The Market Ticker

... here's the wind-up, and the pitch ...

or is that....

... here's the wind-up doll behind the curtain ...

Tuesday we discover that Moody's made a, uh, "mistake" in their computer software that erroneously rated certain synthetic debt obligations (CPDOs), causing "AAA" ratings to be applied when they should have been four notches lower.

This apparently was discovered internally at Moody's in early 2007, but do you remember any public announcement of this error, any mass-rerating of these securities, or any, uh, compensation to those who were screwed?

I don't seem to recall that disclosure, do you?

Gee, you don't think that perhaps investors, the public, and oh my gosh, the buyers who overpaid for these CPDOs had a right to know that there had been an error made, do you?

I mean its one thing to make a mistake, but its quite another to cover it up!

Cough-Watergate-cough.

Never mind that the curtain appears to be slowly drawing back on The Great Wizard of Oz, otherwise known as the government's scam in how it computes and publishes numbers of all sorts related to our economy. Marketwatch ran an amazing article Tuesday, but they weren't the first. The St. Peterburg Times blew the cover off this a couple of weeks ago, along with Harpers, and Prudent Bear is now being quoted in Asia Times, all on the same topic.

I guess some people have been reading The Ticker at a few editors' desks.

We're now seeing mainstream media articles on silly little inconvenient facts like:

• Intentional understatement of price inflation....
• Which leads to overstating GDP....
• And screwing Granny in her COLA adjustment on Social Security....
• And convincing people that unemployment is low (which it is not)....
• And enticing people to buy government bonds (T-bills) at a negative rate of return....
• While intentionally throwing hundred of billions of excess liquidity into the banking system so that your "best buddies" don't have to fess up to their losses which....
• Empowers Wall Street to blow bubble after bubble, while offloading their trash and costs into pension funds and ordinary people's pockets so we will all eat it while at the same time they pocket billions in fees and bonuses.

Never mind the cover up of all of this, where the lies just keep getting bigger and bigger as the compounding of fraud and theft snowballs just like 30% interest on a subprime credit card.

And before you go lambaste Republicans for this, stop right where you are. Democrats are just as guilty. Did you hear either political party go after Bernanke on The Hill after Bear Stearns was "bailed out"? On price inflation over the last few years? On his and Greenspan's insane "monetary policy" which amounted to intentional and willful blindness to fraud throughout the financial system, offloading the costs onto all of us?

Oh hell no.

As long as they can pretend there's a Maestro behind the curtain, the show will go on.

Or will it?

Several mainstream articles over the last couple of weeks seem to suggest that perhaps the proletariat (that would be "us", you know, "we the little people") might be getting sick of this crap and are fixing to raise a ruckus.

Hope springs eternal......

The "game" of 3-Card Monte requires an endless supply of new "marks", or its all over. When the con-man and his "buddy", who of course is in on the scam but pretends to be "just a passerby" deduce that they might be discovered, or worse, the number of marks has simply dwindled down towards zero, they suddenly up and run - with all your cash, of course.

In other astounding news we had hearings in the Senate Tuesday in which it was claimed that "speculators are driving a commodity bubble."

"Benn Steil, director of international economics with the Council on Foreign Relations, testified that the value of commodity index investments has grown by about one-third since the beginning of the year to more than $250 billion.

"The sharp recent rises in global commodities prices, particularly in the energy and agricultural sectors, is undoubtedly causing hardship for many Americans, and is indeed threatening the health of many millions in developing countries," Steil said. "There is also no doubt that these price rises have been accompanied by a corresponding rise in interest from institutional investors in commodities as an asset class.""

That's a very curious number, $250 billion. It all seems to have shown up out of nowhere, like Dorothy in The Wizard Of Oz, starting right about last August.

How'd that happen, one must wonder?

