AIG: The (False Accounting of the) Bloodsucking Parasite That Just Won't Die


so does this mean AIG should snitch on itself?
Just sayin



Hey guess what? You can "restructure" all you want, AIG, but if liabilities outweigh assets, AIG is essentially a dead man walking unless they can keep fudging the numbers indefinitely. Looks like things don't add up too well for AIG, despite numerous attempts to magically rearrange that red ink.

NYT:

The dozens of insurance companies that make up the American International Group show signs of considerable weakness even after their corporate parent got the biggest bailout in history, a review of state regulatory filings shows.

Over time, the weaknesses could mean trouble for A.I.G.’s policyholders, and they raise difficult questions for regulators, who normally step in when an insurer gets into trouble. State commissioners are supposed to keep insurers from writing new policies if there is any doubt that they can cover their claims. But in A.I.G.’s case, regulators are eager for the insurers to keep writing new business, because they see it as the best hope of paying back taxpayers.

In the months since A.I.G. received its $182 billion rescue from the Treasury and the Federal Reserve, state insurance regulators have said repeatedly that its core insurance operations were sound — that the financial disaster was caused primarily by a small unit that dealt in exotic derivatives.

But state regulatory filings offer a different picture. They show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect.

More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.

Echoing state regulators’ statements, the company said the interdependency of its businesses posed no problem and strongly disputed that any units had obligations they could not pay.

House of cards anyone?

If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”

[Retired LA state insurance examiner W. O.] Myrick has not fully examined all the A.I.G. subsidiaries but said his own recent review of many state filings raised serious concerns, particularly about the use of reinsurance to “bounce things around inside the holding company group.”

“That is a method used by holding companies to falsify the liabilities,” he said.

A.I.G.’s premiums have, in fact, been declining in important lines. Its ratings have fallen, and customers tend to steer clear of lower-rated insurers. To woo them back, A.I.G. has in some cases lowered its prices, competitors say. A.I.G. executives insist they would rather lose a customer than drive down prices dangerously.

A.I.G. has also pledged a share of its life insurance premiums to the Fed, to pay back about $8 billion. Details have not been provided, but consumer advocates say it is not clear how the life companies will pay future claims if their premiums are diverted.


Pull the damn plug on this monster already, or has AIG been back to its old tricks? With the appropriate counterparties already slipped their hush money (yes, I'm talking about you Goldman Sachs), who cares if it continues to lumber along or not?

One more time in case you missed it: "That is a method used by holding companies to falsify the liabilities"

I don't know about where AIG is from but where I'm from, we call that cooking the books.

You've Been Suuuuuuch a Bad Bank, Purr Regulators


Pic credit: the one and only Banksy


I have to kind of laugh after getting my copy of Minneapolis Fed's FedGazette this week only to see a cover story on "A spanking in banking" (where's the sign up sheet for that?) - looks like the baaaaaad bad banks are getting their comeuppance, or in this case perhaps just a little *fap!* from regulators and a time out.

Reuters:

U.S. federal regulators have raised the number of struggling banks which they have essentially put on probation, forcing them to fix their problems to avoid potential failures, the Wall Street Journal said.

Citing data obtained under the Freedom of Information Act requests, the paper said The Office of the Comptroller of the Currency (OCC), along with the Federal Reserve, have issued more memorandums of understanding so far this year than in all of 2008.

At the current rate of at least 285, the Fed, OCC and Federal Deposit Insurance Corp are in line to issue nearly 600 of these secret agreements this year, the paper said, compared with last year when 399 such agreements were issued.

The memorandums -- which can force financial institutions to increase their capital, overhaul management or take other major steps -- are not bound to be made public by the banks, the Journal said.

The OCC, a division of the Treasury Department that supervises national banks, could not be reached outside regular business hours.

Oooooh, you're in trouble now, banks!

FDIC Begins Loan Sharking Toxic Assets with Fed Blessing


This murder was not performed
in accordance with GAAP



So here's what happened, and let me make this as simple as possible just in case you still don't understand what exactly toxic assets are. Granted, we're giving up the delicate intricacies of packaged securities by making it this easy to digest but in the interest of making this clear, we'll just have to chalk that up and move on.

Imagine in the years leading up to the financial crisis, the big investment banks were all belly-up to a 21 table. Of course, Goldman Sachs was probably counting cards too but we'll leave that be. AAA securities, of which these banks could not get enough, were the hand and the dealers were sometimes the same ones playing the game (which is fine, dealer gets to play too, right?).

Well just because a bundle of mortgages was rated AAA did not mean the hand held two Queens and an Ace. In fact, perhaps we wouldn't be in the trouble we're in now if more of them did.

Instead, after everyone had cleaned up on their 21s, with the smarter investment banks choosing to stand on 16 instead of gunning for that 5 of clubs, now the FDIC must come in and buy back the cards that tipped investor hands over 21. And since everyone was smoking the financial crack back in those days, the FDIC has quite a mess on its hands. It doesn't matter that it was the banks' choice to yell "hit!" on 18, nor does it matter that the taxpayer is the one who has to foot the bill (wtf, I didn't get a trip to Reno out of this deal). They're doing it whether you like it or not - and in fact, it's launching today!

