. There have been no meaningful improvements in areas of environmental protection, workers rights and wages or political freedom. Indeed, the recent dust-up with Google just underlines the reality in China: Their government is a band of murderous brigands and thugs.

Disagree with them inside their nation, refuse to censor The Internet, for example, so that people can't read about Falun Gong and China will be happy to arrest the executives of your firm inside the nation and provide this as "corrective influence" to your head:

Oh, they send the 50 cent bill for it to your family too. Isn't that special?

At least in this country they don't shoot people for talking about the evil-doing that both private parties and government engage in. If they did, well, I'd be long-dead.

Second, China hasn't changed its spots a bit. It has pursued a mercantilist policy for over two decades while at the same time stealing anything that isn't nailed down (and some things that are), including such wonders as our technological prowess in nuclear warhead design. Argue the defensive merits of nukes in a silo all you want - when they're flying, they're anything but defensive.

In short our policies have been an abject failure. We've destroyed consumer product manufacturing in The United States, we've shuffled a huge amount of wealth over to China due to their manipulated currency, we've trashed our real standard of living and replaced production with debt and the supposed benefits of an open and free market, along with a democratic political system in China have failed to materialize.

It's time to stop the stupid. It's time to force those firms who want to offshore production to return the so-called "savings" to the United States as something more than executive bonuses. And it's time to treat those who are a communist dictatorship as exactly that.

The simplest solution is to hit China with a 25% tariff on everything - literally everything - and close the market entirely to anything coming over here that contains stolen intellectual property.

China has done us one better with their "liquidity program." Instead of allowing the economy to adjust and build internal demand, they have stoked a huge bubble in fixed assets. This, coming on the back of what we just experienced in our property market, is one of the most-pernicious and outrageous series of acts I've seen out of a sovereign in a long time. Couple that with questionable (at best) "official" statistics on China's economy and you've got the ingredients for real trouble.

There are often claims that we're "hostage" to China's holdings of Treasuries and other bonds. Nonsense. First, if China sells them they cut off their own nose. Second, in an extreme circumstance we could easily institute capital controls that would effectively neuter their influence entirely - and they know it. Third, it's time for us to live within our means anyway, so if China was to provoke that, where's the foul? There's a solid argument to made for such an event being positive for America, not negative. And finally, China needs us more than we need them - should we throw up a complete barrier to their cheap junk, along with the Euro zone who is likewise tired of the manipulation their mercantilist game would collapse on their heads.

It's time to call the curtain down on the cock-and-bull story coming from China. We have not achieved our goals with "engagement" and "trade", and won't. Our nation has been intentionally and severely damaged by these thugs who have adopted a mercantilist "raid 'em and loot 'em" approach to commerce, then hidden behind their communist ability to manipulate and even kill those who disagree with them. If we don't deal with this now, we will wind up having to deal with it militarily, and it will be even less-pleasant than telling them to stick it with the slave-labor-produced, water-fouling and air-blackening $30 DVD players.

In short, it's time for us to grow a pair of balls and tell the Chinese to put it where the sun doesn't shine, neutering their interference and intentional distortion of trade balance and currency valuation.

We didn't get what we bargained for, so it's time for us to change the bargain.

We're All Lehman (Accounting Fraud)

nospam@example.com (Karl Denninger) — 2010-03-15T12:46:35Z

An ugly thought - what if we're not all Madoff, we're all Lehman? Balance sheet games are the worst, because they encompass all manner of embezzlement. Join us for a hard-hitting hour focused on the Jenner and Block report and what it means for your money - and the markets.

3:30 today Central Time at http://blogtalkradio.com/marketticker

Social Security: "Here It Comes"

nospam@example.com (Karl Denninger) — 2010-03-15T12:45:00Z

Now the interesting part of the game begins....

This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes -- nearly $29 billion more.

In a world where we talk about trillions, this doesn't sound like much. But it's not the amount that's the problem - it's the direction.

For decades government has cooked its books by stealing the Social Security taxes you pay. This was the infamous "lock box" debate had during Gore's campaign. Too bad Mr. "the world's getting hotter so I have to live in my 20,000 sqft mansion with the AC blasting in all 79 rooms" Gore decided to make a partisan political issue out of something that his boss (that would be Herr Clinton) had practiced himself to make the (false) claim that he had run a surplus!

There was no surplus in the 1990s folks. Clinton, like the Presidents before and after him (from both sides of the aisle) simply stole the FICA tax receipts, replacing them with non-marketable bonds.

If you're wondering why we have hinky accounting in our banks, a good part of the reason is that our government cooks the hell out of the books themselves.

There's little reason for private business to behave ethically when our government won't, and there's little risk of prosecution when the scamming starts at the very top.

In order for the government to redeem these bonds it will have to issue more marketable debt, dollar-for-dollar. So if you look at the "Debt To The Penny" screen, what will begin to happen is that the "Intragovernmental holdings" (and boy are they mental) will shrink a bit, while the "Debt Held By the Public" line will of course grow.

This is all fine and well provided that (1) the first doesn't run out and (2) the government doesn't have trouble selling the debt in the second.

The NY Times perpetuates the "big lie" about FICA, specifically:

Social Security is financed by payroll taxes -- employers and employees must each pay a 6.2 percent tax on workers' earnings up to $106,800. Retirees can start getting early, reduced benefits at age 62. They get full benefits if they wait until they turn 66. Those born after 1960 will have to wait until they turn 67.

Bull. Employees pay 12.4%. Each and every one. If you're self-employed, you pay it all right up front. But if you work for someone else, they reduce your salary (or hourly wage) offer by 6.2%. You pay it, not the employer. No business ever pays a penny in tax - it is always shifted to the person that it allegedly "benefits" or "costs", and in this case that's you.

