The Market Ticker

Consumer Credit: Awful

nospam@example.com (Karl Denninger) — Fri, 06 Nov 2009 15:22:00 -0500

Consumer credit decreased at an annual rate of 6 percent in the third quarter of 2009. Revolving credit decreased at an annual rate of 10 percent, and nonrevolving credit decreased at an annual rate of 3-3/4 percent. In September, consumer credit decreased at an annual rate of 7-1/4 percent.

Yuck.

Here's the graphical representation.

Nothing good in here. The non-revolving flattened out some in September (gee, you think "cash for clunkers" might have influenced August and September?) but revolving credit - that is, credit cards - continues its base jump without any appreciable change in slope.

Here's the longer-term view:

We are a credit-based system, as are all modern monetary systems. No meaningful economic recovery can or will occur until the consumer has purged his balance sheet of the inappropriate debt he has and is once again able to earn and borrow.

If we supposedly exited the recession on or before September, it sure isn't apparent in this report. You can put a fork in that line of garbage - it's done.

PS: The next update of the Z1, due out in a couple of months, should be interesting..... especially the "Ponzi Finance" indicator....

To The SEC: Prove It

nospam@example.com (Karl Denninger) — Fri, 06 Nov 2009 12:55:00 -0500

The SEC is laying out more details of their "bust" in the hedge fund world:

The defendants behaved like “common criminals” who took a “page from drug-dealer handbooks,” Manhattan U.S. Attorney Preet Bharara said yesterday at a press conference. The probe is focused on hedge funds and their sources of information, he said, adding that more arrests may be coming.

....

“And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character,” Khuzami said.

Is it ok if you perform your insider trading in plain sight?

I am of course referring to (among other outrages):

The blatant and outrageous buying of stocks, options and futures contracts the day before Options Expiration in August of 2007 - the afternoon before Ben Bernanke made his "unannounced" discount rate cut. The market was down huge in the morning before reversing in an "unexplained" fashion that later proved prescient. What are the odds that was a "lucky guess?" A few hundred million to one?
A similar "magical" reversal right in front of the financial stock shorting ban - announced the next morning.
The put buying on Bear Stearns - front month with roughly a week left and dramatically out of the money, not to mention the request to open up strikes all the way down to $2.50 - with the stock trading at $60. There is no possibility that was a "lucky bet" either.
Ditto on Lehman Brothers, although somewhat (and only somewhat!) less-dramatic.
The incessant rumor-mongering and "pump and dump" played during the entirety of the summer and early fall of 2008 with MBI, Ambac and other mortgage insurance companies, which were the recipient of daily "leaks" promulgated through CNBC and elsewhere on "imminent" rescues (that never materialized.) Who fed Charlie Gasparino that (later proved false) information and did they trade on it, knowing that it would (and did) produce a huge pop in the market every time he came on the air?
The documented example of UBS employees sending emails stating that a security they were peddling was "Vomit" - yet they were peddling it to customers. They still have a banking license, despite this coming from a judge in that case:
- “Pursuit has established probable cause to sustain the validity of a claim that the UBS defendants were in possession of material nonpublic information regarding imminent ratings downgrades on the notes it sold to the plaintiffs, information UBS withheld from the plaintiffs,” Superior Court Judge John Blawie wrote in a Sept. 8 opinion in Stamford, Connecticut.
The incessant "Buffett is buying the world" garbage rumors of the same timeframe - also promulgated by CNBC and other media outlets. Again, the rumors were proved false but the question remains - who fed them to the media and did they trade on it?
Barofsky is said to have 35 active criminal investigations related to insider trading, among other sins, related to the bailout. Will we see those turn into criminal complaints - or indictments?
How about Dick Durbin (yes, the Senator) who disclosed trades on the back of information related to the bailouts?
The two-day-ago outrage with front-month UUP calls, 300,000 of them, that were bought (two weeks left!) for 15 cents and more than doubled yesterday (the next day) after a news release about a temporary liquidity freeze on the fund (thereby generating a massive squeeze.) Those were bought in 10,000 lots - that's clearly institutional activity. Did someone KNOW there was to be a squeeze? It sure looks that way!

Or how about a bit of statistical analysis? What are the odds of a large firm having only three losing days in about 120, and only one in 60? Who's that? Goldman Sachs and their proprietary trading. Again, quite simply: what are the odds?

Everyone likes to make a buck. But nobody wants to play in a rigged casino - unless they're one of the people who is either being kicked back profits for doing the rigging or one of the beneficiaries.

People seem to forget that it's not just wrong when someone profits by improperly driving some firm into the dirt. The market is a negative sum game in that it has fees and costs associated with participation.

As a consequence whenever someone makes a profit based on improper inside information and/or rumor mongering whether the move in the market is up or down someone else loses an equivalent amount of money.

That is, there is no "free lunch" - the scammers only profit by stealing a gain from (or larding a loss onto) someone else.

The comment from the SEC was that:

(the) probe suggests insider trading may be a fundamental part of the business model of some of the firms being probed.

No, really?

How about the major Wall Street players? How about those calls from Bernanke and Paulson to those executives right around major market "turning points"? Is it unlawful for a major Wall Street bank, for example, to buy futures after receiving a call from Bernanke in which he discusses intent to increase asset purchases and/or lending facilities?

If it isn't it should be, and if it is, I think some people have a bit of 'splaining to do.

Remember, the SEC said:

“If you’re a wealthy trader, you aren’t special,” Bharara said, urging Wall Street professionals to come forward to disclose crimes. “Knock on our door before we come knocking on yours.”

I'll believe it when I see explanations for the above list - for starters - along with an explanation of how in a fair and free market where there is no unlawful inside information being exchanged you can manage to put up a string of over 120 trading days with only three tiny losses.

About Those Stress Tests...

nospam@example.com (Karl Denninger) — Fri, 06 Nov 2009 10:17:00 -0500

I said at the time they were nowhere near "stressful" enough in their "more adverse" scenario.

I was right.

Here's the table (thanks to Northwoodspete for pulling and posting it on the forum)

How about a bit of reality?

Real GDP looks to be a fairly decent guess on "more adverse", but the problem is unemployment. The "average" estimate for 2009 was 8.4%, the "more adverse" was 8.9.

But we are now at 10.2, and that's the "headline" number, not including the "disgruntled" or "not in labor force" folks.

The entire premise was that we would turn the corner on or before now, with the usual "lagging indicator" factor on the headline unemployment number.

That hasn't happened, as I reproduce again in this chart:

The turn upward in this chart was a near-exact correlation with the end of the recession in the early part of the decade. Not only are we dramatically worse now, we haven't even begun to turn, and those who have exited the labor force continues to skyrocket.

The key item here is loan losses.

They will not begin to stabilize until year-over-year job loss turns.

The Treasury "stress tests" did not envision this outcome. I said at the time they were nowhere near pessimistic enough and did not demand enough capital be raised (probably because they couldn't.)

But one of the premises of modeling outcomes is that your "worst case" scenario has to be worse than the expected range of outcomes. That clearly has not happened, and leaves open the question of whether the banks that were pronounced "safe" really are.

I'd argue that based on the stress tests and actual economic performance the answer is a resounding NO!

Employment Report: OUCH

nospam@example.com (Karl Denninger) — Fri, 06 Nov 2009 09:00:00 -0500

Yow.

The BLS employment report is out and it's not good.

Here's the BLS' top-line graph set:

But the internals were markedly nasty. Top-line, U-3, is now reported at 10.2%. But U-6 is 17.5%, rising dramatically from 17.0% previously (both "seasonally adjusted.")

What I really don't like however is the household survey information.

Here, once again, is my personal set of data that I use for employment situations, and again, there is no positive trend change in either. Let's start with the y/o/y trends in the "employed":

Remember, the annualized change turning positive has marked the end of recessions in the past, and turning negative has given a roughly 12 month "lead" on the initiation of a recession. It has not turned positive.

The "not in labor force" graph is even worse:

This graph continues to accelerate in a near-parabolic rise since June. In the history of the data available for this series, unfortunately only back to 1999, this has never before happened.

Our government, by choosing to protect the oligarchs and banksters instead of allowing the market to force the bad debt out into the open where it defaults has chosen to saddle our nation's citizens with unconscionable and unsustainable debt loads, both at a government and personal level. This was a critical error and, as I expected and predicted, it is now being reflected directly into the employment situation.

There is no reason for cheering in this report; you can argue over "productivity gains" all you want but without jobs the civilian population cannot buy "stuff", whether that be goods or services, and a durable economic recovery is impossible.

Buckle up folks; this ride could get a bit rough, especially with the holidays right around the corner upon which virtually all retailers depend for their continued viability.

When Does The CHARADE Stop? (Fannie)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 19:42:02 -0500

It's a policy (according to Barney Frank) to lose money on purpose, right?

Well then Fannie Mae ought to get some sort of award:

Fannie Mae, operating under a federal conservatorship, said it will seek $15 billion in aid from the U.S. Treasury as its ninth straight quarterly loss once again drove the mortgage-finance company’s net worth below zero.

A third-quarter net loss of $18.9 billion, or $3.47 a share, pushed the company to request its fourth draw on a $200 billion lifeline from the government, Washington-based Fannie Mae said in a filing today with the Securities and Exchange Commission.

Let's face it. They're bankrupt. They've been bankrupt. They continue to become more bankrupt, despite being under "conservatorship" for more than a year!

Now let's first and foremost deal with what Fannie IS. From their 10Q:

Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. Fannie Mae has a public mission to support liquidity and stability in the secondary mortgage market, where existing mortgage loans are purchased and sold. We securitize mortgage loans originated by lenders in the primary mortgage market into mortgage-backed securities that we refer to as Fannie Mae MBS, which can then be bought and sold in the secondary mortgage market. We also participate in the secondary mortgage market by purchasing mortgage loans (often referred to as “whole loans”) and mortgage-related securities, including our own Fannie Mae MBS, for our mortgage portfolio. In addition, we make other investments that increase the supply of affordable housing. Under our charter, we may not lend money directly to consumers in the primary mortgage market. Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

Got that? This will become important later.

We recorded a net loss of $18.9 billion for the third quarter of 2009. Including $883 million in dividends on the senior preferred stock, the net loss attributable to common stockholders was $19.8 billion, or $3.47 per diluted share.

Note that in addition to losing $19 billion through operations, they also had to pay $883 million in dividends for the existing "draw" on their Treasury credit line. They propose to expand that by about 30%, which will of course increase their dividend expense on that draw by an equivalent amount, causing it to reach approximately $1.2 billion dollars next quarter.

The impact of these items more than offset our net revenues of $5.9 billion generated primarily from net interest income and guaranty fee income.

These dividends will reach approximately 20% of their net fee and guarantee income next quarter. This is an enormous (and effectively permanent) expense that will only expand so long as they continue to lose money.

In comparison, we recorded a net loss of $14.8 billion for the second quarter of 2009.

Operating losses are increasing sequentially, not stabilizing or receding.

The "serious delinquency rate" (loans three or more months past due) has continued to accelerate. In the third quarter it accelerated to 4.72% of Fannie's entire book of business (some $3.2 trillion) When one considers that older loans that become delinquent result in the immediate sale of the property and satisfaction of the note (since the home has positive equity) the magnitude of the disaster in play here becomes clear.

To put this in perspective, non-performing loans accelerated by 19.8% in the third quarter. In the second quarter the rate of acceleration was 25%, in the first quarter it was 30%, and in the last quarter of 2008 it was 40%.

This looks like a "better" rate of change but that is only because the original numbers were so small (1.72% originally.) In point of fact the "usual" default rate on their credit book has been around 1%, and was in the first quarter of 2008 (1.15%); as such the catastrophe should be clear in that the "serious delinquency" rate is now some 410% what it was in the first quarter of 2008!

Fannie also likes to keep some of their credit exposure "off balance sheet." Indeed, in the third quarter of 2009 they had almost $164 billion dollars of seriously delinquent loans off balance sheet, as opposed to $33.5 billion that are on the balance sheet formally. They are holding 72,275 foreclosed properties, up about 10,000 from what had been a very stable 62,000ish number since the fourth quarter of 2008.

Now let's talk about these "off-balance sheet" MBS. What does the footnote to that table say on Page 5? This:

Represents unpaid principal balance of nonperforming loans in our outstanding and unconsolidated Fannie Mae MBS held by third parties, including first-lien loans associated with unsecured HomeSaver Advance loans that are not seriously delinquent.

Who are those third parties? Do they include this particular this particular third party?

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities.

Just curious....

Now let's talk about Fannie's problems with their mortgages. I found this paragraph interesting:

We are experiencing increases in delinquency and default rates throughout our guaranty book of business, including on loans with fewer risk layers, such as loans with lower original loan-to-value ratios, higher FICO credit scores and mortgages with fixed rate mortgage terms.

This is bad. Loans that were formerly considered "safe" are defaulting. That is, they're not "safe".

Risk layering is the combination of multiple risk characteristics that could increase the likelihood of default. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices. Certain loan categories continued to contribute disproportionately to the increase in nonperforming loans and credit losses for the third quarter and first nine months of 2009. These categories include: loans on properties in the Midwest, California, Florida, Arizona and Nevada; loans originated in 2006 and 2007; and loans related to higher-risk product types, such as Alt-A loans. The term “Alt-A loans” generally refers to mortgage loans that can be underwritten with reduced or alternative documentation than that required for a full documentation mortgage loan but may also include other alternative product features. In reporting our credit exposure, we classify mortgage loans as Alt-A if the lenders that delivered the mortgage loans to us classified the loans as Alt-A based on documentation or other product features.

So if a lender didn't classify a loan as "Alt-A" or otherwise risky, according to Fannie, it wasn't. How much attention was paid to whether or not those loans sold to Fannie were properly classified by the sellers? Countrywide Financial anyone? Note that a federal judge has ruled that Countrywide's Mozilo must face securities fraud charges for:

The SEC sued the defendants in June, accusing them of misleading investors about the quality of Countrywide's loans, including tens of billions of dollars of risky subprime and adjustable-rate mortgages.

"The specific allegations of the complaint relied on by the SEC describe in great detail the virtual abandonment of prudent underwriting guidelines and the resulting proliferation of poor quality loans, during the same period Countrywide was touting the superior quality of its underwriting guidelines and its loan portfolio," the judge wrote.

How many of those are (as constituents of MBS) sitting on Fannie's balance sheet (and off) and are in fact a rotting fish instead of the claimed "quality, prime loans"?

Under the senior preferred stock purchase agreement, as amended, Treasury committed to provide us with funds of up to $200 billion under specified conditions. The agreement requires Treasury, upon the request of our conservator, to provide funds to us after any quarter in which we have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our GAAP balance sheet).

The problem with drawing the entire facility is that it would make it almost impossible for Fannie to turn a profit. Indeed, if you look at the above original statement, multiplying the preferred dividend by five (roughly what would be involved) would result in a quarterly dividend payment that would consume nearly all of the free cash flow of the company.

This presumes zero credit loss. But that is improbable beyond all reason - even in an ordinary economy a 1/2% loss rate is reasonable and expected (1% default rate and recovery of 50 or so on the defaults, after all expenses, or 1.5% default rate and a recovery of 70ish.) On a $3 trillion credit book this implies an annualized $15 billion in credit losses. The firm not only has to post sufficient net earnings to cover this, but also has to cover the dividends that are roughly $5 billion a year (as of now with the new draw); that is, it must post more than $20 billion in earnings a year just to break even, and that doesn't retire any of the debt.

At least they're honest about this:

Our senior preferred stock dividend obligation, combined with potentially substantial commitment fees payable to Treasury starting in 2010 (the amounts of which have not yet been determined) and our effective inability to pay down draws under the senior preferred stock purchase agreement, will have a significant adverse impact on our future financial position and net worth.

My analysis: NO KIDDING!

Now on to The Fed and the intertwined snake pit between it, The Federal Government and Fannie:

In response to the strong demand that we experienced for our debt securities during the first nine months of 2009, we issued a variety of non-callable and callable debt securities in a wide range of maturities to achieve cost-efficient funding and an appropriate debt maturity profile. In particular, we issued a significant amount of long-term debt during this period, which we then used to repay maturing debt and prepay more expensive long-term debt. As a result, as of September 30, 2009, our outstanding short-term debt, based on its original contractual term, decreased as a percentage of our total outstanding debt to 30%, compared with 38% as of December 31, 2008. In addition, the average interest rate on our long-term debt (excluding debt from consolidations), based on its original contractual term, decreased to 3.76% as of September 30, 2009, compared with 4.66% as of December 31, 2008.

The Fed bought all they could get their hands on. Must be nice, eh?

Accordingly, we believe that continued federal government support of our business and the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the government’s support of us or the markets could lead to an increase in our debt roll-over risk in future periods and have a material adverse effect on our ability to fund our operations. Demand for our debt securities could decline in the future if the government does not extend or replace the Treasury credit facility, which expires on December 31, 2009, as the Federal Reserve concludes its agency debt and MBS purchase programs during the first quarter of 2010, or for other reasons.

Uh, how do they intend to replace those facilities? We're talking about three and six months hence here folks!

Now on to their "help"....

On average, borrowers who refinanced during the quarter through our Refi Plus initiatives reduced their monthly mortgage payments by $154.