Reuters:

The U.S. Federal Deposit Insurance Corp is launching the first test of its Legacy Loans Program to help banks rid their balance sheets of toxic assets so they can raise new capital and increase lending, the agency said on Friday.

The FDIC insures the deposits of U.S. banks and acts as the receivership for failed institutions by liquidating assets.

In the test transaction, a receivership will transfer a portfolio of residential mortgage loans to a limited liability company in exchange for an ownership interest in that entity, the FDIC said in a statement.

Accredited investors will be offered an equity interest in the limited liability company under two options.

The first is an all-cash basis, which is how the FDIC has recently sold receivership assets, with an equity split of 20 percent to the investor and 80 percent to the FDIC. The other option is a sale with leverage, under which the equity split will be 50-50 between the investor and the FDIC.

The FDIC said it will be protected against losses by the limits on leverage amount, the mortgage loans collateralizing the guarantee, and the guarantee fee.

"The FDIC will analyze the results of this sale to see how the Legacy Loans Program can best further the removal of troubled assets from bank balance sheets, and in turn spur lending to further support the credit needs of the economy," the agency said.

The clock is ticking for the FDIC to swoop in and clean up this mess before recent FASB changes force banks to move these assets from the dark moldy realm off balance sheet and into the light. And we are still a little mystified as to why the Federal Reserve would endorse a move like this knowing it will expose giant capital holes in already fragile banks but hey, who are we to ask why the Fed does what it does?

As we told you in June 12th's Fed Embraces FASB Changes, Toxic Asset Shuffle:

From the FRB's website, Federal Reserve responds to new accounting standards:

The Federal Reserve notes the Financial Accounting Standards Board's publication today of Statements of Financial Accounting Standards No. 166 and 167 (FAS 166 and 167), which will have a material effect on banking organizations' accounting for off-balance sheet vehicles. These statements, which become effective in 2010, address weaknesses in accounting and disclosure standards for off-balance sheet vehicles. The new standards amend Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140), and FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (FIN 46(R)).

The Federal Reserve is reviewing regulatory capital requirements associated with the adoption of the new accounting standards. In conducting this review, the Federal Reserve is considering a broad range of factors including the maintenance of prudent capital levels, the record of recent bank experiences with off-balance sheet vehicles, and the results of the recent Supervisory Capital Assessment Program (SCAP). As part of the SCAP, participating banking organizations' capital adequacy was assessed using assumptions consistent with standards ultimately included in FAS 166 and FAS 167.

Banking organizations should take into account in their internal capital planning processes the full impact of FAS 166 and 167 and assess whether additional capital may be necessary to support the risks associated with vehicles affected by the new accounting standards.

Now a sane person might wonder why in the hell the Fed would decide to do this knowing how bad off the banks are and that their only saving grace might be the fact that the majority of their toxic assets are off balance sheet, right?


And for the record, nearly two months later, we are still wondering why the Fed likes this idea but have a sneaking suspicion that this FDIC clean-up job has something to do with it.

Run, Sheila, run, the clock is ticking and you've certainly got your work cut out for you!

Cash for Clunkers or Bait and Switch?



(Thank you to carstereis for the heads up on this)

Ok wait, so Cash for Clunkers runs out of cash in 4 days of operation and now it looks as though it was really just a sad attempt to sucker dealers into rendering old cars obsolete? Call me crazy but that sounds like one hell of a bait and switch to me. (see Cash for Clunkers Runs out of Cash - in SIX Days if you need to catch up)

Via the Ex Car Salesman:

I've spoken with several dealers concerning the cash for clunkers program and this video sums up the "cash for clunkers" suspension in great detail.

It is true the program is successful and will use allotted funds. But the situation is more sophisticated that that.

First, because of the popularity, there is a huge backlog of paperwork. The 20-page application requires data from various sources and in many cases takes days to complete. Dealers continue to sell cars while they wait for all the information required. Of of the many hold-ups is the fact dealers must disable the 'clunker' with two quarts of a special sodium silicate solution before before the car crushers can give them a required signature. However, many dealerships have run out of this solution or have not received it. If dealers continue to advance people the CARS credit, on faith the government will refund them for destroying a car, their cash flow will soon be depleted.

Second, the CARS dealer website -- where dealerships submit applications -- cannot handle the traffic. Dealers continuously report website crashes rendering them unable to submit their application. This increases the amount of time dealers must wait before they receive their rebate check -- depleting cash flow.

Third, worry is building in many dealerships because many applications for the rebate are being denied after the car deal. Some on this blog have expressed outraged after dealers have called them back demanding the customer make up for the denied CARS rebate (up to $4,500.00) or else they would have to return the car immediately. Some have had their trade-in cars already destroyed.


So perhaps this "stimulative" effort wasn't nearly as successful as TPTB would like us to believe, unless of course "success" is based upon the number of suckers born in the minutes between the announcement of the program and its exhausting of funds.

