D Day in California: 7/01/09, the Day the Cash Died

I'm not sure what this pic is supposed to be for
but why not? Screw it, we're broke

As far as I am aware, WC Varones and his crew of merry bloggers are the only ones in what I consider to be my "inner blogging circle" who understand what is happening here at homebase. Anyone else out there in California? I see you fuckers Googling "tax refund delays" and "California default" so now is the time to speak up, reach out, and figure out how in the hell we are going to get our state to turn things around. Hate to break it to you kids but we are in one hell of a mess right now and obviously our state legislators aren't going to be much help.

I'm going down with the ship so Arnie can suck it. He'll bail before I do; this is the place I chose as home over 10 years ago when I was just a starry-eyed smidiot teenager from Wisconsin and I'm not about to let a little financial crisis change that. Just sayin.

The state of California must pass a budget by tomorrow or its credit rating could tumble to junk status. Both Moody's and Standard & Poor's have warned the state of a multinotch downgrade if the state fails to approve a budget.

California currently has an A2 rating, the lowest of any state. Governor Arnold Schwarzenegger needs to close a $24.3 billion budget deficit and has threatened to cut essential services if a budget agreement cannot be reached.

On Wednesday, July 1, California Controller John Chiang will begin to pay bills with IOUs because he will run out of cash if the legislature doesn't deal with the deficit for the coming fiscal year. Fitch Ratings downgraded California's general obligations Friday to single-A-minus from single-A, citing "the magnitude of the state's financial and institutional challenges and persistent economic and revenue weakening."

George Friedlander, Morgan Stanley Smith Barney muni analyst, warned that while he can't conceive of an outright default on California municipal bonds, he recommends "some diversification out-of-state" for holders of the state's paper. He added that a disorderly disruption of California's finances could spread beyond munis, affecting all risk assets and the dollar. Investors are nervous and after what they went through last year, could sell first and ask questions later.

The California legislature is deadlocked over the state's budget. Democrats want to raise taxes, while Republicans want to cut entitlement spending. The state's budget deficit for 2010 is expected to be 20 percent of its general fund budget or more than $20 billion. As California's bond rating drops, the harder it will be for the state to finance public works projects because it will become prohibitively more expensive to do so.

The state's bond rating is not the only one at risk. The California State Teachers' Retirement System, the second-largest U.S. public pension, may face a lower credit rating as well. S&P told the pension system its credit rating could be cut.

S&P's rating criteria limits a pension fund rating to be no more than three levels higher than the general obligation creditworthiness of the governmental sponsor of the pension fund. As a result, if California's A rating were lowered, the teachers' pension fund's AA rating would also fall, S&P said in a statement.


What now?

You guys know me if you read me, normally I could give a rat's ass either way but somehow I have a feeling that this might turn out to be slightly more than I usually LOL at with my flippant "oh well" attitude. I am genuinely concerned that we might not be able to pull this one off - and what does that mean for my state? My beloved Muni? My crappy apartment in the Inner Richmond? My office? My child's public school education?

What next? Really, I am asking you, dear reader: what next? I'm not leaving home so anything else that you might come up with is totally game. I know you aren't used to seeing this side of me, despite Fed shenanigans and bailouts and the continually diminished "personal freedoms" of Americans but frankly I am saddened by this and not entirely sure what to say.

Speechless? Jr Deputy Accountant?

Yup. I live here, people. My 6 year old lives here. I have spent nearly my entire adult life as a San Franciscan and know little beyond this 7x7 plot of land I call home.

So? Where do we go from here? The ocean I guess... Not much else to do...


Goldman Bets on the Loonie, Loses

WTF, boys? I expected better out of my favorite little rats.

What in the world would inspire Goldman to make a move like this? Could one of my little Forex geniuses please clarify for me? Because no matter how many times I read the headline, I still can't figure it out.

Psst, GS Rats, come closer. I hate to break this to you but Canada sends something like 95% of its crap to the United States. Now I know this may come as a shock to you, you little pricks, but you see, we're in the middle of a recession that has left the American consumer desperate to stash as many pennies as possible in their mattresses. So that means Canada is choking. You're welcome for the remedial lesson in supply and demand. Next lesson? Hedging against stupidity.

Goldman Exits Money-Losing Bet on Loonie Versus Mexican Peso (via Bloomberg):

Goldman Sachs Group Inc. exited a bet that the Canadian dollar would strengthen versus the Mexican peso after the trade lost about 5 percent.

“Recent data points have gone against our fundamental views of continued stabilization in Canada and a lagging recovery in Mexico, relative to the global cycle,” analysts at Goldman Sachs wrote today in a note, citing worse-than-expected Canadian retail sales and jobs numbers, and a less-than-forecast drop in Mexican industrial production.

Goldman entered the trade on June 8, and stands to lose about 5 percent including the cost of carry after being “stopped out” when the peso traded beyond 11.40 per Canadian dollar yesterday, the researchers wrote. A long position refers to a bet that a currency will rise. Traders place “stops” on trades to automatically limit their losses.

The peso strengthened 0.5 percent to 11.34 per Canadian dollar at 12:44 p.m. in Toronto, from 11.40 yesterday. The peso has declined 1 percent this year against the loonie, nicknamed for the aquatic bird on the C$1 coin.

Good job, boys, glad to see you've got everything under control.


It's Official: Economic Downturn Hits the Amish

Filed under: no one is immune

Under any other circumstances, this might be a LOL story. Considering the implications of an entire group of people normally insulated from the booms and busts, I'd say there's nothing to LOL about here.

USA Today:

Freeman Wingard is Amish, but he spent the last decade living quite differently than the popular characterization of the Amish as farmers, their plows hitched to enormous draft horses as they eschewed influences of the outside world.

Wingard took his family to restaurants every week, made trips to Chicago and vacationed in Florida. That was when, he says, he was earning $40 per hour working in a Northern Indiana recreational vehicle factory.

But as RV sales slowed in the economic downturn, Wingard and many of his Amish co-workers were laid off from the high-paying jobs.

Wingard, who has a wife and five daughters younger than 13, added jellies and jams to the quilts and other crafts he and his family sell from their farm. Despite the long hours — Wingard often rises at 3:30 a.m. and puts up 300 jars of jelly by noon — none of the new enterprises has come close to replacing the factory incomes.

Still, Wingard says, there is an upside. "The work is still hard, but it's flexible, and I can be with my kids."

The economy has taken some toll on most of the USA's 400 Amish settlements, experts say, but none has seen such a widespread impact as the country's third-largest Amish settlement in Northern Indiana.

"Nowhere in U.S. Amish history has a down economy affected the Amish so much," said Steven Nolt, a professor at Goshen College who has written about the Northern Indiana Amish. "It's a pivotal time for them."


What's Up With the Missing Canadian Gold, Deloitte?

Tuesday, June 30, 2009 , , , , , 6 Comments

How fitting after we just finished a whirlwind CPA Review World Tour (pfft) in San Jose on Auditing and Attestation, eh?

Royal Canadian Mint Releases Missing Gold Findings:

The Royal Canadian Mint today released the findings of a third party review related to the unreconciled difference between the Corporation’s rolling inventory and the physical count of precious metals for the 2008 fiscal year.

The scope of the review, conducted by Deloitte and Touche, was to specifically determine if the unreconciled difference in gold was the result of an accounting or transaction recording error.

The report concluded that "the unaccounted for difference in gold does not appear to relate to an accounting error in the reconciliation process, an accounting error in the physical stock count schedules, or an accounting error in the recordkeeping of transactions during the year."

The Deloitte and Touche report identified three other areas for consideration:

1. A technical review of operations – As the Mint applies scientific processes and formulae to various aspects of refining, such as process losses, the Mint may wish to review and update its benchmarks and/or third party studies regarding such technical processes and formulae.

