The Market Ticker

Mid-Year 2009 Checkup

nospam@example.com (Karl Denninger) — Fri, 03 Jul 2009 13:25:00 -0400

It doesn't seem possible that six months have passed under the bridge of time in 2009 yet, does it? Yet they have.

Let's take a look at the scorecard first from my 2009 Prediction Ticker, remembering of course that I have six months left!

The economy will not recover in 2009. No sign of it yet, "green shooters" be damned. I predicted that U3 would reach 8% by the end of the year, it has exceeded that wildly, and is now 9.5%. U-6 also has exceeded my predicted value already.
Deflation, not inflation, will become evident well beyond housing. Already has. CPI and PPI have come in with negative prints as has capital goods pricing.
Housing prices will continue to decline. Yep.
The Fed's attempt to "pump liquidity" will be shown to be an abject failure. I'll leave this one on the table for now; I believe the evidence is in, but I'm in the minority. Score this one as a "no result" as of yet.
GDP will post a 12-month negative number. 12 months aren't up yet, but we're working on it!
The Stock Market has not bottomed. Remember, this was made with the market around the 900 level. Major check; we declined to 666. My secondary prediction was a 50% trading range and a 5xx low; we missed that by 67 points, but I still have six months left. I'm sticking with this one.
Precious metals will not be a safe haven. Oh Jim Sinclair! Where's my $1,600+ gold price? (Or for some, their $5,000+ gold price?) Missing, that's where. I know, I know, its all manipulation (instead of debt deflation.) Check.
The Dollar will not collapse. Hasn't yet.
The pound or euro will be where the FX dislocation originates if it occurs. I predicted Par for both being a possibility, not happening yet. We'll see what the next six months bring.
The US Consumer will go from a negative savings rate to a seriously-positive one. I'm predicting 4% but it could go as high as 10%. Major double-check! We're up close to 7% now. That's a home run in any book.
Commercial Real Estate will effectively collapse. The REITs have not yet imploded but the pricing and occupancy look like something that came out of the back end of a horse. Anyone got a finger to lend to push this pile over?
Along with the above, expect 10% of retail stores to close. We're getting there.
Several states will get in serious financial trouble and outright default of one or more is possible. California anyone? Major check.
Mortgages are not done. Yep. Prime, OptionARMs, ALT-A.
If you want to refinance you may get one brief shot at it with long rates around 4%. Check again. Hope you took it.
Those who have said that the corporate bond market is being "unreasonable" in its expectation for defaults will start to look like the jackasses they are. Ding! Check CDS spreads the last few weeks? They're widening again. Even worse, the actual corporate default rates are getting rather nasty. This trend continues.
Calls for "more lending" to consumers and businesses will go exactly nowhere. Major check. The drunk who is passed out from intoxication can't lift the bottle. Nice try guys.
General Motors and Chrysler will wind up in bankruptcy. DING!
Protectionism and currency manipulation will rear their ugly heads. This has started but there's much more to come. Watch out; this has the possibility of igniting wars.
Commodities will appear to be headed for a new bull market but this will turn out to be a false hope. Attempts to manage oil output to prop up the price will fail. Crude just rolled over, in fact, and major agri commodities were lock-limit down on one day last week. Ding.
Sovereign debt defaults will number at least three. Not yet.
China will have its first large-scale rumbling of civil unrest. Maybe. Scattered reports, but nothing confirmed. Let's call this a "not yet."
Foreign uptake of Treasuries will be choked off. DING DING DING DING DING DING DING DING DING! Treasury changes the definition of "indirect bid" and then under the NEW definition demand appears to have (just recently) collapsed. This, by the way, is double-plus ungood.
"The City" will be recognized as getting it worse than we are. No kidding? :)
Things will get "revolting" in a number of nations. Not yet on any meaningful scale, unless of course you count Honduras and Iran. I'll call it a "not yet" for now, as those weren't the areas I was thinking of and I don't believe in "curve fitting."

So let's see - I have 25 predictions and of them I can score 13 "confirms", half the year is over, and no busts as of yet (although there is one, the Euro/Pound prediction, that is looking shaky.)

That's not bad, and we have six months left. I'll take it.

Now let's talk about what's going on.

First, I want to focus on housing, because, well, everyone else is, even though the housing mess is a symptom, not the cause of the problem. But the WSJ's "opinion" page has an interesting article up this morning:

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures (homes in foreclosure during December of 2008 generally entered foreclosure in the second half of 2008). A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

Stan then waxes on about the necessity of "real" down payment amounts, something I've harped on for more than two years. In fact, on April 6th 2007 I said this:

You should have put down 20% of the purchase price as a down payment. The down payment serves two purposes - it insures you have "skin" in the game, and more importantly, it demonstrates conclusively that you have the discipline to amass a decent chunk of cash and sequester - rather than spend - that money. Historically, this money had to be "seasoned" - that is, it could not have come from some other form of loan (e.g. a personal loan) or gift (e.g. your parents give you $20,000); the source of the down payment has historically had to be disclosed and proven.

The reason for this, by the way, is not "simply" (as is often claimed) to provide positive equity. In fact, that's a side effect that happens to be very beneficial.

What Stan misses (as do the others) is that down payments are an inverse to leverage, and it is leverage throughout the system that got us in trouble in the first place.

Unfortunately neither the government nor columnists such as Stan "get it" in this regard. Stan claims this is "New Evidence" in the title of his piece; it is, in fact, not new at all. I've been yelling about this since literally the founding of The Market Ticker, and with good cause - it is the reason we are in this mess.

The market is a cruel enforcer of reality in this regard - when Fannie, Freddie, AIG, Lehman and Bear blew up all had leverage ratios in excess of 30:1 - that is, less than a 3% decline in asset value caused them to detonate.

This is the bottom line in the housing and indeed all other markets. Values fluctuate in the marketplace and the only way you can avoid those fluctuations becoming a bankruptcy trigger is by leaving yourself sufficient cushion by keeping leverage to reasonable levels.

This same principle applies to banks, it applies to homeowners and it applies to businesses. The concept of "too little skin in the game" is really a matter of leverage ratios, and how far an asset can depreciate in value before the holder owes more than the asset is worth. Once that occurs the so-called "asset" becomes a liability, and in short order it will sink you economically.

The underlying foolishness among our so-called "experts" in industry and government is that nobody is talking about or addressing this.

Why?

Because doing so means that we must:

WITHDRAW the "excess stimulus" that made this idiocy possible in the first place, and is attempting to continue it.
ACCEPT that asset prices will FALL until they reach equilibrium with income, and will appreciate only in concert with real income from production, not from leverage and debt.
DEFAULT the existing bad debt that cannot be serviced under the above two points, forcing those institutions and individuals who are over-leveraged to go bankrupt.
DEAL WITH the inevitable contraction in GDP that will come from this, even though it will be painful and unpleasant.