The problem with Social Security (and Medicare) is that the boomers number 78 million and comprise the largest block of our demographic. As they shift from working to retired over time there will be paradigm shifts in both entitlement program funding and private investment. Boomers, even with the "great recession" dives in their portfolios (before you cheer about the "recovery" in the market, realize that it's still 30% off the recent high in 2007, and the Nasdaq is more than 50% off its all-time high in 2000!) still have considerable wealth in their portfolios. Those who didn't play ATM machine with their house have wealth there. All of this will get tapped and dissipated as these people age out of the workforce. It is inevitable.

During the "salad years" of the boomers, roughly 50 years of age to 60 or thereabouts, they have tremendously added to market values of, well, virtually everything. These are widely regarded as the peak earnings years for most people. Starting in 1946 the peak began in 1996 and with the end in 1960 the "tail" of the boomers hit the start of their peak years this year - in 2010. But the "Great Recession" has truncated many of these people's peak years, as the most expensive employees are often the first to be let go and the last to be rehired during bad times - so it remains an open question whether those born in the early 1960s (of which I am one) will indeed hit our "peak years" as expected, or whether we just had one of our earning hands chopped off. Time will tell.

In any event in another 10 years that peak will have passed, and the boomer generation will have entered the "Draw It Down" period in their lives. This is an inexorable process, and one that cannot be prevented. Nearly 80 million people shifting from squirrels socking away nuts to eating those nuts is going to change many things, and market valuations for various assets will be one of the larger changes that most people are entirely unprepared for.

More than a decade ago I wrote a paper called "Investable Capital" which, unfortunately, I no longer have available for republication. What's worse is that some of the data set has been lost - at least I think it has. I expected that the negative FICA draw would begin in 2015, and that this would make a major shift in all market valuations. We're five yeas ahead of that time, largely due to the bubble-blowing. The original paper saw the Internet Bubble (because it was nascent at the time) but did not predict what Bush and Greedspan would do to try to arrest the effect of it popping.

We talk about ratings agencies downgrading the US Debt - they should have done it a decade ago. Why? Because we continually call the debt-to-GDP ratio as $12.57 trillion to ~$14 trillion "right", or 89.8%, while ignoring the claimed amounts of the Social Security and Medicare promises. But unless you're going to tell Granny that she's not going to get her check (or her health care), along with the 80 million boomers (all of who will instantly vote out anyone who tries to tamper with those programs, whether the money exists or not!) those "promises" are real.

So what's the real debt-to-GDP ratio of the federal government? About 500%, if one assumes the forward liabilities are on the low end of CBO and private estimates, or $60 trillion. This makes the total "debt" $72 trillion dollars and the ratio 514%!

No nation has ever managed to pull that off past the point of recognition of these costs. The reason is simple - interest costs. Compute the damage that, say, 5% interest imposes on $72 trillion and you blanch immediately (that's $3.6 trillion by the way, or more than our entire federal budget!) We get away with not paying that by sleight-of-hand, effectively playing "Option ARM" and adding to the principal. But all Option ARMs have a recast point. We're just not sure where this one is.

Once the "recognition point" happens the decline in all asset classes becomes both relentless and instantaneous. The power of self-delusion is powerful, but it cannot overcome the math - not in the long term.

The Government's view?

Good luck to the politician who reneges on that debt, said Barbara Kennelly, a former Democratic congresswoman from Connecticut who is now president of the National Committee to Preserve Social Security and Medicare.

''Those bonds are protected by the full faith and credit of the United States of America,'' Kennelly said. ''They're as solid as what we owe China and Japan.''

China and Japan aren't going to get paid either.

NOW FASB Wants To Do The Right Thing?

nospam@example.com (Karl Denninger) — 2010-03-15T02:20:00Z

This is unbelievable:

The war over mark-to-market accounting is about to get hot, again. In coming weeks, the Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans, according to people familiar with the matter. That departs from current practices in which banks hold loans at their original cost and create a reserve based on their own view of potential losses.

Let's cut the pump-monkey crap and recall for everyone exactly how that "current practice" came to be, shall we?

Back last spring as I have written about more than once, the dishonorable Mr. Kanjorsky, Barney Frank's stooge, held a hearing in which he basically put a gun to FASB's head and informed them that they would allow banks to mark their loans to model - or Congress would introduce a law overriding FASB.

FASB objected, but it didn't matter. In the end they relented.

This was the catalyst for the huge rally in the stock market. It was a declaration of legalized accounting fraud from the people who oversee financial accounting matters.

Now, a year later, after Barney Frank comes to realize that it was precisely this "gun up your butt" approach to financial regulation that has made all efforts to modify home loans (including cramdowns) worthless, we see some effort to change things.

Why does it make modifications worthless? Simple - a second loan behind an underwater first (e.g. a HELOC) is worth zero if the first is underwater and forecloses. That's because it is a subordinate lien and is only entitled to be paid (at all) if the first is fully recovered. In a case where the first is underwater, it won't be recovered; ergo, the second is worth exactly nothing.

But "mark to fantasy", otherwise known (by me anyway) as legalized accounting fraud, has these banks carrying the loan on their books at or near 100 cents on the dollar. That's because "the loss hasn't happened yet", so since they're entitled to "model" a potential outcome 30 years in the future, they can say "well property prices won't stay down for that long, so we don't have to take the loss!"

It's bogus of course as the odds of someone paying on an underwater loan for a decade are close to zero. Anything that interrupts the borrower's cash flow - a loss of job, a medical problem, or simply being tired of taking it in the cornhole month after month while they could buy a house across town for half the price - results in a foreclosure, because the property isn't worth enough to sell and extinguish the mortgage.

Under mark-to-market rules banks had to price these loans at the current market's appraisal of their worth. Thus, as home prices declined and people were more and more underwater the market price would fall toward the zero that would be recovered if the foreclosure happened. This would in turn make the foreclosure no more damaging to the bank balance sheet than not foreclosing, and thus, the market would tend to clear.

