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More Extortion By The Banks

nospam@example.com (Karl Denninger) — Sat, 07 Nov 2009 13:14:00 -0500

Yeah, that's a strong word.

In my opinion it is also the only word that's appropriate for the circumstances:

The Fed has been informed by dealers that they would be willing to enter into very sizable amounts of reverse repos with the Fed, if asked to do so, provided they could get some relief from Tier I capital constraints, MNI also understands.

Ah, the old "let us lever up and we'll do it, but if it blows up, we'll then be back at the public trough for another bailout since we're too big to fail."

Two words need to be spoken to these clowns by Congress; the first begins with "F" and the second with "Y".

It was precisely the relaxing of leverage limits by Congress and The SEC that got us into the mess in the first place. Henry Paulson, you remember, got the former 12:1 leverage limit dropped, and the consequence is now known.

BEAR STEARNS, AIG, LEHMAN, FANNIE AND FREDDIE - ALL BLEW UP SPECIFICALLY DUE TO EXCESSIVE LEVERAGE. ALL HAD MORE THAN DOUBLE THE PREVIOUS LIMIT.

ALL OF THEM.

NONE OF THEM WOULD HAVE BLOWN UP UNDER A 12:1 LEVERAGE LIMIT.

LET ME REPEAT THAT: NONE OF THEM WOULD HAVE FAILED HAD THEY BEEN OPERATING UNDER THE FORMER LEVERAGE LIMITS.

Zerohedge reported back on October 21st that the repo test was allegedly "a failure." We now have confirmation that it indeed was, and in addition, we now apparently have the primary dealers - once again these are the "really big oligarchs" - Goldman, Morgan Stanley, JP Morgan, Citibank, etc - that are now twisting The Fed's arm to allow them to do exactly what caused the meltdown in the first place as "compensation" for entering into these reverse repos.

We also have this:

Amid the ongoing financial regulation overhaul, the banking industry is hoping to pull off a quiet power grab that has eluded its grasp since the Great Depression, by stripping the independence of the board that sets financial accounting standards.

The move could effectively let banks set their own accounting standards in rough economic times.

That is unbelievably outrageous. The bottom line is that the banks feel that not only was the blatant extortion pulled this spring with "mark to market" appropriate, but now they want the ability to force changes to the accounting rules any time they get in trouble to make it look like they're all ok when they're not!

Not one thing has been done about what got us into this crisis. The causes of this mess are:

Asset bubbles blown by intentionally loose monetary policy coupled with intentionally-absent regulation and monitoring. None of that was a mistake - it was willful blindness and intentional promulgation of known-dangerous policies.
A legal structure that has allowed banksters to asset strip Americans. Specifically, the law explicitly allowed the peddling of so-called "mortgages" that were designed to not be affordable beyond their "teaser expiration", thereby guaranteeing that the applicant would have to come back for another bite at the apple. In addition Congress has both allowed unlimited interest rates to be charged on credit cards and (at the banksters behest) made dramatic modifications to the Bankruptcy Code that had the effect of turning many debtors into debt slaves, prohibiting discharge of those debts in liquidation. At the same time corporations can and do file bankruptcy without the same consequences for the directors and officers of the firm!
Intentional lobbying for (by Henry Paulson when he was with Goldman Sachs before becoming Treasury Secretary), the granting of, and then full utilization of ever-increasing leverage. As noted above every single one of the large bank and bank-style institutions that has failed had more than double the formerly-level "investment bank" limit of 12:1 leverage. The housing asset bubble could not have effectively grown beyond 2004 without this change as investment bank capital requirements would have stopped it in its tracks.
Willful and intentional blindness to insolvency in financial institutions. The FDIC has been repeatedly found wanting in this regard, in that of the over 100 banks that have failed essentially every one of them has been "underwater" at the time of seizure, typically by 30, 40 or even 50%. Prompt Corrective Action (12 USC Ch 16 Sec 1831o), if actually followed, makes this outcome impossible. More than two years into this mess our banking regulators including the FDIC, OCC, OTS and Federal Reserve are still willfully and intentionally refusing to follow the law, for the simple reason that if they did they would have to have seized hundreds of banks including several of the "too big to fail" ones.

The economy cannot resume sustainable growth and health until and unless the causes of the mess are remedied, as all of the above have led to unsustainable debt levels throughout the economy. The current "remedy" being applied is to pretend the bad debt does not exist, pretend the excessive leverage does not exist, and meet the cash flow requirements by loading even more debt into the Federal Government. This is a Ponzi Scheme writ large that is unsupportable in the medium and long term as a consequence of mathematics, irrespective of whether or not policymakers and banksters want the scams of the last two decades to continue.