The last three points sound awful, and they are.

The problem is that they're more awful today than they were two years ago when I started yelling about this in the current economic malaise, and are much more awful than they were in 2000, when we should have done it, but refused due to the idiocy of Alan Greenspan and our elected government officials at the time.

The longer we wait the worse the damage will get, and you need no more evidence than what has recently come out of the auto industry.

The last couple of years of the bubble featured 14 million unit sales rates. This has now collapsed, of course, along with GM and Chrysler.

Their own people, along with the government, now predict that "stability" will come when we return to a roughly 10 million sales rate for new vehicles.

THAT IS A TWENTY-NINE PERCENT DECLINE!

Folks, do you realize what we're talking about here? If you look at the 2009 "Year In Review" Ticker (linked above) you will find that I discuss (again) the fact that in 2000 the Internet fraud had created an "excess" 10% GDP that had to be taken down to restore balance. It wasn't - and instead of 10%, now we are faced with 25%.

But the automakers are telling us that the real number in terms of capital goods might be closer to thirty percent.

It is happening here and now whether the pundits like it or not. We have gone from a -3% savings rate (roughly) to a +6.9% one. This is a 10% swing and with the consumer being 70% of the economy that's an immediate hit of somewhere between 4.83% and 7% of GDP (depending on whether you "count" the negative as an additive force, and you probably should.)

The problem is that it doesn't stop there: The government calls this a "savings rate" but it isn't. It counts debt repayments as "savings" among other distortions, meaning that trying to use the "savings rate" as an indicator of future capital formation is a lost cause. In point of fact there is no capital formation going on - people are cutting back on their voluntary 401k and IRA contributions because they don't have any money to put in - they are furiously paying down debt as fast as they're able in an attempt to avoid foreclosure and bankruptcy.

That of course means that spending drops which in turn means that employers need fewer people to work. Capacity utilization is in the toilet and average hours worked has fallen to never-before-recorded numbers in the history of the data being collected. This in turn feeds more layoffs which begets more people without income to spend on discretionary purchases (and in some cases non-discretionary ones!)

There is no avoiding the necessary contraction in GDP to bring the system back into balance, and the longer we continue to allow our government and media to LIE about what has happened, who is responsible, and what has to happen before the economy can clear and recover the worse off we will be.

Two years ago I began beating the drum on the prescription for a solution. It involved pulling the rug - intentionally - on housing price supports, and allowing them to collapse to sustainable numbers, all at once.

This would have resulted in a lot of people losing their homes. But by now, they'd be starting to buy them back at half or less of their former prices - and at sustainable payments under a 30 year fixed mortgage. They would have been able to save the 20% down payment too.

We would have seen myriad banks, including most of the big ones, go under. So what? The FDIC would have consumed the "bailout funds" in paying off depositors, which is bad, but the debt would be out of the system. Instead we have gotten exactly nothing out of more than $2 trillion now borrowed and spent by government - the debt is still there, it is still toxic, and it is still preventing recovery.

This story is by no means finished. The government has spent $2 trillion it does not have and has committed to nearly $6 trillion more in either guarantees or outright payments, and yet capacity utilization continues to drop, employees continue to be laid off, consumption continues to fall and frantic attempts to pay down debt and avoid default continue to rise.

In response the economy has continued to shrink and tax revenues have sunk through the floor, skyrocketing the deficit. Treasury apparently detected a reluctance among foreigners to continue buying our used toilet paper and changed the rules on reporting of "indirect" sales - which then, even after the change to intentionally overstate foreign interest, have precipitously declined anyway. It is fair to say that foreign interest in Treasuries is all-but-exhausted and barring a collapse in equity prices to recreate a "fear" environment for holding government bonds, there is going to be an increasing problem with funding the insane "prop up the game" money flood policy of The Fed and Treasury.

California is just the beginning of this unraveling; they are now issuing IOUs. Most other states will find themselves in similar circumstances and be forced to dramatically curtail spending along with raising taxes. The public labor unions (state and federal) are currently able to prevent their overly-fat pension and benefit programs from being brought in line with private industry, but this will not last forever, and when that wall cracks it will come with ferocious intensity. The "death spiral" of higher taxes leading people to erect their middle finger and either cocoon, go underground with their earnings, or depart has begun in California and will spread - count on it.

At some point reality must be faced, and we may as well do it now while we still have civil order. Those politicians, numbering nearly all of them from both parties, who argue that this can be "avoided" or that we can "support housing (and/or asset) prices" need to be run out of town on a rail.

There is no way to prevent the unwinding of leverage when the carrying costs exceed income and the more debt we as a society take on in trying to do so the worse things will get in the end, as we are simply adding to the pile of defaults that must occur.

I am quickly running out of possible scenarios to prevent a severe deflationary depression from taking place. By "severe" I mean 20%+ U3 unemployment, GDP contraction of at least 25%, and a possible loss of federal funding capacity leading to the immediate destruction of Medicare, Medicaid and Social Security, a 50% reduction of defense spending and near-complete-elimination of all other Federal Programs due to a "sudden stop" in the ability to fund Treasury issuance. Yes, it could get that bad, and it could happen a lot faster than you think.

I wish there was good news - "green shoots" - that I could honestly find and report. There are not. There is only more obfuscation and fraud, which I have and will continue to chronicle here in The Ticker, not so much in the belief that government gives a damn, but rather so that historians have it available later and, if the collapse I believe is possible does materialize, the angry proletariat with pitchfork and torch will know where to properly direct their wrath.

Government needs to lock up the psychopaths that have run the asylum for the last 20 years and let adults into the room to rationally discuss the inevitable and how to best deal with it. They're refusing now, just as they did when Bush was President. This is not a partisan debate - even having lost badly in November the Republicans are wasting time with the same old canards about "Tax and Spend" instead of attacking the problem at the root: fraudulent credit issuance, much of which they championed and enabled themselves.

Happy Independence Day

"BOOM!" (More Obfuscation)

nospam@example.com (Karl Denninger) — Wed, 01 Jul 2009 15:35:00 -0400

"Someone" paid 7% for overnight money on the Fed Trading system last night (that "someone" was a bank, by the way.)

This will be claimed to be "ordinary" end of quarter distortions for closing the books.

Don't believe it for a second.

Let's put this in plain language: The discount window is open for any bank that has good collateral at less than 1/10th of that interest rate.