Oh, don't look behind that curtain over there! Why if you do that you'll find one Doctor Ben Bernanke pulling levers to fiddle with the slosh in the banking system, intentionally tamping down interest rates and taking trash collateral in exchange for his pristine Treasuries and cold, hard cash so his buddies don't have to recognize their losses.....

Oddly enough, the amount of money that he's been tossing around, the excess liquidity that he has allocated to this nefarious purpose is.......

about $250 billion dollars.

Oh my.

I think we figured out where the problem came from.

Sssshhhhhh... don't tell anyone that The Wizard Bernanke (we retired the moniker "Maestro") is standing behind that curtain butt naked.

If you're upset about $4 gasoline go talk to Bernanke - you are paying $4 for gasoline because he is covering up the insolvency of his buddies on Wall Street.

All that excess "slosh" has to go somewhere, and the "somewhere" is oil, gold, and grains in a vile attempt to "earn" their way out from under the rockpile that collapsed on top of their heads.

The bill is not only going to come due for this nonsense in the future, you are paying it right now!

Of course The House today played perpetuate The Wizard of Oz instead, voting to pass a bill that will allow The Justice Department to sue OPEC over fixing oil prices and limiting supplies. Bush threatened to veto it, but it has a veto-proof majority.

One has to wonder - exactly how do you enforce a judgment against, oh, Saudi Arabia? Might they not decide to give us the finger instead?

Perhaps we should tell The Wizard to put some damn clothes on first?

The game-playing isn't limited to the commodities space either. Have a peek at the fun and games at Freddie Mac:

"Until then, we're left with a system in which the only reason Freddie Mac is now solvent is that everyone who matters has agreed to believe it's true. That can't last forever, either."

What's that about? Simple - Freddie, along with Fannie, are "ignoring" losses by claiming that the impairments are "temporary."

How temporary? In many cases for more than a year, in some more than two. The size of these "adjustments"? More than $30 billion - enough to wipe out shareholder equity and, quite likely, render Freddie insolvent.

OFHEO, the so-called "watchdog", thinks this is just fine.

More lies, all sanctioned by yet another branch in The World Of Oz.

Never mind the other piece of deception that The Wizard and Maestro enabled, that of hedge fund CDS-writing.

Writing insurance is not a bad thing, right?

Well we're about to find out, because this over the counter hedge fund "swap business" is what everyone was freaked out about with Bear Stearns and contrary to popular belief the problem has not gone away.

See, this is the problem:

"Investors can't tell whether the people selling the swaps - - known as counterparties -- have the money to honor their promises, Backshall says between phone calls."

Those aren't "promises" they are contracts and if you write one with no ability and intent to perform you've committed an act of fraud, pure and simple.

I think we can all figure out that if we buy insurance on our house against, oh, say, a hurricane, the time to find out that the company has no money to pay (and never did) is probably not after Katrina comes knocking on the front door (blowing straight through and out the back!)

Yet that is exactly what's going on here. But more than a year after all this started in early 2007, despite warnings from people as diverse as Warren Buffett and Mr. Satyajit Das going back several more years, there has not been one substantive move to force these counterparties to prove capital adequacy or repudiate these contracts.

NOT ONE!

Make no mistake - The Wizard is clearly empowered to do exactly that, at least as far as it pertains to the regulated banking system, including, now, the Investment Banks.

See, The Wizard could, if he decided to, proclaim that nobody gets access to any Fed Credit Facility until and unless they can document that all of the swaps they rely on for protection are "money good".

That would end the fraud in one day.

It would also probably result in a couple of big "booms" in the investment and commercial banking world, and a whole lot of booms in the Hedge Fund industry.

But no!

We have to pretend that The Wizard is in fact a great and glorious demigod rather than the shrivelled up old naked man behind the curtain that he really is.

If he bellows loud enough then he's really powerful, right?

The Great Wizard of Oz.

What happens when this all collapses under its own weight? It will, you know. These sorts of games only work until someone comes to the point that their counterparty either has to pay them or they can't make the electric bill.