Can anyone confirm this?

The Consumer Financial Protection Agency: Do We Need More Acronyms?




Alan Greenspan and I don't just share initials (yeah, I know) but an unshakable belief in the ability of a well-greased market to oil its own gears appropriately. Except unlike the other AG, I also believe that you shouldn't load up a Kindergarten classroom on Pop Rocks and Coke and leave them alone with scissors and switchblades. Unfortunately, when Mr Greenspan was teaching the class, he forgot to lock the scissors in his desk drawer and here we are.

So I may be slightly more affectionate towards regulation than said other AG because I, like markets, tend to get out control when I've had too many Pop Rocks.

That being said, I also believe that there is little productive to be found in recent regulatory suggestions. As I believe I've already said, putting the same regulatory agencies (FDIC, SEC, PCAOB, Fed, etc) that were asleep at the wheel while things were going sour under their noses (bank failures, Madoff, KPMG, Bear Stearns) is akin to hiring Al-Qaeda to rebuild the World Trade Center. Unfortunately, I'm not sure that creating a new regulatory Frankenstein is the best idea either.

Elizabeth Warren (yes, that Elizabeth Warren) of the Congressional Oversight Panel recently guest posted over at The Baseline Scenario on why she favors a single regulatory body (CFPA) that may be found here. Warren also told the House "the credit markets are broken" in recent testimony and says the CFPA may be the wisest way to work out the financial kinks.

Other supporters include Chris Dodd (heyyyy! Remember that guy?!). Talk about a den of vipers! The head of the Senate Banking Committee only wants a single regulator so he only has to cut one sweet check.

What's on the table here with the CFPA and what all are we handing over? On the bright side (if there is one in this), Federal Reserve regulators might be able to take a vacation, which means a whole bunch of them will probably be laid off.

Via The CIA Memory Hole:

Under the Act, the CFPA would be headed by a board consisting of four members appointed by the President, subject to the advice and consent of the Senate, for five-year staggered terms and subject to removal only for cause. The board also would have one ex officio member, the Director of the National Bank Supervisor4 (proposed in the White Paper to be a new government agency, which would be established under subsequent legislation, in charge of prudential regulation of all federally chartered insured depositories).5 The Agency would be funded through appropriations and potentially through fees assessed by the CFPA against covered entities.6

The CFPA would be established to “seek to promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products and services” to ensure that consumers are able to make educated decisions regarding financial products and services; that they are “protected from abuse, unfairness, deception, and discrimination”; that markets operate efficiently and fairly; and that “traditionally underserved consumers and communities have access to financial services.”7

To implement these goals, the CFPA would have authority over a vast array of financial activities, including deposit taking, mortgages, credit cards and other extensions of credit, investment advising by entities not subject to registration or regulation by the Securities and Exchange Commission or the Commodity Futures Trading Commission, loan servicing, check-guaranteeing, collection of consumer report data, debt collection, real estate settlement, money transmitting, financial data processing, and others.8 The CFPA would not have authority over insurance activities other than mortgage, title, and credit insurance.9 The range of entities engaged in financial activities that would be subject to the CFPA also is expansive under the Act, including banks, credit unions, and mortgage brokers to name a few. The proposed legislation defines those covered by the Act to be

any person who engages directly or indirectly in a financial activity, in connection with the provision of a consumer financial product or service [used primarily for personal, family, or household purposes]; or any[one who] provides a material service to, or processes a transaction on behalf of, [such] a person.10


Additionally, the Act would consolidate in the CFPA consumer protection regulatory and enforcement authority, which is currently shared by a number of federal agencies. The Act would transfer to the CFPA the “consumer financial protection functions”11 and many of the employees performing those functions from the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), the Federal Trade Commission (FTC), and the National Credit Union Administration (NCUA).12 However, according to the guidelines of the White Paper, these agencies, with the exception of the OTS,13 would retain safety and soundness supervisory and examination powers outside the purview of consumer protection over certain regulated entities.14

The CFPA also would be the primary federal regulator, examiner, and rulemaker15 with enforcement authority under many of the federal consumer protection laws, including
(A) the Alternative Mortgage Transaction Parity Act16;
(B) the Community Reinvestment Act17;
(C) the Consumer Leasing Act18;
(D) the Electronic Funds Transfer Act19;
(E) the Equal Credit Opportunity Act20;
(F) the Fair Credit Billing Act21;
(G) the Fair Credit Reporting Act22 (except with respect to sections 615(e), 624, and 62823);
(H) the Fair Debt Collection Practices Act24;
(I) the Federal Deposit Insurance Act, subsections 43(c) through (f)25;
(J) the Gramm-Leach-Bliley Act, sections 502 through 50926;
(K) the Home Mortgage Disclosure Act27;
(L) the Home Ownership and Equity Protection Act28;
(M) the Real Estate Settlement Procedures Act (RESPA)29;
(N) the S.A.F.E. Mortgage Licensing Act30;
(O) the Truth in Lending Act (TILA)31; and
(P) the Truth in Savings Act.32

The CFPA would be required to monitor the market and the innovation of new products and services. In order to do so, the Act would provide the Agency the authority to examine covered persons, including national banks, federal credit unions, and federal savings and loan associations.33 Under current law, examination powers generally rest exclusively in the institutions’ primary regulators.