Therefore there is absolutely no reason for any institution to go into the Fed Funds market for overnight money at 7% unless they have no good collateral to post against it and thus cannot go to the window.

So who is it? No idea. And while the amount borrowed overnight at that rate may be tiny, that's not the point - the point is that the last time we saw anything that dramatic was just before it all went "boom" last year.

Yes, I'm sure that end-of-quarter had something to do with it. In fact, I'd be stunned if it did not.

However, as I noted, there's no reason for anyone to pay that if they have good collateral to post at the discount window, given that you can do so for 1/10th or less the price.

Keep your nose to the ground and your eyes open.

Someone (or more than one someone) is in trouble.

Conspiracy To Hide Bubble-Formation

nospam@example.com (Karl Denninger) — Wed, 01 Jul 2009 09:15:00 -0400

In yet another move to make a mockery of so-called market transparency, and again with mad props to Zerohedge, we have this:

The Exchange has filed with the SEC to implement the decommissioning of the DPTRrequirement following the July 10, 2009 trade date. Accordingly, the last required submission of the DPTR will be on July 14, 2009, which is the second business day after the last trade date for which the DPTR is required.

Go read the entire Zerohedge article; what this means, in short, is that the ability of people (like you and I) to see the fact that a handful of banks, most specifically Goldman Sachs, constitute the majority of NYSE trading volume - and they're trading for their own book, not for customers, will no longer be disclosed.

This "back and forth trade" between a handful of institutions is nothing more than the old "pump and dump" game that has been played in the OTC market forever - and almost always screws the individual investor.

This is no different than you and I selling a house back and forth between us repeatedly, each time at a higher price. We both appear to be geniuses as we're both making a "profit", right?

Well, no. One of us is destined to take a horrifying loss if we do not find a sucker to make the final transaction with.

The embedded scam is that real gains require real parties at interest and not a closed system of a couple of guys passing an asset back and forth in a transparent attempt to "bait" someone else into becoming the sucker to offload that asset to.

The parallels to the housing bubble are not coincidence. There is no "value" being created nor is there any actual value appreciation taking place when people pass an asset back and forth at ever-higher prices. Only when there are lots of parties participating on their own, organically, does a market truly exist and does value align with price. Otherwise the so-called "price" is nothing other than a cheap parlor trick.

Zerohedge has been documenting this game now for months as Goldman in particular has come to represent an outrageously large percentage of the entire NYSE volume.

The problem of course is that, at least on paper, market manipulation, irrespective of what form of parlor trick you choose to use, is a serious violation of the law. Of course these violations of the law have been ignored for so long that nobody seems to care any more, but the fact remains that should the public come to believe that the NYSE has turned into nothing more than a gigantic pump-and-dump scheme operated by a handful of banks trading between themselves with publicly-guaranteed funds the consequences could be catastrophic.

So rather than stop it, the NYSE is doing what all good robber barons do - they're obscuring the data so nobody can see it any more.

More "change we can believe in"; the blackjack dealer is once again stashing a whole bunch of aces and kings under the table for his use whenever he deems that he "should" have a blackjack, and you, once again, are the sucker just as you were in the housing bubble.

Wanna play some 21?

Update: The NYSE apparently didn't like Zerohedge's characterization and issued a response; my comment is the same as theirs - why not ADD to the disclosure instead of redacting the "older" format? I'm with them on this - more disclosure always beats less.

To Dennis Kneale: You're An Idiot

nospam@example.com (Karl Denninger) — Tue, 30 Jun 2009 20:32:08 -0400

Since Dennis saw fit this evening on CNBC to "go after" bloggers who in turn had gone after him, yet he omitted The Market Ticker, I'll go ahead and put a full-on dredge out behind my stern and slow to 3kts.

And Dennis, if you would like me on your show, I'll be happy to appear. Phone is fine. And I'm not anonymous, nor do I want to be - CNBC already has has my full bio, my full name, and my CNBC-standard disclosure document back with a digital signature affixed. You can also "whois" this domain and get my full name and address. Good enough? Several employees of NBC Universal are on my forum and a CNBC producer has my direct email address - just ask around and I'm sure you can obtain it, and if you do email me I'll be happy to call you at your convenience.

OK, now on to the facts - your idiotic and utterly unsupportable "the recession is over" call.

There are two types of recessions, if you happen to know more about economics than you knew about options a year ago, when you were caught asking on the air "what's the VIX?"

The types of recessions are inventory driven recessions, the most common, and credit driven recessions.

The last material credit driven recession was in the 1930s. We called it the "The Great Depression."

Inventory-driven recessions are primarily about excessive industrial capacity for demand. That is, manufacturers and suppliers of services get too bullish about prospects, build too much capacity and inventory, and wind up engaging in a destructive price war in an attempt to "win". This drives down profits and ultimately forces the weaker firms out of business, ergo, recession - GDP and employment decline. Having cleansed itself of the excess, the economy recovers. The trigger for these recessions is often (but not always) an external shock such as the oil embargo in the 1970s or the collapse of the Internet fraud-and-circuses games in 2000.

The second sort of recession is a credit-driven recession. Excessive credit creation - that is, loans going too far toward "fog a mirror" qualifications (and in some cases, such as the most recent event, actually reaching "fog a mirror") drives one or more asset bubbles. These pop when effective interest rates in the economy reach an effective level of zero, usually because the amount of leverage available becomes for all intents and purposes infinite (Bear and Lehman at 30:1, Fannie/Freddie at 80:1, AIG at god-knows-what, and duped "home buyers" buying with zero down for a true infinite leverage ratio.) This excessive credit creation drives a speculative asset bidding war which in turn causes prices to go sky-high for one or more types of asset.

The latter sort of recession is triggered because the cost of borrowing money is never actually zero, even if people pretend that it might be. As a consequence the lenders begin to earn a negative spread and lose actual purchasing power. This is an unsustainable situation because cash flow cannot be fudged nor can anyone sustain a negative cash flow for very long; no matter how much you start with if you spend more than you make eventually you go broke.

Recessions cannot end until the conditions that caused the recession are removed from the economy. This is elementary logic and obvious to anyone with an IQ larger than their shoe size.

For an inventory recession growth returns when enough capacity is destroyed through layoffs and inventory selloffs to bring capacity and demand back into balance. Employers then hire new workers and the economy recovers.

For a credit recession, however, there is a much larger problem: The reason real interest rates went negative is that debt has a carrying cost and consumes free cash flow; so long as the debt taken on in the credit binge remains the cash flow impact also remains.