Will we, the people continue to allow this to go on with our financial system? The one that keeps our paychecks and investments in electronic accounts as nothing more than flickering numbers on a computer monitor?

If Congress was serious about stopping this nonsense instead of masturbating for the public they could end it immediately.

Send a note over to The Wizard and his cohorts and tell them that they have 30 days to do all of the following:

• That The Fed must withdraw all of the "excess slosh", including the TAF, the TSLF and the other "alphabet soup" nonsense. If its not an actual government security The Fed won't take it. If this means you must sell it to raise money, then you sell it. Life's tough and we all make bad investments. Deal with it and take your losses.
• BLS is directed to publish actual price and labor statistics as the headline numbers, with no "black box" adjustments. All headline numbers shall be unadjusted. Any adjustment the BLS wishes to make in the "internals" as an "alternative" number must be fully disclosed as to the data set gathered, how it is collected, and the precise formula(s) used to derive it.
• All counterparty exposures must be documented as money good or repudiated within 30 days for any firm that has a Government liquidity guarantee of any kind. In addition nightly mark-to-market and margin supervision must be performed going forward to guarantee capital adequacy, with a central clearing agent (like the OCC) given plenary supervisory authority. This includes but is not limited to all commercial and investment banks.
• All swaps and other instruments held by any such government "backstopped" firm must trade on a public exchage. Chicago already has one set up but it is being actively boycotted by the banks as they love the ability to "massage" quotes to customers so as to skim off more spread. This, and the above, bring swaps and other "exotics" under the same sort of contractual and procedural framework that governs listed options. There has never been a fail on an OCC-cleared option. NEVER - not even after the 1987 crash.

The "or else" part of the letter is simple - you attach The Bill with your sponsors signatures on it to repeal The Federal Reserve Act of 1913 as amended, returning monetary control to Congress, and at the same time you place the Bureau of Labor Statistics (BLS) function (that compiles the statistical data) under the non-partisan GAO.

If Congress gets told to go stuff or is stonewalled, the Bill is filed, debated and passed.

This would instantaneously collapse any speculation in the commodity markets, radically strengthen the dollar immediately, and force recognition of the real rate of GDP and income growth.

It would also go a long way towards preventing the formation of future asset bubbles.

To be fair, it would also drive up interest rates to sustainable levels, complete the adjustment of housing back to sustainable prices, force both government and private industry to live within their means, and go a long way towards stopping the routine plundering of our people.

Are you, the people, waking up yet?

If so its time to call Congress.

Psst: You know that warning I've issued repeatedly about uninsured bank deposits over the last few months? My ears are ringing...... and a long weekend is coming up. Nuff said.

Costco and WalMart reported decent retail results, everything else rotted - and that's being polite. Teen-and-fun oriented retail is on life support (gee, you think when Miss Priss needs to preen a bit but Mom and Dad are strapped she might get the boot on that demand for another $100 pair of jeans? Oh the horror!) Never mind JC Penny, Saks and Kohls, all of which looked really bad; Gap and Abercrombie were off double digits (!) Target down more than 4% - nasty.

WalMart, however, stripped of fuel, wasn't up nearly as much as you might have thought - 0.7%.
So when you're broke you go to WalMart. Surprised? Not me! Believe me, if WallyWorld gets into actual trouble we're not in a recession - its an all-on economic collapse.

ICSC came in at -0.5% .vs. the up 0.9% expected.

The BOE cut by a quarter as expected with no significant effect on the overnight market.

Oh, China's currency continues to appreciate. There are those who have been screaming for this, but the nasty is that this will of course push our import prices from them higher. Hmmmm....

Now let's add another nasty into the mix - trade deficit. It was much larger than estimated at $62.3 billion .vs. $57.1 expected. Add in the appreciation of the yuan and you've got a serious situation brewing here; US consumption slowing, consumers squeezed, consumer confidence in the tank and both Chinese imports and energy rising in price - all at once.