Rather than explicitly imposing new regulation on financial activities and products, the Act primarily (though, not exclusively34) leaves such decisions to be made by the CFPA through future rulemaking and guidance. The Agency would have the authority to promulgate rules and issue guidance and orders to meet the objectives of the CFPA Act.35 The standard rulemaking procedures provided by the Act would require the Agency to weigh the costs and benefits to both consumers and industry, including the potential effect the rule would have on the availability of financial products and services.36 The Agency also would have to “consult with the Federal banking agencies ... regarding the consistency of a proposed rule with prudential, market, or systemic objectives administered by such agencies.”37 Within three years38 of any CFPA “significant rule or order” becoming effective and after a public comment period, the Agency must publish a report assessing the effectiveness of the rule or order.39 The Act does not specify what would be considered “significant,” presumably leaving these determinations to the Agency.

The Act imposes additional procedures upon specific types of rulemaking. For instance, the Agency would be authorized to promulgate rules on unfair or deceptive practices in connection with consumer financial services and products. However, the Agency could only promulgate a rule deeming an act unlawfully unfair if

the Agency has a reasonable basis to conclude that the act or practices causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.40


Other examples of specific rulemaking authority for which the CFPA Act would impose requirements in addition to the Act’s standard rulemaking procedures outlined above include disclosure requirements;41 minimum standards for the prevention and detection of “unfair, deceptive, abusive, fraudulent, or illegal transactions”;42 provision of “standard consumer financial products or services” that may serve as a comparison to similar, but less traditional products or services;43 and imposition of duties, including compensation practices, on covered persons.
That's enough of that, I'm getting sick to my stomach.

On the other hand, perhaps this is a good thing. Are they positioning to overthrow the Fed?

"However, according to the guidelines of the White Paper, these agencies, with the exception of the OTS,13 would retain safety and soundness supervisory and examination powers outside the purview of consumer protection over certain regulated entities" sounds like a coup to me. The recommendation makes it sound as though the CFPA proposes the FDIC, OCC, NCUA, FTC, OTS and Fed live out their lives limp and useless, pushing paper across the great wide government pasture. Huh?

Is this necessarily a good thing? While I may not agree with the regulatory alphabet soup, it is far easier for one agency to be corrupt than it is for six agencies to be the same kind of corrupt (of course, this is not to say that the Fed is corrupt) together.

You can tell here that I'm only slightly disappointed in the government's track record when it comes to regulation.

Save the FZVA!

Cash for Clunkers Runs out of Cash - in SIX Days




Let us keep in mind that this was meant to be a 90 day program, in between fits of hysterical laughter.

Bloomberg:

The U.S. government’s $1 billion “cash for clunkers” program is being closed because it is almost out of money six days after it began, a person familiar with the matter said.

The effort to get older, less fuel-efficient vehicles off the road, for which rules were published on July 24, will be halted at midnight New York time tonight because demand proved greater than expected, said the person, a congressional official. Funds are close to running out or have run out, the official said.

The congressional delegation from Michigan has called a phone conference meeting tonight to discuss the matter, said the person, who declined to be named because the meeting hasn’t been announced publicly.

Officially named the Car Allowance Rebate System, the plan provides credits of as much as $4,500 for turning in older vehicles. The program was to continue until Nov. 1 or when the money runs out.

Jill Zuckman, a Transportation Department spokeswoman, and Nick Shapiro, a White House spokesman, declined to comment. Tom Gavin, a spokesman for the Office of Management and Budget, the White House branch that oversees government spending, didn’t immediately respond to a phone call seeking comment.
We'll update accordingly as this story develops and we are able to stop laughing.

[AP update]

Through late Wednesday, 22,782 vehicles had been purchased through the program and nearly $96 million had been spent. But dealers raised concerns about large backlogs in the processing of the deals in the government system, prompting the suspension.

A survey of 2,000 dealers by the National Automobile Dealers Association found about 25,000 deals had not yet approved by NHTSA, or nearly 13 trades per store. It raised concerns that with about 23,000 dealers taking part in the program, auto dealers may already have surpassed the 250,000 vehicle sales funded by the $1 billion program.

"There's a significant backlog of 'cash for clunkers' deals that make us question how much funding is still available in the program," said Bailey Wood, a spokesman for the dealers association.

Even before the suspension, some in Congress were seeking more money for the auto sales stimulus. Rep. Candice Miller, R-Mich., wrote in a letter to House leaders on Wednesday requesting additional funding for the program.

"This is simply the most stimulative $1 billion the federal government has spent during the entire economic downturn," Miller said Thursday. "The federal government must come up with more money, immediately, to keep this program going."

Brendan Daly, a spokesman for House Speaker Nancy Pelosi, D-Calif., said they would work with "the congressional sponsors and the administration to quickly review the results of the initiative."