Default and bankruptcy clears excessive credit (debt) from the system - if it is allowed to occur. But if it is not, then the bad debt remains on the balance sheets somewhere and the cash flow impact remains in the economy. Employment remains weak, capital spending restart attempts falter as demand fails to return and credit quality continues to remain insufficient to support new credit demand.

The consumer is 70% of our economy, give or take a few points. The consumer's "savings rate" (which government blithely declares as income minus spending), which was in fact negative (that is, consumers were spending more than they made through taking on more and more debt), but is now solidly positive at 6.9%.

The impact of this (6.9% X 70%) is an immediate 4.83 decrease in real GDP. Fudge the numbers all you want (and government will), but this is the math, and the math is never, ever wrong.

The truly bad news however is that most of the time saving in fact turns into capital formation - that is, it becomes investment. But government doesn't differentiate between actual savings and debt repayment - their formula is simply "income less spending = savings rate."

You had one guest on this evening who "got it", but you wouldn't let him explain it, so I will.

Consumers are not saving, they are paying down debt in a furious attempt to avoid defaulting on nearly $1 trillion in outstanding credit card balances that have gone from 11% interest to 29.6% along with OptionARMs that are experiencing a tripling of payments while the home's value is underwater and precludes refinance, all while consumers are being laid off by the hundreds of thousands monthly.

We as a society and government are doing everything in our power to avoid the banks and others having to take their medicine - that is, to allow the excessive debt to be defaulted. We have in fact shifted more than $2 trillion dollars of actual bad debt onto the Treasury and Federal Reserve rather than allow the market to declare it defaulted and force those who hold too much of it into bankruptcy, and we continue this asinine and exactly backward program to this very day.

This is an utterly idiotic policy because the condition that led us into this recession - excessive debt - must be removed, not shifted around and hidden, before the recession can truly end.

Japan tried what we're doing in the 1990s and failed. The Nikkei never recovered its former highs, in fact, it never even got close. Japan's economy never managed to get materially out of deflation and is now back in it as a direct consequence of their refusal to force the bad debt into the open and default it.

We are going to suffer the precise same fate for the precise same reason unless our government and economic leaders stop hiding the bad paper and force it out into the open where it will default and be removed from the economy.

Your network has fawned all over Bernanke when in fact he is acting exactly backward compared to what must be done - he is hiding bad assets on his balance sheet, allowing banks to hide bad assets on theirs, and refusing to expose the liars, cheats and frauds (along with their phony "assets") so they will default and clear the system of bad debt. He is doing this because he is protecting those who wrote all that bad paper, mathematics be damned, and if it doesn't stop we will at best play Japan and at worst have a Depression far worse than the 1930s, as our systemic leverage ratios still, to this day, are higher than they ever were in the Great Depression!

This is not about what I believe Dennis, this is about mathematical facts. Real GDP has taken a 4.83% contraction already from consumers alone - now add into this the pass-through effects on manufacturing and service output from unemployment and the numbers are even worse. It matters not what the government cooks up - what matters is what people actually do.

Finally, on your so-called "Golden Cross"; for it to be valid the 200MA and 50MA must be rising. The 200MA is falling; ergo, it is a false signal. Go look at some charts; this indicator is no better than a coin toss if the second condition, which you conveniently omitted, is absent. Better yet, talk to a market technician that knows his butt from a hole in the ground. I do a nightly technical video available on my forum and pointed this out several days ago.

I will be happy to debate this at your leisure at any time live on the air Dennis, and will tattoo your "Recession Is Over" call on your forehead. In addition to CNBC I will issue my own challenge - let's do this on Podcast. I have a show on Blogtalk, and will schedule a separate show of duration of anywhere from 15 minutes to 1 hour (you choose the length of the beating you wish to endure of the topic) and we'll go at it. The rules are simple: No talking over one another, and nobody hits the MUTE button; you bring your best alleged facts, and I'll bring mine. You can also bet that this Ticker will be prominently featured when, not if, you're proved to be just as ignorant of economics as you were on options hedging strategies and the VIX, or if you attempt a stunt like you pulled on the blogger who DID agree to be interviewed.

I'll bet you won't take me up on this challenge for one simple reason: your claims are unsupportable and you know it.

The teleprompter will not save you.

"Starve The Beast" - July 4th, 2009

nospam@example.com (Karl Denninger) — Tue, 30 Jun 2009 10:13:00 -0400

Perhaps its time.

There have been a number of people on the forum talking about this, with one of the most recent converts being "iflyjetzzz".

Look, we can rant and rave about market manipulation and government-sponsored games. We can petition the SEC, the FBI and Congress. We can demand that they stop it all we want.

But they haven't and likely won't until and unless America gets pissed off enough to force them to act.

So how do we make that happen, yet remain within the law?

Its not that hard, and in the intermediate and longer-term it would be incredibly positive for our economy and nation.

We go on a consumption strike until and unless our demands are met.

What are our demands? Here's the list:

All the financial fraudsters are investigated, indicted, and prosecuted. This includes the con artists in CONgress who got "special deals" from Mozilo and his "Friends of Angelo" program (and who are blocking a subpoena to BofA as it would implicate them), it includes those past and current members of Government Sachs, and it includes all those other financial "professionals" who deceived Americans and others with their sale of toxic exploding mortgage products along with the securities supposedly backed by them.
Glass-Steagall is restored, in full, and all the firms that can't exist under it are broken up. Period.
The insider-trading that has become blatant and outrageous is prosecuted where illegal and where not, is made illegal and then prosecuted, with the focus being on the size of the scam. This includes obvious circumstances such as August 2007 (Bernanke's phone logs were FOIA'd) where trading patterns made clear that "certain someones" had foreknowledge of the discount rate cut along with Congresspeople who were briefed on the TARP and within hours or days made significant stock trades. Today if you're Martha Stewart you're prosecuted where if you make millions in an hour by exploiting government information "leaks" the SEC and FBI look the other way.
The Government withdraws all of its backstopping of financial firms who created this mess. All of it. If you're a bank or other firm and did something imprudent, you fail. Period. This is true whether you're a small regional bank (as is happening now; 5 in the last week) or a big behemoth like Citibank or Bank Of America. No "special deals", no "special guarantees", nothing of the kind. If the government wishes to avoid "systemic risk" then the government regulators can do their damn job.
The Fed disgorges all of its improperly-acquired MBS and other related securities. If it doesn't have a full-faith-and-credit guarantee and was bought, it is disgorged - period.
The Fed agrees to full annual audits without exception.
Those people inside government who conspired with certain bankers to cook the books, along with those in the banks who did so, go to jail. Our own Office of The Inspector General in the government has confirmed that there was an active conspiracy to break the law within the OTS, but not one indictment has been issued.
Those who committed fraud in the creation of this economic mess, whether they be mortgage lenders, those who packaged up securities while intentionally omitting credit information, those in the real estate industry to pressed for appraisal fraud and others are investigated, prosecuted and if convicted jailed. All of them.
Losses are born by those who made bad decisions, not the taxpayer generally. Those who made good decisions get to reap the benefits, while those who made bad decisions eat the losses. No exceptions.
Government cuts the annual budget deficit to zero. If government wants to blow the money it has to have the money. If they can't raise the money they don't spend it. It is time to live within our means and hold government to account for its profligate spending along with promises of "benefits" they know they cannot actually deliver down the road such as Medicare Part D.