But no! We can't have that! So instead we have this fantasy. The consequence is banks letting people live in a house that they haven't made a payment on in a year - and sometimes two. Nobody cares if the loan is performing or not, because it was probably sold to some poor bastard and the servicer is advancing interest payments anyway! Moody's, S&P and Fitch keep downgrading these bonds in a furious fusillade, but nobody cares at the bank, because the bank doesn't hold that paper - some fool pension fund does.

(What's left unsaid there, of course, is that said pension fund might be getting their interest payments now, but they sure as hell will not get the principal at maturity - because it doesn't exist. What that will do to the pension funds is obvious, but heh, so long as the banks get to lie, it's all ok that pensioners get screwed, right?)

What the bank holds is the HELOC and they are often the servicer as well. They have a terrible conflict of interest in this regard because if they foreclose then the HELOC is worth nothing, and they take the full dollar hit right here and now. If that was to be done across the board with these delinquent loans my analysis shows that many banks Tier 1 common equity levels would be forced below regulatory minimums and in some cases would be destroyed altogether. The latter would force immediate FDIC seizure. It is thus cheaper to advance the interest payment to the bondholder and pretend, even though the payments aren't coming in, praying that somehow the borrower who hasn't made a payment in a year will suddenly come up with $25,000 to "come current." (Yeah, right.)

Let me be absolutely crystal-clear - this is an outright scam promulgated by the same jackassery in The Government (SEC, Treasury and Congress) and The Fed that led to the destruction of Lehman. Instead of forcing these institutions to take their marks and admit to their losses they were allowed to put forward abjectly false and misleading financial statements. In the case of Lehman it appears the law was broken. But in the case of the big banks today Congress got the rules changed by shoving a gun up FASB's nose so as to make the INTENTIONAL false reporting of asset values a lawful act.

This should have absolutely never, ever happened and those dishonorable knaves in Congress responsible should resign NOW.

These banks should have been taken into receivership by the FDIC and closed. We would still have the $3 trillion we have blown trying to prop up the economy - well more than enough to pay off the depositors when the assets were liquidated. Deposits would have been dispersed to strong community banks, lending them further strength and ability to lend to qualified borrowers. The scam-meisters on Wall Street would have lost their jobs and been closed down, we would have taken a horrific hit in the market but it would now be over and the economy would truly be on the mend.

Instead we lied and pretended, creating a false dawn and a market rally based on nothing more than a scam. This cannot hold indefinitely, and yet the conditions for a true recovery in those asset prices will not happen for over a decade - if ever. If we do not stop this insanity cash flow will force the issue eventually and by then The Government will have blown its wad furiously trying to replace 10% of GDP in the private market, as it has for the last two years, and thus be unable to fund the FDIC deficiency.

The simple fact of the matter is that as I have written about for over three years I absolutely believe that if valued on market prices these banks were insolvent then and are today. Hiding the fact of that insolvency with bogus accounting fictions does nothing to solve the problems that face us and in chokes off lending, prevents markets (especially housing and commercial real estate) from clearing and will absolutely prevent any durable economic recovery from occurring.

Oh yes, it has pumped the stock market to the moon, but the test is not whether the stock market goes to the moon - it is whether the market price reasonably reflects underlying fundamental value, and there the evidence is clear - it does not.

The danger here from continued obfuscation could not be more grave. We may have already passed the point where the government is capable of funding the deficiency to come in the FDIC accounts, but if we do not stop this crap, it is a certainty that such will occur, exactly as did in Iceland.

Blabber Blabber Blabber: Moody's

nospam@example.com (Karl Denninger) — 2010-03-15T01:45:00Z

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) — 2010-03-14T20:38:00Z

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) — 2010-03-14T02:31:00Z

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."

What The Lehman Report Proves: Financial Insolvency

nospam@example.com (Karl Denninger) — 2010-03-12T13:21:00Z

The Lehman Report on which I wrote last night regarding deeply troubling issues surrounding the Lehman Bankruptcy, has laid bare some very ugly facts relating to our financial system, corporate governance, and our government's active complicity not only in the Lehman collapse, but in ongoing balance sheet shenanigans and the current investment picture.

The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.

They compel me to advise that, in my opinion, the market is now trading both technically and on a fundamental basis, exactly as the Nasdaq was in 1999.

I recognize this is a serious charge and has implications that are most unpleasant, in that it implies a probable detonation ahead at some time in the next year - one that will not only destroy all of the gains made since March of last year but go beyond that - indeed, perhaps as far as the banner on The Market Ticker has for the major indices.

The technicals of the last month leave no doubt what's going on - the market is moving in a parabolic upward fashion, exactly as was the case for the Nasdaq in '99, and indeed, we are approaching the sort of gains in the broad market that Nasdaq saw in 1999.

For those who need a refresher, here it is:

Now let's look at the S&P 500 since the March lows:

And if you need a refresher on what happened to the Nasdaq after it topped in early 2000, here's that unfortunate reality:

Not only did the entire ramp in 1999 disappear, more than another 50% was lost beyond that.

The seriousness of this cannot be overstated. Anyone who bought into the start of the decline in 2000 was wiped out by doubling into a decline that took a literal 85% off the NDX from the peak. Worse, today, nearly a decade later, we remain more than 50% below the peak valuation that the NDX reached.

The Nasdaq is not alone in this behavior. The Nikkei 225 reached 38.957 in 1989. Today it trades around 10,000 - a nearly 75% loss from it's all-time highs, and despite 20 years it has not healed.

An analytical look at history says that when markets rise on fraudulent accounting and false claims - that is, the booking of asset values that is fictional, the claim of profits that were never really made, the hiding of losses off-balance sheet - the losses, when they come, are not recovered for a generation or more.

When this happens to individual companies, they go bankrupt.

When it happens on a broad basis in a market index, the result is utter destruction.

Such happened in the 1930s as well. The DOW's high of 1929 was not recovered until more than 20 years later, and due to FDR's devaluation of the currency it was another decade before, on a purchasing-power basis, your original values were seen again.