2. An accounting review of prior periods - Precious metal reconciliations have been performed by the Mint twice annually in prior years. Although, in theory, revisiting prior period reconciliations could explain the difference, it would be difficult to complete such a review due to the passage of time, the availability of supporting documentation and the turnover of Mint staff.

3. Security reviews - A more in-depth review of systems security and an assessment of potential inappropriate activity by both internal and/or external parties.

"As a Crown Corporation, we understand that Canadians hold us to a high standard of accountability and the Mint’s Board of Directors will continue to work closely with management in ensuring that this matter is pursued vigorously," said James B. Love, Chairman of the Board of the Royal Canadian Mint.

"In response to the report’s recommendations, the Mint has engaged third parties to assist the Corporation in its review of specific aspects of its operations, including refinery processes and internal controls," said Ian E. Bennett, President and CEO of the Royal Canadian Mint. "We have also requested the RCMP’s assistance to investigate the matter and the Mint has committed to fully co-operate with them."

The amount of the unreconciled precious metals at this stage is approximately $15.3 million. Mr. Bennett emphasised that "the Mint will aggressively continue its efforts both internally and with outside experts to determine the sources of the unreconciled difference."

In the interim and on the basis of the Deloitte and Touche report, the Corporation has notified its insurance carriers that it intends to file a claim under its "All Risks" insurance policy which, if successful, will largely offset the amount of any unreconciled difference.

Uhhhhh.....excuse me? Please tell me someone dubbed this "material" or else I have officially lost all faith in the world.


The American Capital Cootie Problem: Swiss Banks Shun American Accounts

It's official. We've got cooties.


Swiss banks are shutting the accounts of Americans as the U.S. Internal Revenue Service accelerates the hunt for tax dodgers.

UBS AG and Credit Suisse Group AG, the country’s biggest banks, have told Americans to move their money into specially created units registered in the U.S., or lose their accounts. Smaller private banks such as Geneva-based Mirabaud & Cie. are closing all accounts held by U.S. taxpayers.

While the banks declined to say how many people are affected, more than 5 million Americans live abroad, including about 30,000 in Switzerland, according to estimates from American Citizens Abroad in Geneva. Swiss banks must register with the Securities and Exchange Commission to provide services for those customers.

“My bank doesn’t want to do that, so we wouldn’t accept an investment account for a U.S. person,” said Pierre Mirabaud, chairman of Mirabaud & Cie. and the Swiss Bankers Association, during a lunch at the American International Club of Geneva.

SEC registration means clients don’t enjoy the protection of Swiss banking secrecy laws, which make it a crime for money managers to disclose the names of clients without their consent. Switzerland said in March it would cooperate with international tax evasion probes after Zurich-based UBS admitted helping U.S. clients avoid taxes.
Can you blame them? No.

Can you blame us for trying? No.

Because the SEC is totally tough on crimes like avoiding the rape and pillage we call personal income tax in America. Mmm hmm.


"Starving the Beast"? Count Jr Deputy Accountant In: Protesting the American Way, with Our Wallets

It was recommended at End the Fed in April that we call July 3rd, 2009 a National Bank Run Holiday - you heard me right, pull all your money out of your checking accounts and cripple the banks where it would hurt them most, at the heart of their fractional reserve scheme. Of course, if you recall this charming story about the Guatemalan man arrested for declaring a bank run via Twitter, you might see where this would be a problem. No one wants to incite panic and the powers that be are working hard to silence critics. See also: ongoing lawsuit against blogger Mike Morgan - we are still on hold over at GoldmanSachs666 as Mike battles with Goldman rat lawyers for the right to criticize their brazen behavior. Don't trip, GS, when he's done we're coming for that ass and there isn't a damn thing you can do about it. Let the record reflect that Jr Deputy Accountant cannot wait to resume writing over at GS666 and is flying the anti-Goldman flag proudly in the meantime as always.

Market Ticker, as always, is ahead of the game. Consider this my public declaration that I will be participating in this event. Hit 'em where it hurts, right? I may not be able to stop the government from stealing my wealth via taxes and inflation but I can certainly do my part to disable the consumergasm machine. Bitches. No new hoodies for Adrienne, sorry.

Take it away, KD, you little diabolical genius you:

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.

Count me in, KD. What about you? Come on, America, we only get this chance once and if we don't pull this off, our kids are going to be wondering where our balls went. Is that what you want? Your grandkids to go "damn, they really sold us down the river with that deal, didn't they?"

I don't.

So let's hope my iPod and smartphone outlast the shenanigans.

I do not own a house. I do not own a car. I do not have excessive debt obligations. And I'm not stuffing my money in some BofA vault so they can make more risky loans - oh, didn't I tell you? $BAC offered someone near and dear to me a $600,000 loan to buy a condo in the Bay Area - someone with a previous bankruptcy only 10 years old, no assets to her name, and who has been on disability for the last two years. Yup. You read that correctly. And this is within the last, oh, three months. So what happened to that whole "lessons learned from the financial crisis" line? Who gives a shit when you've got a taxpayer backstop?

The time is now. Don't blow it, America, I'm counting on you to wake up and get this right.


Gold Manipulation for Dummies: US Treasury Edition and How Goldman Learned to Stop Propping and Love the Yellow Stuff

Note: Goldman is still propping. It just made a great headline so suck it.

There's trouble brewing with gold yet again -- what, did you think we forgot about the bond market implosion earlier this month? Oh please. Perhaps Timmy has forgotten but you know the Chinese haven't, they're the elephants of American dollars and they aren't going to let a single one slip out of the printer. Hate to break it to you, Zimbabwe Ben, but they've sort of got our number.

Fox News, however, is a tad behind the curve. $1000 gold? Please. I've been saying $1500 by the end of the year if only it can break $1000. Who or what is intent on keeping it down? And what in the hell is going on with the Comex? Well, duh, again.

Via FN:

Gold could go well above $1,000 an ounce in the next couple of years, according to some people bullish on the metal, who say China could boost the yellow metal's price significantly if it takes the policy actions one of its research officials is advocating.

A Chinese academic with ties to the Chinese Communist Party says the People's Republic should buy more gold and diversify its nearly $2 trillion in foreign exchange reserves away from U.S. Treasurys.

Li Lianhzong, director of the economic bureau at the party's China Central Policy Research Office, made the comments at a forum in Beijing that also covered the broader topic of China’s currency on the world financial stage.

Li was cited by Dow Jones Newswires as saying China needs to increase the value of its foreign exchange reserves -- the source “from which we create our fortune.”

GATA Chair Bill Murphy blames Citi alum Robert Rubin for these shenanigans, and I guess "setting the tone" can have its own consequences:

Bill Murphy: It's what we call "The Gold Cartel". The United States government is the main culprit, with "hit men" like Goldman Sachs and J.P. Morgan Chase, and other central banks, like the Bank of England. It's been going on for some time now.

Basically, it all started with [former US Treasury Secretary under the Clinton Administration] Robert Rubin, back when he was the head of Goldman Sachs in London. He would borrow gold from the central banks at a 1% interest rate, and then sell it. He took this idea and made it the essence of his "Strong Dollar Policy" [while at the US Treasury].

Then there was Lawrence Summers, who followed him as Treasury Secretary. He once articulated the relationship between gold and interest rates in his paper, "Gibson's Paradox and the Gold Standard". Keep the Gold Price down, he said, and you keep interest rates down.

Now, the US is very concerned about stock market interest rates, the Dollar and so on. The main way to control all that is to keep the Gold Price down. So they'd borrow central bank gold and surreptitiously put it in the marketplace, via various leasing and swap operations. It's this gold that has kept the price from being $2,000 an ounce – or well over it.

Oh wait! Are we talking about the same Larry Summers who might take over as Chairman of the Federal Reserve if OMGObama decides to give our buddy Zimbabwe Ben the boot? Go figure!