This says the following things to me loud and clear:

EVERY ONE OF THE LARGE BANKS HAS TO BE BROKEN UP RIGHT NOW. They are ALL a public menace and have learned exactly NOTHING from the pain they have inflicted on America - and from which America is still suffering with sky-high unemployment, 30% interest rates on their credit cards and more. No firm that is "too big to fail" can be allowed to exist and any firm that makes this argument in any form must be deemed to have declared its own demise. Glass-Steagall had this right - the depository and fractional lending function is a public utility and must maintain absolute separation from the other other areas of finance, including but not limited to securities dealing, proprietary trading and insurance. Glass-Steagall prevented these destructive "boom and bust" cycles for nearly 50 years; they returned only after it was repealed and we have now seen four (LTCM, Latin America, The Internet Bubble and Housing Bubble) in less than three decades, with Citibank in particular having to be bailed out at least three times all on its own. The evidence is incontrovertible.
MARK TO MARKET MUST BE BROUGHT BACK RIGHT NOW ACROSS THE BOARD AND ALL OFF BALANCE SHEET STRUCTURES MUST BE BANNED. This gaming of the regulatory environment is beyond ridiculous - it is blatant robbery.
THE BANKS WILL NOT BEHAVE RESPONSIBLY UNLESS FORCED BY EITHER THE THREAT OF MARKET DISCIPLINE (BANKRUPTCY) OR THE BOOT OF GOVERNMENT REGULATION ON THEIR NECKS. They will in fact attempt to use their position as primary dealers to force The Fed and Congress to allow them to take more and more risk once again siphoning off the wealth of Americans for their own personal benefit until they blow up the world again, at which point we will hear once again threats of imminent "Armageddon" unless we shovel in yet more taxpayer funds and guarantees.
THOSE INSTITUTIONS AND INDIVIDUALS WITHIN THEM IN OUR GOVERNMENT WHO THUMB THEIR NOSES AT THE LAW AND SOLID PUBLIC POLICY MUST BE REMOVED AND REPLACED. Prompt Corrective Action (Title 12 Ch 15 Sec 1831o) is sufficient to prevent losses from being taken by the FDIC's Deposit Insurance Fund - if it is followed as written. Mark-to-market may cause many banks to go out of business, but that process of bankruptcy will also resolve the excessive leverage and debt, forcing asset prices to sustainable levels. Leveling the playing field between corporations and individuals with regard to bankruptcy may force rates of interest to rise, but appropriately pricing risk is necessary for sustainable economic growth. Raising The Fed Funds Rate may be politically difficult, but doing so will cause lending to resume as the "risk free" trade of borrowing at zero and buying 10 Year Treasuries at 3.5%, then swapping off the interest rate risk (without any nightly mark-to-market for the counterparty!) to yield 300 basis points (radically in excess of normal "AAA" credit risk profits) will disappear.

You're seeing some evidence of recognition from over in the UK, to wit:

On the eve of the G20 meeting of finance ministers in Scotland, Andy Haldane, the Bank's executive director for financial stability warned that the relationship between the state and banks represents a "doom loop" which will keep inflicting crises on the public unless arrested.

Yep. Funny how over here in the United States the only people willing to speak truth are the bloggers and, oddly enough, The Huffington Post.

We cannot afford another disaster. Each of the last three has been exponentially more expensive, with this last go-around being a $12 trillion outrage.

The next one will literally destroy our government and economy and unless we act now to prevent it from happening we will suffer this outcome.

Tim Geithner was involved in this mess through its construction and still is, as he has not made a public issue of the regulatory arbitrage and extortion - indeed, he was one of it's chief architects when at the NY Fed.

HE MUST BE FIRED.

Be aware Congress: The People aren't as stupid as you think. There is a breaking point beyond which the people of this or any other nation simply will not tolerate the blatant extortion and theft of any hope for a better future for themselves and their children.

A 10.2% "official" unemployment rate and a real rate of unemployment approaching 20%, or one in five working-age Americans, after all the broken promises of "easier credit" (when the truth is 29.9% interest rates while the banks can borrow at ZERO) along with "better times" out of both Congress and Obama might just be it - especially if you let this sort of outrageous conduct by the banksters and their lobbying arms continue.

Consumer Credit: Awful

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

Where are my green shoots?

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.

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.

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