So the seminal question for this alleged recovery has been whether or not the recovery is real - that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.

If you cannot be reasonably certain of this then you simply cannot, as an investor, be in this market. The reason for this is clear on its face - we will, at some point in the not-distant future, have a point where the insolvency of these institutions rises to public consciousness.

When (not if) that happens the market will collapse.

This is not conjecture.

It has occurred in each case through history where markets have been pumped through fraudulent balance sheets and similar game-playing, and when it happens the typical losses are in the 75-80% range. Those losses are maintained even a decade or more later.

Now let's examine the evidence on whether the core of the reason for the collapse - bogus accounting that led to the failure of Bear Stearns and Lehman Brothers - is in fact resolved and no longer present.

Tim Geithner and the Obama Administration understand this risk. That much was made clear last year when they ran their so-called "Stress Tests." The market understood this too, in that the promulgation of those "results" was a large part of the underpinning for the rally in the markets that has followed.

Is that reliance reasonable?

The evidence says it is not.

As was made clear in the article I wrote last night, Lehman failed multiple stress tests externally, and yet they were repeated with ever-looser standards until an internally-conducted test passed - at which point Tim Geithner's NY Fed proclaimed them healthy:

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

Unfortunately the precise same practice took place with all of the other major institutions when Geithner ran the famous "stress tests" that were hung out in front of investors to "bring them confidence."

It was physically impossible for The Federal Reserve to actually perform the testing on its own - so instead, they provided metrics to the firms and asked them to run them.

This is the precise same process that was used to produce a "passing" grade by Lehman after the Bear Stearns failure and that process was administered by the same person who was responsible for the false Lehman outcome.

Now add to this that Diane Olick of CNBC has confirmed what I've been saying since the crisis began: If the banks really accounted for all the losses in the home loan market, they'd all be insolvent.

Wait a second. If the "stress tests" were valid, then the capital raises that were done were sufficient and none of the banks are insolvent.

Indeed, Diane Olick called this exactly as I have:

That's why the Obama Administration has created this kind of shell game in the first place.

Shell game?

Further, the fact that these loans have no economic value isn't just mine. It's also Barney Frank's, who is the lead guy in Congress on the House Financial Services Committee. He said:

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

Accounting rules that Congress caused FASB to modify by literally pointing a gun at them.

I'm sorry folks, but the weight of the evidence is overwhelming on this point.

Whatever gains you think you're chasing in the stock market at this point in time, you're doing so against a risk of an 85% loss. The idea that Government can prevent this sort of collapse if it initiates is fanciful - remember that in the summer of 2008 the common belief was that we'd never see a crash right in front of an election, as "they" would not allow it to happen. If you bought into that belief, you lost half your money.

The risk here is even more severe. If, in point of fact, those "Stress Tests" provided false confidence (and I believe the evidence is strong that they have) then it is simply a matter of when the market comes to realize that these losses in the large banks are still present but being hidden.

If we apply the FDIC's own metrics to the expected losses from such a revelation that would "immediately appear" we get a number between $2 and $3.5 trillion that would have to be paid to depositors of the failed institutions - equal to somewhere around one full year's Federal Budget and dramatically exceeding what the FDIC and Treasury could cover - by more than 10 times.

The consequence of such an event would be literally catastrophic. Having squandered over $3 trillion in the last two years in new borrowing by The Federal Government to prop up the economy (instead of clearing this bad debt through resolving the bankrupt financial institutions) it is highly unlikely that The Government would be able to, on short notice, raise another $3 trillion.

I'm out of all long positional trades as of this morning and will not be back in them until this issue is resolved. Even if there is a potential 10 or 20% advance that I will miss by doing so, the downside risk of 85% is so extreme and the facts that we now have available strongly suggest that not only are all the large banks insolvent but that the government has been and is complicit in covering it up - not just temporarily, but as an ongoing practice, just as occurred with Lehman.

I'm sure many will call me crazy for this analysis.

We will see if you still think so in a year or two.

Alan Grayson Tossed Out A Hardball

nospam@example.com (Karl Denninger) — 2010-03-12T19:20:00Z

Now we're talking:

Congressman Alan Grayson, D-Fla., today introduced a bill (H.R. 4789) which would give the option to buy into Medicare to every citizen of the United States. The “Public Option Act,” also known as the “Medicare You Can Buy Into Act,” would open up the Medicare network to anyone who can pay for it.

http://grayson.house.gov/News/DocumentSingle.aspx?DocumentID=175363#main

Ding ding ding ding.

If you're going to mandate that everyone have health insurance, then you have to provide a public option.

That is the only way you're going to keep people from being raped.

I still don't think this is Constitutional, by the way, but this much is clear: Medicare's premiums haven't been going up at 20, 30 or 40% a year.

Depending on the premium, I'm interested, and would likely dump my private insurance (which I have to pay for in cash) immediately were this to become law.

If we can't have the sort of four-point plan I've put forward in the past, this is the next best option.

Confessional Roundup Friday (3/12)

nospam@example.com (Karl Denninger) — 2010-03-12T18:15:00Z

We have two warnings on the board in financials.

First, Discover said it is boosting reserves and expects to loss 22 cents, which is a significant deterioration from the 9 cent profit previously expected.

Second, Charles Schwab warned that its first quarter profits will fall short as trading fell 14% despite the fact that it lowered fees significantly for its consumer accounts.

The brokerages will also get hit by their fee waivers on money market funds, which they have to maintain (absorbing the operating expenses) with our fantastic Fed holding rates at zero, providing them with no spread that they can take for their operating costs.

This is pretty significant, given that the estimates were for around 15 cents, yet the expected hit is around 4 of them - or about 25%.

That's a big decline.

This is worth watching as the confessions were notably absent last quarter.