Analysts already write in the manipulation as it's been a reality for as long as there have been hands to stick in the cookie jar. How pathetic is that?

The Fox News article continues (taking a long hard piss on gold is the media's favorite activity right after rubbing Ben Bernanke's balls, apparently):

Some are not as bullish on gold's prospects.

John Nadler, senior analyst of precious metals company Kitco says over the next several months gold's range will likely "remain between $680 and the $980 area.

He says it's been a "struggle" for the gold bulls at the four digit level and that the "onous is on them to prove if we're in the midst of a hypercyle for gold"

"Despite the Armageddonish headlines, the sky ended up not falling and the dollar retains its reserve currency status."

Nadler believes the talk of a the need for a new world reserve currency is merely "jawboning by the Chinese."

Longer term, Nadler says the jury is still out on whether gold can go deep into four-digit territory. For gold to move to $3,000 to $4,000 an ounce, Nadler says “Kim Jong il would have to go nuts” with his nuclear weapons.

Well who said gold is going to $4000 an ounce at this point? That's just ridiculous, even for the doom-and-gloomers (present company included and excuse me, we call it being realistic thank you very much).

For those of you who are still in denial, I warn you now that the big boys are ramping up for a doozy. You thought June was a bit silly? Hold tight and try not to lose your breakfast in the process.

Market Force Analysis says December 2009 gold is working out to look even more astonishing than June futures (with a chart so go check it out):

The bets by bulls outnumber those by the bears by a 2.3 to 1 ratio which is even more bullish than for JUN 2009. The Total Call option interest is 113,663 contracts which is very similar to JUN 09. Furthermore if gold is trading at around $1600 by DEC then 100,000 contracts will be in the money!

I consider option players highly sophisticated speculators. Such large bets are likely being made by some large money interests who are buying out of the money options BEFORE going into the futures market. Buying long futures in large volumes will rapidly drive up the gold price but the massive open interest in the Call Options then allow access to much more futures contracts at the same price by exercising the options and then perhaps taking delivery of the gold. This is bolstered by sources revealing that JPM and GS are buying in quantity. So on the part of JPM this is likely a ploy to try to cover a chunk of their massive short position.

Duh. Duh duh duh.

Goldman and JPM loading up on gold? Uh huh. That's interesting. Hold tight, kids, it's about to get a bit crazy around here...


Foreclosure: It's Not Just for Subprime Anymore

Tuesday, June 30, 2009 , , , 0 Comments

Filed under: Didn't you see this coming from a million miles away?

Looks like subprime isn't the only worrisome housing sector, as the crisis starts to touch on even the most credit-worthy borrowers. Well DUH. A 10% unemployment rate might have that effect on the country. Just sayin.


Delinquency rates on the least risky mortgages more than doubled in the first quarter from a year earlier as U.S. efforts to help homeowners failed to keep pace with job losses that pushed more borrowers toward foreclosure.

Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today in a report. First-time foreclosure filings on the loans rose 22 percent from the fourth quarter, the report said.

“I’m very concerned about the rise in delinquent mortgages and foreclosure actions,” Comptroller of the Currency John Dugan said in a statement released with the quarterly report. President Barack Obama’s plan to create “sustainable, payment- reducing modifications is a positive step that should show significant benefits in the coming months,” Dugan said.

Obama’s program, unveiled Feb. 18, aims to help as many as 4 million borrowers by modifying loans and calls for Fannie Mae and Freddie Mac to refinance mortgages for as many as 5 million borrowers who owe more than their homes are worth. Foreclosure filings surpassed 300,000 for a third straight month in May, according to RealtyTrac Inc., and the U.S. economy has shed about 6 million jobs since the recession began in 2007.

Serious delinquencies on prime loans, which account for two-thirds of all U.S. mortgages, rose to 661,914 in the first quarter from 250,986 a year earlier, according to the report. Overall, mortgages 60 days or more past due rose 88 percent from last year, the report said.

Mortgages modified to help struggling borrowers stay in their homes fail within nine months more than half the time, the report said. About 53 percent of mortgages modified in the first quarter of 2008 were 30 or more days delinquent after six months, and increased to a 63 percent default rate after a year.

“Rising serious delinquencies are a leading indicator of increased foreclosure actions in the future,” the agencies said.

Again: DUH


And So it Begins: California Forced to Issue IOUs

Hey remember when they held our tax refunds hostage for weeks while they ironed out the budget problem? What happened to that?

Buh buh-bye-bye-bye, Golden State. We're screwed.

Via FT:

California is preparing to issue IOUs to its creditors this week as it grapples with an unprecedented cash crunch and prepares to begin its new fiscal year deep in the red.

Once the US’s richest state, California now has the dubious distinction of having the worst credit rating in the country.

It is facing a budget deficit of $24bn (€17bn, £14.5bn) yet Arnold Schwarzenegger, its governor, and the state assembly cannot agree on a budget that would address the shortfall.

California’s fiscal year ends on Wednesday but as the state’s cash reserves are empty, IOUs will be issued to a range of creditors, including contractors, such as information technology companies and the food service groups that cater for prisons.

“On Wednesday we start a fiscal year with a ­massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” said John Chiang, the state ­controller. “Unfortunately, the state’s inability to balance its chequebook will now mean short-changing taxpayers, local governments and small businesses.”

The state is also likely to issue IOUs to the US government. California currently contributes funding for government-run programmes for elderly and developmentally disabled people but is considering issuing IOUs to cover its contributions because of the lack of cash.

Education funding is ­protected under the state’s constitution while payments on the state’s bond debt are also guaranteed under state law.

What does this mean for California? That we should hope we hurry up and fall into the ocean already?


If CNBC Wasn't Reason Enough to Boycott GE, How About this Creative FAILout Trick?

Told you a boycott is due. And if you needed more reason than the simple fact that GE is CNBC's parent, here you go (via WaPo):

General Electric, the world's largest industrial company, has quietly become the biggest beneficiary of one of the government's key rescue programs for banks.

At the same time, GE has avoided many of the restrictions facing other financial giants getting help from the government.

The company did not initially qualify for the program, under which the government sought to unfreeze credit markets by guaranteeing debt sold by banking firms. But regulators soon loosened the eligibility requirements, in part because of behind-the-scenes appeals from GE.

As a result, GE has joined major banks collectively saving billions of dollars by raising money for their operations at lower interest rates. Public records show that GE Capital, the company's massive financing arm, has issued nearly a quarter of the $340 billion in debt backed by the program, which is known as the Temporary Liquidity Guarantee Program, or TLGP. The government's actions have been "powerful and helpful" to the company, GE chief executive Jeffrey Immelt acknowledged in December.

GE's finance arm is not classified as a bank. Rather, it worked its way into the rescue program by owning two relatively small Utah banking institutions, illustrating how the loopholes in the U.S. regulatory system are manifest in the government's historic intervention in the financial crisis.

The Obama administration now wants to close such loopholes as it works to overhaul the financial system. The plan would reaffirm and strengthen the wall between banking and commerce, forcing companies like GE to essentially choose one or the other.

"We'd like to regulate companies according to what they do, rather than what they call themselves or how they charter themselves," said Andrew Williams, a Treasury spokesman.

GE's ability to live in the best of both worlds -- capitalizing on the federal safety net while avoiding more rigorous regulation -- existed well before last year's crisis, because of its unusual corporate structure.

Of course, GE and the FDIC insist that this has been a huge moneymaking venture in which no one gets hurt. Uh, like CDOs circa 2005? That's what I thought.

Banking companies are regulated by the Federal Reserve and not allowed to engage in commerce, but federal law has allowed a small number of commercial companies to engage in banking under the lighter hand of the Office of Thrift Supervision. GE falls in the latter group because of its ownership of a Utah savings and loan.