Well that's better than nothing, but you might try explaining how someone who has had their payments double - or more - is going to be kept from foreclosure by a $154 decrease in their monthly "nut." While any decrease is better than none, to believe that people are losing their homes over $150 a month is likely a losing bet.

Now let's talk about The Fed and the impact of it's programs. Specifically:

The $649.9 billion in new single-family and multifamily business for the first nine months of 2009 consisted of $392.2 billion in Fannie Mae MBS that were issued,

It is rather clear that The Fed is buying more than "the entire market" of new issue thus far, since only $400 billion (roughly) of new issue into the market occurred. The rest was retained on balance sheet, and The Fed has been buying Fannie debt issues that are used to fund that as well.

In other words, The Fed is not a participant in the market, it IS the market.

We expect that our credit losses and credit loss ratio will continue to increase during the remainder of 2009 and during 2010 as a result of the continued high unemployment we have experienced and an expected increase in our charge-offs as we foreclose on seriously delinquent loans for which we are not able to provide a sustainable workout solution.

Fannie sees continued deterioration in the macro economic environment that bears on consumer mortgage performance.

This is in STARK CONTRAST to the media pumpers and pundits, all of whom are claiming that "the worst is behind us" for the economy. Since consumers are 70% of the overall economy, it is simply impossible for both of these views to be correct.

Fannie has more current and more topical information on the performance trends in their book than any of the media folks.

Guess who is more likely to be right, and who has nothing to sell you under the rubric of "hope"?

Fannie also has $47 billion of ALT-A and other "garbage" securities for which there is no market price (under "Level 3".) What are those really worth? Good question - and we also don't know what their acquisition cost was. Surprisingly (pleasantly so) there are few derivatives on their book.

In short while Fannie has managed to increase its interest and fee income dramatically (some 77% over last year) it hasn't mattered, as credit losses have risen at a stagging 246% over the same time period.

This is an organization that is going to die on it's present course. Only extraordinary intervention has kept it from happening thus far, but that intervention has imposed a bone-crushing liability in the form of dividend payments - a liability that will only increase as the line is further drawn down.

It appears that the original $200 billion line was set not with an eye toward what the firm could ultimately sustain and pay down, but rather with the singular goal of assuaging the financial markets at that instant in time. This, as we all know, was an utter failure, as the line was extended in the spring and summer of 2008, yet the market melted in the fall anyway.

Worse, we have now embedded The Federal Reserve in this charade, with them buying debt and MBS that under the black letter of the law appears to be flatly impermissible. I cite Section 14 of The Federal Reserve Act:

Purchase and Sale of Cable Transfers, Bank Acceptances and Bills of Exchange

Any Federal reserve bank may, under rules and regulations prescribed by the Board of Governors of the Federal Reserve System, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this Act made eligible for rediscount, with or without the indorsement of a member bank.

This paper is not a cable transfer, bankers' acceptance of a bill of exchange. This section thus does not apply.

(a) To deal in gold coin and bullion at home or abroad

They are not gold.

Nor does this paper qualify under:

Purchase and Sale of Bills of Exchange

(c) To purchase from member banks and to sell, with or without its indorsement, bills of exchange arising out of commercial transactions, as hereinbefore defined;

Again, these are not bills of exchange. This leaves us with:

Purchase and Sale of Obligations of United States, States, Counties, etc., and of Foreign Governments

(b)

To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners' Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, and obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System. Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.
To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.

These notes and debt instruments have maturities exceeding the limits specified; therefore, the debt must carry the full faith and credit of the United States as to principal and interest.

But again, according to the 10Q:

Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

Treasury has the authority (under the laws passed by Congress) to prop up Fannie and Freddie in this fashion, ill-advised though it may be, and inextricable though it may be given their credit position, earnings power, and required dividend payments.

THE FED, HOWEVER, HAS NEVER HAD AND STILL DOES NOT HAVE THE AUTHORITY TO BUY EITHER FANNIE'S MBS OR ITS DEBT! THE ENTIRETY OF THAT $1.2 TRILLION DOLLAR PROGRAM CONTINUES TO APPEAR TO BE, AS I HAVE REPEATEDLY ASSERTED, ENTIRELY BEYOND THE LAWFUL CONFINES OF THE FEDERAL RESERVE'S AUTHORITY.

Fannie, by its own disclosure in this 10Q, is surviving ONLY due to the extraordinary acts of Treasury and, I would argue, the blatantly impermissible acts of The Federal Reserve. Fannie has turned into nothing more than a politically-motivated toxic waste receptacle, first abused by Countrywide (and others, assuming the SEC's complaint against Mozilo is valid) and now by the FHA! This is a black hole that has consumed almost $1 trillion dollars of taxpayer money thus far. Worse, there is no viable exit strategy on the table nor can there be under the current course we are on.

THIS CHARADE MUST STOP AND THE GSE'S MUST BE RESOLVED.

Janet Tavakoli: More Goldman (ed: Tee Hee)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 14:33:00 -0500

From Janet this afternoon.....

I apologize to Goldman Sachs’ CFO David Viniar. He did not lie when he said that Goldman’s direct credit exposure with AIG was hedged in the event AIG collapsed. He only addressed direct AIG credit risk.1 On September 16, 2008, he may merely have been unimaginative about risk to Goldman as a result of AIG’s potential bankruptcy partly brought on by stress created by billions in collateral payments already made—and the billions in additional collateral owed—to Goldman Sachs (and other CDS counterparties). Systemic risk is a matter of public interest. Viniar apparently did not intentionally give the impression that Goldman was disinterested when it came to AIG’s bailout.

Read the rest at http://www.tavakolistructuredfinance.com/GS2.pdf - it's good.

Is it getting warm up there in NY this time of year?

(*chuckle*)

More Insider Trading (UUP Options)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 14:00:00 -0500

Ok, who knew in advance of the UUP "dislocation" from this news:

Creations of new shares in the fund are temporarily suspended pending clearance of the registration statement by the SEC, the Financial Industry Regulatory Authority and the National Futures Association and declaration of the effectiveness of the registration statement.

SOMEONE came after the front month (November) $23 CALLs yesterday, with the underlying trading in the mid 22s. For 10-15 cents. Some 300,000 of them were bought yesterday.

They just spiked on the re-open for more than a clean double after UUP's halt and some 60,000 of those contracts have, in the last few minutes, been sold. The "nutso premium" has since relaxed and is now "only" a clean double from yesterday's 10 cent close.

You don't think they expected this to happen, do you?

You tell me what that looks like, and let me know when the responsible party for those CALL buys (they were happening yesterday in blocks of 10,000 at a shot - that's institutional) is identified and we see an investigation of what looks like blatant insider trading.

CNBC just asked "is insider trading literally everywhere" on air.

The answer, as I have repeatedly chronicled here in The Ticker, appears to be "Yep!"

Breaking Up The Big Banks?

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 13:37:00 -0500

From a Reuters blog:

We are hearing that discussion of breaking up large financial institutions that pose systemic risk to the market is gaining traction on the Hill. At this point, discussions are in the early stages, but we understand that an amendment addressing breaking up institutions deemed “too big to fail” could be introduced in the House over the next few days. How does one define “too big to fail” and how would the divestiture process work - these are good questions that Congress will have to address as the discussion moves forward. To our understanding, any amendment that could be introduced in the coming week would likely be vague and would give the regulators discretion to determine which institutions qualify as “too big” and how to address the risk they pose to the system.

The author goes on to say that Kanjorski may be the originator of this. Good, as far as it does, assuming it's real.

But that's not the bombshell in the post. No, it's this:

He left Geithner with two documents. One was a fact sheet that listed all the attributes of AIG FP [the division run by Joe Cassano that blew the company up] and argued why it should be given status as a primary dealer. The other–a bombshell that Willumstad was confident would draw Geithner’s attention–was a report on AIG’s counterparty exposure around the world, which included “2.7 trillion of notional derivative exposures, with 12,000 individual contracts.” About halfway down the page, in bold, was the detail that Willumstad hoped would strike Geithner as startling: “$1 trillion of exposures concentrated with 12 major financial institutions.”

Was that a threat?

And isn't threatening the United States (whether directly or otherwise) something you're not supposed to do?

Sounds like "Bail me out or I will crash everything."

Isn't that analagous to walking into a bank, opening one's coat to reveal an explosives-laced belt, and saying "gimme all the money or everyone dies!"

Does such an act constitute a terroristic threat? You decide.

Then decide whether or not anything has actually changed for the better in terms of stability, or whether we're really in far more danger than we were last fall, as we've not only failed to de-fuse the bomb, we've allowed those who made the threats to profit from it - and thus have increased, rather than decreased, the risk of an all-on collapse.

Verizon ETF Warning

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 13:22:00 -0500

If you have an "advanced device" on Verizon (or want one) be aware that there are rumblings of SERIOUS increases in ETFs should you be unhappy (or just run out of money and need to cancel.)

It appears that Verizon (from a little birdie that just tweeted in my ear) is increasing their ETF on these devices some time in the next two weeks to $350 (from $175) with a $10/month decline (from a $5/month decline) for "advanced devices" (e.g. Blackberries, Netbooks, etc) for all new contract signers or re-signers.

This is a rather curious change given that T-Mobile has effectively gotten rid of subsidies with their "Even More+" plan, and even better, has quantified the subsidy value to the customer ($10/month difference between subsidized and non-subsidized.)

This wasn't quite the reaction I expected from T-Mobile's announcement...... we'll see whether arrogance is an appropriate business model in this economic environment, and whether AT&T attempts to follow Verizon's lead.

Best guess as to intent: This is an attempt to prevent people from arbitrage'ing the ETF and some devices (e.g. the Blackberry Storm.)

I wish you luck Verizon.

Disclosure: No position.

P/E Is Improving (It Is, Right?)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 12:21:10 -0500

Really. It is.

October's numbers are now in the S&P table. Here 'ya go:

S&P 500 Statistics
As of October 30, 2009

Total Market Value ($ Billion) 9,124

Mean Market Value ($ Million) 18,248

Median Market Value ($ Million) 7,635

Weighted Ave. Market Value ($ Million) 75,767

Largest Cos. Market Value ($ Million) 344,431

Smallest Cos. Market Value ($ Million) 642

Median Share Price ($) 31.800

P/E Ratio* 137.98

Indicated Dividend Yield (%) 2.09
NM - Not Meaningful

*Based on As Reported Earnings.

Ok, the P/E dropped by two points in the last month, with nearly all of the S&P 500 now having reported earnings.

Roughly.

WHERE ARE THE DAMN HANDCUFFS? (Fraudie)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 10:52:00 -0500

WTF is this?

Thousands of borrowers on the verge of foreclosure will soon have the option of renting their homes from Fannie Mae, under a policy announced Thursday.

The government-controlled company, through its new "Deed for Lease" program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.

This has exactly nothing to do with helping "homeowners."

It is entirely about Fannie not having to recognize the written-down value of these houses - that is, allowing them to hold the "mark" on the loan at it's original value, rather than recognize the loss.

The rental program is designed to help homeowners who don't qualify for a loan modification under the Obama administration's plan, but still want to remain in their homes. Fannie Mae is not planning to market the homes for sale during the one-year rental period.

Fannie won't sell the properties because then they would have to recognize the mark.

This is nothing other than yet another scam to avoid recognition of bad paper Fannie took on their books and has a HUGE embedded loss.

To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent, which would be determined by the management company. The rent can't be more than 31 percent of their pretax income.

Oh, so the rent can't be more than 31% of their pretax income, but the original note's payment was, right? After all, if it wasn't then the homeowner wouldn't have been in foreclosure in the first place!

That's the key paragraph, and tells you that:

This is simply an attempt to avoid mark-to-market on the properties.
The rent charged will be insufficient to meet the PITI (Principal, Interest, Taxes and Insurance) on the original note, as by definition if it could the "homeowner" wouldn't have defaulted in the first place!

This is yet another scam folks, all courtesy of our government who will do anything to avoid admitting the extent of the liabilities that are now in Fannie and Freddie's portfolio (and by extension, partially in The Federal Reserve as well!)

But the economy is getting better, right?

That's why we keep seeing scheme after scheme, scam after scam, all intended to do one and only thing - avoid a true and accurate accounting of losses that have already occurred.

And the market roars - it spiked a full 1% on this announcement - on yet more government-sanctioned and legalized fraud.

IF the economy was truthfully improving we wouldn't need any of these schemes. Honest profits would be sufficient to both support the housing and stock market. The fact is those honest profits simply do not exist, and neither does the value of these "assets" support the loans outstanding against them.

IF the government gave a damn about these homeowners they would instead reset the loan to the discounted cash amount of that market rent and re-write the loan at that same 31% of the homeowner's income. Of course that would force recognition of the fact that the property isn't worth anywhere near what the loan balance is, and thus force Fraudie and Phoney to EAT the bad paper they're holding.

Scam scam scam scam scam - it's all good for the banks and oligarchs, while the average American is dispossessed of his house!

Legislative Voting Fraud (Texas)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 10:34:00 -0500

How can the people of Texas sit for this?

And this begs the question - in The US House, where voting is done by "electronic card" (as opposed to open outcry in the Senate), do you really believe this isn't going on there too?

So much for a so-called "representative republic."

Insider Trading Busts: "A Good Start"

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 09:31:00 -0500

From Bloomberg:

Nov. 5 (Bloomberg) -- FBI agents arrested seven people in relation to an ongoing federal investigation of insider trading in the hedge fund industry, agency spokesman James Margolin said today in an interview.

That, along with the previous complaints, are what I can best characterize as "a good start."

I have long written about the insider trading outrages - like the "inside baseball" obvious in the buying of huge numbers of way out-of-the-money PUTs on Bear Stearns just before they blew up.

(By the way, who did buy those, and why isn't THAT one of the top investigations? Isn't 18 months long enough to identify and bring to the dock those folks?)

I applaud these investigations and busts, but must ask - when will we see some of the folks involved in the game-playing in the "securitization bubble" implicated - and busted?

And no, handing out "agreed fines" and "amnesty", as appears to have occurred for JP Morgan and Bank of America, will not suffice.

The Warning Shot Fired Yesterday

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 07:59:00 -0500

So few commentators have made this point..... indeed, I think I was the only one. Let's revisit the FOMC statement:

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

That's the key part of the statement: it is a warning to The Administration and Treasury.

What I said yesterday was:

We bought it all. We're no longer part of the market, we are the market! We have no freaking clue how to exit from this, and we know that when we do rates will spike higher. Unfortunately we also know that if Fannie and Freddie continue to bleed red ink we will blow up instead of them by doing this, so in March we pinky-promise to stop, even though that will destroy what's left of the housing market.

Read that again.

Now consider this:

The Federal Housing Administration abruptly delayed the release of a long-awaited independent audit of the financial soundness of the agency, citing potential problems with the accuracy of some of the study's economic models.

Economic models eh? You mean an institution that is levered 50:1 (which the FHA currently is, if I'm doing the math right) could have a wee problem should something go wrong? What could go wrong? Oh, maybe things like this:

Most banks rejected Ms. DeForte because her debt level was too high and her credit score too low. But Lend America put Ms. DeForte into a $402,000 loan backed by the Federal Housing Administration, a New Deal-era agency that Washington and Wall Street were relying upon to pick up the slack in the mortgage market as private lenders pulled back. Ms. DeForte fell behind on payments six months later and is seeking a loan modification. Taking the loan was "a stupid mistake," the 46-year-old office manager said.

It may have been a stupid mistake but the principle of asymmetric information meant that the FHA knew damn well what it was doing, and did it anyway. Ms. DeForte might not have understood it at the time (and now recognizes that it was a stupid mistake), but both Lend America and The FHA don't have that excuse.

Indeed, as I've documented, the FHA has been willing to write paper with their guarantee on loans with DTIs (debt-to-income) ratios exceeding 50%!

Congress is barking but has yet to bite:

"If not addressed promptly, problems at the FHA may result in yet another massive taxpayer-funded bailout that this country cannot afford and which the American people will not accept," wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, released Wednesday, to Housing and Urban Development Secretary Shaun Donovan.

Really?

I love 'ya Darrell, but neither you or anyone else on Capitol Hill have done a damn thing about Fraudie and Phoney! Indeed, close to $100 billion in taxpayer funds have been larded into those institutions to prevent their utter collapse but the bogus lending has simply shifted as a matter of formal policy over to the FHA, which is then selling the paper back into - you guessed it - Fannie and Freddie!

Fraudie and Phoney are not new to trouble. Documents from 2004 show that the "massage the earnings" game was well-embedded into these institutions as early as 2001, yet nothing was done.

Seven years later, the taxpayers are on the hook for $100 billion, the firm's capital continues to erode as their default rate skyrockets by the month and yet not one of the people responsible is sitting in the dock - or in a prison cell.

The Federal Reserve's statement is, I believe, a clear statement and warning to the Congress and Treasury: Figure out what to do with these two firms, and do it, prior to the end of the first quarter of 2010, or we will cut them off and stand back, as we're not going to be the one holding the grenade when it goes off.

The reason for the warning should be clear - FHA may be writing the insurance on these notes but most of them are being foisted off on Fannie and Freddie. Rather than solving the problem we have Barney Frank making public statements that intentionally making bad loans is a policy - when The Fed is the one buying the paper generated by those bad loans!