Of course the Wicked Witch of the Far Left would love nothing more than to blow another billion next week and the week after that.

Goldman Sachs, JP Morgan Subpoenaed Over Subprime



Indictments or it didn't happen? Uh, how about some subpoenas? That's a start.

Bloomberg:

A Senate panel seeking evidence of fraud tied to last year’s mortgage crisis has issued subpoenas to financial companies including Goldman Sachs Group Inc. and JPMorgan Chase & Co., said U.S. Senator Tom Coburn, a Republican from Oklahoma.

Coburn declined to say whether subpoenas were issued to other institutions. Frankfurt-based Deutsche Bank AG, Germany’s biggest bank by assets, also was sent a subpoena, according to a person with knowledge of the inquiry, who declined to be identified because the request isn’t public.

Coburn declined to discuss what kinds of information was requested by the Permanent Subcommittee on Investigations. Coburn, the highest ranking Republican on the subcommittee, said he approved issuing the subpoenas with Subcommittee Chairman Carl Levin, a Michigan Democrat.

The subpoenas don’t mean the financial institutions violated the law, Coburn said. “There is no indication that JPMorgan or Goldman Sachs did anything wrong,” he said.

Thomas Kelly, spokesman for New York-based JPMorgan, the second-largest U.S. bank by assets, declined to say whether the bank received a subpoena. The firm “always cooperates” with the government, he said.

Michael Duvally, spokesman for New York-based Goldman Sachs, the biggest U.S. securities firm before converting to a bank last year, declined to comment. Michele Allison, a New York-based spokeswoman at Deutsche Bank, didn’t respond to a call seeking comment.
Big effing deal.

Until the criminals are doing life in Gitmo, I don't want to see any dog and pony shows thanks!

Fannie and Freddie: The Bulls in Bernanke's China Shop




Can someone please forward this to Bernanke? If not, I'll have to.

Psst, Zimbabwe Ben, you might want to check this out (via Money Morning):

At its most basic level, the U.S. Federal Reserve’s so-called “exit strategy” is designed to let government bailout and liquidity programs unwind on their own, as markets return to a state of “normalcy.”

But what investors don’t realize is that without an exit strategy that includes plans for unwinding insolvent mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) - now more accurately defined as government-sponsored hedge funds - recent market gains will be limited and will likely reverse. If those setbacks cause the nascent U.S. housing market rebound to stall, it could even lead to a decade-long downturn.

And Fed Chairman Ben Bernanke’s exit strategy ignores Fannie and Freddie.

Government-sponsored hedge funds, that's cute.

In last week’s "Semiannual Monetary Policy Report to the Congress" and in his July 21 Wall Street Journal Op-Ed piece, Bernanke, the U.S. central bank chairman, laid out plans to wind down government credit extension programs and combat any potential inflationary pressures. What was not addressed was how - or even if - the two government-owned and operated de-facto hedge funds, with combined assets of more than $6 trillion, would be unwound, or whether they would remain in place as they are in order to be used as back-door fiscal and monetary policy tools.

In what amounts to more than just a bailout on an unprecedented and under-reported scale, the takeover of both Fannie and Freddie provides the Fed and the U.S. Treasury Department a super sponge to both guarantee new mortgages and absorb all the unwanted mortgage-backed securities that banks and non-bank originators package and need to offload.

Because they lack sufficient capital - or lack the appetite to hold any new mortgage paper on their balance sheets - banks need this government-sponsored outlet for the mortgages they want to unload. The Fed and the Treasury Department are using their taxpayer-supported hedge funds to grease the rusted wheels of the mortgage money machine to gain traction where there is none.
So what we have here, essentially, is a government-sponsored parasite sucking at the lifeless carcass and a central bank who either refuses to acknowledge or directly discounts the massive 800 pound gorilla standing on the fiscal fire escape blocking the way out of this mess.

So, ZB, whatcha gonna do about it?

Oh, and it gets worse. Taxpayers will likely never see their GSE infusions returned, nor should they expect Fannie and Freddie to suddenly learn to play by the rules. Why should they? One imagines that the Fed is actually promoting some of this behavior to keep up the illusion of a healing housing market.

WSJ:

Fannie Mae and Freddie Mac are unlikely to repay the government in full for all the capital it has pumped into the companies, according to their regulator.

"My view is that some assets in the senior preferred will have to be left behind as they come out of conservatorship," Federal Housing Finance Agency Director James B. Lockhart said Thursday in response to a question at a panel discussion in Washington. "That will mean that some of the losses will never be repaid."

The Treasury has agreed to pump $200 billion into each company in order to keep them solvent. In exchange, the government receives senior preferred stock that pays a 10% dividend. So far, it has injected $85 billion in total into the companies, but Lockhart said that figure was likely to rise in the coming months.

Fannie and Freddie together own or guarantee $5.4 trillion in mortgages. When the housing market soured in 2007, mortgage defaults ate through the companies' thin cushions of capital, prompting fears they would collapse. The government seized them in September, putting them under the conservatorship of their regulator.