Unlike other major lenders participating in the debt guarantee program, including Bank of America, Citigroup and J.P. Morgan Chase, GE has never been subject to the Fed's stress tests or its rules for limiting risk. Also unlike firms that have received bailout money in the Troubled Assets Relief Program, or TARP, GE is not subject to restrictions such as limits on executive compensation.

The debt guarantee program that GE joined is administered by the Federal Deposit Insurance Corp., which was reluctant to take on the new mission, according to current and former officials who were not authorized to speak publicly. The FDIC also initially resisted expanding the pool of eligible companies, fearing it would add more risk to the program, the officials said.

Despite those misgivings, there have been no defaults in the loan guarantee program. It has helped buoy confidence in the credit markets and enabled vital financial firms to raise cash even during the darkest days of the economic crisis. In addition, the program has raised more than $8 billion in fees.

"The TGLP program has been a moneymaker for us," FDIC chairman Sheila C. Bair has said. "So I think there have been some benefits to the government and the FDIC."

For its part, GE said that it properly applied for and qualified for the program. "We were accepted on the merits of our application," company spokesman Russell Wilkerson said.
Spin the acronyms however you like, risk is risk. And it is exactly this sort of behavior which opens us up to continued economic beatings. Perhaps if these sorts of behaviors were kept in check (helllllo Sheila Bair wtf are you doing?!) we wouldn't be forced to bat around the idea of the Federal Reserve as regulator to beat all regulators.

Enough already.


Prosecuting Rogue Bankers: Bank of America Edition

Sigh. Bank of America/Merrill Lynch/and the Fed part 79 - and so the drama continues. I've said myself that unless top Fed and Treasury officials (read: Bernaulson) are actually prosecuted for this, I'm not too impressed with the song-and-dance. You can line up all the Fed fuckers you want on the Hill but without charges, this is yet another pathetic show of how limp-dicked the United States government is against the Fed.

Oh, wait, you thought we were the ones in charge? Ha! That's cute. Really.

For a not so brief recap, see my June 26: Next Up on the Hill for Bank of America/Merrill/Federal Reserve BS Part 64: Hank Paulson!

Anyway, I found this piece by Napolitano so awe-inspiring that I present it to you now, dear reader, sans snarky commentary. America wants indictments. End of story.

Via Fox News Senior Judicial Analyst Judge Andrew P. Napolitano:

The Secretary of the Treasury and the Chair of the Federal Reserve have taken an oath to uphold the Constitution and the federal laws. Among those laws is the obligation of management of publicly traded corporations to inform shareholders in a meaningful way of the risks attendant upon all extraordinary corporate activity, including major acquisitions.

The acquisition of Merrill Lynch by the Bank of America was surely a major acquisition and an extraordinary corporate act. The president of B of A now tells us that the Secretary and the Chair told him not to inform his shareholders that Merrill Lynch was truly a risky investment. As it turns out, when Ken Lewis learned that Merrill Lynch was worth about $17 billion less than the $50 billion agreed upon amount, he attempted to invoke the material adverse change (MAC) clause in the contract of acquisition, which would have given him the option of getting Merrill Lynch for $33 billion or walking away from the deal.

“Ken Lewis, Henry Paulson, John Thain, Ben Bernanke, and Jeffrey Lacker, the President of the Federal Reserve Bank of Richmond, should all be prosecuted for extortion, conspiracy to extort, criminal fraud, and theft of honest services; and they should be imprisoned if convicted.”

The former president of Merrill Lynch, John Thain, is not happy that he was fired from B of A, even though he left a very wealthy man. He does not refute Ken Lewis’ statements. He only argues that Lewis and the B of A folks knew what Merrill Lynch was worth when they bought it. He may have inadvertently opened a new can of worms for himself: Did he knowingly sell an asset to a public company, which had received a huge federal investment, for $17 billion less than he knew it was worth?

The failure of the president of B of A to have revealed the risks of the acquisition to shareholders, as the law requires, and his failure to exercise the MAC clause were acts of fraud and directly violate laws enforced by the SEC. As for Paulson and Bernanke, they were participants in a criminal conspiracy to defraud B of A shareholders. We also now know that the Fed in DC and its regional bank in Richmond threatened to fire Ken Lewis and his management team if B of A did not follow through with the Merrill Lynch acquisition for the full $50 billion. This is EXTORTION. It is the threat to perform a lawful act in order to compel a person to exercise his free will adverse to his own interests or his fiduciary obligations. Unfortunately for Ken Lewis, “the government made me do it” is not a defense to a criminal indictment. Ken Lewis, Henry Paulson, John Thain, Ben Bernanke, and Jeffrey Lacker, the President of the Federal Reserve Bank of Richmond, should all be prosecuted for extortion, conspiracy to extort, criminal fraud, and theft of honest services; and they should be imprisoned if convicted.

Ouch. I'm with Napolitano on every point except Lacker playing a part in this. As I've said from the beginning, let's make sure we're watching the right criminals, kids. Just because Bank of America happened to belong to Richmond doesn't mean we need to start calling for his head too. From what I've read of the e-mail exchanges, Richmond didn't necessarily play the game correctly but it has certainly not been implied that BofA's regulator played a part in duping BofA shareholders.

Just sayin... and no, not just because Lacker is my favorite. Shush.


All's Fair in Love and Value when it Comes to FASB and the IASB

Monday, June 29, 2009 , , , , , 0 Comments

Can FASB and the IASB play nice when it comes to fair value? That's the ultimate question, and one that the accounting industry will ideally answer before the U.S. transitions away from GAAP and towards IFRS. Blah blah blah blah blah, chugging ever onward...

Via PwC's IFRS blog:

The FASB and IASB documents have different emphases (for example, the FSP focuses on indicators of inactive markets; the EAP requires management to consider all available information and to apply judgement) and a few subtle differences (for example, on transactions that are not orderly), but these aren’t expected to result in differences in practice.

Guidance from the FSP and the EAP has been included in the IASB’s long-awaited exposure draft on fair value measurement, published last month. It addresses the question of how to measure fair value but not when. So it is perhaps not the most controversial topic of the moment.

The proposed standard is based on the US equivalent, SFAS 157, ‘Fair Value Measurements’. The definitions of fair value are identical – that is, “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (the ‘exit price’ approach) – but there are some important differences. The IASB has proposed not to permit recognition of day-one gains for those financial instruments whose values are impacted significantly by unobservable inputs (so called Level 3 financial instruments).

This looks to be a sensible move in response to recent market conditions, but nonetheless it is an interesting departure from the US position. The IASB has also proposed a different unit of account for financial instruments measured on the basis of anything other than unadjusted prices in an active market (so called Level 2 and 3 instruments – that is, at the level of an individual instrument rather than a portfolio). This appears contrary to the approach typically adopted by banks of valuing certain risks in their derivatives portfolios (such as credit risk) across the whole portfolio rather than by individual instrument. There are other subtle changes that could also result in differences in practice.

Somehow I get the sneaking suspicion that following in the IASB's footsteps can do nothing but harm as far as FASB is concerned, but that never stopped them before.


"Don't Know Whatchu Heard Bought Me, I Lost all My Loot in R-E-I-Ts"

Filed under: Don't look over here if you're looking for sympathy

If you tried to stash your loot in REITs, you sort of have this coming.


Investors who purchased exchange-traded funds tracking real estate investment trusts in hopes of diversifying their portfolio against stock-market shocks have been sorely disappointed.

REITs, which let individuals invest in commercial real estate, have been thumped by the recession and tight lending markets. The companies manage specific types of properties such as shopping malls, apartments and storage facilities.

The SPDR Dow Jones REIT ETF (RWR 33.76, +0.13, +0.39%) was off 49% for the year ended June 25, trailing the Standard & Poor's 500 Index (SPX 927.52, +7.67, +0.83%) by more than 20 percentage points, according to investment researcher Morningstar Inc.