The proper Congressional role of regulation - that is, write laws which The President then signs - has been perverted by a Federal Reserve that has had two successive chairmen who have "knelt before Zod" and performed an obscene act - with Zod residing both in Congress and Wall Street. This was all in the name of "economic stability", but now it threatens The Fed itself.

Consider that The Fed will have over one trillion dollars of potential putrid trash on its balance sheet by next spring. MBS and Debt that have no formal guarantee from The Federal Government, contrary to the strictures on Fed ownership embodied in the black-letter law of Section 14 of The Federal Reserve Act.

The "detonation risk" on these securities is very real, and when one considers that said securities will back more than half of the reserves in the system under Fed control, this should be keeping Bernanke and company up at night.

The Fed has in fact been the handmaiden of both Congress and Treasury through this entire mess. Under the guise of "systemic risk" The Fed has monetized over a trillion dollars of debt for the explicit purpose of bailing out the outrageous actions of both Wall Street and Congress. But unlike the relatively small exposure of Maiden Lane I-III, totaling some $60 billion, the outrageously bogus lending practices ensconced in Fannie, Freddie and the FHA have exposed The Fed to well over $1 trillion of garbage paper.

Congressfolk must zip up and get to work, for The Fed has made a clear statement that it will not be coming back to kneel shortly.

Fannie and Freddie must be wound down. Whether Congress likes it or not, mortgage lending must return to sound principles - 20% down payments, 36% back end ratios - period. It must become reasonably safe and profitable to portfolio loans - not play "hot potato" with them so as to generate nothing other than fee income, relying on that for profit instead of making sound lending decisions.

Yes, this means interest rates will rise to a market rate.

We have spent more than two years trying to avoid recognition of fundamental mathematical facts - average home prices cannot exceed 3x average incomes, and on balance home prices cannot rise faster than income over long periods of time.

Mean-reversion isn't a suggestion, it is a mathematical reality. As a homeowner with a fully-paid-off house, bought with cash, I certainly would prefer my home to have a value closer to 2005's price than 1995's.

But what I prefer has nothing to do with what is mathematically sustainable or what can be supported by the broader economy, and my personal desire to be able to "flip" my house or use phantom "wealth" to extract a lifestyle I cannot afford does not and cannot change the reality of what stability in the economy, on balance, requires over the intermediate and longer term.

Property prices must contract to sustainable values. If this causes banks to fail, so be it. If this causes consumer bankruptcies for those who used their homes as ATM machines, so be it. If this causes me to lose half of the "value" in my home, so be it.

I believe The Fed sent a message to Congress yesterday in recognition that the wall is fast approaching at 120mph: do the right thing and do it now - or else.

Watch The Distortions (UIC Data)

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 09:13:00 -0500

The unemployment claim release looked good. Here's the headline:

In the week ending Oct. 31, the advance figure for seasonally adjusted initial claims was 512,000, a decrease of 20,000 from the previous week's revised figure of 532,000.

Sounds good, right? So does this:

The advance number for seasonally adjusted insured unemployment during the week ending Oct. 24 was 5,749,000, a decrease of 68,000 from the preceding week's revised level of 5,817,000.

Now let's talk truth:

The advance number of actual initial claims under state programs, unadjusted, totaled 480,178 in the week ending Oct. 31, a decrease of 14,216 from the previous week. There were 466,341 initial claims in the comparable week in 2008.

The rate of firing is higher than it was this week last year - a really, really bad time, if you remember. This was immediately post-Lehman and AIG, when firms were shedding employees like water off a duck's back.

So why the disconnect?

States reported 3,459,148 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Oct. 17, an increase of 90,239 from the prior week.

68,000 people came off the rolls and found jobs, right?

Wrong.

90,239 fell off the government's "official statistics" and rolled into "extended programs." That means that net-on-net the picture got worse by 22,239.

It gets even better than this, however, as we are now far enough into the mess that people are rolling off even the extended benefit programs in many states! There is no current tabulation of that count, but any number greater than zero simply adds to the malaise.

The bottom line:

Unemployment continues to get worse, not better. The "official" numbers used for the headline don't count you once you "roll off" the original unemployment program - "extended benefits" and those who have rolled off even the extended programs are not counted as "continuing claims."
More people were fired the last week of October this year than were fired the last week of October last year, and last year was directly in the blast zone from Lehman and AIG.

You want to cheer these numbers?

The market might, but Main Street, where most of us live (myself included) has a somewhat different view.

Productivity And Costs: More Caution

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 08:44:00 -0500

This is pretty amazing, really:

Nonfarm business sector labor productivity increased at a 9.5 percent annual rate during the third quarter of 2009, the U.S. Bureau of Labor Statistics reported today.

That's a stunning number. But you better pay attention to what this means:

Output increased 4.0 percent and hours worked decreased 5.0 percent in the third quarter of 2009.

Got it? Here's the bottom line:

From the third quarter of 2008 to the third quarter of 2009, nonfarm business output fell 3.5 percent and hours worked fell faster, 7.5 percent, resulting in a productivity increase of 4.3 percent (tables A and 2). The four-quarter decline in hours was the largest in the series, which begins in 1948.

Here was the mantra from employers:

Work harder, get paid for fewer hours, OR GET FIRED!

This sounds great if you're an employer, but as an employee, or wanna-be employee (that is, you're unemployed)?

Then it's horrible, as the better the productivity of existing workers, the less likely it is that you, dear reader, will be able to find a job, as the wall of output has yet to meet the wall of exerted labor.

This also means that per-unit of output, labor is reaping less in wage, which in turn means that per unit of output there is less in disposable income available to purchase it.

Yeah, the futures liked that report, "amped" by the CNBC liars parade - it's "great" that companies are squeezing the employee and getting better profits out of smaller labor inputs, right?

Exactly who is it that buys the output of those firms, and with what do they purchase it? On a forward basis what will this mean for consumption - and eventually, both production and sales?

FOMC In English

nospam@example.com (Karl Denninger) — Wed, 04 Nov 2009 14:39:00 -0500

Tickerguy's English translation of the FOMC statement:

Release Date: November 4, 2009

For immediate release

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up.

We successfully talked some people into rebuilding inventory and spending money they don't have. Suckers.

Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period.

We don't count the 29.9% interest rates that Citibank decided to charge its credit-card holders in this computation; but if we did that would be considered a good thing, since raping the consumer is positive for banks. Oh, and we're a bank.

Activity in the housing sector has increased over recent months.

Four year olds and cats are cashing the $8,000 homebuyer credit, as the IRS has recently disclosed. This of course supports housing.

Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

A huge number of people are out of work, those who have jobs are having their wages and hours cut, your house is still going down in price and Citibank just raised your credit card interest rate to 29.9%. This is all bullish for the economy, of course.

Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

We suckered a few of you, but most businesspeople have IQs larger than their shoe size, and refuse to play our game any more. As a consequence our attempt to hose them isn't working out so well.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Fraud always works for a while. We can buy trash MBS, for example, and by doing so make things look better than they are. We can also ignore the real capital position of the banks that are under our jurisdiction, including those really big ones that shorted Gold in the futures market at $1,000 and now are way underwater. Never mind that little man behind the curtain, I AM THE GREAT AND WONDERFUL OZ!

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The only place pricing power exists is in commodities. Everywhere else prices are collapsing. That's not supposed to happen, but we'll figure that one out later.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

When something doesn't work, do more of it! That's the ticket! Pay no attention to that asshole Einstein - he's dead, and besides, I'm smarter than he ever was.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

We bought it all. We're no longer part of the market, we are the market! We have no freaking clue how to exit from this, and we know that when we do rates will spike higher. Unfortunately we also know that if Fannie and Freddie continue to bleed red ink we will blow up instead of them by doing this, so in March we pinky-promise to stop, even though that will destroy what's left of the housing market.

In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

There isn't any more to buy, didn't you hear us up above? Fools.

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Its all trash but heh, it's marked to model! I pinky swear it's all worth PAR. Seriously.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

We're all in this together, now let's hold hands and......

JP Morgan And Alabama Swaps

nospam@example.com (Karl Denninger) — Wed, 04 Nov 2009 13:26:00 -0500

Amazing story here.... you really need to read the whole thing. The salient point is here:

The county paid JPMorgan and a group of banks $120.2 million in fees for $5.8 billion of derivatives, according to a series of stories published by Bloomberg News in 2005. The payments were about $100 million more than they should have been based on prevailing rates, according to estimates in 2007 by James White, an adviser the county hired after the SEC said it was investigating the deals.

That's six times what they should have cost - that is, six hundred percent of market price or a 500% overcharge.

Must be nice eh? What did they do to get this? Allegedly:

The SEC alleged that JPMorgan, Charles LeCroy, the banker who pitched the refinancing to Jefferson County, and Douglas MacFaddin, the former head of the New York-based bank’s municipal derivatives desk, made more than $8 million in undisclosed payments to close friends of county commissioners. The associates owned or worked at local-broker dealer firms that didn’t do any work on the deals, the SEC said.

Not bad. Pay $8 million in kickbacks and get $100 million in overcharge. The allegedly-bribed weren't very good negotiators - you'd think they would have gotten half, right?

And again, we settle for a fine and of course admit no guilt.

Nov. 4 (Bloomberg) -- JPMorgan Chase & Co. agreed to pay $75 million and forfeit another $647 million in interest-rate swap termination fees to settle a U.S. Securities and Exchange Commission probe into the sale of derivatives that helped push Alabama’s most populous county to the brink of bankruptcy.

If I pulled something like this as a person I'd go to prison for a number of years - maybe 10 or more.

Why don't government officials revoke the corporate charters of firms that pull this sort of crap?

It's pretty hard to argue that executives at the top level of a company "didn't know" when you overcharge someone by 500%. It's one thing if you charge someone $100 for a $90 product - it's quite another when you charge someone $120 million for something that is trading in the market for $20 million.

"I didn't know about it" looks awfully thin from where I sit.

Bubbles: The Fed And Bankrupt "GSE"s

nospam@example.com (Karl Denninger) — Wed, 04 Nov 2009 11:04:00 -0500

From The Wall Street Examiner comes this:

Another anomaly of note is the fact that 10 year Fannie paper is now yielding less than 10 year Treasuries. This is another sign of mass psychosis. Unfortunately, the source of the infection has been Bernanke’s insane policy of piling up risky MBS paper on the Fed’s balance sheet. Wave after weekly wave of Fed buying has created one of the most ridiculous market distortions in history. Unfortunately, the problem it was designed to solve, the housing market collapse, isn’t responding.

This is more than ridiculous. It is in fact outrageous.

The GSEs are in fact bankrupt. This is why they were taken into "conservatorship" and have required roughly $100 billion in direct taxpayer subsidy to remain "breathing", much like a brain-stem-only human requires thousands of dollars a day in direct input in the form of a ventilator and mechanical feeding (not to mention diaper changes and similar) to remain "alive."

This distortion allegedly is supposed to "help" the housing market.

It has done no such thing.

It has led Barney Frank to pronounce that intentionally making bad loans is a "policy", and the market laughs, knowing that The Fed is directly monetizing the very same debt - after saying it wouldn't.

If you hand out hundreds of billions of dollars for what are worthless securities (or at least those against which any rational person would demand a HUGE haircut) you are in fact doing nothing other than debasing the currency and printing money.

The worst part of The Fed's action isn't that they're printing money. It is that the outrageous actions of these "lenders" are being rewarded - that is, do a bad thing, make an unsupportable loan, distort the market on purpose and The Fed (and government) comes along and rewards you.

This is in fact no different than what government did during the entire housing bubble. Make bad loans, loot the economy, it's ok - you can make millions in bonuses, even if you ripped off both home buyers AND investors.

Now we're doing the same thing "writ large" and right under the public's nose, and yet we "justify" it by claiming it is being done to "stabilize" the housing market.

If this "printed money" went to consumers instead and Fannie and Freddie were allowed to crumble into dust, at least the average American would get some of the benefit, even if he or she subsequently got crushed by the currency devaluation.

But no! Instead the oligarchs make off with their outsize salaries, those who put together questionable (if not outright fraudulent) accounting continue to get paid, the government continues to run it's revolving door with Wall Street and the "GSE"s, and we the people continue to get screwed.

This is despite the fact that Section 14 of The Federal Reserve Act appears to prohibit the purchase of these very same securities, and for good cause - The Fed is not supposed to be buying anything that is or could be potentially impaired, as any losses it may take inure to us (not it), and worse, by "flattening" the risk curve it inherently distorts the market and prevents market pricing of risk.

Lee Adler calls this "psychosis."

It's psychotic all right, but not in the way he posits.

But what he won't say I will:

This has been and still is nothing other than a psychotic heist.

Political Winds Shifting?

nospam@example.com (Karl Denninger) — Wed, 04 Nov 2009 08:38:00 -0500

Perhaps.

Two Democrats - governors - were ousted.

Why?

Taxes, lack of jobs, in short: It's the economy stupid!

The fiscal side of the picture is done. Those who are looking for some sort of fiscal stimulative posture out of DC? Forget about it. We had three of those (at least) which have been announced, and they have done nothing.

Now here's the challenge: The American People have had it with the job loss and with the vast and fast deterioration of their personal balance sheets and, more importantly, their cash-flow statements.

But these problems were two decades in the making with both Democrat and Republican governments. They are to a large degree the consequence of bogus and even fraudulent credit creation - practices that were not intended to help the economy along at all, but rather were designed to siphon off the wealth of ordinary Americans and hand it to a fistful of oligarchs.

This behavior has not only been tacitly approved by the silence of Washington DC it has been explicitly promoted and advanced by both Washington DC and The Federal Reserve - on both sides of the aisle.

Indeed, when it comes to Washington DC the government even went to court to block state laws that would have stopped a big part of the mess from happening - and succeeded.

Worse, the policies of both the Bush and Obama administrations have not addressed the problem nor forced the bad debt created by these policies out of the system - the millstone remains around the economy's neck!

You can't get away from the issues - "more taxes" isn't going to sell in a world of 10%+ unemployment and, whether the government claims it or not, high inflation in the prices charged for food and fuel over the last decade. The impact of this was masked by the fraudulent credit creation and asset bubble in houses, but now that's gone, laying bare the decimation of the average American's cash flow statement. The asset bubble intentionally blown in the stock market by Bernanke and his pals Geithner and Obama cannot make up for this; indeed, irrespective of the "big rally" the average American is still missing 30% or more of his money from the 2007 peak!

Yet now the budget deficits and fiscal debt of the government - the "big carpet" under which we shoved all the defaults of the private sector that should have bankrupted every large financial institution in the nation, now demands to be paid. You can either raise taxes dramatically or cut services dramatically, but in the end you cannot indefinitely grow debt faster than GDP, even if you're the government of the United States.

The bottom line is that the American People want "blood", and in fact they deserve it.

We the people, in the main, were scammed.

We didn't just make bad decisions, we were lied to.

We didn't just buy bubble houses, they were sold to us with outrageous misrepresentations of alleged "growth" in price to come; witness David Lereah's two books, and he was NAR's head economist!

We the people failed to understand the 6th grade math, but the banksters and government told us that there was no such thing as immutable exponential functions at work in the economy, and that this growth in a finite world - the world in which we live - was in fact possible.

The pain that is due to be taken has not been worked through the system, and in fact government has made the situation worse. Economic contraction is not over, despite the claimed "GDP" number - as I've said repeatedly if you go to the bank and borrow $20,000 on your credit card you are poorer, not richer, even though you might then spend that $20,000. Cook the books all you want but it won't change the average American's income - only a good job that pays enough to stay ahead of ramping mandatory personal spending does that.

Most of America has the true cost of health care ("insurance") hidden from them. Those who actually write the checks have seen those costs rise 10, 15, even 25% in a single year - every year for the last decade. You who are "W2" employees don't see it directly, but it in fact comes straight out of your pay, as employers do not offer you the salary increases you would otherwise receive - that money is instead diverted to your "free" insurance.

The Republican Party has a tough road here. They need to break up the oligarchs, and deal with the fact that the math is never wrong - and the sooner we deal with it, the better.

It won't be an easy sell, but if they fail to make it, or worse, win on the back Obama's refusal to deal with the banksters and then continue the "anything goes in ripping off America" policies that both Bush and Obama have countenanced and in fact explicitly endorsed, we will suffer a political and economic collapse unlike anything previously seen in the world - a catastrophe worse than Germany in the 1930s.

"May you live in interesting times" has new meaning this morning.....

Commentary on Gay Marriage

nospam@example.com (Karl Denninger) — Tue, 03 Nov 2009 10:59:50 -0500

This has only a tangential relationship to the markets, so I am placing only a link here....

Head on over to Musings if you're interested in that discussion.... :)

Why Bernanke And Geithner's Gambit Fails

nospam@example.com (Karl Denninger) — Tue, 03 Nov 2009 09:55:00 -0500

Since I wasn't invited to Treasury's confab of bloggers yesterday (there's no surprise there, given how critical I've been of them and how Obama's administration is no less of an echo chamber than was Bush's!) I thought I'd loose this on the blogosphere - a post I've been sandbagging for about a week now.

There has been much discussion over whether the generally-Keynesian approach, along with Bernanke's "Depression Thesis", have in fact staved off Armageddon in the financial world, or simply played "extend and pretend" on the fuse, clearing and solving nothing.

It is my position that we have in fact not only solved nothing we have made the situation materially worse than it would have been if we had left things alone.