FHFA on Thursday unveiled several new regulations concerning the mortgage giants and the 12 Federal Home Loan Banks. The regulator also announced conclusions from three studies it was required to conduct by a 2008 housing law.

One of the studies found that Fannie and Freddie have been using fees they collect for guaranteeing less risky single-family mortgages to subsidize the fees for backing riskier loans.

As a result, borrowers with 15-year fixed-rate mortgages and adjustable-rate mortgages were subsidizing borrowers with 30-year fixed-rate mortgages, which are more risky for the mortgage giants to guarantee.
So not only are these two GSEs little more than mutated hedge fund black holes, they are also some kind of bizarre mortgage Ponzi scheme? Well no wonder they are government-sponsored.

Manipulation at its finest, people, from our friends at the Fed.

"Horrendous" 5-Year Treasury Auction Raises Yet More US Deficit Concerns



I was accused of "scraping the bottom of the pork barrel" earlier for sharing this story but let no one say later on down the road that I didn't try to warn you. Some call it doom-and-glooming but I prefer to look at it as a public service for the unwashed masses. It is, as always, up to them to pay attention but even a child can understand why news like this is dangerous. Or should I explain how this works for 5 year olds? (no offense to the person who implied I was just digging for dirt in a bottomless bucket of sludge)

You see, this is how it works. The Treasury issues debt in the form of bonds, which are generally held to maturity by investors. Up until about, oh, a few weeks ago, this process worked fairly well, with only occasional bumps in the road as foreign investors faltered on concerns over the strength of the US dollar. Because you see, if the dollar tanks, investors are out. It's like this: imagine you pay $5 today for a beer you will be able to drink in 10 years. One beer costs you $5 today but because the bar needs the cash to operate, it is willing to take your $5 today and promise you two beers in 10 years for the same amount. Pretty sweet gig, right? I mean, won't you be thirsty in 10 years? But what happens if 10 years comes and goes and when you go to collect your beer they slide you two mugs full of water with just a splash of beer? You'd be pissed, right? Here you're out $5 and can't even get tipsy, let alone wasted.

Worse, what if you go to the bar 10 years down the road to collect your prize and find out they are out of business? Now imagine this happening to sovereign governments who have invested trillions in this beer scam?

Well shit! Now you see where the problem lies, surely? Hope this clears up any confusion for the uninitiated.

Ouch! Via Reuters:

The U.S. Treasury sold $39 billion in five-year debt on Wednesday in an auction that drew poor demand, raising worries over the cost of financing the government's burgeoning budget deficit.

Demand overall was below average, measured by the bid-to-cover ratio of 1.92, the weakest in almost a year.

In a further sign of weakness, yields at the auction were well above expectations, known as a "tail" by market participants.

A key proxy for foreign interest, the indirect bidder category, was slightly above the average of auctions over the past year at 36.6 percent but far below the most recent sale.

"It was just a horrendous result," William O'Donnell, head of U.S. Treasury strategy at RBS Securities in Greenwich Connecticut, said about the auction.

"It was the weakest bid-to-cover since September 2008, and by my numbers it was the biggest tail since February 1993. It was just a very, very weak result."

The tail indicates that dealers drove an unexpectedly hard bargain to raise yields, and lower prices, to buy the bonds, which spooked the bond market.

Five-year notes US5YT=RR fell further, last trading down 10/32, with the yield rising to a four week high around 2.66 percent.

Benchmark 10-year notes US10YT=RR surrendered their gains for the day and dropped into negative territory after the sale. They were last trading down 3/32, yielding 3.71 percent versus 3.69 percent at Tuesday's close.

The five-year sale is part of this week's record $115 billion in coupon securities being auctioned.

With the government set to issue $2 trillion in new bonds this year to finance economic and financial rescues, investors have been watching for any signs of waning demand for U.S. debt, particularly among foreigners.

Treasury auctions have come under particularly close scrutiny since investors began to question the longevity of the United States' prized AAA credit rating back in May.

Meanwhile, the Treasury continues to ignore these warning signs as bond auctions have gotten larger and larger despite increased feedback from the bond market that it is pretty much bloated on US debt at this point.

Who would like to place a bet as to how TPTB handle this all-too-clear sign from the market? Jr Deputy Accountant will go on record as having said they will likely ignore the market bite and push for another record-breaking auction next week. But that's just us.

Citigroup Should be Punched in the Face (Figuratively)


Breaking News:
Citi has relocated its headquarters
to the Republic of Asshatistan


(ht Dennis Howlett - who, despite being jet-lagged still manages to be both useful and entertaining)

The Fed shenanigans make me want to yell at inanimate objects but this makes me want to start punching people in the nose. Not advocating violence or anything but sometimes you've got to break a few jaws to get your point across and if anyone deserves to get a smiley on the curb, it's Citigroup right about now.

Andrew Cuomo's bonus report is the big news of the day, of course, but Citigroup's ultimate taxpayer fuck you is the true highlight. Despite four taxpayer cash injections (or perhaps because of), Citigroup seems compelled to reward failure with funds - and why not? It's on the taxpayer dime anyway, who cares?