The REIT fund has a three-year annualized return of negative 19%, or more than 10 percentage points behind the S&P 500.

"REITs are currently enduring the perfect storm: a lack of credit and weak economic fundamentals," said Morningstar analyst Mitchell Corwin in his latest report on SPDR Dow Jones REIT ETF.

"In one of the worst bear markets in history, investors seeking diversification cover in REITs have realized poorer performance," he noted.

I mean shouldn't investors have seen this from 10 miles away? Just sayin.


Economists are worried that after the residential housing bust, the next shoe to drop will be commercial real estate. REITs have massive amounts of debt they need to roll over or refinance in coming years. Meanwhile, property values and rents are weak, and tenants are falling on hard times.

Investors will be looking for any news on the deleveraging process and economic trends when REITs begin reporting second-quarter results in coming weeks.

As if we needed another shoe, sure, but this has been months in the making. Delusion does not a diversified portfolio make.


Ben Bernanke is a Helicopter Cash-Dropping, Lying, Fraudulent Hack

Dude. And you thought I was a harsh critic of Zimbabwe Ben. Glad to see I'm not the only one.

Mish over at Global Economic Analysis was kind enough to clear everything up should you still have reservations about bagging Bernanke. How kind of him.

Regarding a recent Bloomberg piece called Bernanke Flubs Tryout, Still Up for Leading Role: Caroline Baum, Mish not only debunks Baum's Bernanke ball-licking extravaganza but does plenty of Bernanke bashing himself along the way and can I just say thank you to Mish on behalf of the rest of us?

So apparently Baum points to Bernanke's qualifications in painting him as a hero of the financial crisis. Thankfully, Mish is here to blast her ideas to bits. Take it away:

Ten Qualifications

1) Bernanke is either a liar or has a memory problem. I believe the former. Either way, there is a problem when a Fed chairman cannot recall a conversation with another Fed governor over something as critical as the Bank of America/Merrill Lynch merger. See Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl" for my take.

2) Bernanke claims to be a student of the great depression yet amazingly concludes the cause was misguided Fed policy after the stock market crash. This is nonsense. The cause of the great depression and the cause of the current depression (yes we are in a depression), is the massive expansion of credit and debt fostered by the Fed itself. Bernanke is no student of history, he is a dunce.

3) Bernanke has on many occasions promised transparency. This is an outright lie. There is no transparency and Bloomberg has filed freedom of information lawsuits requesting information that should have been disclosed. Moreover, Congress had to subpoena the Fed in regards to the Bank of America / Merrill Lynch shotgun wedding which is how we know about Bernanke's selective memory loss. What else is Bernanke hiding?

4) Bernanke is creative. Some might think creativity is a positive attribute. It is, for a design engineer. Unfortunately creativity is not a good attribute for a Fed chairman. This whole mess was sponsored by the Fed when Greenspan got creative with interest rate policy. Bernanke is light-years more creative than Greenspan as witnessed by an amazing array of Fed lending facilities and the ballooning of the Fed's balance sheet swapped for garbage collateral. The unintended consequences of Bernanke's extraordinary actions are coming down the road. We do not even know what those consequences are. However, we do know that the Fed has no exit policy, and will come up with one by the seat of Bernanke's pants on the fly. Given there is no need for the Fed at all, the last thing we need is for a creative Fed.

5) Bernanke supports policies of theft. Proof of this is easy to establish. Bernanke favors a policy of 2% inflation, and inflation is theft. How so? Inflation benefits those with first access to money: governments, banks, and the wealthy. Government benefits when property taxes rise more than wages, banks benefit by borrowing money into existence, and the already wealthy benefit by being next in line for access to cheap money. By the time those low on the totem pole have access to cheap money, asset prices are already through the moon. Moreover, those with enough common sense to avoid the bubbles, get nothing for their money sitting in the bank. The middle class has been ravished by inflation, and Bernanke supports that inflation.

Please note that Bernanke cannot even follow his own mandate. Where was Bernanke when property and commodity prices were soaring? The answer is he was ignoring them. Thus we see the one sided nature of Bernanke's policies. He let home prices soar, and now that they are crashing looks to support them. By the way, this is not just Bernanke, this is a symptom of central bankers in general.

6) Bernanke cannot dissent. As a member of the Greenspan Fed, Bernanke went along with everything Greenspan did. It is clear Greenspan failed. Thus it is clear that Bernanke failed by supporting Greenspan's policies.

7) Bernanke supports policies of outright fraud. Fractional reserve lending is a fraud. Please consider Murray N. Rothbard and the Case for a 100 Percent Gold Dollar in which Rothbard condemned fractional reserve banking as a violation of contract. "In my view, issuing promises to pay on demand in excess of the amount of the goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues "fake" warehouse receipts — warehouse receipts, for example, for ounces of gold that do not actually exist in the vaults. This is legalized counterfeiting; this is the creation of money without the necessity of production, to compete for resources against those who have produced. In short, I believe that fractional-reserve banking is disastrous both for the morality and for the fundamental bases and institutions of the market economy...."

8) Bernanke could not spot the housing bubble. Amazingly Bernanke thought the housing bubble was "well contained" right before it exploded in his face. Of course there is another possibility: Bernanke is a liar and knew it was not contained but did not want to say so.

9) Bernanke has no idea where interest rates should be. Of course no one else does either. But Bernanke thinks he does. The result is overshooting interest rate policy in both directions, just as Greenspan did. This is the Fed Uncertainty Principle Corollary Number One in action: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

10) Bernanke is a power grabbing hack. This is the Fed Uncertainty Principle Corollary Number Two in action: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.


Bernanke is a disingenuous liar with a memory problem. He is also an economic dunce who does not understand the cause of great depression nor could he spot a housing/credit bubble visible to nearly every blogger in the country. However, like his mentor Greenspan, Bernanke believes that every problem can be cured by throwing money at it. Finally, he is a creative, political power grabbing hack who gives memorable speeches about throwing money out of helicopters.

Dude! I LOVE THIS guy!!

Enough with the asshats. As Skeptical CPA has said a million times, just Kill the Fed already. Seriously. I can't take much more of this.


Boston Fedhead Rosengren on Roles and Responsibilities of a Systemic Regulator (Who He Swears Isn't the Fed)

It isn't fair for Jr Deputy Accountant to play favorites when it comes to Fed banks so let's give Boston Fed's Eric Rosengren a little play, shall we? And why does Rosengren always look like someone ran over his puppy?

The Roles and Responsibilities of a Systemic Regulator (via Boston Fed)- oh now isn't that a sexy title? How fitting that a Fedhead would come out singing the importance of a systemic regulator while Washington is mulling over handing over the whole ship to the Fed. Coincidence? My ass.

Rosengren seems to love this subject, see also: my April 15th Boston Fedhead Rosengren: What We Really Need is a Systemic Regulator to Keep Our Shit TIGHT. Get a new act, ER, we get it.


U.S. gross domestic product growth is likely to resume in the second half of this year but the U.S. labor market should lag any such improvement, the president of the Federal Reserve Bank of Boston said on Monday.

"GDP is expected to start being positive in the second half of this year, the unemployment rate is likely to lag, so that the peak in the unemployment rate is likely to be sometime early next year," Eric Rosengren told reporters on the sidelines of an economic conference in Brussels.

The Fedheads are certainly making a show of "lessons learned by the financial crisis" aren't they? Wonder why. Rosengren covers his ass by claiming he is not referring to or endorsing the Fed as elusive "regulator to beat all regulators" but it is certainly implied:

My remarks today will focus on the roles and responsibilities of a so-called “systemic regulator”. Please note that when I speak here of a systemic regulator I am sharing my own general views of that role, in broad terms, rather than discussing any specific proposal currently under consideration.