Two days ago Ambrose Evans-Pritchard opined that Japan is staring down a dramatic implosion in their economy and government:

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return

Right. But then he goes on to close with:

Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

What?

No, Japan's error was not "being less than properly forceful in their printing of money" (which is what "Quantitative Easing" really is.)

Japan's error was in papering over bad debt with more debt, transferring defaults that had already taken place but were being hidden to the public treasury and, as a consequence, to the taxpayer.

This in turn put in place a structural drag on GDP that cannot be jettisoned, as that debt did not go to build a road or bridge over which commerce flows, but instead went to bail out oligarchs who successfully persuaded lawmakers to kneel before them and perform obscene acts.

Bernanke's and Treasury's gambit has and will continue to fail because they refuse to honestly discuss and operate upon the actual failure that occurred in the marketplace.

That failure was lending money to people on obscenely-easy terms with no reasonable expectation that they would be able to pay as agreed, creating a churning business out of a legitimate lending business.

If I loan you money at a ridiculously low original interest rate with a built-in "jack it up" escalator in the deal I strongly encourage you to come back from another bite. This is extremely profitable, as these fees are not "interest" and yet they amount to a huge mark-up on the market.

Let's posit a $200,000 mortgage. If I make one 30 year mortgage and you pay it off over 30 years, I make one set of fees. Application, processing and similar fees might total $2,000 - $3,000 for the bank, with another $1,000 paid in title insurance and of course the other fees that are larded into the pie (e.g. doc stamps for the county, etc.)

The point here is that the bank makes perhaps as much as 2% of the gross face amount of the loan right here and now on the mortgage.

Let's assume that the bank borrows money at 5% and lends it at 7%. They thus have a NIM, or "net interest margin", of 2% on the transaction. "Turned" via fractional reserves they might be able to crank out a 20-25% gross pretax operating margin on lending operations. Not a bad profit margin for what is essentially a utility function.

Now let's presume that the bank is able to somehow force you to come back into their office every couple of years and refinance that mortgage. Suddenly they can take what is a 2% NIM and add on another 1% (annually, since it's every two years) in fees and costs. Oh, now we're getting somewhere, right? That's an instantaneous 50% improvement in their gross money, and cranks up that 20% pretax margin to 30%!

This is not a small increase, and is in fact why the banks pulled this nonsense.

Variations on this theme played out in the credit card space. You would get a "0% balance transfer for 12 months" deal in the mail. All fine and well. But the amount you charged today on that card was paid last, and it carried a 15% interest rate. So if you transferred $10,000 to that card then charged a $1,000 computer you'd pay 15% interest on that $1,000 for a couple of years - or forever - since the entire $10,000 transfer had to be retired before any of your current charges would begin to be paid down. The CARD law passed this spring ended this charade, forcing payments to go to the highest interest rate charge first (when it goes into effect.)

Now some consumers took good advantage of this balance transfer game, putting the card (wisely) in the drawer and never activating it. They thus got what amounted to a 2 or 3 year "free loan" (0% interest) on that $10,000 balance! Nice, right? Well, maybe. But if you were late just one time with a payment, suddenly that entire balance got hit with a 29% default rate.

The banks, on a statistical basis, never lose this game. Yes, some people could (and did) game it successfully, but far more of the population lost. Those who could game it did so only because of asset price appreciation - they HELOC'd the house when they missed a payment and covered the card!

The fundamental problem here is that sound lending went out the window - the entire economy became based on one and only one thing - complex bets placed in the capital markets on asset price appreciation.

That's all it was.

But those bets are never sustainable, because asset prices go down as well as up! Indeed, they have to, because asset prices over time cannot grow faster than incomes, net-on-net over long periods of time. And real disposable personal income has basically not grown at all since 2000 for anyone not in the top 5% of earners - everyone else actually lost ground during the last decade.

This of course only supports lower prices for assets, not higher ones. The imbalance became more and more ridiculous with each passing year as we went into the middle of the decade, supported not by wages but by ever-more complex (and obfuscated) securities where the creator had gamed the system to be a "never lose" for him, and "always lose" for whoever was on the other side. These "features" were of course not disclosed (would YOU buy a "must lose" security?) but provided a convenient means of continuing the game - for a little while.

When the game collapsed TARP was allegedly going to provide for "restarting and supporting lending." This was a lie and I believe Paulson knew it - he's not stupid, and neither is Bernanke. In point of fact the consumer had taken on more debt that they could service (witness the collapsing lending numbers), but it was the only way to "sell" the program to Congress.

Capital will always go where the holder believes they can make the best return given the environment they have. The big trading and investment houses have inside information that they use daily in making their bets, with most of it being shady but legal, coming from their conveyor-belt style access to Washington. As they demand fealty (and an obscene act of 8 letters beginning with the letter "f") from their bought-and-paid-for Congressfolk, they of course get to both dictate actions and are fed "inside baseball", allowing them to place bets in the capital markets with a far better chance of success than you, the ordinary American. Even better, in the instant case they were gambling not with their money but yours!

The outcome was both predictable and obvious - the banksters bet on "asset reflation" in the equity markets and got it - to the tune of a P/E in the S&P 500 of 140 (as of the end of September.) This "ramp job" is, in fact, nearly identical to what happened in the Nikkei following their collapse, and it occurred for the same reason!

But neither Bernanke or Geithner can fix an over-levered consumer. Doing that would require either massive debt defaults (bankrupting both lenders and borrowers) or the erection of trade barriers worse than anything ever seen in the history of America, forcing manufacturing (and thus high-wage jobs) home. That in turn would fuel price inflation as wages and prices both rose.

There is no way out of the box that Geithner and Bernanke face. Bernanke concluded in this famous speech on deflation that:

We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Notice that Bernanke confuses higher prices (the result of a devalued currency) with higher spending.

Under a paper-money system a determined government can always generate higher prices by deprecating the currency but generating higher spending net of that currency devaluation requires that the aggregate purchasing power increase or that sufficient slack between income and mandatory spending (e.g. that on food, fuel, etc) exists to increase expenditures.

A determined government can only do that by either driving productivity higher or incenting companies to locate their high-paying jobs here rather than abroad - that is, inhibiting global wage arbitrage. Absent that all higher prices do is impoverish a greater portion of the population and that in turn destroys debt carrying capacity among the very same people.

Since all modern monetary systems are debt-based the consequence of such a program is in fact the exact opposite of that which Bernanke (and Treasury) expected.

Leave it to the ivory tower folk to forget that in the real world (the one where you have to go to both the grocery store and gas station and buy your own stuff as opposed to having it all handed to you on a silver platter) consumption is driven by the spread between wages and mandatory spending (that on food, fuel, medical care, etc.)

Ramping prices through currency deprecation in an environment where global wage arbitrage has capped the feedback mechanism into earnings capacity destroys credit capacity instead of adding to it.

Oops.

States Growing Hair On Their Pair

nospam@example.com (Karl Denninger) — Tue, 03 Nov 2009 08:32:00 -0500

It's about damn time:

Frustrated by the banks’ inability or unwillingness to stop an avalanche of foreclosures, the states are considering lawsuits over the creation and marketing of millions of bad loans as well as the dismal pace of mortgage modifications.

Good.

As I have repeatedly opined, there is more than enough fertile ground here for lots of lawsuits to spring up and take root. Indeed, let's go down the list of what I believe are the grounds for such suits:

Most of the "exotic" loans being made during the housing boom were never intended to, on balance, be "paid as agreed" leading to a clean "fee simple" title on the property. An "Option ARM" or "Subprime" loan that qualified the buyer at the teaser rate (or anything similar), where the forward view three or five years later would result in a payment of two or three times the original amount implied a per-year compound annualized growth in income of 15-20% for the buyer. This was not disclosed, of course, yet it is what was being "discounted" in those notes, and without that capacity these notes were entirely reliant on "return business" to avoid default.
That "return business" turned the contemplated transaction into nothing more than a churning operation. Indeed, many borrowers were even given some variant on the theme: "come back before the reset and simply refinance!" The problem here is not simply that this cycle depends on ever-ascending asset prices - it is that this is not a mortgage in the legal sense at all, but rather is a sophisticated capital market bet that happens to involve most people's largest asset - their house. The percentage of buyers who understood what they were doing in this instance was vanishingly small, and the percentage of Realtors and Mortgage Brokers who explained what they were really doing was close enough to zero that we might as well just put a goose egg in that column.
Both mortgage brokers and Realtors have (successfully, thus far) hidden behind the "no fiduciary responsibility" banner. We need to fix that in the law, so that fiduciary responsibility attaches to these individuals who hold themselves out as "experts" in their respective fields of finance and real estate. But even without that formal definition under the law the generalized fraud statutes do not permit you to make a knowing misrepresentation, and it sure looks to me like everyone involved in this party did, from the big banks on down the line to the lowly "local real estate agent."

The general view of the states appears to turn on the same principle:

While statutes vary, those of every state prohibit fraud in consumer lending. The attorneys general are considering the theory that the banks essentially perpetrated a vast fraud on consumers by marketing exotic loans that would prove impossible to pay back.

And of course, now that the states are considering going after the alleged scammers en-masse, The Mortgage Bankers Association is pulling out the usual "threaten people with our big guns" game:

The Mortgage Bankers Association, a trade group, declined to comment on the possibility of state fraud lawsuits. A spokesman, John Mechem, warned that consumers would end up paying for any campaign of stepped-up legal activity.

As opposed to the paying they've already done?

Has it not dawned on these clowns that a few million Americans dispossessed of their homes as a consequence of the banking industry running what amounts to a complex capital market bet on the back of the American Consumer, without disclosing to him or her that they're all part of the machine and will bear the loss, along with those who bought this trash, WHEN, not if, mean reversion occurs, has already brought the "paying" part to America and dumped it squarely in the common man's lap?

The Clearing House ruling rolled back an expansion of federal authority that began more than five years ago. In January 2004, the Comptroller of the Currency, the agency responsible for regulating national banks, issued two rule changes that had a far-reaching effect on the ability of state banking regulators and law enforcement to pursue violations of state law by large banks and their subsidiaries.

The rule changes broadened the protections afforded to national banks against prosecution for violations of state civil rights and predatory lending laws and other banking statutes. In a statement announcing the regulations, then-comptroller John D. Hawke Jr. said that his agency would take the lead on preventing lending abuses by the banks.

OCC then did exactly nothing while the subprime, liar loan and OptionARM lending boom expanded by leaps and bounds, more than doubling the price of homes in bubble markets while incomes remained flat.

The Federal Government willfully and intentionally looked the other way while the citizens were looted, and when the game wound down all the banksters that had profited once from the "puppy mill" churn game came back to the government and looted the citizens again via the myriad bailouts - an endeavor that is still ongoing today!

Oh, and lest you believe that President Obama, with his "hope and change" mantra, has actually changed anything, you might want to consider that he continues to "kneel before Zod" as does Barney Frank and Chris Dodd:

Two weeks ago, the House Financial Services Committee voted to give the federal government the power to block states from regulating large national banks in some circumstances.

That's right - they're still at it.

Two words to the States: 10th Amendment

Berkshire's Big Bet

nospam@example.com (Karl Denninger) — Tue, 03 Nov 2009 08:07:00 -0500

The amusing part of Berkshire buying BNI (Burlington Northern) isn't that he's doing it at what looks to be a ridiculous premium to the current stock price (although below the historic high) - it is that he's splitting Berkshire's "B" shares in doing it.

Remember, this is the guy who has maintained forever that stock splits are inherently wrong, in that they're nothing other than a game.

Well, yes. But under the cover of the claim that he wants BNI shareholders to "enjoy" a tax-free exchange, suddenly Berkshire "gets religion" and splits the "B" shares 50:1?

Uh, Warren. This is a stock and cash deal, right? What prevented you from issuing a "C" share? Nothing, other than dilution, which you could handle with an immediate buyback of the outstanding amount necessary to balance it.

Here's my view, for what it's worth - BNI at yesterday's closing price was reasonably valued at a P/E of 14. At the deal price it's about 20. That's too high, unless you believe that manufacturing is coming home in massive numbers, and that "indefinite growth" is coming back.

I think Warren's wrong on valuation. I also think he should have bought BNI back in March, when the stock price was under $51, and paid $70, which would have been an even bigger premium in percentage terms and been a better deal for Berkshire shareholders:

Here's Berkshire's "B" share chart (the "A" is the same, just bigger numbers):

If you're a BNI shareholder, I'd be taking the money - this morning. You're no longer the owner of a big industrial mover; you're now the owner of stock in what amounts to a financial conglomerate trading with a P/E of 52 (as of this morning), where you had a P/E of 14 last night. Worse, Berkshire's market cap is being "invaded" tremendously by this acquisition, turning Berkshire from a financial company (in the main; banking and insurance) into a multi-line conglomerate with a HUGE transportation component.

Mean reversion is going to suck WHEN it occurs, and this much is certain - you didn't own BNI expecting it to have a P/E of 52, but suddenly it does, and anyone who believes that a conglomerate with 25% of it's total market cap comprised of "railroad" should trade at anywhere near a P/E of 52 has rocks in their head.

Buffett's comment: "This is a bet on the future of the country, 5, 10, 20 years from now."

That's Berkshire's and Buffett's mantra, and in addition this is a bet that rails will be the big winner over time in terms of moving products in a world that is increasingly hamstrung by both energy constraints and (in my view insane) "global warming" nonsense.

I think Warren is right on who wins in the transportation matrix in the future, but he doesn't care about multiples.

I, as an investor, do.

If I owned either of these firms (I don't) I'd be a seller this morning into the ramp job, especially if I held BNI. Nobody in their right mind trades a P/E of 14 for a P/E of 52.

Disclosure: No position.

Sheila Bair: All Bark, No Bite

nospam@example.com (Karl Denninger) — Mon, 02 Nov 2009 14:11:00 -0500

Sheila is apparently upset at the banks "pushing back" against reform:

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said on Monday that some in the financial services sector are trying to argue that regulatory reform would stifle innovation and impede economic growth.

"That makes me angry," Bair said in a text of remarks prepared for a lecture at Kansas State University.

It does? You're not showing it.

How hard is this Sheila? You have the authority, along with the OTS and OCC, to walk into any bank in the United States with your examiners, look at every asset they hold, compare it against your standards of a "reasonable" mark and take action if you find that the bank could not be liquidated "at or above par."

You not only can do this but Prompt Corrective Action, US Code Title 12, Chap 16, Section 1831o mandates that you do, as that law is liberally peppered with "SHALL"s and has precious few "MAY"s.

Sheila is being gamed because the FDIC has shown over the last two years that whenever the banking industry say "Bark" the response from Sheila is "YIP!" Indeed, when I looked up "lapdog" in an online dictionary I got the following back:

lap*dog
Function: noun
Date: 1645

a small dog that may be held in the lap

a servile dependent or follower

Sheila Bair

Oops, did I make that last one up? Well....

There is already plenty of law on the books to cover what's been going on here, especially when it comes to banking regulation.

The examiners can have their mandate set by Sheila, along with the OTS and OCC. Their job, after all, is to determine what the odds are of loss to the deposit fund and whether a bank is safe and sound (for depositors), not whether the numbers will look good for Wall Street's quarterly parade.

Yes, I'm sure the banks would grouse if the examiners were to show up and demand that banks hold capital against the underwater portion of Home Equity loans, subprime CDOs and similar garbage. They'd also squeal if the examiners decided that any loan that was 60+ had to be reserved against at recovery value.

So what? The response ought from them to be "Talk to the hand."

Those banks that don't like these rules don't have to take FDIC insurance! They can run without it if they're so "safe" - let's see how many depositors they retain without it.

If Sheila doesn't like being the hard-nosed enforcer of capital adequacy and marking assets at recovery value as soon as loans fail to be paid on time then she should resign and cede the office to someone who has no problem getting on the phone - or showing up in person - and raising hell.

I'll volunteer, and suggest that anyone wondering if I have the "sack" for the job should find Mory Ejebat (formerly of Ascend) and mention my name.

Bring a tape recorder and post the result on YouTube.

Alternatively, just read a few Tickers.

Slope Of Hope Interview, Pts 4, 5 and 6

nospam@example.com (Karl Denninger) — Mon, 02 Nov 2009 12:48:00 -0500

Here 'ya go - last three parts.....

PMI: Heh, An Actual Good Number!

nospam@example.com (Karl Denninger) — Mon, 02 Nov 2009 10:58:00 -0500

This isn't a bad report! (Headline 55.7%)

On balance, quite strong. Warning signs in new orders (slowing in advance, although still growing) and prices (increasing.)

No change in backlogs; production up, employment went positive, and this is significant.

Inventories are still contracting, but at a slower pace, and customer inventories are below critical levels.

This last point is a potential trouble spot and could lead to some really ugly price dislocations if the economy actually improves.

That is, there are a lot of people who appear to believe this is a "false dawn" (I'm one of them) but if they're wrong the consequence could be a truly ugly price spike at the final side and/or outright shortages. That would be very bad for the consumer, although it might produce some impressive profit numbers - for a while - on the business side.

On balance this is the first ISM report I like. We'll see what it looks like next month, but my "first blush" reaction to this is quite positive.