Welcome to what happens when the "virtuous" cycle of "offshoring" our production turns vicious.

Jobless claims came in at 357,000 which was a bit of a surprise on the downside (better), but the continuing claims didn't move, with the 4 week MA moving up a bit.

Trichet continues to say that their policy obligation is towards price stability and that inflation pressures remain uncomfortably high. Oh Ben, how's that vise feeling about right now on your "package"? Looks like Trichet gave the handle another twist this morning eh? Mmmmmm... dominatrix games in central bankerland - I like it. Will there be a video available at the local "dirty picture" store soon?

The "credit crunch", in particular, the Auction Rate Security Mess, is now hitting students.

"The 18-year-old planned to obtain a government-backed loan of about $10,000 from a New Hampshire nonprofit group to pay the $32,000 tuition and expenses not covered by financial aid and a music scholarship, just like last year. That option evaporated when the New Hampshire Higher Education Assistance Foundation stopped making such loans in March."

Let me see if I get this right - $32,000 a year for tuition and expenses for college? To study political science? Are you kidding me? Well, obviously not, and what is also obvious is that the bubble hasn't been confined to houses. One of the "dirty secrets" is that the "college benefit" has been pumped to unreasonable levels and the "easy money" rubric has in turn spread to college costs, driving them to the sky. Employers of course have piled in with "demands" that you have that sheepskin, or else you work flipping burgers.

So now we have more complicity in forcing the ever-expanding debt bubble down people's throats, hoping it won't explode? What happened to the ivory tower being the place of open expression and critical thought?

Well, it got swept up in useless "research" and "publication", advanced degrees got watered down to the point that regurgitation passes in a thesis defense, and budgets swelled while return-on-investment wilted.

My advice to would-be-matriculators? Take a cold, hard look at the economics before you pack up. Consider community college for the first two years. If you live somewhere that you can do a collegiate high school program (NW Florida for example), do it - getting the first two of your four years free cuts half the cost off right up front!

Until and unless students start practicing a "just say no!" approach to this sort of insane escalation in costs it will not stop. If you're a student or parent, its time to stand up. What's clear is that the phrase "Higher Education" has come to indicate a pervasive invasion of bong hits in the board rooms and meetings of the reagents of these institutions.

Lehman disclosed this morning that it wasn't three money market funds it bailed out, it was five. So far. Hmmm..... so much for being "off balance sheet" eh - they all seem to be coming back home to roost. There are rumors flying around about Lehman - I won't repeat them in detail and I can't find verification but they're not positive, and what may be adding a bit to this is an interview out with their CFO that was decidedly downbeat.

Paulson is out this morning with comments that Fannie and Freddie need "strong oversight". Oh really Hanky? Gee, how about walking the talk you lying sack of crap? Fannie and Freddie are sitting on a ticking bomb in credit risk and the administration - which happens to include you - have sat back and let them expand that risk instead of contracting it. In the most outrageous example they are using their "expanded" balance sheet to make unsecured loans!

Strong oversight eh? Ha! I smell nationalization of these firms in the not-distant future along with a 100% loss for their stockholders. Beware!

"Hiding under the Kimono" continues to be the buzzphrase for our wonderful folks in the investment bank community, with "Level 3" assets - those which the polite claim is "hard to value" (the honest person says "valuations laced with myth and fraud") growing across the board. Our banking and financial system will not clear until this garbage is brought out into the open and marked at whatever the market will bear, which for many of these "assets" may in fact be a dime on the dollar.

Of course our fine regulators don't want to force this. Why that would be sacrilege! Nor do they want to force all the OTC derivatives onto public exchanges where there would be a "man in the middle" (such as there is with equity options with the OCC) as that would force margin supervision into the marketplace.