Furthermore, I am specifically focusing on the activities of a systemic risk regulator that involve so-called macroprudential analysis – or in shorthand, macroprudential supervision. There are other aspects of systemic risk regulation, such as resolution authority, that do not necessarily need to be the responsibility of the entity that supervises systemically important institutions. As Chairman Bernanke noted in a March speech on financial reform to address systemic risk, “Financial stability…could be further enhanced by a more explicitly macroprudential approach to financial regulation and supervision […] Macroprudential policies focus on risks to the financial system as a whole… [and] a macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets.”

blah blah blah blah blah - well if Rosengren doesn't mean the Fed, then what the hell is he talking about?

Indeed, I would like to begin by highlighting some differences between a macroprudential supervisor and one focused on traditional bank-solvency oversight. I will then touch on the characteristics of two types of institutions that render them “systemically important” – first, large and highly leveraged institutions, where losses of capital could have a magnified impact on the economy; and second, financial institutions that have extensive counterparty exposure to other financial institutions and financial markets, such that their failure could create significant problems for domestic and international counterparties in “domino” fashion. Note that most of the institutions likely to fit this definition are, or have recently become, bank holding companies that are already under the supervision of the Federal Reserve – although systemic regulation would differ from the traditional supervisory responsibilities of the Federal Reserve.

I plan to then discuss some of the roles and responsibilities a systemic regulator should have, in order to prevent contagious failures. In particular I will argue that the systemic regulator should have the ability to do the following three things, at a minimum, at systemically important institutions:

* First, supervise capital structure to minimize the potential for problems originating at such institutions to spill over to others. This can, perhaps, be pursued by limiting debt instruments that qualify for capital; requiring banks to hold additional capital during expansionary periods; and mandating higher capital ratios for systemically important firms.

* Second, supervise liquidity risk and asset-liability management to minimize the likelihood, and impact, of runs on institutions.

* Third, supervise risk management so that systemically important institutions have robust and effective means of evaluating risk, thus minimizing the likelihood of needing government support to avoid the spread of contagious instability.

To give you a peek at the bottom line, I will conclude that such responsibilities overlap with what is needed for effective oversight of potential discount window borrowing, if such borrowing is available to non-depository systemically important financial intermediaries. Monitoring solvency risk and liquidity risk are key elements of discount window analysis, and are also key components of macroprudential supervision.

Ok I'm done with this speech. Please try harder next time, ER, you're boring.

I take this speech to mean that Rosengren supports the idea of the Fed as supreme regulator and in no way does he endorse any sort of "free market" mentality that might allow institutions to create risk management programs based on the rationality of reward/punishment.

Go figure. A Fedhead who promotes the heavy hand of unnecessary regulation? As if.


Next Up on the Subprime Block: State Street

I prefer the State Street of my youth,
State St, Madison, WI

Yawn. The SEC is tough on crime. Uh huh. I buy that.

Hey, State Street! You're on notice. Years after the fact. So take that! Asshats.


Asset management and servicing giant State Street Corp (STT) said it might face civil charges by U.S. securities regulators for exposing investors to losses on subprime mortgages.

The company said on Monday that Securities and Exchange Commission staff had issued a "Wells" notice to its banking unit on Thursday regarding disclosures and management by State Street Global Advisors of "active" fixed-income strategies in 2007 and in prior periods.

A Wells notice indicates that SEC staff may bring civil charges, and gives the recipient a chance to mount a defense.

The Securities and Exchange Commission said on Monday that it had no comment on the matter.

Boston-based State Street, which oversees $11.3 assets in custody and has $1.4 trillion in assets under management, said it had been cooperating with the SEC and other regulators.

In 2007, State Street established a $625 million legal reserve to cover investor claims after the company invested in mortgage-related securities that lost value when credit markets tightened in the second half of the year.

Many investors have sued State Street, accusing it of misleading them about the risks of the investments. Last month, the company said that as of March 31, it had made $418 million of payments from the legal reserve, leaving $207 million.

State Street disclosed the Wells notice in an SEC filing.

In morning trading, the company's shares were down 2 percent at $47.38.

At Friday's close, the stock was up 22.8 percent year to date, beating the 16.5 percent rise in the Dow Jones U.S. Asset Managers Index.


Geithner's Plan for Saving the Economy and Stuff: Still Vague as Ever

So basically Tim Geithner still has no plan, and now that the Obama administration has had nearly 6 months to get its shit together, I'm only slightly disappointed. After all, we sort of knew Timmy boy would bomb, didn't we? At least we hoped.

Geithner has thus far accomplished nothing. Nothing. Not even for his Wall Street Mafia puppetmasters, making his performance all that much more pathetic.

And now, as is his wont, Timmy wants you to know that though he understands creative financial instruments just so happened to destroy the economy, he doesn't think they should be stopped. Somehow, we are to believe that creativity fuels our financial system, don't worry that there is no viable system of checks and balances to keep them reigned in. Who cares?


Timothy Geithner said on Thursday that the Obama White House was attempting to create a new economic system in which large institutions did not assume that the government would automatically bail them out when times got tough. But the Treasury Secretary also argued against the abolition of credit default swaps - one of the instruments that helped bring the financial system to its knees - saying such a move would stifle creativity in a market desperate for innovation.

"Overall, we do not believe that you can build a system based on banning individual products - our core challenge is ensuring we have a system that has a proper balance between innovation on the one hand and consumer protection on the other," said Geithner.

Blah blah blah blah blah

"We want to make sure that no one assumes the government will step in to bail them out if their firm fails," he said. "We want to require all firms to keep more capital and liquid assets on hand as a greater shock absorber against potential future losses and that the biggest, most interconnected firms, keep even larger amounts on hand."

Shut the fuck up already and do something useful, k Timmy? And don't open your mouth again until you have.


Should Have Listened in 2006: "Is the United States Bankrupt?"

Climb back into the time machine, this time to check out Boston University economist Lawrence Kotlikoff on Is the United States Bankrupt? in 2006.

We did this one before. But just in case you missed it:

The gist of [Kotlikoff]'s case is that national "bankruptcy" isn't simply when a government can't pay its bills in the current fiscal year. Instead, it's an evaluative determination based on the likely paths of future spending and taxes that, in the absence of divine intervention, there's simply no way a nation can meet its future obligations.

By that measure, today the U.S. Treasury is a bankrupt entity, according to Kotlikoff. The reason is simple—just have a look at the growth of Medicare, Medicaid and Social Security lurking over the horizon in the Congressional Budget Office's startling long-term budget projections.

Here's a sample from Kotlikoff's latest piece on the subject, from the Federal Reserve Bank of St. Louis' Review:

Is the U.S. bankrupt? Or to paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bear, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?

Many would scoff at this notion. They’d point out that the country has never defaulted on its debt; that its debt-to-GDP (gross domestic product) ratio is substantially lower than that of Japan and other developed countries; that its long-term nominal interest rates are historically low; that the dollar is the world’s reserve currency; and that China, Japan, and other countries have an insatiable demand for U.S. Treasuries.

Others would argue that the official debt reflects nomenclature, not fiscal fundamentals; that the sum total of official and unofficial liabilities is massive; that federal discretionary spending and medical expenditures are exploding; that the United States has a history of defaulting on its official debt via inflation; that the government has cut taxes well below the bone; that countries holding U.S. bonds can sell them in a nanosecond; that the financial markets have a long and impressive record of mispricing securities; and that financial implosion is just around the corner...

There are 77 million baby boomers now ranging from age 41 to age 59. All are hoping to collect tens of thousands of dollars in pension and healthcare benefits from the next generation. These claimants aren’t going away. In three years, the oldest boomers will be eligible for early Social Security benefits. In six years, the boomer vanguard will start collecting Medicare. Our nation has done nothing to prepare for this onslaught of obligation. Instead, it has continued to focus on a completely meaningless fiscal metric—“the” federal deficit—censored and studiously ignored long-term fiscal analyses that are scientifically coherent, and dramatically expanded the benefit levels being explicitly or implicitly promised to
the baby boomers.