Goldman Sachs: Reasonable Doubt

nospam@example.com (Karl Denninger) — Mon, 02 Nov 2009 09:03:25 -0500

Goldman Sachs: Reasonable Doubt (pdf)

TSF Opinion Commentary - November 2, 2009

By Janet Tavakoli

In August 2007, I publicly challenged the fact that AIG took no write-downs whatsoever for its credit default swaps on underlying mortgage related “super senior” positions. I used the example of its aggregate $19.2 billion in credit default swaps on super senior positions backed by BBB-rated tranches of residential mortgage backed securities. I spoke with Warren Buffett, but only about what I had already told the Wall Street Journal (Dear Mr. Buffett Pp. 164-165, 246).

I met with Jamie Dimon, CEO of JPMorgan Chase, adding that the difference was material. JPMorgan Chase’s credit derivatives positions exceeded those of all other U.S. banks combined at the time. JPMorgan was not a participant in the problematic deals, and it was not a recipient of AIG’s settlement payments, but stability in the credit derivatives markets was an important issue. Dimon was dismissive of my concerns. In August of 2007, a potential implosion of AIG was too horrible to contemplate.

Unbeknownst to me, in July 2007, Goldman Sachs and AIG began a prolonged battle over prices and collateral payments for pre-2006 vintage deals on which Goldman had bought protection.

Fraud Audit

Was the risk that Goldman hedged with AIG as bad as Goldman Sachs Alternative Mortgage Products’ GSAMP Trust 2006-S3? Any risk manager worth their salt would have reasonable doubt about this deal and conduct a fraud audit. A fraud audit doesn’t mean you are accusing anyone of fraud, only that the audit will be thorough, because there are indications of grave problems. If there is fraud, however, the audit should be rigorous enough to uncover it.

If the aggregate $19.2 billion CDS position were derived from BBB rated tranches similar to one from GSAMP Trust 2006-3, the supposedly super safe “super senior” tranche would be worth zero. Every underlying BBB tranche would have permanent value destruction and zero value. AIG would owe a credit default swap payment for the full amount $19.2 billion. Since there is doubt about the collateral of every deal of this ilk, super senior tranches of mezzanine CDOs in the secondary market are currently valued at zero.

No wonder Goldman Sachs bought protection from AIG on mortgage backed deals—and then bought protection on AIG. Goldman may not have contributed to the aggregate $19.2 billion position, but this mezzanine super senior risk was visible to all of AIG’s counterparties.

Sophisticated counterparties like AIG are supposed to protect themselves, and have little chance for recovering damages. But now the American taxpayer has stepped in to make payments for AIG. U.S. taxpayers have a right to recover money paid out for derivatives on deals that include phony collateral.

Maiden Lane III now owns the underlying CDOs for AIG’s cancelled credit default swaps. One can now investigate them—and all of the underlying collateral.

The government’s 100% payout to AIG’s counterparties was a gift, and the negotiations were done in secret. The monoline insurers were in a similar situation with a variety of deals from a variety of counterparties. (Structured Finance Pp. 405-427) For example, in 2008, Citigroup Inc. accepted about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO. Ambac said the underlying “super senior” was worth about zero, and the protection payment would otherwise have been near the full $1.4 billion. Citigroup got a relatively huge payout, since other “high grade” deals have been settled for as low as ten cents on the dollar.

The irony is that Goldman Sachs may not have been involved in the worst of the deals, but its officers had unusually high profile in AIG’s damage control. Goldman’s deals with AIG may have all been completely proper, but deals like GSAMP Trust 2006-3 indicate that Goldman should not be exempt from the general fraud audit of mortgage securitizations that all of the former investment banks [Lehman, Bear Stearns, Morgan Stanley, Goldman Sachs, Merrill Lynch, and some foreign banks going business in the U.S. (DMB Pp. 97-107.)] should undergo.

END OF EXCERPT – Click on pdf file above to continue reading.

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008).

Tavakoli’s book on the global meltdown: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

Is It ALL A Scam? (BAC)

nospam@example.com (Karl Denninger) — Mon, 02 Nov 2009 06:37:56 -0500

One has to wonder, when you start hearing of things like this....

In a $2.8 trillion municipal bond market that more than doubled in just over a decade, public corruption, officials’ mistakes and lack of disclosure cost taxpayers as much as $6 billion a year, according to data compiled by Bloomberg.

What's going on here?

Nov. 2 (Bloomberg) -- At the end of a March 6, 2000, conference call with the financial adviser David Rubin, city of Atlanta officials disqualified the winning bid for a $453.3 million investment-management contract.

The decision shaved $58,000 off what Atlanta taxpayers would have earned from the $13.5 million high bid and awarded the account to runner-up Bank of America Corp., according to a copy of city documents obtained under the Georgia Records Act.

Only after the Internal Revenue Service investigated five years later did local officials learn that Rubin’s firm, CDR Financial Products Inc., had entered into a secret side agreement with the Charlotte, North Carolina-based bank. CDR’s share would be worth as much as $340,000, based on city and federal records.

This, ultimately, is the sort of result that one can expect when we refuse to stop the looting and start prosecuting.

There have been many over the last two years who said that the "subprime (and stated income) borrowers deserved it" - referring to the loss of their houses, of course.

Perhaps they did.

But the bigger issue here - the societal issue - is how crooked the entire marketplace has become for securities in general. Not just for end-user mortgages but also for securitizations, municipal bonds (as outlined in this article) - virtually everything!

“We need a worldview change about transparency and that includes municipal finance,” said Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program, in an interview with Bloomberg last month.

Indeed. But so far we see zero indication that we're going to get it. Municipal finance is just one tiny piece of the scam-ridden world of financial back-room deals.

Witness the mortgage-backed bond business, where firms such as Goldman Sachs have admitted shorting the very mortgage-backed securities they were packaging and selling! McClatchy ran a story this weekend on the matter which I opined on this morning; the salient factor here being not that McClatchy picked this up, but that it took two years for the so-called "mainstream DC media" to do so!

We continue to see the fraud-and-pony-show throughout Wall Street and Washington DC - and there is no indication anywhere that anyone gives a damn. Amnesty, as given to Bank of America in this case, is an outrage. Remember that the allegation in the instant case is that:

“IRS believes that CDR, Bank of America and possibly others may have colluded to fix pricing,” an unidentified Atlanta employee wrote in an undated internal memorandum after city authorities met with IRS investigators in September 2005.

Got it? Fix prices, and if you're a big bank you get amnesty. Even though what you did is under black-letter law felonious, you will not be prosecuted so long as you are one of the favored few.

How much more of this is hidden under the rock of bribes, er, "campaign contributions" and lobbying? The answer is likely to surprise, but what's also likely to surprise is exactly how little of this we the "little people" will ever hear about.

Sustainable economic growth does not come from scams - it comes from honest deals. So long as the way Wall Street "makes money" is to rip someone off, and those who engage in such activity are given "amnesty" instead of losing their corporate charters we will simply continue robbing the common man for the benefit of the few banksters among the "privileged elite."

CIT BOOM BOOM!

nospam@example.com (Karl Denninger) — Sun, 01 Nov 2009 16:30:00 -0500

Hope you didn't buy any CIT on the hope of a bailout!

Nov. 1 (Bloomberg) -- CIT Group Inc., a 101-year-old commercial lender, filed for bankruptcy with financing from investor Carl Icahn after the credit crunch dried up its funding and a U.S. bailout failed.

The practical impact of this is likely to be:

Their factoring business is unlikely to be significantly impacted. This is a very profitable line of work, and while I have often (and still do) argue that any business using it is certifiably insane, it should continue.
Their "general" lending, however, is almost certain to be severely curtailed. I have seen estimates that it could fall by as much as 90%, and that seems reasonable to me.

For many small businesses the latter could be particularly acute. I would also expect the margins on their factoring business to be adjusted (better for them, worse for retailers) which could put a further squeeze on their small and mid-sized business clientele.

This will leave a mark - we'll have to see how bad it gets for retailers in the coming weeks and months, but being right in front of the holidays it cannot be a welcome development.

Citi-Citi-BANG-BANG! (C)

nospam@example.com (Karl Denninger) — Sun, 01 Nov 2009 16:05:00 -0500

Oh boy, it appears that I may have hit the mark here....

Of the company’s $1.2 trillion in credit commitments outstanding in the second quarter, $873 billion were credit card lines.

And the charge-off rate on those things is over 10%!

Here's what I wrote:

Both of these "results" have a high probability of decimating Citibank's card business and the latter behavior could literally blow them up. That the firm is willing to risk this outcome - an outcome that, to me at least, appears to have a very high probability - means that Citibank has to be crazily-desperate and willing to place an "all-in" bet that they will be able to either (1) book unpaid "interest" as "earnings" and "assets" (much as banks did with negative amortization loans) prior to final disposition via bankruptcy for those consumers or (2) there are enough people who both can't pay off or transfer the balance AND can continue to pay to make this strategy worthwhile even given the intensely negative public opinion reaction this move is guaranteed to generate.

In short, this looks to me like a "Hail Mary" pass. So long as this remains a Citibank-only story my interpretation is that Citibank is in a lot worse financial shape than is being let on - perhaps poor enough that they're at risk of imploding anyway, "too big to fail" or not.

Good luck Citibank; I'll keep my telescope trained in your direction from beyond "minimum safe distance" looking for this....

Disclosure: No position; I don't short stocks under $10. IMHO this issue has a high probability of being a zero.

Is the DC Media "Getting It" (Finally)?

nospam@example.com (Karl Denninger) — Mon, 02 Nov 2009 06:54:00 -0500

Hmmm.... maybe late, but not never!

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Right. On October 31st of 2007 I said:

Realize this folks - some of these "boys" on Wall Street have gone so far with their hubris that they have, effectively, shorted your house! That'd be Goldman, who actually shorted subprime mortgage bonds (so they said) to make their quarter. The amazing part of this of course is that Goldman (along with all the other investment banks) are the very people who set up these structured finance vehicles in the first place.

That's kind of like repping out your company for an IPO and then shorting into the IPO! Oh, and it has another parallel - like an IPO underwriter they have more information than you do - CDOs and such are exempt from "Reg FD", or "Fair Disclosure." So if an investor wanted to buy a CDO, they'd not have access to the same information that the guys who put it together (and the guys who rated it) do - that'd be Goldman, Moody's, etc.

Isn't it nice that the guys who put this stuff together thought it was of such high quality that while they were selling it to you with one hand they were shorting it with the other?

Arrogance knows no boundaries on Wall Street, and I wouldn't have a problem with it (after all, I short stocks too you know!) if it wasn't for the fact that Goldman was doing it while in possession of information that nobody else in the marketplace had, except perhaps for other investment banks who had done similar deals and the ratings agencies.

This sort of thing smells and is why Reg-FD was passed after the 2000 tech wreck - of course it doesn't apply to this part of the market. Isn't it amazing how the "Wall Street Boyz" found a loophole in the rules and exploited it for a big fat wad of cash - at the expense of their customers?

Two years ago folks, literally almost to the day.

McClatchy continued:

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

No, really?

A five month investigation eh? You're more than 18 months late on this one sir, but I will give you credit for the reporting - even if late.

I've been saying what Mr. Kotlikoff said in McClatchy's piece now for more than two years:

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

No kidding? You mean packaging up something you get an "AAA" rating on (after shopping and massaging it like mad) but which some other portion of your firm opines is worth far less, in fact may be worth zero, and thus goes short that same instrument, creates a problem if you don't disclose that to the buyers?

DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

Actually, that may not be quite true, and, indeed, that's the rub.

See, "AAA" has an actual definition in credit land. It means "about as likely to default as is an asteroid impact on your house."

Here's the problem, when you get down to it - at least some parts of Goldman's operation had every reason to believe these loans would blow up - that is, there was no reasonable expectation that the "AAA" rating was correct and the issues would perform in accordance with it. This, indeed, was the entirety of the premise behind shorting those instruments.

But what did they know and when?

Did they know, for instance, as I did in April of 2007 that:

According to a small study done by HUD, half of all those "stated" loans have incomes overstated by 50% or more!

And was that disclosed in their offering documents?

When did Goldman become aware of this, and did they tell the buyers of these securities that the "qualification" of the borrowers that underlay those securities was in doubt - and might have even been fraudulent?

Further, what did the ratings agencies know and when? Did their (and Goldman's) opinions reflect that HUD study? And did it reflect the findings in this study, also done by HUD?

More than half of the borrowers referred for File Review could
not afford the loan they were being given by their mortgage broker/loan originator. 9% of the File Reviews showed indicia of fraud.

More than 60% of the borrowers who received File Review were obtaining loans with adjustable rates. It was evident during the File Reviews that in the majority of cases borrowers were being approved for financing solely on the basis of the initial or ‘teaser’ rate, without regard to the borrower’s ability to afford the loan when the rate adjusted.

The kicker in that report is the following - indeed, this is the truly damning piece:

Only 12% of all the File Reviews resulted in the recommendation that there were ‘No Issues’ with the loan. ‘No Issues’ meant that the information entered by the Loan Originator matched the information verified by the HUD-certified Counseling Agency; there were no indicia of fraud; that the borrower appeared to understand the transaction; that the loan had a ‘market rate’; and that it was ‘affordable’.

Twelve percent. The rest of the loans either had one or more indicia of fraud, the information the loan originator claimed for the borrower matched the actual borrower's information (income, assets and debt), the borrower understood the transaction, it was made at a "market rate" and it was affordable.

88% of the loans reviewed under this program, in short, were likely to default - a fact that was known to and published by HUD in April of 2007.

The question, when it comes to fraud and other games, is nearly always one of "what did you know and when did you know it?"

In this specific instance, when did the investment banks and ratings agencies know that:

A mere 12% of the files (in this sample, and it is reasonably presumed in others) were "clean" - with the others either showing signs of fraud, being blatantly unaffordable, not understood by the borrowers or that the information in the file did not match the borrower's actual income, debt and expense profile?
Nine percent of the files had indications of fraud in them that were not followed-up upon by the issuers and prosecuted.
More than half of the loans were not affordable under any reasonably-objective criteria - that is, they were likely to default but for continued asset-price appreciation.

This is in fact the key to whether these institutions (and ratings agencies) should be held culpable for securities fraud (and perhaps racketeering); if they had actual or constructive knowledge of these facts prior to selling these securities and did not disclose it, and in particular if they were shorting them on that basis, then I believe a reasonable argument can be made that the law was broken, and no esoteric securities legalese language need be applied. Simply put there is no reasonable argument to be made that securities generated from a loan pool that has these characteristics could ever meet the criteria of an "AAA" issue, irrespective of whatever "credit enhancement" or similar shenanigans one might employ. Indeed, such a debt issue is the very essence of a "highly-speculative" instrument, if not outright trash with true value very near recovery at the time of issue!

And by the way, lest anyone think that policy has actually been changed, let me point out two points from the same study:

“Cannot afford the loan” – The agencies agreed that any loan that resulted in a total ‘Debt to Income’ ratio (‘DTI’) of more than 45% would be considered ‘unaffordable’. DTI is calculated by dividing the total gross household income (on either an annual or a monthly basis) by the sum of the total payments due (monthly or annually) for housing expense (principal, interest, taxes, insurance, mortgage insurance, condo fees) plus other obligations (minimum payments on revolving credit, installment payments, child care expenses, tuition).
“Precipitously close to not being able to afford the loan” – The agencies agreed that any loan that resulted in a total DTI ratio (as calculated above) of 40% to 45% would be deemed ‘precipitously close’ to being unaffordable.

Shall we go back to RECENT FHA disclosures that I wrote about in September of this year?

Like, for example, this recent loan the FHA funded that was submitted to FHA on 9/21/2009?

41.59% HOUSING expense ratio .vs. gross income.
53.40% TOTAL DEBT TO INCOME.

A loan that according to HUD's own HB 4050 Predatory Lending Database pilot program was unable to be afforded, BUT THE FHA APPROVED AND FUNDED IT ANYWAY MORE THAN TWO YEARS LATER.

The bottom line is that they're still doing that which they said was absolutely over the line and unsustainable, with the full sanction and approval of our government and its agencies!

Anyone that thinks that the "issues" in the mortgage lending system that led to the credit and housing mess beginning in 2007 have "gone away" has rocks in their head.

In fact what has happened is that the very same dangerous and loss-producing practices have instead migrated to the FHA's products with the full knowledge and complicity of everyone involved in HUD and the FHA itself, and with the explicit consent and guidance of Barney Frank, among others in Congress:

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

Intentionally screwing homeowners - knowingly and willingly violating the limits in a more than two-year-old study by HUD is "a policy".

What was it when Goldman and the other big banks were doing the same thing to investors?

Was that "a policy" too?

"Doing The Same Thing Over And Over": War

nospam@example.com (Karl Denninger) — Sat, 31 Oct 2009 19:48:00 -0400

I wish this was about economics.

It is only tangentially so.

No, this is about the war in Afghanistan. The FT reports:

Some time in the next two weeks, Mr Obama is likely to bring months of agonised deliberation to a close when he decides how many more troops to send to Afghanistan. The number, which could be as high as the 40,000 recommended by Stanley McChrystal, the general in charge, will be analysed minutely for what it can achieve on the ground in Afghanistan.

But as Mr Cheney’s contrasting observations illustrate, the more influential war is being fought politically on the ground in America. Somehow, the compulsions of US politics have brought the candidate who electrified America by promising to pull out of Iraq to a position where many of his most ardent backers fear he may be about to get America into another Vietnam.

We have already done that.