A Disturbing Pattern? (Bank Loans / Helocs)

nospam@example.com (Karl Denninger) — 2010-03-12T16:53:00Z

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!)

EXPLOSIVE: Lehman - Where Are The Cops?

nospam@example.com (Karl Denninger) — 2010-03-12T01:40:00Z

Sarbanes-Oxley was supposed to prevent crap like this:

From the paper:

Lehman employed off-balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008.2847

Oh yeah, that's legal? It's not supposed to be!

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet.2850 Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt.2851 Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios.

Isn't that special?

It gets better, as you might expect.

The Examiner concludes that colorable claims of breach of fiduciary duty exist against Richard Fuld, Chris O’Meara, Erin Callan, and Ian Lowitt, and that a colorable claim of professional malpractice exists against ~~Arthur Anderson~~ Ernst & Young.2915 (strikethrough mine, not in the original)

It is stated that Government Regulators (FRBNY and The SEC) had "no knowledge" of these practices. Perhaps true. But this calls into question why we're hearing of this just now, and whether other firms have or are at present doing the same sort of thing.

There also appears to be a colorable claim that Lehman Management was fully-aware of what was going on:

Although interview statements given to the Examiner were inconsistent at times, no reasonable dispute exists that each of Lehman’s Chief Financial Officers from late 2007 to September 2008 possessed some knowledge of and/or involvement with multiple aspects of Lehman’s Repo 105 program, including the existence of firm-wide Repo 105 limits, the volume of Repo 105 activity Lehman engaged in at quarter‐end, and Lehman’s efforts to manage its balance sheet using Repo 105 transactions.

Well that's special.

But we're just getting warmed up.

Remember, The Feral Reserve is supposed to by the "uber-regulator" and the "safety and soundness" manager for the financial system.

They did a great job, right? Well...

For example, when

the Examiner questioned Lehman executives and other witnesses about Lehman’s financial health and reporting, a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.

True? Let's see what the Examiner had to say:

Although various Government agencies had information that raised serious questions about Lehman’s reported liquidity and about the sufficiency of its capital and liquidity to withstand stress scenarios, the agencies generally limited their activities to collecting data and monitoring.

Oh. They looked but didn't act. I see.

Indeed, they looked pretty closely....

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

So let's see what we got here. They ran two sets of stress tests and the firm failed both. Not satisfied with the results they then designed a third set, which the firm also failed (we can reasonably presume the third had less stringent requirements than the other two!)

Instead of applying any of these three, FRBNY, which was run by one MR. TIMOTHY GEITHNER, NOW OUR TREASURY SECRETARY WHO REPORTED TO ONE BEN BERNANKE, instead took Lehman's word that all was ok and did nothing.

Wait a minute. In the spring of 2009 we were told that all the big banks ran "Stress Tests" of Geithner's design. But Treasury didn't actually run them and didn't actually get and process the data - they told the banks to do so.

Uh, that's exactly what Lehman did, right? And Lehman passed its own "internally computed" stress test but failed all three of the externally-computed ones.

Do you still accept that all these other banks are solvent? What about the facts we do know - such as the inconvenient fact that between them the "big banks" have something like $150 billion of Home Equity lines behind an underwater and delinquent first mortgage, which is, by the way, worth zero yet being carried at or near full value......

Nor did it end there.

The SEC inspection revealed significant problems at Lehman. The SEC found that Lehman’s Price Valuation Group was understaffed; and it found that Lehman’s asset pricing function was overly “process driven.”5761 But the SEC did not release its findings or formally present them to Lehman prior to Lehman’s demise.

So The SEC knew, and they too did nothing.

It's worse. While Geithner is implicated as being "concerned" about Lehman in the paper, the most-troubling part the narrative is here:

The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in “collateral damage” by demonstrating weakness and exposing “air” in the marks.5823

Air?

Uh, that's an apparent admission that FRBNY and Tim Geithner specifically knew that the marks that these banks were taking on their assets was materially and intentionally false.

Where have we seen this of late? Oh yeah - in all those banks that have failed of late, with 25-40% discounts to their claimed balance sheet values when the marks are actually reduced to losses to the deposit fund by the FDIC!

So let's see here. We now have:

Geithner, and presumably everyone under him, knew the marks on these assets were fictions months before Lehman failed, yet they intentionally concealed this fact from the market and took no action (nor did the SEC) to disclose this intentional misdirection.
The misdirection and false claims in this regard are almost certainly continuing today, as evidenced by the FDIC seizures literally on an every-week basis.

How about Bernanke? While he maintains (as did Geithner) that primary responsibility lay with the SEC, he also said:

Our concern was about the financial system, and we knew the implications for the greater financial system would be catastrophic, and it was.”

What does all this say about the stability of things now?

Yeah, I know, everyone's "too big to fail."

But what if the truth is that they're "too big to bail", for instance, if one of the "big four" was to get in trouble today due to a recognition in the marketplace that not only is this what blew up Bear Stearns and Lehman Brothers, but that the same chicanery with "asset values" is continuing even today, and as such one cannot be reasonably certain that liquidity provided today will be repaid tomorrow?

Why is it that if the implications would be catastrophic (and they were), both the SEC and FRBNY knew that Lehman had insufficient liquidity long before the collapse (and they did) neither the SEC, The Federal Reserve or FRBNY did a damn thing to blow the whistle on this crap and put a stop to it?

This report sets out a damning case against the pseudo-government and government actors, who it is alleged were well-aware of critical weaknesses in Lehman's risk controls and liquidity months before it collapsed, yet none of them did a damn thing about it until days before the bankruptcy filing.

Why should any of the clown-car riders who clearly knew that this situation existed for literal months before it blew up, yet did nothing, still retain their jobs and, in Geithner's case, obtain a promotion? These people are unqualified for supervisory positions involving anything more complicated than handing out towels in the men's room.