Until then the position of those who wish to join is simple: No non-essential purchases of anything are made. Period.

What's an essential purchase? Here's the list:

Enough food to eat at home. No more eating out.
Rent and utilities.
Essential medical services.
Enough fuel to get to and from work.

In addition any "excess withholding" is stopped; if you are getting a big fat refund from the IRS every year you are loaning the government your money at zero interest until April. Stop that; its stupid. Change your W4 so you get exactly nothing back or owe a tiny amount; if you pay estimates pay only that which you must and not one dime more.

Note that it is unlawful to use your W4 to intentionally under-withhold, but you are in fact not obligated to pay one more dime in tax than you actually owe. There is nothing wrong with adjusting withholding to match (as close as you reasonably can) your actual tax obligation.

Put the money you save (it will be a lot!) into a non-TARP Credit Union if you have one available to you, or a non-TARP local bank if you do not. Spend none of it.

If we pledge to do this and not resume normal spending habits on wants as opposed to needs until and unless the budget is balanced, the bailouts are rolled back and those who committed fraud go to prison the government will be forced to act as they will simply run out of money.

They cannot force you to buy that new iPOD or flatscreen TV, or to take an expensive vacation.

Consumer spending is 70% of the economy.

This is a consumer weapon that is more powerful than any other means of peaceful protest. Strangling the government and private business' ability to steal from us all by cutting off their revenue will force reform, and has the additional benefit of being exactly what this nation needs to provide a strong capital formation base when that reform is complete.

If businesses want my money they can join in the chorus of voices demanding that government stop the looting and start prosecuting.

Will any of us be perfect in this endeavor? No. There will be the occasional indulgence I'm sure no matter who we are. But I'm willing to bet we can shrink consumption - each and every one of us - by at least 10% without any real personal pain at all, and if we do so it will send an indelible message to those in government and business: cut that crap out!

July 4th is Independence Day.

Let's make it a day of freedom from the banksters and government financial marauders.

Who's with me?

And Here It Is On CNBC: Manipulation

nospam@example.com (Karl Denninger) — Mon, 29 Jun 2009 12:19:00 -0400

Gee, you've heard me in various Tickers talk about insider trading and intentional market manipulation.

Now hear it from a trader on the floor. Listen to this clip - 6 minutes, if you're not interested in the whole thing slide in to about 2:00 in.

"This market continues to be propped up by government intervention and manipulation."

No really?

By the way, market manipulation is illegal.

Of course when you own the police force you can do whatever you damn well please, right?

Carbon Credits: A Scam

nospam@example.com (Karl Denninger) — Mon, 29 Jun 2009 09:51:48 -0400

Ok, I don't usually wade into the entire "global warming" schism on this board, preferring to write about it on Musings instead.

But this is going to hit the economy, and as such I'm compelled to do so.

You have to be living under a rock to not know that The House passed an "energy bill" late Friday that includes what amounts to a carbon tax via so-called "cap and trade."

Let's first define what this is - "Cap and Trade" is a taxation system when what you do (commercially) that causes carbon dioxide to be emitted into the atmosphere is subject to tax, as a disincentive to do so.

The justification for this, as Krugman (and others) claim, is:

And as I watched the deniers make their arguments, I couldn’t help thinking that I was watching a form of treason — treason against the planet.

To fully appreciate the irresponsibility and immorality of climate-change denial, you need to know about the grim turn taken by the latest climate research.

To read the rest of Paul's screed you have to be ignorant of basic mathematics. Not calculus, not differential equations, not even geometry or trig.

Math. Fifth-grade stuff. You know, grade-school - specifically, percentages.

Let's assume for the sake of argument that the "global warming" folks are right. I am not sold, but for the purpose of this discussion I'll grant the hypothesis that man is causing the planet to get warmer as a consequence of his emission of CO2 (sequestered millions of years ago into the earth's crust and elsewhere) into the atmosphere.

Here's the problem: North America has about 330 million people in it, most of them in The United States. That's a lot of people.

But Asia has 4 billion people living in it, or more than 10 times as many. And unfortunately most of them are living at a vastly inferior standard of living compared to ours. Africa has about 970 million people (three times North America), and again, nearly all are living vastly below our standard of living.

We're 1/15th of the population in question and nearly all of the rest of the people involved are going to dramatically increase their per-capita CO2 output whether we like it or not.

Herein lies the problem: While we emit more CO2 per-capita than anyone else today, we won't be emitting the most CO2 for very long on an aggregate basis.

To actually stop the increase in CO2 emissions we would have to find some way to compel the Asians and Africans to not increase their CO2 emissions.

But all possible means for them to improve their standard of living inherently involve significant and even dramatic increases in CO2 emissions per-capita.

The math is simple: Within a few years China will emit more CO2 than we will. A few years after that both Africa and India will surpass the United States. None of these regions will agree to stop emitting CO2 because to do so is to agree to keep their people perpetually poor and agrarian while we enjoy the fruits of a westernized, industrialized economy.

That's not going to happen and yet without it happening no amount of bleating about "climate change" or laws passed to curtail our CO2 output will do a thing for the climate of the planet. It will not make any material difference to the outcome; indeed, oil companies have said that they will simply move refining and other operations to nations without such pacts (like India and China!) to avoid the tax, and pass through any impact in the US directly to consumers.

The amount of CO2 emitted will not go down, but your costs will go up, making the only net effect economic: you will be poorer and whatever man-made effect exists on the climate will continue to exist.

If we were truly interested in the welfare of the planet we would recognize that short of thermonuclear war developing nations are not going to agree to stop developing. We would thus divert our attention toward dealing with the changes that come with our planet's climate, whether it is in fact warming due to our activity or whether the changes in climate are more mundane (read: due to the sun.) We would thus deploy our money where it could actually do some good, such as flood control and population relocation, along with modifying farming and other production resources to be able to suit changing climactic conditions.