We must as a nation choose whether we are going to prosecute this as a war, or leave.

We have not fought a war since WWII. None of the engagements we have entertained as a nation since with our military power have been wars, irrespective of what someone has called them.

There is only one way to fight a war. You commit your nation's resources - material and the most precious of all, human - to the complete obliteration of your enemy.

You mass those resources against each objective in turn, without reservation, without holding back, without care for collateral damage or world opinion.

You do so until your adversary sues for peace, not because it is the political thing to do, not for expedience, but for one and only one reason: they're tired of dying.

There is no "armistice" or "cease fire" in a war. There is only victory or defeat. There is only death or life. Collateral damage, including the loss of innocent life, is a known price that will be paid, although the toll is not of concern in that regard - only the certainty that it will occur.

If we are justified in utilizing military force - the last resort of any nation in the resolution of grievance - then we are justified in utilization of every bit of force we can muster, without mercy, without limit, without fear or favor.

If we are not justified in doing so we have no business placing our nation's resources, including and most especially the lives of our men and women in uniform, in harm's way, since each such excursion guarantees that some of them will not come home to their families and friends.

This nation once knew these facts. We fought two World Wars, the first of which was arguably without risk of invasion or damage to our territory, the second of which began the same way but escalated dramatically on December 7th, 1941. In both cases we mobilized not just our men and women in uniform but also every man and woman at home - we realigned factories to produce the machines of war, we rationed goods and services in our nation, we sacrificed. We applied the full force of this country and its people to the task at hand, and we were victorious. In the process we all honored those who fought, for behind each infantryman on the ground or airman in the sky there were a hundredfold more at home building the guns, ammunition and fighting machines - day and night - that they required. When each of those who died on the battlefield fell, they gave their life knowing that our nation and her resources - all of them - were behind each and every fallen soldier, without limitation or exception.

If we are to press a military engagement in Afghanistan or elsewhere we owe it to our fighting men and women to approach that engagement with no less vigor than we did in World War I and II.

We dishonor those who serve in our uniform when we ask them to fight and die with less than a full commitment of our national resources to the task we set before them.

These fighting men and women, each and every one of them, takes an oath to uphold not an office, nor a person, but our Constitution - the defining difference between America and all other nations.

We must honor them in return, in that when our President and Congress determine that the use of military might is our right and duty as a nation, we the people must demand and our President and Congress must make a full declaration of war and the commitment of every resource within our nation, both military and civilian, without reservation.

President Obama, do what your predecessors did not in Korea, Vietnam, Kosovo and Iraq.

Either fully commit our nation to war with all of her resources or bring our troops home.

You Can't Possibly Be Serious (CRE)

nospam@example.com (Karl Denninger) — Sat, 31 Oct 2009 10:03:00 -0400

I am speaking of the notion that went up the flagpole on allowing banks to refinance commercial real estate loans at more than 100% LTV - and having this "overlooked" by regulators.

Oh, but they are!

Regulators, in a significant step, also said they won't penalize banks for performing loans where the value of the underlying property is now worth less than the loan balance.

Who did this?

The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are "experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties."

Their comment?

"Financial institutions that implement prudent [commercial real estate] loan workout arrangements after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts," the agencies said in a policy statement.

One of the definitions of "prudent lending" is not to lend beyond the current value of a given asset, with any such "excess amount" requiring a dollar-for-dollar reserve of the bank's own capital.

Of course the others are knowing that the borrower can pay, which they appear to be covering.

But just as in residential real estate when you lend in commercial real estate beyond asset value you're doomed, because it is not possible to have a reasonable expectation that the borrower will continue to perform!

Why?

Primarily because demanded rents cannot be maintained.

Take two strip malls across the street from one another. Both started with a "value" of $10 million. Both now have a "present value" of $5 million. Both are identical - in the same location, on opposite sides of the same road, both have the same square footage and amenities.

One loan is foreclosed and the property sold - for $5 million. That buyer finances the $5 million purchase.

The second is "worked out" instead of demanding that the borrower either be foreclosed or pony up the other $5m (which he doesn't have), and the bank rolls the note at a negative equity position of $5m.

What happens?

Tenants start to go out of business. As space opens in the $5m note mall, those in the $10m note mall see the open space. So do potential new tenants.

Is the rent in the $5m note property going to be higher or lower than the rent in the $10m note property?

How many of the $10m note property spaces will be rented one, two, three or five years from now, compared to the $5m property?

What is going to happen to that $10m loan?

This is an out-and-out scam that is simply going to end up costing the FDIC even more money, because the banks will be even further underwater when the note on that "worked out" property inevitably blows up.

Every time I see the government come up with some hair-brained scheme that will (1) never work and (2) will explode in the taxpayer's face, I maintain that I've seen the dumbest thing yet.

Unfortunately the FDIC and other regulators keep outdoing themselves.

White House LIES: CFC

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 15:39:17 -0400

This is ridiculous and anyone who believes it deserves to eat The White House Dog's used food:

The administration's blog post argued that Clunkers helped to lower auto prices on the rest of the vehicle market as well, a fact the administration said Edmunds ignored.

What a total load of crap.

First, I personally walked into dealerships during the "CFC" program time, and every single one of those dealers was literally screwing everyone who walked into the door.

Normally, you can buy an American car for $100 or so over invoice price. I have, in fact, not purchased one vehicle for more since I started buying cars! My last "new" American vehicle, a 2002 Suburban, was bought during the 0% "craze" following 9/11 and even with the 0% financing I bought it for $1,000 UNDER factory invoice. I saw no dealer willing to sell at anything approaching that number this time - they were all selling at full sticker, and two had their own "supplemental rip-off stickers" on the windows that they refused to negotiate on yet were full of junk (the usual "undercoating" and "fabric protection" for $250 garbage.) People literally got robbed to the tune of $2,000, $3,000 and sometimes more than the rebate was worth on these so-called "deals."

Second, this "program" destroyed the low end resale market. It literally took all those cars and crushed them! If you were in the market for such a clunker as the only car you could afford they all disappeared for the duration of that program. This did severe damage to sections of the used-car market and the consumers dependent on it.

This program was nothing other than a royal screwing of the American Consumer and a sop to the UAW, and that's a fact. Edmunds got this exactly right and the White House is pissed off that they got called on their incessant lies by a very influential auto industry publication.

Well, boo-freaking-hoo Barry.

Reprised: HERE IT COMES

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 15:10:24 -0400

Time to drag this out.... from quite some time ago.....

Oh Boy, Threats!

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 12:01:00 -0400

I was wondering how long it would take before the threats really started to show up in earnest..

Kansas City Fed president Thomas Hoenig is circulating a book titled “The Balance of Power: The Political Fight for an Independent Central Bank.” Charles Plosser of Philadelphia said on Sept. 29, “we must preserve” the Fed’s structure.

Must? That implies that there is an "or else" in there somewhere... let's see.... can I find an "or else"?

U.S. stocks, bonds and the dollar would collapse if investors perceive Congress violating the independence of the policy-setting Federal Open Market Committee, said Former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC.

There it is!

Let's see.... stocks and bonds eh? Which stocks and bonds would be "threatened" if The Fed was forced to account for its actions, like, for instance, to show us all what it bought, with what it bought, and to provide us with CUSIP's so we could look at the current market value (if any!) of these stocks and bonds?

Would that, per chance, be the stocks and bonds of banks that are holding hundreds of billions of dollars of HELOCs on their balance sheets at or close to PAR (100% of face value) when the first mortgage hasn't had a payment made on it in a year, the house is worth 50% of the first mortgage's outstanding balance, and the home is in BubbleVille, CA?

Or would it be the stocks and bonds of institutions that have (between them) well north of a trillion dollars of off-balance sheet "stuff" in a big black box labeled "good as gold", when "gold" really refers to the fact that it is "used dogfood" and has the same color - but not the same mass or consistency?

Would it be all those myriad institutions that The Fed was (along with OTS, OCC and the FDIC) responsible for overseeing and enforcing the strictures of Prompt Corrective Action (12 USC Chap 16 Sec 1831o), a law that has been entirely ignored when it comes to the larger banks in the financial system for more than a decade?

Would it be the institution (Goldman Sachs) linked to the NY Fed who has had board members who also served as the former Chairman of the company that isn't a commercial bank but managed to finagle itself a bank holding company charter - with the permission of the very same NY Fed?

The central bank has also come under fire for granting a waiver allowing a former Goldman Sachs Group Inc. chairman to remain on the board of the New York Fed after the company opted to come under Fed oversight.

What did Dodd have to say?

Allowing banks to select their supervisors is “absolutely backwards,” Dodd said this month, without mentioning Fed interest-rate policy.

Really Chris? That didn't seem to bother you for the last how many years? Why now? A bit short on campaign contributions this cycle?

Some legislators want to “make the institution more political, and I think that’s terribly unfortunate,” Hoenig, 63, Kansas City’s president since 1991, said in an Oct. 9 interview.

Oh, I disagree Mr. Hoenig.

If the process becomes more political it will be by your own hand, and that of the rest of the Fed Governors, and it will be a side effect, not an intended outcome.

You really ought to go stand in front of a mirror, along with Bernanke, Plosser and the rest, and glance thereupon. There you will find the cause of this little mess.

Let's see, shall we count the ways (although I'm sure I'll miss some of them!) I think so.

Greenspan rubber-stamped a blatantly unlawful merger of Travelers and Citibank, then lobbied for the passage of Gramm-Leach-Bliley, retroactively making it legal. That (bad) law was the first of the last line of nails in the coffin of bank regulation that had kept the system sound and functional for more than fifty years.
Brooksley Born warned of the danger of an unregulated CDS market and was literally stomped into the ground by the rank derision of both Greenspan and Larry Summers. She was right, they were wrong and this nonsense allowed the AIG mess to unfold - a mess that was effectively sanctioned by Greenspan and Summers. Where are the apologies and corrections? Missing - the obfuscation continues in this regard!
Bernanke ran his "Depression Avoidance Playbook" to a "T" following the original subprime meltdown. However, he has failed to explain how he can be excused for (1) claiming that house price appreciation was "a reflection of strong fundamentals" in light of the fact that it was driven by dangerous and even fraudulent lending, (2) the nation "was unlikely" to suffer a recession, and (3) failing to detect or get in front of any of the failures prior to them happening. In fact, Bernanke and The Fed granted many Federal Reserve Policy Waivers (the infamous "23A" waivers) that in fact concentrated and increased risk while the crisis was unfolding.
The policies of The Fed were allegedly to "help lending"; in point of fact what Bernanke missed is that while he can provide all the printed money he wants he cannot control where it goes. And "go" it went, right into oil and other commodities first in late 2008 and then again in the summer of 2009, causing not one but two doubles of oil prices off the bottom - first from $70 to $140 and then again this spring and summer from $35 to over $80. This, despite demand collapsing for oil and refined products.
In the same light this "flood of liquidity", instead of promoting economic growth, went into the stock market as well. This has driven the S&P's P/E to one hundred and forty (as of 9/30/2009), a level never before seen in the history of the stock market, and on a historical valuation basis some seven times expected price/earnings value and more than double the previous high of approximately 60 (just before the Tech Bubble collapsed.) Should the stock market correct to a "somewhat reasonable" P/E of 50, the S&P 500 would trade at 375! Should it correct to a "more normal" P/E of 20, it would trade at 150! Of course earnings could (and almost certainly will) improve, but even if they double this implies that "fair value" for the S&P 500 is something close to 300! What are the societal and political implications of that collapse should it come, and how does Bernanke believe he can avoid mean reversion - when every other attempt to do so thus far has failed? Bernanke has done nothing more than create more asset bubbles in a puerile attempt to avoid taking responsibility for the policy mistakes that led to this crisis in the first place.
The Fed (along with the other regulators at the table) have been either willfully blind or intentionally complicit in the "valuation shams" of the last several years. They, along with Congress, twisted FASB's arm into formally allowing what amounts to mythical accounting to be used to "value" assets. This, along with willful and intentional blindness (or worse) toward the requirements of Prompt Corrective Action allowed large banks, of which The Fed is one of their primary regulators, to find themselves in a negative real asset position compared to liabilities - that is, on an accounting basis, bankrupt. Rather than take the institutions into receivership The Fed along with other regulators have looked the other way and "recapitalized" these institutions with taxpayer money via what amounted to locking Congressional leaders in a room and pointing an economic gun at their heads. This isn't the first time either - witness Citibank's history during the Latin American Debt Crisis, LTCM and other episodes. By some accounts several of these institutions have been broke more than once and yet "saved" by this "regulatory forbearance." The cost has been shoveled off to borrowers and the taxpayer generally.
The Fed has arguably violated the black-letter law of Section 14 of The Federal Reserve Act. Section 13(3) currently allows The Fed to make loans under "unusual and exigent circumstances" as it sees fit but nothing in Section 13(3) permits it to purchase assets by printing new bank reserves - that is, by printing money. That function is controlled by Section 14, and a plain reading of that section does not disclose any legal authority to buy Fannie or Freddie paper, nor the assets of Bear Stearns and AIG. Yet all of these programs were in fact put in place and continue to this day.
Who is the real holder of all the Treasuries in "Caribbean Banking Centers"? You don't actually expect me to believe that little islands like Antigua and Grand Cayman have the sovereign wealth to support holding nearly two hundred billion dollars of Treasuries, do you? Is that a vehicle by which back-door monetization can (and has) taken place? Germany, with a real economy and government, by contrast holds a mere $55 billion dollars, and even Russia (and Hong Kong!) have only $121 billion.

The Fed has promoted and in fact still is promoting through policy action the lie that credit can expand "forever" at a rate that exceeds GDP. This is mathematically impossible and Bernanke knows it. I do not accept that he is ignorant of this fact as he is clearly an intelligent man and in addition is a credentialed Professor with an advanced degree - therefore, I must conclude that this is not an error but rather an intentional lie. It is, in fact, the big lie upon which all others rest, and yet as I have repeatedly pointed out the mathematical facts are not subject to dispute. To recap, here's the graph:

And to recap on the averages:

GDP growth from the early 1950s onward has been 6.818% annually, debt growth 8.777%, for a spread of 1.959%.

From 1990 onward, GDP grew at 5.396%, debt at 7.907%, for a spread of 2.511%.

From 2000 onward GDP grew at 5.225%, debt at 8.495%, for a spread of 3.270%.

The spread is increasing and the chart above shows that mathematically it is inevitable that you WILL reach the point where debt service cannot be maintained so long as the spread either is maintained or increases. This is the essence of the "Ponzi Finance Indicator" that I have posted before, to wit:

All of this data is from The Fed's own Z1 release and the BEA's GDP series.

You can't argue with your own data!

The outcome of these policies is not in question, as that is a matter of mathematics.

Mathematics that The Fed has willfully and wantonly ignored.

Congress must put a stop to it before the economy and monetary system collapses - not due to "oversight" of The Fed, but rather due to The Fed's own policies, obfuscation and willful disregard of mathematics.

The FDIC Must Be Indicted

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 10:01:00 -0400

Yeah, ok, the title is dramatic and will never happen.

Nonetheless, if we were truly a nation of laws, it would happen.

The LA Times notes regarding IndyMac depositors over the insurance limit:

The head of the Federal Deposit Insurance Corp. delivered some bad news personally to uninsured depositors who lost money last year when IndyMac Bank crashed and burned, saying an act of Congress is their only hope for recovering their funds.

“When a bank fails, we have to do what’s least-cost to our deposit insurance fund,” FDIC Chairman Sheila Bair said during a public appearance Wednesday in Los Angeles.

Sheila is correct as far as she goes, but like most government employees, it is what she didn't say that is the problem, not what she did.

The problem lies with the willful and intentional refusal to enforce black-letter law, in this case Title 12, Chapter 16, Section 1831o which says in part:

Each appropriate Federal banking agency and the Corporation (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.

"Shall" is a specific term of art in legislation. It allows no discretion and mandates action. "May" and "Can" are two other words of course, and mean what they say - as does "shall."

This section of the law goes on to define capitalization "buckets", each of which represents a level above water, or above zero, of the excess of assets .vs. liabilities for depository institutions.

It also contains plenty of other "shall" directives such as:

Each appropriate Federal banking agency shall—

(A) closely monitor the condition of any undercapitalized insured depository institution;

(B) closely monitor compliance with capital restoration plans, restrictions, and requirements imposed under this section; and

(C) periodically review the plan, restrictions, and requirements applicable to any undercapitalized insured depository institution to determine whether the plan, restrictions, and requirements are achieving the purpose of this section.

and plenty more.

Everyone should go read that section of law, and note all the shall requirements in there.

These are not suggestions, they are mandates, and if they were followed each and every bank that has been closed by the FDIC would have resulted in ZERO loss to uninsured depositors.

The reason for this is simple, when you get down to it - a bank's "capital structure" looks like this (roughly) in terms of claims against a failed institution:

Advances and loans/liens by the government (e.g. employment taxes and liabilities)
Deposit liabilities
Senior secured debt (bondholders)
Senior unsecured debt (bondholders)
Ordinary debt (bondholders)
Preferred stockholders (hybrid stock/bondholders)
Common stockholders
Excess capital (retained earnings, etc.)

As you can see in a liquidation depositors are subordinate only to statutory preference for employment and similar related claims; the entire capital structure of the firm has to be wiped out before depositors take any loss whatsoever.