WSJ:

Here is the breakdown for Citigroup:

Tarp funds received: $45 billion ($25 billion on the Capital Purchasing Program on Oct. 28, 2008, $20 billion on Dec. 30, under the Targeted Investment Program.

2008 Loss: $27.7 billion, or $5.59 a share.

2008 total bonuses: $5.33 billion in cash and stock ($4.6 billion of the mixed cash and equity bonuses were discretionary, and $704 million were guaranteed).

11 executives received a combined $77.25 million in cash, deferred cash, performance vesting stock and performance priced options.

The Senior Leadership committee (excluding members who are also executives) received a combined $126.26 million in cash, deferred cash and equity.

Top four recipients received a combined $43.66 million.

The next four received: $37.47 million.

The next six received: $49.81 million.

Number of individuals that received more than $10 million: 3

Number that received more than $8 million: 13

Number that received more than $5 million: 44

Number that received more than $4 million: 69

Number that received more than $3 million: 124

Number that received more than $2 million: 176

Number that received at least $1 million: 738

Total work force: 322,800.


So it's illegal for me to punch these pricks in the face but it's totally legal to create an advanced money laundering scheme through the Treasury and Fed, call it some clever acronym, get it approved by Congress under false pretenses, and then use what's left over to reward the idiots who created this mess in the first place?

That would only make sense to crack addicts and schizophrenics, and even those groups might have some concerns with the details.

Proposed SEC Action in the Wake of Madoff Could Cost Advisers $24,000 an Audit



Ohhh Mary Schapiro, you're a bulldog of a regulator, aren't you? We get it, your predecessor was a scumbag and now you're here to let us know that despite its pathetic track record, the SEC is tough on financial fraud.

Also, the SEC should really update its figures. The world has changed significantly since 2002. Just in case they didn't get that memo.

Via Investment News:

If a Securities and Exchange Commission proposal that advisers deducting fees from client accounts conduct annual surprise audits is enacted, such audits could cost as much as $24,000 apiece, some three times the $8,000 estimated by the SEC, according to the Financial Planning Association.

In a July 28 comment letter to the SEC regarding its controversial proposal, the Denver-based FPA said that the SEC's cost estimate is based on an out-of-date 2002 analysis.

According to the FPA's calculations, the average cost of the audits would range from $15,000 to $24,000.

The SEC's rule was proposed in the wake of the $65 billion Ponzi scheme perpetrated by Bernard L. Madoff Securities LLC of New York that came to light in December.

But the proposal for advisers who deduct fees is inappropriate, the FPA said in a letter signed by Duane Thompson, managing director of its Washington office.

"Ponzi fraud requires physical custody, not fee deductions, to operate," he wrote.

Protections are already in place for fee deduction practices, and third-party custodians used by most advisory firms offer additional protections, Mr. Thompson said.

The FPA urged the SEC to wait until its inspector general finishes its report on the Madoff case, and Congress passes reform measures, before the SEC acts on rule changes for advisers.


Oh please, like this is Madoff's fault. The SEC should have acted on the endless red flags, it's a tad late to start forcing audits and increased regulatory oversight now!

As an alternative to the requirement that advisers conduct surprise audits, the FPA suggested strengthening the authority of the Public Company Accounting Oversight Board to oversee audits of firms that hold physical custody of assets.

The SEC previously exempted privately held broker-dealers, such as Madoff's firm, from undergoing audits by accounting firms fully regulated by the PCAOB of New York and Washington.

Even though the SEC has since ended the exemption, legislation needs to be enacted that will give the PCAOB enhanced authority over firms that audit broker-dealers, the FPA said.

"Registration with PCAOB does not automatically allow it to inspect all its registrants unless the firm is involved in examining public companies," the FPA wrote.

Legislation has been introduced by House Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., that would allow the PCAOB to regulate fully accounting firms that audited all brokers, including privately held brokers.

SEC Chairman Mary Schapiro has called for Congress to enact it.


As is their wont, the regulatory powers that be are a bit behind yet again.

Pushing to Politicize Accounting: FASB Fights to Keep its Cojones




You have got to be kidding me.

You all should know how I feel about the Federal government getting its inefficient, grubby paws on things, but we're talking about financial reporting here. What could the government possibly know about accounting standards? Have we not learned anything?!

Via FinCriAdvisor:

Should FASB's decisions be subject to government oversight? A bipartisan effort is underway in Congress to make that a reality, a position supported by former FDIC chair Bill Isaac, former Speaker of the House Newt Gingrich and Paul Volcker, the chairman of President Obama's Economic Advisory Board.

The Federal Accounting Oversight Board Act, introduced in the spring by Rep. Ed Perlmutter (D-Colo.) and Rep. Frank Lucas (R-Okla.), now has 14 co-sponsors, including seven members of the House Financial Services Committee and five Republicans. The bill, formally H.R. 1349, would create a board comprised of the chairs of the Fed, FDIC and SEC, secretary of the Treasury, and head of the Public Company Accounting Oversight Board to approve or suspend standards set by the Financial Accounting Standards Board (FASB) and to adjust GAAP to account for illiquid assets and potential systemic risk.