Countries can and do go bankrupt. The United States, with its $65.9 trillion fiscal gap, seems clearly headed down that path. The country needs to stop shooting itself in the foot. It needs to adopt generational accounting as its standard method of budgeting and fiscal analysis, and it needs to adopt fundamental tax, Social Security, and healthcare reforms that will redeem our children’s future.

Read the full piece here.

(via The Tax Foundation)


Mark Sanford: A "Pound of Flesh" Would Have Been Far More Useful

OMG I'm never going to shut up about the Fed's Bank of America drama.

Because I'd be a bad conservative if I didn't at least devote some time to South Carolina Governor Mark Sanford (sorry I'm late, it's been a busy week), I thought it might be a good idea to compare his "racy" e-mails to the Fed's racy Bank of America e-mails. Bear with me. Just want to make sure we're watching the right scandal.


Federal Reserve staff discussed getting a "pound of flesh" from Bank of America Corp. (BAC) management in return for government aid to help close its deal for Merrill Lynch & Co., internal documents show, highlighting the tense deliberations over the $20 billion rescue eventually provided to the bank.

The documents, unearthed by congressional investigators, show that Fed officials faced skepticism from both inside and outside the central bank. FDIC Chairman Sheila Bair, writing to Fed Chairman Ben Bernanke just two days before the government aid was unveiled, said there was "strong discomfort with this deal at the FDIC."

"My board does not want to do this," Bair wrote in the Jan. 14 email discussing what role the FDIC would play in backstopping possible losses at Bank of America.

It's so good that we have to do this twice (NYT):

The documents show that many Fed officials refused to believe that Kenneth D. Lewis, Bank of America’s chief executive, had not learned about Merrill’s losses until mid-December. Many top officials wanted to shake up the bank’s top management, or at least rein in its activities, in exchange for government rescue money. One official asked how the central bank could best extract a “pound of flesh” from the bank.

So where's the e-mail where Sanford tells Maria he would like to extract a "pound of flesh" from her backside? Now that's a story. Otherwise, you have a middle-aged Governor who accidentally fell for some Argentinian chick and sort of forgot about the rest of his life for a moment.

Oh please, America, like you never said you were going "hiking on the Appalachian Trail."

The argument is that Sanford abandoned his post so we'll go with that one. One more GOP hopeful down, who's left? The clock is ticking for the Republicans and it appears the viable candidates are being picked off one by one.

Sanford just happened to get picked off going after a pound of Argentinian flesh that he was obviously hopelessly in love with.

Meanwhile, what was Bernaulson's excuse?


Karma is a B*tch, Sheila Bair: FDIC Chief Hit by Housing Crisis

If you notice, the FDIC borrows its official mandate
from our friends at the Fed. Must have worked so well the first time...

Granted, when you're trying to ditch a house you paid $355k for in 2002 for $795k in 2009, you sort of know what you're in for. Unless you're FDIC chair Sheila Bair.



Last week, Ms. Bair removed her 14-room colonial in Amherst, Mass., from the market after cutting its sale price by $100,000 from an initial $795,000 in April, according to the listing sheet. It's across the street from Emily Dickinson's house in the college town.

Ms. Bair, and her husband, Scott P. Cooper, paid $355,000 for the house in 2002. In "02 and "03 they received building permits valued at $89,500 to renovate the 1860s house., including new roofing and a counter-current basement pool. In 2006, President George W. Bush appointed Ms. Bair, then a professor at the University of Massachusetts at Amherst's school of management, to the FDIC post, and she was one of the few officials to remain in their positions in the Obama administration.

After listing the five-bedroom property in April, the couple cut the price to $745,000 less than three weeks later, then reduced it again before withdrawing the listing. Ms. Bair's real-estate agent, Stephen Feldman, of Prudential Sawicki Real Estate, declined comment. An FDIC spokesman said Ms. Bair decided to remove the listing and wait for the market to improve on the advice of her real-estate agent. The family will continue to lease the house to its tenants. Ms. Bair and her family currently rent a house in Maryland.

Houses in downtown Amherst are a tough sell in the current economy, said Linda Rotti, a sales manager at Jones Group Realty, another agent in town. The downtown location, extensive remodeling and size of Ms. Bair's house -- it has 3,630 square feet of living space -- pose difficulties, Ms. Rotti said.

In April 2007, Ms. Bair suggested that mortgage executives freeze interest rates for people who seemed unlikely to make payments in the future. The idea was swiftly rejected.

Awww, so sad for Sheila.


Goldman Manipulation: The Rats Respond

By now you've heard of Matt Taibbi's Rolling Stone piece on rampant Goldman manipulation. Goldman certainly has.

Marching out the clowns to Reuters' Felix Salmon, GS insists that everything it does is above the board under current regulations. Well of course it is. We argue that the regulations are built with Goldman in mind, idiots. Great argument though from GS' Lucas van Praag:

Having read your piece about Matt Taibbi’s article in Rolling Stone, I wanted to set the record straight, particularly about “regulatory capture”.

Background: Under the Commodity Exchange Act, the CFTC (for agricultural futures) or exchanges (for energy/metals futures) established speculative position limits. As much as anything else, the limits are intended to prevent market imbalances that would result in failures of the ultimate settlement of the futures contracts.

The CFTC rules exempt “bona fide hedging” transactions from these spec limits. A bona fide hedging transaction was originally understood to be an actual producer/consumer who was selling or buying the underlying commodity and wanted to hedge risk of the price moving up or down. In 1991, J. Aron wanted to enter into one of its first commodity index swap transactions with a pension fund. In order to hedge our exposure on the swap, we wanted to buy futures on the commodities in the index. We applied to the CFTC for exemption from position limits on the theory that even if we weren’t buying the commodity, we had offsetting exposure (in our swap) that put us in a balanced/price neutral position. The CFTC agreed with our argument and granted exemption. By the way, each of the then Commissioners signed off, so it was hardly a secret…

The CFTC published a report in August 2008, indicating that there were few instances when entities would have exceeded spec limits, had they applied to OTC positions.

Yesterday, as you probably know, the Senate Permanent Sub-Committee on Investigations issued a report on wheat futures in which they concluded that divergence between prices for actual wheat v. wheat futures is being caused solely by index investment. The Committee’s recommendation is that hedge exemptions which support indices should be phased out.

Not quite so recently, the elimination of Glass Steagall doesn’t exactly provide a robust argument for regulatory capture. And Taibbi’s bubble case doesn’t stand up to serious scrutiny either. To give just two examples, even with the worst will in the world, the blame for creating the internet bubble cannot credibly be laid at our door, and we could hardly be described as having been a major player in the mortgage market, unlike so many of our current and former competitors.

Taibbi’s article is a compilation of just about every conspiracy theory ever dreamed up about Goldman Sachs, but what real substance is there to support the theories?

We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance of being a force for good.

And so Goldman shrinks off, defeated, allowing JPM to reign as top rat?


Bernie Madoff Gets Sentenced. Yawn

Sunday, June 28, 2009 , , , 2 Comments

Bernie Madoff is old news, it's Sunday night, I'm tired, and this is what you get.

150 years? Yeah right. Oh wait, maybe the SEC wants you to know that if it ignores you for 10 years and you end up bilking billions and get caught when you're old, it'll throw the book at you. I'm sure 71 year old Bernie has really learned his lesson =/


Next Monday, Wall Street's biggest and most brazen crook, Bernard Madoff, will leave his jail cell to hear his punishment. But for his victims, even a lifetime in prison may not be enough.