If assets are properly valued at all times by government examiners and the bank is closed in accordance with the black-letter requirements of Prompt Corrective Action, then in a liquidation the depositors will never lose any money and neither will the FDIC's Deposit Insurance Fund.

It is in fact willful and intentional blindness by government agencies, including but not limited to allowing financial institutions to lie about the value of their assets, that has resulted in these losses being sustained by ordinary Americans.

Sheila Bair and the rest of the government's "apparatus", including the OTS and OCC, will undoubtedly claim "sovereign immunity" from suit, even though in the instant case, that of IndyMac, the OTS' own inspector general has disclosed that an OTS employee and persons at IndyMac conspired together to back-date deposits, thereby distorting the bank's financial condition, and there is now a 100-bank set of history on FDIC seizures that shows the FDIC has not been and still is not following the black letter requirements of Prompt Corrective Action.

We the people must not accept this sort of malfeasance and misfeasance. These losses sustained by ordinary Americans are not the result of bad luck or even bad decisions by the banks that have failed.

Instead, these losses taken by ordinary Americans occurred as a direct result of malfeasance and misfeasance by the OTS, OCC and FDIC itself.

To be blunt, if you lost money as a consequence of being an uninsured depositor at IndyMac that loss occurred as a direct consequence of the willful blindness (or worse) of government agencies who have intentionally and wantonly refused to obey the mandates set before them under black-letter law.

You were, in essence, robbed by the government.

Another Bad Economic Report (PCI/Spend)

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 09:05:00 -0400

How do you get "economic recovery" out of these numbers?

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $47.2 billion, or 0.5 percent.

That looks like flat income and down spending to me.

Oh wait - we have to read past the first two sentences, right?

Let's do that.

Private wage and salary disbursements decreased $11.2 billion in September, in contrast to an increase of $10.1 billion in August. Goods-producing industries' payrolls decreased $7.8 billion, compared with a decrease of $6.3 billion; manufacturing payrolls decreased $1.5 billion, compared with a decrease of $4.1 billion. Services-producing industries' payrolls decreased $3.4 billion, in contrast to an increase of $16.4 billion.

Wait a minute. I thought that income was flat? We have a decrease, a decrease, a decrease and a decrease. How do we get to flat with those?

Supplements to wages and salaries increased $0.1 billion in September, compared with an increase of $2.0 billion in August.

Proprietors' income increased $0.7 billion in September, compared with an increase of $3.4 billion in August. Farm proprietors' income decreased $1.6 billion, compared with a decrease of $1.2 billion. Nonfarm proprietors' income increased $2.3 billion, compared with an increase of $4.6 billion.

Rental income of persons increased $5.4 billion in September, compared with an increase of $5.2 billion in August. Personal income receipts on assets (personal interest income plus personal dividend income) decreased $13.8 billion, the same decrease as in August. Personal current transfer receipts increased $17.3 billion in September, compared with an increase of $9.6 billion in August.

Ah.

Small business income was down compared to August, rental incomes were basically flat (compared to prior month), but income receipts on assets (dividends + interest on assets) decreased. Those are bad comps too.

The big Kahuna was government handouts, which was up big m/o/m. There's the entry that kept PCI and DPI from collapsing.

Real PCE -- PCE adjusted to remove price changes -- decreased 0.6 percent in September, in contrast to an increase of 1.0 percent in August.

Consumers are not spending.

All in all, another bad report. Not a disaster, but certainly not the stuff of which "economic recovery" is made.

The evidence continues to pile up......

Is The Press Waking Up?

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 08:04:00 -0400

In a piece in The Dallas Observer, James Lieber opines:

Where did our wealth go? How do we claw it back? And when are we going to punish the culprits?

Heh, my refrain being sounded in the "mainstream media": Where are the cops?

He also calls out President Obama and the usual litany of campaign lies, including:

The Obama video portrayed John McCain as Keating's stooge and likened the S&L crash to the 2008 Wall Street meltdown, except that the current crisis is global and its bad guys are bigger and badder. Today's corporate villains were flashed on the screen, among them AIG, Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac. The opening narrator was Bill Black, a Ph.D. criminologist and former lead lawyer at the Office of Thrift Supervision who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.

Those watching the compelling attack ad (still online) had every reason to believe that Obama's approach would be just as hard-edged and that felon-busting G-men would rout the crooks and recover our money.

This was not to be.

Yep. In point of fact President Obama immediately post-election installed people who were personally responsible for the mess and were either complicit in or blind to the looting that happened during President Bush's Presidency, including Geithner, Shapiro, Summers and more.

Of course the looting has continued since, and in fact has picked up pace, since the "honest buck" is rather hard to make in a lending environment with no qualified and willing borrowers!

We've also got this:

So, where is the justice in the current crisis? Why have there been so few prosecutions and only feeble attempts, at best, to claw the money back? One reason may be that, in such infamous cases as the Lehman Brothers collapse and Bank of America's absorption of Merrill Lynch, the Fed and the Treasury were intimately involved with the financial elite's deal making at the time. It's difficult to prosecute others for securities fraud if you condoned the deals to begin with.

Ah, recognition of reality! In the mainstream press no less. Congratulations. Better late than never!

More important, the nation's new top prosecutor, U.S. Attorney General Eric Holder, has a history of preferring that deviant corporations be held to no more than a "voluntary cooperation" system in which they investigate themselves privately.

Under the "Holder Memo," which he wrote in 1999 as deputy attorney general in the Clinton administration, bad-boy executives and their corporations who turn over evidence to the government qualify for lenient sentences and fines and, sometimes, for settlements without even indictments. The consequences of their crimes often amount to only the cost of doing business.

Oh, it gets better....

Black vents particular ire at Tim Geithner, who, as New York Fed chair, fiddled while Wall Street imploded; Henry Paulson (and Geithner again), who, as Treasury secretaries, refused to enforce a key banking law; and Alan Greenspan and Ben Bernanke, who, as Fed chairs, were supposed to regulate banks, especially the renegade mortgage units. The two Fed chairs closed their eyes to excess and continued to blow easy money into the bubble.

The key statute that the Treasury flouted under Paulson and Geithner is the Prompt Corrective Action (PCA) law. Congress passed it in the wake of the S&L scandal in 1991, and the first President Bush signed it. It's probably the best, fairest and clearest piece of financial legislation since the New Deal.

.....

The message from the Bush administration was clear: The PCA "ceased to be applied to the big boys," says Camden Fine, president of the Independent Community Bankers of America.

Gee, what's The Ticker been talking about for the last two+ years?

He continues....

Eventually, it became clear that "nothing was happening to the big banks, and everyone knew they were sliding south," Fine says. When four majors—Wachovia, National City, Bank of America and Citigroup—became critically undercapitalized, Fine went to FDIC Chairwoman Sheila Bair to ask why they weren't being subjected to the PCA law, which could have resulted in replacing their executives or even breaking them up. Fine likes Bair, who has a populist streak of her own and whom he finds to be a candid, "hard-as-nails regulator." But he says she "basically gave a non-response": that there were complicated issues and that, perhaps, if she had a free hand, action would be taken. "She was very sympathetic," he says, but what he gathered was that there "was great resistance from the political community."

It is called "regulatory capture" and it is what happens when you have NAKED BRIBES called "campaign contributions" and "lobbying" in Washington DC.

Yet this is exactly what we have had over the last twenty years in this country. Justice? Where? Fair play? Where? Honesty? Where? No, what you have instead is a monstrous snake pit that occasionally spits out one or two vipers that are "sacrificed" to appease the masses.

The Dallas Observer gets the naked credit default swap issue right too:

Geithner told Congress that the government was "blindsided" last year by the explosive risk of the derivatives market, but can regulate it now. That's wrong on both counts. Everyone in Washington knew or should have known the risks in 2000, when the government stopped regarding these complicated bets as felonies and started calling them "investments." Then, as now, the main argument was that if American markets won't clear such swaps, someone else will. But two wrongs don't make a right; nor do a trillion.

Ding ding ding ding!

The danger that is being left unsaid - and unrecognized - is as I have asked repeatedly - is the government a cop or a felon?

Should the people come to the conclusion that The Government is in fact a felon - should there be no enforcement at the state level, no real move to "take back" authority vested in The Constitution, returning it to the states and to rein in the crooks, subjecting them to the just desserts for their crimes, there is a very real risk that The People will decide that there is only one way to obtain justice: through the actions of their own hand.

Lest you think this is an unrealistic view, I direct you to Mexico, where the police have become so corrupt that the people are now catching burglars and torturing them on their own. Vigilante justice is swift, certain, and brutal.

But it is the logical and expected outcome when the people reach the breaking point. Those who believe it "can't happen here" are deluded - it both can and will if our government does not stop condoning and in fact conspiring with the crooks that have robbed the people of this nation. In the collapse of the 1870s there were multiple instances of bankers being pulled from their desks by angry mobs and strung up on the lamp-posts, and while I will not condone this sort of justice being meted out I can and do certainly understand it.

The States can step in and take this ball from The Federal Government in the prosecutor's arena, but whether this happens at the level of Eric Holder or in State AG offices it had better start soon. Irrespective of claims that "the economy is improving" the facts on the ground are nowhere near that complimentary - job loss continues to accelerate, banks continue to operate that should have been shut down two years or more ago, and those who can pay are being looted to cover the debts of those who cannot.

Exactly where the breaking point of The American People lies is impossible to determine in advance, but once that point is reached it is too late to do the right thing.

Slope Of Hope Interview, Pts 2 and 3

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 07:17:00 -0400

Isn't This Illegal?

nospam@example.com (Karl Denninger) — Thu, 29 Oct 2009 15:59:00 -0400

Gee, let's see....

One executive who dealt with Galleon said: “They wanted anything the public did not have. They got various pieces and put them together and that was their edge.”

Uhhhhhh..

"Anything the public did not have" eh?

I thought that trading on material non-public information was unlawful?

Who is alleged to have provided that information? Guess:

The latest development in the Galleon story makes Wall Street banks, like Morgan Stanley (MS) and Goldman Sachs (GS), look pretty bad.

Oh gee, why I am I not surprised?

When will the public - and the rest of the Hedge Fund community - say "enough!"

As noted in the linked article if Galleon was getting information on the order flow of other clients then there are a whole host of questions raised, both from a standpoint of potential legal exposure and from a standpoint of reputational and client risk.

After all, if you're a customer of these houses, do you want your order flow disclosed to those who pony up $250 million dollars for an "inside edge" - that is then used against you?

Uhhhhhh....

GDP Is..... Better Than Expected?

nospam@example.com (Karl Denninger) — Thu, 29 Oct 2009 08:59:00 -0400

Oh what a tangled web we weave....

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

Looks good, right?

Hmmmm.... or is it?

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.

....

Real federal government consumption expenditures and gross investment increased 7.9 percent in the third quarter, compared with an increase of 11.4 percent in the second.

Ok, from this we can compute a few things.

3.5 - 1.66 - (7.9 * 30%) = -0.53%

Now let's adjust for inventories:

The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change.

-0.53% - 0.94% = -1.47%.

Ok, that's bad but not catastrophic and is an actual improvement compared to the second quarter. But....

Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second.

Personal current taxes increased $4.8 billion in the third quarter, in contrast to a decrease of $119.1 billion in the second.

Eeeeehhh... those are both going the wrong way. Taxes up, income down. And...

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

That's worse. A lot worse. Disposable personal income decreased in nominal terms q/o/q by 5.9% while in real terms (inflation adjusted) it decreased q/o/q by 7.2%! That is an enormous swing in purchasing power and not in the right direction!

Personal outlays increased $148.2 billion (5.8 percent) in the third quarter, compared with an increase of $8.2 billion (0.3 percent) in the second. Personal saving -- disposable personal income less personal outlays -- was $364.6 billion in the third quarter, compared with $533.1 billion in the second.

The personal saving rate -- saving as a percentage of disposable personal income -- was 3.3 percent in the third quarter, compared with 4.9 percent in the second.

So into decreasing personal income and disposable personal income people tried to spend anyway. Best guess: most of this was "cash for clunkers", which is the worst sort of "spending" - it is the taking on of more debt by replacing a paid-off car with one that now comes with a shiny (and nasty) payment book. The Trade: Go long auto repo outfits (aside: as far as I know there are no publicly-traded repo companies.)

Nothing in here I like; to the contrary, this report sucks and on a drill-down appears to be full of outright lies.

Looking inside the data, the "big change" in private domestic investment is all residential fixed - up 23.4%. I don't believe it. I've been scouring the homebuilder earnings releases and data, and I don't see the numbers that support this. An improvement over the ditch-diving of the last many quarters, yes - but a 23.4% increase, a swing of fifty percent from Q2-Q3? Oh hell no. Where is it? It's not in Home Depot's or Lowe's quarterly results, it's not in the homebuilders, and I can't find it in the suppliers (lumber companies, etc) either. This sort of move would result in monstrous top-line revenue increases reported by firms in this sector and that simply has not happened.

Nor do the export and import numbers look right. Port of Long Beach and LA anyone? Those numbers also don't add up - swings of 20-25% in one quarter? Not reflected in container volumes and freight loadings. Yet it has to be - how do you get something in or out of here without it going through a port?

Government looks right, both federal and state/local. The "Obama will cut defense and war spending" folks have to be bashing themselves with a hammer - there's no evidence for that in the data, now three quarters into his administration. If you're anti-war and "bring the troops home", you may want to re-think whether voting for Barry was a wise decision - he sure as hell hasn't kept that promise. (Note that I didn't think he would either but that lie sure played well in San Francisco, didn't it?)

Forward the big problem is the deterioration in personal income. You can't spend what you don't have without credit creation, and that's fallen off a cliff. The Fed's credit reports continue to come in with huge contractions - this should not surprise, as demanding that banks lend to people who are seeing their income shrink is into the realm of pure idiocy.

The market likes the numbers although a lot of the move - perhaps all of it - is Bucky getting thrown under the bus once again.

You can't expect the cheerleaders on CNBC to read beyond the headline numbers, and they (once again) did not disappoint in this regard. The first 20 minutes of "analysis" brought not one mention of the decease in personal income or disposable personal income, yet on a forward basis this is in fact the most important piece of information in the report.

You cannot have an economic recovery when on a q/o/q basis real disposable income is contracting at a 7.4% annual rate and worse, the spread between nominal and real income is widening, indicating that mandatory purchases such a food, energy and health care - are increasing.

Financial Reform: Other Testimony

nospam@example.com (Karl Denninger) — Thu, 29 Oct 2009 13:09:27 -0400

I know I keep talking about pieces of this (and in fact posted an earlier Ticker related to Sheila Bair), but I believe it is important to piece it all together.

First, the financial regulatory hearing had one of the most outrageous pieces of testimony that I have heard in a long time from the ABA:

It is critical that banks remain committed to the long-term. For banks to provide long-term loans to, and investment in, businesses, communities, and consumers’ futures, banks must not have their loans and investments marked to prices set in markets that are panicked or are over-exuberant. These are long-term investments, not day-to-day trades. Simply put, if FASB continues its effort regarding mark-to-market, the lesson learned from this financial disaster will be that long-term loans and investments will have their valuations destroyed, and therefore the bank will be destroyed, by mark-to-market accounting during financial panics.

Panics only happen when you first have financial bubbles caused by loose lending policies.

This is the worst sort of complaint from an arsonist who has managed to accidentally burn down his own house! "But the fire was so unfair!" he protests, while hiding his own gasoline can - which he spread liberally around the neighborhood!

SIFMA also ignores the 900lb Gorilla in the room, refusing to accept their member's responsibility for creating the bubbles in the first place, then bleating about "fair value" in a panic of their own creation. But the gist of the issue we now face is in fact that "fair value" is in fact zero for many of the instruments currently being held at or near "par". As just one of many examples we have the HELOC exposure on all of the major banks - 70% of the dollar value is in the bubble states and by law these are subordinate loans - if the first mortgage balance is higher than market value this is an unsecured credit line and has zero recovery value in the event of default, yet there is absolutely no accounting recognition of this fact that I can find in quarterly reports over the last two years.

Interestingly enough the AFL/CIO has a very critical piece submitted to the panel; among their comments was this nugget:

These arrangements may explain why the Federal Reserve has never given any account of how it allowed bank holding companies like Citigroup and Bank of America to arrive at a point where they required tens of billions of dollars of direct equity infusions from the public purse to avoid bankruptcy.

Is there an explanation required? Willful blindness is obvious in this instance. So is the willful blindness that has trashed AFL/CIO (and other) pension plans who were investing in securities that ultimately were proved to be worth far less than represented (and in some extreme cases actually worthless) - all through a process of intentional obfuscation that was known to The Federal Reserve system and yet not only left alone but actively encouraged under Alan Greenspan's tenure, and ignored during Bernanke's.

The fact of the matter is that while "mark-to-market" may be imperfect, published, market prices are superior to all others, in that there is a reference - what a willing buyer will give you for a given asset right here and now.

The function of the banking system is not, as often believed, to allow certain "favored sons" to get wealthy while everyone else gets screwed.