The key question facing the nation this evening is not, however, the past. It is the future. We have over 100 literal instances in which banks have been seized by the FDIC since Lehman blew up in which their balance sheet "asset values" have been shown by the FDIC's own DIF loss projections to be abject fictions, yet none of these institutions have been flagged to investors or the public, no indictments or civil complaints have been brought by the SEC or Department of Justice, and they have remained operating for months with these bogus values exhibited for bank examiners and regulators to see.

IF - and I stress IF - these fictions are also present in our large banking institutions, and there is NO REASON TO BELIEVE THEY ARE NOT, it is simply a matter of time before one or more of them detonates in a similar if not identical fashion. Since these firms are all much larger than Lehman and neither the FDIC or Treasury has a spare $500 billion laying around for the potential payout to depositors that might be necessary in such an instance, we cannot reasonably assume that the risk of financial Armageddon has in fact passed until we know for a fact that all fictional balance sheets are excised and all off-sheet exposures accounted for.

Ponzi City Government: Chicago

nospam@example.com (Karl Denninger) — 2010-03-11T18:42:00Z

Ok Daley, nice bleat:

Mayor Daley warned today that the day of reckoning has arrived for a financial crisis that’s choking local taxpayers: underfunded city pensions.

Daley said the 32-member pension commission he created more than two years ago will soon recommend solutions to the crisis that won’t be pretty or politically popular.

What's the primary problem? Try right here:

He cracked the door open to raising the retirement age from the current minimum of 50. He said he would consider raising employee contributions and implementing a two-tiered pension system that shifts newly-hired employees to the 401k plans favored by private industry.

Can I have my Social Security - full benefits - along with Medicare at 50? That's only three years form now. Sounds pretty good.

Why not?

Because the Federal Government would go broke in about a year if we tried this nationally.

So who thought it was a good idea to do this with City (and State) employees?

Where the hell were you, Mr. Daley, back in the 1990s when I ran a business in your putrid, corruption-infested town?

I'll tell you where he was: he had the public sector unions under his desk taking turns giving him fellatio in return for endorsements and votes, that's where.

Now, having basically bankrupted the City, he, like a number of other mayors and governors is bleating about how horrible the situation is - a situation he was responsible for creating!

Oh, and instead of facing this years ago his "response" to the early warnings was to sell off the parking meter revenues via a "forward" (in effect) and then blow the money, thereby destroying that which was in fact a decent city asset.

This sort of stupidity is nothing new and now there's no ability to avoid a truly nasty set of consequences.

Of course deposing the Daley monarchy is a bit of a problem when you have a plurality of people who suckle on the teat.

When the teat runs out of milk Daley might want to consider how the fine citizens that would otherwise guarantee his re-election might choose to refill the udder they're used to being able to suckle from.

New Fed Z1: Market Move Is NOT Sustainable

nospam@example.com (Karl Denninger) — 2010-03-11T17:54:00Z

Sorry guys and dolls.

The new Fed Z1 is out, and it makes clear exactly what's going on when it comes to the broader economy.

This isn't a market timing call, but it is an inevitable recognition of reality call - and it will come.

Note that the Federal (and to a lesser extent the State) governments have replaced credit expansion in the broader economy but it is not working anyway, as total outstanding credit continues to shrink. That is, the Q3 contraction "on balance" was not a statistical one-quarter fluke.

As of the 4th Quarter of 2009 there is no evidence of recovery in the broader economy's credit growth; to the contrary, it continues to shrink despite the government's attempts to halt it.

Here's some more detailed color on this:

Find the rising economic activity, as measured by the debt load in the system. Hmmm... let's see, a little bit in State, down everywhere else, except..... The Federal Government!

The Federal Government went from $5.122 trillion to $7.805 trillion in 24 months. That's $2.68 trillion dollars in 24 months, or almost exactly ten percent of GDP in net Federal borrow-and-spend to prop up consumption and output.

How long can this continue?

The economy operates on credit folks. Every category of net final private demand and economic activity is contracting. ALL OF THEM. The Federal Government is engaged in a furious game of "blow up the doll" while one of its fingers is cut off and the air leaks out faster than they put it in! This is shown by the top graph, which reveals that even with the Federal Government's machinations total economic activity as measured by credit outstanding continues to decrease.

Folks, there's no recovery. Not through Q4 2009 anyway. The Fed Z1 does not lie and the destruction in the financial space continues at breakneck speed, despite the idiots who think that buying stock in these companies is a good idea.

Best-a-luck folks if you're listening to ToutTV - there's a "use by" date on this nonsense, and if you find yourself on the wrong end of it you will not like the consequences.

Is That Fear I Sense? (CDS Regulation)

nospam@example.com (Karl Denninger) — 2010-03-11T16:38:00Z

Amusing how Bloomberg comes out pumping the CDS monster:

March 11 (Bloomberg) -- European politicians and regulators could initiate a continent-wide ban on speculative trading of sovereign credit-default swaps tomorrow. Making it stick without the Americans won’t work.

Oh there you're simply wrong, my friends. The assertion is made:

“You need to get the U.S. on board, otherwise the effect will be minimal because trading will simply move elsewhere,” said Jan Hagen, head of the financial services group at the European School of Management and Technology in Berlin. “A ban would allow European politicians to tell voters at least they’re doing something.”

On the contrary.

EU nations can pass laws and regulations that make the collection of bets placed in this fashion unenforceable. That is, you're free to write all the swaps you want over in London, but you can't force anyone in the EU to pay when the bet goes against them.

This, incidentally, is exactly what the Dutch did when Tulip Mania blew up. They declared all the contracts that had been written against Tulip Bulbs (which were an awful lot like a CDS!) to be unenforceable gambling contracts and thus void.

POOF!

Such a law, if passed EU-wide would make the European Union a haven for corporations and even banks. No longer could you be attacked within the EU - and frankly, who gives a tinker's damn what London or Wall Street thinks if they can't reach into your firm if and when their contracts go bad!