Instead we have so-called "economists" like Krugman who are incapable of doing basic 5th grade math resorting to emotional pleas to try to guilt us into ignoring the basic mathematical facts: this bill will do nothing to address any actual problem and can't, simply because the lions share of the people on the planet will not agree to go along with any plan we might formulate - and this assumes the "global warming" crowd is right.

Toxic Assets (PPIP) Death Rattle

nospam@example.com (Karl Denninger) — Mon, 29 Jun 2009 08:33:00 -0400

Remember, folks, that the DOW surged by more than 500 points, a 7% gain, on the day the PPIP was announced. Now we find out that this plan to "rid the banks of toxic assets" is on its deathbed:

A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend.

The real problem is this: The banks have been and still are lying about the value of these loans.

Nowhere is this more evident in the mortgage arena. People are being "allowed" to remain in homes where they have stopped paying the mortgage and banks are sitting on the foreclosure process.

Why? Because if they foreclose and sell the house they are forced to book the loss. But if they "forget" to foreclose they can hide the fact that there's an embedded loss, sometimes as much as 50%, from both regulators and shareholders!

The same thing is going on in Commercial Real Estate. Rather than force the defaults that are occurring to be recognized and foreclosed, the banks are "pretending and extending" terms. That is, ignoring the default and extending the terms of loans even though they are not performing, as this way they can (and are) avoiding taking the write-down.

This is accounting fraud, by the way, but nobody in the regulatory or law enforcement apparatus of this country seems to care.

When PPIP was proposed I noted the fact that banks were not taking realistic marks; this has not changed.

Nor am I alone in this:

Citigroup’s $1.6 billion in first-quarter profit would vanish if accounting were more stringent, says Martin Weiss of Weiss Research Inc. in Jupiter, Florida. “The big banks’ profits were totally bogus,” says Weiss, whose 38-year-old firm rates financial companies. “The new accounting rules, the stress tests: They’re all part of a major effort to put lipstick on a pig.”

Further deterioration of loans will eventually force banks to recognize losses that their bookkeeping lets them ignore for now, says David Sherman, an accounting professor at Northeastern University in Boston. Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, says the government stress scenarios underestimate how bad the economy may get.

The simple fact of the matter is that for the PPIP to "work" assets must be sold into it at somewhat of a realistic price.

But if banks do that, they will be forced to recognize losses they (in conspiracy with their regulators, including The Fed, OTS, OCC and Treasury) have been hiding for the last two years - losses that are sufficient to force all of them under critical Tier Capital Ratios and thus subject them to FDIC seizure and liquidation.

We should have done the right thing and forced recognition of fair-market-value of these securities and whole loans, sent in the FDIC and closed these institutions.

We still should.

Even if they're "big banks."

The longer we wait the more damage our economy will take when, not if, the mounting losses are recognized.

PPIP will do nothing to alleviate the problem, exactly as I predicted, because for it to "work" the banks would have to admit their insolvency, and there is zero political or regulatory will to make that happen.

But to clear the credit markets and allow the economy to truly recover, that admission and subsequent clearing must happen.

Agency MBS (Mortgages)? Better Read This!

nospam@example.com (Karl Denninger) — Mon, 29 Jun 2009 07:23:00 -0400

Mad props once again to Zerohedge who shone the bright light on Freddie's latest screed.

I'm not going to take from their discussion of The Fed buying up paper at what will (almost certainly) lead to ruinous losses - you can find that there.

Rather, I am going to look at some of the internals from the document published that they didn't focus on.

Specifically, I'm going to go after a couple of graphs.

Let's start with this one (click any for a larger copy):

This seems to show very small declines in home prices. Or does it? The very next graph says....

Wait a second! Now its down ~20%? Hmmmm.... that's more like what everyone would expect Freddie to report. Ok, we'll go with that one.

But but but what does this do to the LTV of their portfolio?

I bet you can guess!

That's a very serious problem.

See, Freddie has a lot of loans on their books that are rather old and have a lot of amortization behind them. That is, lots of principal paid down.

But the newer loans have much less principal paid down and in many cases are underwater. This has driven an insane deterioration in actual credit quality of the portfolio as a whole.

In fact that single slide ought to peel your whig back. If it doesn't, these two will:

and immediately following it:

Notice that up until 2007 there were no loans with more than a 100% loan-to-value ratio in their portfolio.

Freddie (and Fannie) detonated because they were operating with an 80:1 leverage ratio, a number that was demonstrably unsound. Regulators, including Lockhart, Treasury and The Fed, allowed not only Freddie and Fannie but also the FHLB system to operate into this environment with deteriorating fundamentals even though as you can see the deterioration that would cause their explosion was evident in 2007. NOTHING WAS DONE ABOUT IT.

There is no solution to this problem folks. These firms have in the neighborhood of five trillion dollars outstanding in either loans or credit guarantees. The Fed has been furiously buying up these securities even though the black letter of The Federal Reserve Act, Section 14, prohibits it and Section 13 only permits loans, not purchases, because private investors can read balance sheets and graphs and know that there is absolutely no way that this sort of credit book deterioration will end anywhere but a great big fat

We are deluding ourselves if we think this will all turn out ok. It will not. The Fed is likely setting on a loss of more than 10% on its "acquisitions" of these securities right now - a loss that exceeds $50 billion dollars in real money. They are playing musical chairs while juggling nitroglycerin and with every month that goes by another bottle gets added to the juggler's load.

The worst part of it is that in 2006 and 2007, as you can see here, the GSEs were buying right into the maw of the deterioration and these securities are now the ones in the most trouble - just as with all the other lenders.

But that's not what should scare you. No, what should scare you is what they bought, especially in 2005 and 2006. Make sure you're sitting down:

You gotta be kidding me.

From this we can figure out what percentage of their loans are likely to explode. That would be the ALT-A and Option ARM loans.

All of the OptionARMs are at risk of detonating, which is $12 billion. All of the ALT-A is at risk as well, $176 billion more. We can't determine what part of the LTV > 90% are not captured in the ALT-A or OptionARM market; let's be conservative and say its none, although I'm quite sure that's not true.

This adds to $188 billion dollars of loans at risk or about 10% of the portfolio, and this assumes that none of the so-called "prime" paper is really ALT-A (e.g. computerized underwriting where the so-called "income verification" was never done by the originator); current foreclosure statistics put recovery value in the bubble areas (where there was a reason to write ALT-A, high-LTV and OptionARM paper) at a conservative 50% when one figures in value deterioration, resale and rehab costs plus other foreclosure expenses (legal, etc.)

This means we have a rough $94 billion in actual losses.

Fannie Mae almost certainly has similar statistics, and has a total book of somewhere around double Freddie's size, meaning that between the two of these organizations there is nearly $600 billion dollars worth of garbage paper on their books and close to $300 billion in actual loss that will happen.