Reality is that in "boom times" nobody worries about anyone's margin capacity or ability to pay, because you can always just "roll it over" and wink. But when tough times come that stops working because the guy on the other side of the table wants his money, and he insists you cough it up. When you don't have it.....



Right now the "big scam" is that an enormous percentage of the people who wrote these swaps - these "CDS" contracts in "Street Parlance" - simply do not have the money.

The fraud is that they never did have the money, not at the outset and certainly not now.

You need to understand where the actual risk is here. It is not that the person who bought the contract won't get paid - that's not the problem. Yes, they're out the premium and the "win" from their bet, but that's minor, really.

The problem is that when the buyer of this "protection" was not a speculator but rather someone holding the asset that is wrapped, and they are a bank or other regulated entity, their reserve ratios are set by the credit quality of those instruments.

Once these "wraps" are deemed worthless those entities are required to increase their reserve ratios to account for the underlying credit quality instead of the fictional "AAA" previously claimed. In many cases this results in a trebling - or more - of reserve requirements and those requirements come in the form of actual cash.

Bluntly - nobody has it, and so everyone is walking around with a big smile on their face hoping that nobody calls them on the fact that these "swaps" in fact have a zero probability of being paid if and when the defaults occur.

In other words the entire foundation upon which the claim that are financial institutions are "well-capitalized" rests is a lie.

Warren Buffett "gets it", in that he has repeatedly called these unregulated OTC contracts "financial weapons of mass destruction." He's right, but so far we have the near-entirety of the equity marketplace whistling past the graveyard, hoping that the actual defaults do not rise to a level that exposes reality - the credit quality claimed on these institution's books is in fact almost entirely fictional.

Here's the truth for you - so when, not if, it blows up you can direct your ire in the proper place - all of the regulators, including but not limited to The Fed, OTS and OCC, know this to be the case. Yet none of them are forcing these institutions to mark their credit exposure and reserve against it as if the wraps do not exist unless those institutions can prove their counterparties can pay.

The fact is that none of the counterparties can in fact pay even a small percentage of the potential claims against them.

WHEN (not if) this blows up in everyone's face make sure you direct your pitchfork and torch brigade at the correct targets.

It is not the investment banks you need to be angry with - it is our bought and paid for government that is responsible for allowing this pervasive and pernicious fraud to both occur and continue, even though they are, as they admitted when Bear Stearns went down, aware of the problem.

If you're one of those people who is allegedly "smart money" and aren't pulling your cash out of harm's way you're not smart at all.

You are in fact an idiot and that whistle in your ear is in fact an approaching train.

Nonetheless the market this morning doesn't seem to care, rallying significantly in big-cap Tech. Huh? Pull the other one fools. You've got a clear recession underway and yet the Nasdaq 100 is up 1.5% this morning, with lots of 3-5% moves? Who are you trying to fool here?

Oh, the Dollar? You better hope that isn't a symmetric triangle that just broke downward, because if it is, well, we're headed straight for a currency crisis.



Why is that happening? No, its not "too easy money."

It is happening because our regulators refuse to do their damn job and the foreign exchange markets, along with the "real money" behind them, are well aware of the pernicious and pervasive fraud that our lack of regulatory supervision have enabled. In addition, you, dear Reader, have refused (in the aggregate) to speak up and get your neighbors to do so as well, and as a consequence the market is driving up the cost of your gasoline, heating fuel, electricity, milk, cheese, meat and rice.

The target on that triangle break? Potentially as low as 62, if the "staff" on that pennant is in play, a devaluation over the next month or so of another 15%.

Yeah.

Enjoy the "rally" today, and go back to swilling 'yer beer.

Its much easier to pay $4/gallon for gasoline than to call your Senators and Reps and insist that all these complex derivatives be either proven to be backstopped by their writers with sufficient capital to insure performance or declared as the worthless paper that they are.

How much did you say that phone call would have cost you again?

If we get a Depression out of this don't say you weren't warned.

You were.