Oh, and if you think the Europeans don't have a real solid reason to do this either individually as nations or collectively, you're wrong. Italian cities, for example, appear to have been scammed with swap contracts written in English rather than their native language by a bunch of High Street shysters. They're now bleeding from all orifices on these "deals" and looking for a clean way to stop it.

This is the way to do it and it's entirely within their rights as sovereign nations to do so, just as it is ours.

Should the EU do so America would be forced to go along, lest it be effectively depopulated in terms of large financial and industrial concerns. Same with Britain.

So go ahead and put forward this sort of BS "firebreak" kind of argument, Bloomberg. It's abject nonsense.

The creation of a "safe haven" where fraudulent swaps are no longer enforceable would be of tremendous benefit to the western world.

If London and Wall Street have managed to bribe their respective governments to a degree that makes banning fraudulent conduct impossible, then we will simply have to look to the Europeans to take the proper - and long overdue - step forward in fixing this problem, and suffer the consequences in the loss of both jobs and companies that come from the "big banks" obfuscation and BS.

Oh Mr. President and Congress (El-Erian)

nospam@example.com (Karl Denninger) — 2010-03-11T14:03:00Z

Well now this is a rather interesting editorial:

Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily - and excessively - through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. To stay ahead of the process, we should keep the following six points in mind.

El-Erian goes on to list six points that make most people's eyes glaze over. Indeed, the entire editorial is one of those things that reminds one of Alan Greenspan and his famous "how to write 3,000 words and yet never find two people who agree on what you said."

The final three paragraphs are worth reading though:

This leads to the sixth and final point. We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.

You mean things like taking in 30% of what the government spends via taxes, then dismissing this as "oh we'll just issue some more T-bills"?

There is a further complication. Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.

Uh, did you parse that one folks?

".....tyranny of backward-looking internal commitments"

That's code for "entitlements that were promised to people but cannot possibly be provided, no matter how long people howl - or how loudly."

Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised (sp), the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.

Forget it. One need only look to Greece, where telling people they have to actually go to work and produce something in order to earn a public-sector salary produces riots.

If you think we're "more advanced" in our thinking here in the United States you're simply insane.

Times like this require a man in the left seat with a big fat church-bell sized set of balls, and the willingness to be unpopular enough to be a one-term wonder. This is inherently in conflict with the narcissist personality required to run for President in the first place.

Nobody who wants the job and is electable to the office is fit for it at a time like this. I'd do it if drafted, but I'd never put up with the crap required to get there, nor am I electable - because I refuse to lie in the fashion required to obtain the office. Stumping for votes while pointing out that promising to pay $100 trillion in Social Security and Medicare that we don't have and can't acquire, that if we try to print our way out of debt that "obligation" will go from $100 trillion to $250 trillion (which still can't be paid), and that the sort of measures required to bring the economy and government back into balance - at both a state and federal level - will result in massive shifts in the economy's balance and, in the short-term, lead to even more pain, are not popular. To the contrary - not one person receiving those handouts would vote for me, and since they're nearly half the population there's not a snowball's chance in Hades that I could carry the day at the polls.

So what's required is a paradox. You need a man or woman who will run for the office saying all the "right things" while lying through their teeth. Someone who will shed that veneer the instant the election is over, then take the left seat and be a five-alarm bastard once in office, placing a big sign on the door "$ = NO!"

Someone who will take a look at The Constitution and if they can't find whatever it is being proposed in the four corners of the text, it's gone. That is, Social Security and Medicare - gone. Provide some sort of subsidy to the states with whatever we've actually got in the so-called "Trust Fund" (that is, distribute to them the "special Treasuries" in the so-called "box") and immediately end FICA. The States are then free to run the programs as they see fit. This will instantly force accountability and a transition to a privately-owned pair of accounts, or perhaps one account that provides both functions, since people move and won't accept anything else.

Someone who will align tax revenue with GDP permanently and radically. This means The Fair Tax, and if Congress won't enact it, then The President does it by executive order - by abolishing the IRS' funding and authority! Issue an executive order barring the DOJ and other Federal Law Enforcement from enforcing anything in The Internal Revenue Code, and suddenly Congress will become far more reasonable since in order to acquire funds they will have to do the right thing. Radical? Yes. Bye-bye 16th Amendment and "K Street."

Now go find the rest. Departments of Education and Agriculture, as just two examples: Gone. All State Mandates from The Federal Government: Gone.

If you can't find it in The Constitution it goes back to The States and is regulated within their borders. The ability of the people to freely migrate from one state to another enforces fiscal responsibility - if you behave like a jackass, such as California has done, you will be rapidly de-populated and without a tax base, your policies fail. End of discussion. No more Federal Welfare of any sort. If The States want to provide it and can fund it, goody for them. More likely what happens is that The States suddenly find that they can provide lots of workfare doing things that need done, provided they outlaw public employee unions first to disarm those thugs.

On monetary policy it's simple: The Fed either honors its actual written mandate or they're gone too. No more BS, no more opacity. Everything they do is public and published on The Internet. Send up a bill mandating that any gaming of economic statistics or monetary policy is a federal offense garnering you 20-to-life in the can and demand that it pass or you'll veto every bill that comes to your desk until it does.

On Credit Default Swaps and other instruments: All trade on a public exchange. All exchanges in the US are public, non-profit organizations. The Federal Government will run one and The States are welcome to set them up too - but only as public non-profits. National Best Bid and Offer (NBBO) is guaranteed by law with felony criminal penalties for anyone gaming it - like offering "Flash Orders." Any federally-chartered institution that fails to adhere to One Dollar of Capital is instantaneously closed - without exception. All firms trading on a public exchange or doing business in The United States across state borders (and therefore under proper federal regulation) is required to produce full, complete and truthful financial statements, without exception. This means the use of off-balance sheet anything is absolutely prohibited under pain of immediate delisting and felony fraud prosecution.