I have repeatedly documented that many of these so-called "securitzations" were the financial equivalent of claiming to have spun flax into gold, in that it is not possible to return more, in aggregate, on a risk-adjusted basis than was present in the original lending transaction. Since nobody works for free the all-in return on any securitization must mathematically be significantly less than would be the case for the same basket of single loans held by the originators. The primary means by which such "flax-spinning" occurred was by hiding risks - not clearly documenting, for example, that <X> percentage of the loans in the pool had no documentation of income or assets, and that HUD had found that those who took "stated income" loans tended to overstate their incomes by 50% or more. By this bit of omission these securities were thought of as "safe", when in fact nothing was further from the truth.

The fact remains that until we force the schemes, intentional mis-valuations and lies out into the open, enforce existing law that makes fraudulent conduct illegal and start locking up the scammers up the down the line trust cannot return to the economy.

What the AFL/CIO needs to understand, along with the rest of America, is that these losses did not happen due to bad luck or a "bubble bursting" - they happened due to lies, intentional obfuscation and even fraudulent misconduct that resulted in the bubble's growth in the first instance, all fueled by making loans - creating credit growth - that the originators of said loans either knew or should have known could not, in aggregate and in the fullness of time, be paid back.

I continue to return to the mathematics because the math is never wrong and can never be debated. Again, the GDP and Credit Growth chart:

From The Fed's own Z1 data the Compound Annual Growth Rate of debt since modern records have been kept (early 1950s) is 8.77%, while GDP has grown at 6.82%, a difference of 1.95%.

Since 1990 Debt has grown at a compound rate of 7.91%, while GDP has grown at 5.39%, a difference of 2.52%.

Since 2000 debt has grown at a compound rate of 8.49%, while GDP has grown at 5.22%, a difference of 3.27%.

The "spread" is and has been increasing and it is a mathematical fact that such cannot be maintained in perpetuity.

Yet the merchants of debt, including Bernanke and The US Congress, continue to refuse to deal with the mathematics - even when it screws major constituencies such as the AFL/CIO.

Here It Comes... (Option ARMs)

nospam@example.com (Karl Denninger) — Thu, 29 Oct 2009 14:15:00 -0400

Hmmmm....

Despite that fact, delinquencies have moved steadily higher with the 30 day + delinquency now reaching close to 50% of all outstanding Option Arms.

"I told you so!"

These loans were never designed to lead to actual home ownership.

They were sold as a means to "buy" a home, but the lenders knew full well that this could never, ever happen given the structure of the note.

These notes were more akin to a levered bet placed on commercial real estate, in that they were worse than the typical commercial "interest-only" loan in their inclusion of a requirement that values continually increase to stay ahead of the negative amortization.

These loans cannot be cured.

The typical OptionARM customer was qualified on the initial rate on the minimum payment, which was usually 2%, interest-only.

For a typical $500,000 California or Florida home, this resulted in a monthly payment requirement of roughly $850 (2% of $500,000 is $833 a month.)

The "real rate", however, on the loan was typically around 6 or 7%, and the rest of the principal and interest was "capitalized". If the amortizing rate was 6% on the note then the P&I for a "full payment" would be $2,982.83, resulting in about $2,100 a month in negative amortization.

If you try to "work these out" and manage to go "to the wall" on the note with a 40 year, 4% amortizing refinance, the note still comes up to $2,082.75 - more than a clean double of the original payment!

The "homeowner", however, can't afford the doubling of the payment. Further, the house isn't worth $500,000 any more - at best it is worth $300,000, which is a big part of why he stopped paying.

These notes were the worst sort of abuse and they're littering the landscape. I know people who have them here in Florida and have defaulted, and there are a scad load of them in California. My prediction originally was that half or more of them would wind up being worth recovery value at best, and this appears to be the case. Since these were nearly all written in the bubble areas, recovery will be fortunate to be 50% of face value.

How many of these are out there? Good question. I have seen numbers from $200 - $500 billion, all from reputable sources. Why don't we have an accurate number from the banks and Fed on these things?

In the "best case" this is another $50 billion in losses and about 25% of the homes purchased in bubble areas from 2003-2006. In the "worst case" this is well over another $100 billion in losses and perhaps as much as half of the homes purchased in those areas during the bubble years.

Either way you slice these losses have not been recognized or accounted for nor has their impact on home inventory and price.

Bair Starting To "Get It"?

nospam@example.com (Karl Denninger) — Thu, 29 Oct 2009 09:16:00 -0400

One wonders....

Oct. 29 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair, breaking with the Obama administration, said U.S. financial companies should prepay into a fund the government would use to unwind large failed firms.

Congress should set up a Financial Company Resolution Fund and force institutions with more than $10 billion of assets to pay before a firm collapses, Bair said in testimony prepared for a House Financial Services Committee hearing today. Investors in failed companies also should take losses, she said.

Getting a little religion here Sheila?

Let's review, however, history. Recent history.

Preservation of the legal strictures of capital structure is very important in order for investors to have a reasonable expectation of consequence in the event of a failure - and thus be able to price risk.

But this foundational principle - the sanctity of contract and capital structure - has been roundly abused and flatly ignored by the government since this crisis began.

Chrysler, GM, a plethora of banks including Lehman, Bear and others - in exactly none of these circumstances has the capital structure remained unmolested. The abuses in GM and Chrysler's cases, in particular, were ridiculously egregious that one simply can't make the argument that there is in fact a distinction between "Senior" or "Secured" and unsecured bondholders any more.

Never mind events such as Indymac Bank's failure - the bank holding company and bank itself were effectively asset-stripped by government fiat, leaving the supposedly-super-senior claims - those of depositors who had more than the insured limit on deposit with the bank - with absolutely nothing against which to recover.

The draft legislation creates a council of regulators, including the FDIC, to monitor companies and the economy for systemic risk. While Bair supports the concept, she said the proposed council “currently lacks sufficient authority to effectively address systemic risks.”

Congress should require a presidential appointee as the council’s leader to ensure its independence and set an odd number of members to avoid deadlocks, Bair said.

I agree. That appointee needs to be a publicly-vetted and appointed person with Senate confirmation. Since this is inherently a function of protecting the public purse, it must NOT fall to an unaccountable person such as Bernanke, who has shown repeatedly that he has not and will not enforce the regulatory strictures even when so demanded by black-letter law, and that Congress will not place him - or you - in the dock when you willfully and intentionally ignore the law.

Bair and lawmakers have said a lack of a mechanism for shutting large firms in an orderly way led to ad hoc programs, such as the $700 billion taxpayer bailout used by lenders including Citigroup Inc. and Bank of America Corp.

There is such a system - you just don't like it and therefore have willfully and wantonly ignored it. It is called bankruptcy and in fact the regulation of same is one of the enumerated powers in The Constitution delegated to the Legislature (Art 1 Section 8)-

To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States;

How can appointed Federal Officials manage to be installed in their offices without reading The Constitution, say much less understanding it?

This is a good start Sheila - now let's see you enforce "Prompt Corrective Action" and close each and every bank that has a negative ratio of assets to liabilities on a market-price basis, so that the disasters we've seen over the last two years with 20, 30, 40% or more losses to the Deposit Insurance Fund stop happening.

Oh wait - that would mean you'd have to close some of those "really big banks" here and now, wouldn't it? It would also mean you'd have to take out that pile of trash called "GMAC", which after huge infusions of taxpayer capital is still trying to grab more to remain alive, while running national advertisements under their name "Ally Bank" for above-market rate CDs!

Hmmmmm...

Slope Of Hope Interview, Pt 1

nospam@example.com (Karl Denninger) — Thu, 29 Oct 2009 07:56:00 -0400

Ending "Too Big To Fail"?

nospam@example.com (Karl Denninger) — Wed, 28 Oct 2009 08:17:00 -0400

The WSJ reports:

WASHINGTON -- A deal between the Treasury Department and a key House Democrat would give the government sweeping new powers to police the country's largest financial companies, including the ability to seize and break up failing companies and order large firms to shrink.

Uh huh.

The proposal would require financial firms with more than $10 billion of assets to pay for the unwinding of a collapsed competitor. The measure would also give the Federal Reserve the power to direct any large financial holding company to sell or transfer assets or stop certain activities if the central bank determined there could be a "threat to the safety and soundness of such company or to the financial stability of the United States." This suggests the Fed would win new authority to order companies to shrink.

The Fed.

The same Fed that ignored the subprime lending fiasco? The same Fed that gave a rubber stamp to a black-letter unlawful merger between Citi and Travelers, then lobbied for retroactive passage of Gramm-Leach-Bliley to legitimate it? The same Fed that permitted primary dealers and other large financial institutions under its supervision to transact credit default swaps with AIG despite the fact that AIG's financial products group was inadequately capitalized (by a factor of 50 or more) to cover those transactions?

The Hill of course sees it differently:

The Financial Services Committee and the Obama Administration are committed to ensuring that the taxpayers are never again called upon to take responsibility for Wall Street’s business decisions. The bill creates a strong, inter-agency council to monitor and oversee stability of the financial system and address threats to that stability. The bill provides strengthened supervision for large, interconnected financial firms to prevent failure. A new resolution regime will ensure that firms that fail despite these measures will do so in a way that minimizes impacts on taxpayers, the health of the financial system and the overall economy.

Let's not mince words - there is good in here. Among the good parts of this bill are that "too big to fail" will become formally invalid as public policy.

It requires the failed firm's creditors and shareholders to bear "first loss", and, if the brief is to be believed, only if they are entirely wiped out and there remains a shortfall will assessments be laid - on other large financial institutions, not the taxpayer. This should result in large amounts of "social pressure" to stop stupid actions, since the risk of them can fall on other large market participants.

It requires that securitized products retain 10% of the risk (which can be reduced to 5% but not lower by regulators) of any product so securitized, stopping the "pass it all on and watch the bomb go off on the back of the fool who you sold it to" game.

And finally, it requires approval of the Treasury Secretary for The Fed's employment of 13(3) authority - the blanket "we can lend to anyone" authority that The Fed has cited (and in my opinion both abused and exceeds the limits of) during this crisis. In addition, it prohibits "special facilities" entirely - that's a real improvement.

Left unanswered is whether there are criminal penalties imposed for violations. My expectation is that like the rest of the "toothless tiger that roared" games out of Washington DC the critical "or else" is missing, but we'll see once the markup is complete.

I cannot endorse this as written, but I can say that it is a vast improvement over what we have now, and what has happened to date. For The Fed to have that primary seat at the table and the "final backup authority" they must be subject to regular and comprehensive audit, so as to insure that the people can see they are complying with the strictures of law - otherwise any so-called "restrictions" are nothing other than a joke.

In addition it is critical that this law include criminal penalties for violations as any failure to follow the constraints laid down will of necessity expose the taxpayer to enormous loss (as has occurred in this instance), and as there is no reasonable civil penalty available in such a circumstance, severe federal criminal penalties are appropriate.

We must not only end "too big to fail" we must also end "too bribed to give a damn", which has permeated the entirety of Washington DC over the last three decades.

The bill being debated in committee hearing today (and presumably being marked up soon) is a good start, but without the addition of full "sunshine" and criminal penalties for violations to the mix it will remain merely a set of suggestions that can and will be ignored when it suits the "rich and powerful", just as has been "Prompt Corrective Action" and the existing bevy of alleged "laws" that supposedly prohibit and should have prevented the outrageous practices that led us into this mess.

More Arrogation Of Power?

nospam@example.com (Karl Denninger) — Tue, 27 Oct 2009 11:35:00 -0400

Bloomberg has an interesting story up on the AIG derivative "payoff" mess I've repeatedly written about (just stick "aig & billions" into the search box and start reading. Make sure you have a lot of time):

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.

....

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

Where did the NY Fed get this authority? Remember, this wasn't the NY Fed's money - it was ours. Where was it appropriated by Congress? This was not part of TARP - AIG was separate.

All appropriation bills must originate in The House.

This one didn't originate at all. It was simply arrogated by The Federal Reserve and the NY Fed.

Section 13(3) of The Federal Reserve Act allows The Fed to lend to anyone under "unusual and exigent circumstances." But this was not a loan. It was a pass-through payment to Goldman Sachs and other banks for credit-default swaps that were in fact functionally worthless, as AIG was functionally bankrupt. Why was it done?

One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.

So what?

And which of those banks were at risk of failure? Goldman? Merrill? Deutche Bank or Soc Gen?

This deal was even worse than it first appeared. The Fed also took a bunch of assets (which, it appears, is flatly illegal) and set them forward in an "off balance sheet" thing called Maiden Lane. How are they doing?

According to a quarterly New York Fed report on its holdings, the $29.6 billion in securities held by Maiden Lane III had declined in value by about $7 billion as of June 30.

Remember, Bernanke has repeatedly told us that The Federal Reserve was highly unlikely to lose any money on any of their programs.

In reality it looks like the loss - so far - has been 25%.

If that's "unlikely" I'd like to know what "likely" is.

More to the point, this appears to be an unauthorized appropriation of funds in fact by The Federal Reserve and NY Fed in which not only United States asset losses but those of FOREIGN INTERESTS were effectively transferred to the US Taxpayer without Congressional review or approval.

“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”

The Fed created this mess. "Loose money" along with willful blindness to reasonable regulatory requirements and in fact black-letter statutory requirements under the law to apply "prompt corrective action", along with wanton and reckless refusal to supervise and impose controls on firms levered 20 or even 30:1, especially given that Henry Paulson lobbied the SEC to remove the investment bank leverage limits in 2004, were the actual and proximate cause of all the failures.

Fannie, Freddie, AIG, Bear Stearns and Lehman - all were levered at more than the former 14:1 limit when they blew up by at least two and in three cases more than five times. Every one of these failures is directly traceable to excessive leverage, a policy enabled by and lobbied for by Hank Paulson before he was appointed as Treasury Secretary.

That The NY Fed refused to step in and prohibit firms under its regulatory authority from engaging in counterparty transactions with AIG until and unless AIG had first proved it was sufficiently capitalized to honor all of it's commitments, is a gross dereliction of regulatory duty.

The argument that The Fed was "powerless" to regulate AIG itself is immaterial - The Fed absolutely had the ability to regulate those firms under it jurisdiction in their trading with AIG.

In allowing systemic leverage to be concentrated and ramped up to 20, 30, even 80:1 or more against actual capital as was the case with Bear Stearns, Lehman and AIG, The Fed was explicitly involved in both setting the table and assembling the financial nuclear device that went off on Bear's, Lehman's and AIG's balance sheets.

Then you have Friedman:

Friedman’s role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.

That's nice.

“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”

If that's true then Goldman double-dipped and owes the taxpayer the full amount paid it through AIG.

If that's false then one wonders whether SarBox, which is supposed to prohibit false statements by company executives, has any meaning at all.

The NY Fed and Federal Reserve must be compelled to open their books - not only on this sordid mess, but on all of their activities.

If these institutions are going to be transacting with the public's checkbook the public has a right to know exactly what they're doing, never mind that the black letter of The Constitution requires that all appropriations - that is, public spending - originate not in some smoky room at the NY Fed but rather in The Halls of Congress.

The Constitution is not "Articles of Suggestion."

Consumer Confidence? Ha!

nospam@example.com (Karl Denninger) — Tue, 27 Oct 2009 10:27:00 -0400

Gee, this is a green shoot....

NEW YORK, Oct. 27 /PRNewswire/ -- The Conference Board Consumer Confidence Index®, which had declined in September, deteriorated further in October. The Index now stands at 47.7 (1985=100), down from 53.4 in September. The Present Situation Index decreased to 20.7 from 23.0 last month. The Expectations Index declined to 65.7 from 73.7 in September.

The kicker....

In fact, the Present Situation Index is now at its lowest reading in 26 years (Index 17.5, Feb. 1983). The short-term outlook has also grown more negative, as a greater proportion of consumers anticipate business and labor market conditions will worsen in the months ahead. Consumers also remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays."

Let me guess - Citibank's decision to jack rates to 29.9% didn't have anything to do with that?

Neither does the gross and outrageous under-reporting of jobless rates by the government?

Neither does the incessant attempts to jack up taxes by state and local governments (instead of cutting spending back to, for example, year 2000 levels)?

Neither does the fact that the very banks who managed to play the "end of the world" card just one year ago, effectively stealing government guarantees and handouts worth some twelve trillion dollars, are now paying record-level bonuses?

Neither does the fact that Bwarney Frank and Chris Dodder are "furious" about the credit card companies rate-jacking people, but they in fact wrote the bill to allow it to happen?

Neither does the Federal Government's outrageous and insane refusal to acknowledge that we have too much debt, including at the federal level, and you can't fix a drunk's problem by giving him a bottle of whiskey?

Many people consider The American People to be "sheep."

It appears that The Sheep have watched a cadre of a dozen foxes (the billions of "campaign contributions") and five sheep holding a vote on what's for dinner, and realized that in such a rigged game the best choice is not to play, kneecapping the foxes' ability to feast.

Beware if your thesis of "economic recovery" requires consumers to "go out and shop", for it is damn hard to do when you have no job, your credit card interest rate was just jacked to 30%, you were laid off yesterday afternoon and you just got a foreclosure notice in the afternoon mail.

S&P 500 Statistics As of October 30, 2009

Total Market Value ($ Billion)		9,124
Mean Market Value ($ Million)		18,248
Median Market Value ($ Million)		7,635
Weighted Ave. Market Value ($ Million)		75,767
Largest Cos. Market Value ($ Million)		344,431
Smallest Cos. Market Value ($ Million)		642
Median Share Price ($)		31.800
P/E Ratio*		137.98
Indicated Dividend Yield (%)		2.09