Folks, there is no possible way we can backstop this and The Federal Reserve along with Congress and Treasury are covering it up!

Ponzi ponzi ponzi ponzi ponzi!

The Fed and Treasury are pretending there is a "recovery" imminent on the economy as a consequence of even-looser credit standards (to banks) and even more debt spending (by government).

It won't and can't work because the inevitable contraction in the economy (and home prices) that must come is simply made worse by the interest expense that comes when the government (or anyone else) borrows and spends forward.

Losses are created when bad loans are made; there is nothing you can do about it after the fact other than choose who takes the loss.

There is no solution to this other than to cut these two organizations loose and let them blow up. Yes, the losses will be horrific. And? There is no other option! We cannot absorb the losses on this portfolio without creating the potential for destruction of the government's funding mechanisms which is exactly what The Fed is trying to shove down the throat of The Taxpayer without a vote of Congress and without telling you, the people of this country!

There is only one way to bring private buyers of this credit back to the table: We must permanently reform what qualifies for a GSE mortgage and set it into law, with criminal penalties for violations. We must require 20% cash down payments, no more than an 80% loan-to-value at origination (that is, no "silent seconds", no games, no BS) and no more than a 36% back-end ratio (or "DTI", that is, "all debt service to income.")

The Fed circle-jerk MBS game is being played precisely because there is no private market for these things any more. Those who bought got burned and everyone understands that the credit quality on the GSE's book is utter and complete garbage.

But The Fed and Treasury programs to "stabilize" the GSEs mathematically will and must fail. Every dollar borrowed by Treasury to prop these institutions up is one that has to be paid back with interest, and thus the economic damage still remains and is in fact added to by the interest cost.

The longer we keep this fraud going between Treasury and The Fed the worst the impact on our economy will be when it unravels - and unravel it will.

It is inevitable.

Did you keep your bomb shelter around after the 50s? You might need it for shelter from this economic storm - the one that all the pundits claim is "over" when in fact we are simply sitting in the eye of a Cat 5 hurricane and the eyewall is bearing down on us at 30 knots.

Don't believe the lies - the math is never wrong.

Updated: Table reading error on Table 35 pointed out and corrected. Its not AS horiffic, but its still REALLY bad.

Next Up: Commercial Real Estate

nospam@example.com (Karl Denninger) — Mon, 29 Jun 2009 07:11:00 -0400

Just when you thought "there will be a recovery" comes this:

June 26 (Bloomberg) -- The ratings on $235.2 billion in debt backed by commercial mortgages may be cut by Standard & Poor’s as it seeks to reflect how the securities would fare in an “extreme economic downturn.”

That's a colossal slab of those things.

Oh, but don't mind the pump monkeys; they assert it will all be ok:

The Fed is counting on the TALF to make borrowing cheaper and help facilitate new lending.

Riight. We're supposed to believe that with the consumer tapped out on credit availability, housing prices correcting to remove the entire speculative premium from 2003-2007 and credit card default rates in excess of 10% that commercial real estate will be just fine and there will be no real loss taken on these TALF'd securities?

Nice try guys; go run that line of bilge on someone who can't find two working neurons to rub together.

Back in the real world, on the other hand, we'll be anticipating the next big blast (as per my annual Tickers in 08 and 09), coming soon to a credit market near you.

SEVERELY Bearish Treasury Development

nospam@example.com (Karl Denninger) — Fri, 26 Jun 2009 13:03:00 -0400

From Marketwatch:

NEW YORK (MarketWatch) -- Dresdner Kleinwort Securities has withdrawn from the Federal Reserve's primary U.S. government security dealers, the U.S. central bank said Friday.

The change is net neutral in terms of numbers as a new dealer just came online, but in general this is a major net negative for the Treasury market.

Why? Because being a primary dealer is, in general a license to print money. You get to field customer orders for Treasuries and make your spread, and you have a privileged trading position with The Fed.

There's only one fly in the ointment, and that is that the position comes with a requirement that you bid. This is distinct from most other nations where no such system exists, and essentially guarantees that there can never be a "failed" Treasury auction.

There was no reason cited for the withdrawal but one can surmise that the issue is that they're stuffed to the gills with Treasuries and are finding it difficult or impossible to earn their spread, think there is a material safety risk in their participation (e.g. getting stuck long with a deteriorating position), or both.

Either way there is no possible means to read this as bullish. While the issue may be with their liquidity demands and thus not reflect severely on the Treasury market with the issuance that has gone on this year and will for the foreseeable future I wouldn't take that bet.

The "Chosen" or "Protected" dealers will of course never withdraw but if the changes made to reporting of indirect bid are in fact concealing deteriorating demand and these folks have detected a potential problem in the offing we are fixing to get a severe spanking in our government debt issuance in the near future.

Beware.

More Fed Lawlessness: AIG

nospam@example.com (Karl Denninger) — Fri, 26 Jun 2009 10:56:00 -0400

See what happens when Congress refuses to enforce The Federal Reserve Act's provisions that require that equity ownership be taken only in instruments that have the full faith and credit of the US Government behind them?

Under the agreement, AIG will split off AIA and Alico into separate company-owned entities called "special purpose vehicles," or SPVs. The New York Fed will receive preferred shares now valued at $25 billion -- $16 billion in AIA and $9 billion in Alico -- and in exchange will forgive an equal amount of AIG debt.

So now The Federal Reserve (actually the NY Fed) partially owns an insurance company through more off-balance-sheet Frankenstein monsters.

This is blatantly in violation of The Federal Reserve Act but nobody in Congress seems to care.

The FRA was written as it stands to explicitly preclude this sort of transaction. If we are to take an equity ownership position in AIG linked to the taxpayer it has to be done through an appropriation passed by and overseen by Congress, not through an administrative action by The Federal Reserve or one of its districts!

The New York Fed said in a statement that the agreements "further the goals of enabling AIG to fully repay the assistance that it has received from U.S. taxpayers and advancing the company's global restructuring process. The exchange of senior secured debt for preferred equity interests reduces AIG's financial leverage and facilitates the independence of these two key subsidiaries."

And who authorized The New York Fed to engage in that transaction? Where is the explicit legislative authorization permitting the creation of an SPV that amounts to EQUITY OWNERSHIP of an insurance company?

The NY Fed just nationalized an insurance company without a bill proffered in Congress and signed by The President!

WHERE ARE THE DAMN COPS?