We adopt a national policy that tariffs are set to provide wage parity. This will produce howling from the WTO. Tough. No longer will we permit wage arbitrage as a reason to offshore jobs. This is not only Constitutional, it is the premise upon which this nation was founded in terms of how the Federal Government is supposed to acquire its funds! Combined with The Fair Tax, which will make the United States a corporate tax haven (zero corporate and personal income tax rate) this will result in an instantaneous flood of manufacturing and high-tech jobs back into the United States - all GDP boosters. The United States GDP would double within a decade.

Refuse to sign any budget that does not run a primary surplus, except in times of declared war. If Congress or The Administration wants to play International Cop it either funds the entire thing on-budget and pays for it or declares war and has the ability to do so via deficit spending.

Adopt Freedom's Vision for monetary policy. No more debt-backed currency. If The Fed doesn't like being relegated to a clearing house for payments that's too damn bad. Tell the CFTC you'd like them to list a "boiled rope" futures contract just to underline the point.

Radical? Yes.

The only solution long-term? Yes.

Will it happen? Not unless our present Administration grows a set of balls, which it does not at present possess, or someone is willing to both lie themselves into office and then do it anyway.

As a consequence what El-Erian is talking about will happen - an "unexpected" recognition of the reality that what is being done today both is unsustainable and won't work, but we will do nothing appropriate about any of it until we find ourselves well-off the cliff and furiously pedaling in the air like Wile-E-Coyote - and at that point it will be to late to avoid the ugly consequences.

What's Our Credit Limit Again?

nospam@example.com (Karl Denninger) — 2010-03-10T19:18:00Z

50% of the federal budget right now goes to entitlements.

This last month we posted a record $220.9 billion budget deficit. We took in $107 billion but spent $328 billion.

Isn't that special. We only funded 32% of expenditures?

Remember - entitlements were half of that $328 billion.

So let's see if we can do the math here.

Entitlements were about $164 billion last month in spending. The rest was, of course, the rest.

But we only took in $107 billion.

So even if we eliminated all entitlement spending we still did not have enough money to cover the rest.

Yeah.

If you want to know why the market is floating higher it's for the same reason you feel all giddy and special when you strike out on the town with your shiny plastic. You have magic cards!

It doesn't matter if you have a job, it doesn't matter if you have any money in the bank, so long as you have magic cards.

For how long does the United States continue to have magic cards?

Remember, from my ticker the other day, the federal government is directly spending 9% more of GDP today than it was just two years ago.

The market and economy are absolutely dependent on the Federal Government continuing to do so. Should the government not be able (or willing) to continue to do so, S&P 666 or DOW 6,489 will look like a bull market.

Now add to this that the continued spending in this fashion inevitably will cause interest rates to rise. It simply must, whether that interest rate increase comes from actual Treasuries, or whether it comes from dollar devaluation and thus causes oil - and by extension virtually every other price in the market - to rise at a meteoric rate.

Oh, and if they choose the second (inflation)? Then, as I discussed earlier, that entitlement spending, which is set to go parabolic anyway as the boomer retire, will have an afterburner attached to its backside due to the fact that all of these programs are indexed to "inflation", with Medicare in particular being indexed at several multiples of inflation.

But for today, folks, it's "Rally On Garth" - even though all of the above is not conjecture, it's mathematical fact and inevitably must come to pass.

Bank Of America To Stop Charging 31,200% Interest

nospam@example.com (Karl Denninger) — 2010-03-10T14:57:00Z

No, that's not a misprint.

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

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

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

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

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

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

The banksters put Guido to shame.

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

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

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

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

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

GreeceFire Out? I Don't Think So...

nospam@example.com (Karl Denninger) — 2010-03-10T13:20:00Z

The idiocy coming from the EU reeks of desperation:

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

Continuing...

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

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

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

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

Bah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As such anyone advocating this course of action must be held to account under the existing laws of The United States which make the advocacy of such acts punishable by 20 years in the hoosegow.

(Never mind that it won't work!)

A Random Look at RMBS And The Economy

nospam@example.com (Karl Denninger) — 2010-03-09T18:22:00Z

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.

IF You Are Going To "Demonstrate"....

nospam@example.com (Karl Denninger) — 2010-03-10T00:56:00Z

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The CISCO Hype Machine

nospam@example.com (Karl Denninger) — 2010-03-09T16:33:00Z

This is simply unbelievable.

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

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

Basically, a faster version of the CRS-1.

CISCO claimed in his hype that:

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

Oh Jesus.

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

You would be dead wrong.

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

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

HORSECRAP!

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

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

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

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

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

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

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

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

Disclosure: No position.

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

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

nospam@example.com (Karl Denninger) — 2010-03-09T15:14:00Z

... 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) — 2010-03-08T15:13:00Z

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.

ADMISSION By FDIC: Massive Balance Sheet FRAUD

nospam@example.com (Karl Denninger) — 2010-03-08T18:02:00Z

Remember this Ticker from a few days ago?

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

There is no conspiracy.

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

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

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

--db

Or tomorrow's market.

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

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

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

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

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

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

Still sleeping well with your investments?

Janet Is On It Again (Sovereign CDS)

nospam@example.com (Karl Denninger) — 2010-03-08T15:43:00Z

From Huffington Post:

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

She then continues with information I was unaware of:

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

WHAT?!

OK, that's enough.

Congress must ban all credit derivatives that are not:

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

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

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

Congress must act to stop this crap now.

More Balance Sheet Fraud: Its INTERNATIONAL!

nospam@example.com (Karl Denninger) — 2010-03-08T13:32:54Z

Greece, Spain, Portugal, Dubai, China, The US: They're all doing it. Barney Frank gets caught endorsing the scam in 2009, then bleating in 2010. The Euro Zone and China both are in this scam up to their necks. Of course so are we with Social Security and Medicare. Why the economy cannot - and will not - truly recover until this is addressed.