Madoff's clients, who once considered themselves lucky to be part of his seemingly exclusive investment circle, have struggled in the six months since his arrest with lost nest eggs, unpaid bills, anxiety, depression and anger over what they see as an unfair process to try to get any money back.

The courtroom drama is expected to draw many victims, including a few who will describe their financial ruin to the judge. Others plan a rally to publicize their plight, saying they worry they'll be forgotten once Madoff is put in prison.

"We don't care about what happens to Madoff," said Laurance Cohen, 79, of Eldorado, New Mexico, who together with his wife Marcia, 78, plan to be outside the Manhattan federal courthouse when the swindler is sentenced.

"We just want to get our money back."

For many, there will be no justice until more people they believe were in on the crime join Madoff behind bars. Madoff, 71, has pleaded guilty to running a long-standing Ponzi scheme and is expected to spend the rest of his life in prison.

They also are angry that Madoff's wife, their two sons and his brother, who have not been charged with any wrongdoing in what was a family-run business, do not appear to be suffering like they are.

"I think my biggest concern is that, basically, everything has gone according to his plan," said Jen Meerow, a New York resident who lost money to Madoff. "It is upsetting to know there are people at all levels of this that are probably going to get away with it."


U.S. Incomes Surge... Uh, Because of the Stimulus?

This is just stupid.

I recently celebrated my 2 year anniversary with my company and of course will be sitting down with the boss about the all-important yearly raise. Do we factor in inflation? There's 1.5% right there. But what about the improved production? What about the "thanks for taking such good care of my company" and the "hey, we appreciate that you get out of bed every morning at 6a to work for us"? While the financial products execs are knocking down million dollar bonuses for imploding the economy, I'm wondering wtf FT is thinking with this:

Personal income in the US surged in May thanks to an infusion of government stimulus funds, while consumers raised their spending modestly as confidence about the state of the economy continues to improve.

However, most of the monthly rise was the result of Federal benefit transfers and lower taxes. Americans, still facing rising job cuts and falling home prices, have been hoarding most of the additional funds, lifting the savings rate to a 16-year high in May.

You call an $8 a week tax credit a surge, FT? Are you out of your mind?

San Francisco Muni is going up to $2 a ride on July 1st. My health insurance goes up in August (but thankfully my benefits also improve - private health care FTW and don't you forget it). Good thing I cut out BART by moving to the city, as they have been forced to raise fares as well. (BART also reports that ridership numbers are way down). I hate to break this to you, but there goes that $8.

Sadly, America understood that savings were important but didn't realize this until it was too late. We're like hamsters shoveling seeds into our cheeks but stashing our goods won't do us much good at this point. In fact, you might do yourself well to take a hint from the hamster and store seeds over worthless paper. Come on, now, kids, keep up.

Consumers have accepted "new normal" because they realize they cannot do much to change it. We're complacent anyway. Who cares?

Who just burned this "GS" into my ass with a cattle prod? What's going on? zzzzz


Jamie Dimon's Punch-Out: Could JP Morgan be the Only One Big Enough to Take Goldman Down?

Look out, Blankfein, cuz Jamie Dimon is comin for dat ass and frankly I couldn't be more excited. You're our only hope, JD.


JPMorgan Chase & Co has snapped up market share for its investment banking unit and, amid the financial crisis, its large balance sheet may put it in a position to threaten Wall Street's dominant investment bank, Goldman Sachs Group Inc.

Analysts largely expect the investment banking unit at the second-largest U.S. bank to again report strong second-quarter results, following record first-quarter revenue.

A retail giant with a reputation for conservative risk-taking, JPMorgan has survived the financial crisis and benefited from its acquisition of near-collapsed investment bank Bear Stearns Cos.

"JPMorgan can compete with, and beat, Goldman Sachs," said Dick Bove, a veteran banking analyst with Rochdale Securities.

With $2.1 trillion in assets, JPMorgan dwarfs Goldman, which has $925 billion, and also Morgan Stanley, the former investment bank traditionally seen as Goldman's closest rival, which has $1.1 trillion.

The strength of its balance sheet could be an advantage, in particular since these banks this month returned billions to the U.S. government's bank bailout fund, known as the Troubled Asset Relief Program.


Sleepless in DC: Bernanke to Richmond's Lacker "Don't Trip, We Got This."

Ben Bernanke is shooting blanks in his battle with inflation
said the NY Post in February of 2008

Vindication, of sorts, for fans of Richmond, or at least elimination of one more suspect for those watching the Bank of America/Merrill Lynch/Fed drama unfolding on the Hill. I know I said I refused to call it Fedgate but seriously? It's getting a tad excessive.

See my June 26 Next Up on the Hill for Bank of America/Merrill/Federal Reserve BS Part 64: Hank Paulson! if you need a comprehensive primer on the situation going back to February.

One of the most interesting parts of this entire thing has been cracking into Fed inboxes, watching the juicy exchange amongst regulators. As I said when the e-mails first hit the press, don't start squealing just yet, Fedbashers, as these guys are certainly smart enough to save the good stuff for the exchanges that aren't digitally archived. Duh.

But this new bit from WSJ is more interesting in that it paints Bank of America's regulator (Richmond) as hard-nosed, leaving Bernanke and Paulson to take the rap. BofA even whined to the Board to get Richmond off their back! Hilarious. Did Ken Lewis have some favors to call in? Looks like he should have saved up a couple.

Documents unearthed by congressional investigators reveal disagreements among senior Federal Reserve officials about how to handle Bank of America Corp.'s acquisition of Merrill Lynch, fueling concern on Capitol Hill over giving the central bank even more power to regulate the financial system.

The glimpse inside the regulatory machinery provided by emails, memorandums and handwritten notes show a Fed that wrestled with how tough it should be on Bank of America, one of the biggest U.S. banks. It also shows Fed officials questioning more broadly their response to the financial crisis months earlier.

In December, Bank of America approached top U.S. officials about abandoning a deal, forged in the heat of the crisis, to buy investment bank Merrill Lynch. In the end, the government arranged a $20 billion rescue package for the bank to cover growing losses at Merrill.

In between, the documents show areas of disagreement within some of the Fed's 12 regional reserve banks.

The Federal Reserve Bank of Richmond, where supervision of Bank of America's parent company is based, pushed for a tougher approach than other regulators, emails suggest. Bank of America officials appealed more than once to the Fed's Washington headquarters to intervene.

Lacker even attempted to get an FOMC vote on this but was told by Bernanke "If we are nimble, we can handle this."

What the fuck? Since when does "nimble" include an alleged securities fraud gamble with not only Bank of America shareholders' money but American taxpayers' money as well? Perhaps I have confused my definitions.

Bank of America CEO "Ken [Lewis] may also raise his favorite perennial issue -- that is, is the Richmond supervisory team on the same page as the [Fed] Board," Fed governor Kevin Warsh wrote in an email Dec. 30 to Fed Chairman Ben Bernanke and other senior officials. "Richmond staff was on our call today, but prior to the call, it sounds like they may have threatened a little more than ideal..."

On Jan. 10, Fed General Counsel Scott Alvarez wrote to Mr. Bernanke and others that Richmond Fed President Jeffrey Lacker was raising some issues over the final deal. Mr. Lacker wanted the entire Federal Open Market Committee to vote on any loan to Bank of America.

Mr. Bernanke responded at 2:01 a.m.: "Thanks. If we are nimble we can manage this."

Boston Fedhead Rosengren even gets in on the action. Didn't I try to explain this you kids before? Either the Fed is incredibly clever and intentionally trying to show us an "independent" almost warring-amongst-itself face to convince us that it would make a great, diverse regulator (Supreme Court of Regulation? Um no) or they really are bickering amongst themselves more than usual.

I love that Zimbabwe Ben Bernanke was up at 2 in the morning glued to his BlackBerry over this. Good, ZB, I hope it still keeps you up 6 months later. It ought to.