Market Gaming: Pressin' Their Bets

nospam@example.com (Karl Denninger) — Fri, 26 Jun 2009 10:28:00 -0400

Props to Zerohedge on tracking this:

Just released NYSE data indicate a 50% ramp up by Goldman's principal Program Trading unit. Whereas the prior week saw Goldman trading only 631 million principal shares on the NYSE, the most recent data indicate a massive rise to 977.8 million. Also notable is Credit Suisse's doubling in principal program trades to 586 million from 245 million. Zero Hedge is compiling materials to demonstrate the phenomenal gamble CS is taking by being the largest holder of the ETF-underlying pair trade. The ensuing implosion, once the market loses the invisible futures bid, will likely destroy Switzerland's second biggest bank and likely take down the country with it.

This is ridiculous.

Someone needs to start listening to Volcker, who has strongly promoted returning to the Glass-Steagall separation of commercial banking and trading activity.

Program trading is now up to 40.4% of all NYSE volume - approaching half.

For those who aren't savvy in this stuff what's going on here is a pair trade between the underlying instrument(s) and the ETFs on the exchanges. This is an arb play and it works until it doesn't - for an example of "doesn't" in the single-name world witness what happened to VW/Porsche earlier this year when the arb speculators on their merger got rammed, or those hedgies who were playing the Citibank preferred-conversion arb earlier this year.

These are allegedly "hedged" transactions in that there is an alleged unbreakable correlation that protects the person doing it from loss.

In truth there is no such thing as an unbreakable correlation and the alleged "protection" against getting reamed is illusory. This is the same sort of "genius trade" that was run with AIG's CDS positions - remember the claim that "we're unlikely to ever see a loss"?

How'd that work out?

Here's the chart from Zerohedge (original source the NYSE itself; click for a larger version):

Someone has to get out in front of this and stop it before it blows up in everyone's face and we have yet another round of "banking problems", this time among so-called "investment banks" that in fact are now commercial banks since they converted and thus have an "Uncle Sam" backstop.

This sort of principal trading is outrageous and in this sort of volume amounts to market manipulation writ large. Like all manipulation it can only work for a certain (but impossible to determine in advance) amount of time, and when it fails it will inflict ruinous losses on the participants in the scheme along with anyone inside the blast radius (which includes you if you happen to be long the markets when it comes apart!)

I have no problem with speculators pressing their bets. I have a major problem with them doing it with taxpayer money and backstops, where the inevitable losses that will come when, not if it blows up will not be their loss, it will be our loss.

CONGRESS MUST PUT A STOP TO THIS CRAP RIGHT NOW, SINCE OUR SO-CALLED "REGULATORS" ARE CLEARLY REFUSING TO DO SO!

The Foolishness of "Income And Spend" Numbers

nospam@example.com (Karl Denninger) — Fri, 26 Jun 2009 08:41:00 -0400

The personal income number came in up 1.4% and spending came in 0.3%. Here's what the BEA said:

The pattern of changes in personal income and in DPI reflect, in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009.

Right. The government hands out money (which it taxes or borrows) and this is reflected in these numbers but taking money from one hand and giving it to another does not help GDP as it does not represent income produced through labor.

A couple of paragraphs into the release the BEA explains:

Private wage and salary disbursements decreased $12.4 billion in May, compared with a decrease of $0.7 billion in April.

Notice that number - it is dramatically worse than April. That's the REAL income contribution (or in this case, loss) to the economy. One must be careful to actually read these economic releases and not listen to the headline number on CNBC!

In addition the savings rate is dramatically improving (good for people, bad for GDP going forward since 70% of GDP is personal consumption):

Personal saving -- DPI less personal outlays -- was $768.8 billion in May, compared with $608.5 billion in April. Personal saving as a percentage of disposable personal income was 6.9 percent in May, compared with 5.6 percent in April.

"Saving", by the way, includes debt paydowns; the government in its "infinite wisdom" computes the "savings rate" as "income less spending", which is not actually correct; money that goes from income to paying down debt isn't "saved". This increase shows that consumers continue to reduce borrowing activity (out of both choice and necessity) and are desperately trying to tread water in their sea of debt (never mind the occasional shark that comes by for a snack!)

Now here's why the numbers, assuming you accept they're "right", are irrelevant.

Currently 12% of all mortgages are either delinquent or in foreclosure. That means the person living in that house is not paying anything for their mortgage. Zero. Nada.

We have roughly 130 million housing units in America. About one third have no mortgage on them at all - they're owned clean. This implies about 85 million mortgages.

12% delinquent or foreclosed in turn implies around 10 million homes for which no money is being spent on mortgage payments.

Further, we know that all residential mortgage debt is about $10 trillion dollars. Let's be nice and assume a 5% interest payment, interest only, but not being paid. That's roughly $69 billion dollars annually that is being spent on "consumer things" that would otherwise be spent on mortgages - if they were being paid.

That is about 1/2 of 1% of GDP, roughly.

Now add to this the 10% charge-off rate on credit cards ($100 billion more; there's $1 trillion in revolving debt outstanding) and then whatever is out there in delinquent car loans (until they come repo the car anyway) and you get one heck of an "add" to so-called consumer GDP - about 1.5% worth, in fact - in the positive direction.

Here's the problem: Eventually the house will be foreclosed upon and the credit card will come up declined. And when those two things happen suddenly that extra "assist" we are currently seeing in personal spending will disappear.

Taxpayer Funds Support Money Laundering?!

nospam@example.com (Karl Denninger) — Fri, 26 Jun 2009 08:11:00 -0400

What the hell is this?

LOS ANGELES (MarketWatch) -- Japanese financial regulators are set to sanction Citigroup Inc., demanding it suspend some of its business due to overly lax money laundering controls, reports said Friday. Tokyo-traded shares of Citi were down 3.6% following reports.

Ex-freaking-scuse me?

Oh yeah, let's not forget that Japan will almost certainly impose a serious fine in addition to the ban on business - perhaps a really big fine to "send a message." Guess who's going to pay that fine?

YOU ARE, since your tax money is supporting Citibank!

We have guaranteed $300 billion of their debt and pumped in billions of taxpayer money to keep these clowns from having to be FDIC'd and now the Japanese government is after them due to failure to enforce money-laundering controls?

Again:

We now have a government and Federal Reserve that is so blatantly blind to what's going on that we commit more than a third of a trillion taxpayer dollars to a firm that is unable to comply with money-laundering statutes?

One final time:

We now have taxpayer-supported institutions allegedly engaged in money laundering regulation violations!

How do we justify Bernanke's and the FDIC's actions again?

CITIBANK SHOULD HAVE BEEN SHUT DOWN BY THE FDIC MONTHS AGO AND STILL SHOULD BE!

Disclosure: None