Although H.R. 1349 has not been taken up by Committee Chair Barney Frank (D-Mass.), its introduction preceded President Obama's proposal to create a systemic risk regulator and could be merged into that proposal, says Lucas spokesperson Leslie Shed. "It could come up soon," she says. After the bill was introduced, FASB changed its rules to allow more flexibility in accounting for investments held to maturity. But for Lucas, that change does not go far enough, Shed adds.

The initiative has confused many bank executives. "Will the state of the economy dictate GAAP?" wonders the CFO at one multi-billion-dollar bank in Illinois.
Surprise surprise, whose fingerprints are all over it?

The idea for regulatory oversight of FASB emerged in a January report by The Group of Thirty, a private international body devoted to examining public policy choices in economics and finance. That report was chaired by Volcker prior to creation of Obama's Economic Advisory Board. Prominent voices from the banking industry subsequently have praised H.R. 1349, including Isaac and ABA President Edward Yingling, despite harsh criticism from the accounting industry.

Oh, you mean Larry Summers' Group of 30? That's adorable!

Remember kids (just in case you forgot):

As we discussed before, the Group of 30 (a non-profit org masquerading as an economic advisory panel, or perhaps it is the other way around) is funded by some familiar names including:

* American International Group
* Goldman Sachs
* Standard & Poor's
* Board of Governors of the Federal Reserve System
* Federal Reserve Bank of New York (hahahahahahahaha! look who it is!)
* JPMorgan Chase
* Citi
* Soros Fund Management
* Morgan Stanley & Co.
* People’s Bank of China (among many other international central banking organizations)

Somehow, it is FASB's fault for not instituting FAS 157-e earlier - but wasn't the entire idea of mark to market to ease the transition to IFRS in the first place? Or am I confused again? (it happens)

The bill is "a radical proposal" that would politicize financial rulemaking and put it in the hands of non-accountants, says Barry Jay Epstein, a CPA with Russell Novak & Co. in Chicago. "This would markedly depart from historical reliance on the private sector," putting the government in "a position to manipulate accounting standards to advance particular political agendas. Coupled with its prosecutorial powers, [this] gives it an absolute level of authority that can preclude the development of market-responsive financial reporting practices."

But [former FDIC chair Bill] Isaac, in testimony before the House Subcommittee on Capital Markets, says the 5-member FASB board itself has become unaccountable and is rarely overruled by the SEC, which approves FASB's budget and nominates trustees to its parent foundation. While he agrees that accounting standards should not be politicized, Isaac notes that, "it is difficult to resist political action when the SEC and FASB are sitting on their hands in the midst of a world-wide financial crisis they played such a large role in creating" by insisting on the use of fair value (mark-to-market/MTM) accounting.

"If the SEC and FASB had suspended this MTM rule nine months ago - in favor of marking these assets to their true economic value based on actual and projected cash flows - our financial system and economy would not be in anywhere near the crisis that they are in today," Isaac says, noting that FDIC rejected the use of fair value accounting when he was chairman. "While it is way late to be effecting these changes in MTM, late is much better than never as many more MTM write-downs remain to be taken." He estimates that mark downs have destroyed $500 billion in capital and $5 trillion in lending capacity.
I actually like Isaac (after all, he's the one who told us the charming story about the FDIC "vault" being dry) but I don't see how marking pathetic assets to Disneyland or whatever value he is referring to could have "saved" the economy - leverage is leverage, regardless of what magical paintbrush you use to color in financial statements. And with most of the damage going down off sheet, the argument that somehow fair value interfered with capital requirements is just silly.

I had high hopes that FASB would grow a pair and tell the Politicos to butt out of financial reporting but now I am concerned it won't have a choice in the matter and will be castrated whether it approves or not.

There is no open comment period for whether or not FASB will be able to keep its tiny pair of shriveled balls (see also: FAS 157-e) but my accounting folks are welcome to weigh in anyway. Pfft.

NY Fed's Dudley: The How and the When of Fed Exit Strategy



NY Fed's William Dudley seems to believe that while the recession will ease later this year, recovery will be a slow and painful process. He echoes the sentiments of most of his Fed colleagues across the system as well as assessments by most economists, though we might argue here that forecasters are known for their uncanny ability to get these sorts of things terribly wrong.

In remarks to the Association for a Better New York today, Dudley played it close to the chest on recovery and what else, the Fed exit strategy!

Regardless of the precise timing, there are a number of factors which suggest that the pace of recovery will be considerably slower than usual. In particular, I expect that consumption—which accounts for about 70 percent of gross domestic product—is likely to grow slowly for three reasons. First, real income growth will probably be weak by historical standards. There were a number of special factors that boosted real income in the first half of the year, helping to offset a sharp drop in hours worked and very sluggish hourly wage gains. These factors included the sharp drop in gasoline and natural gas prices; the large cost-of-living-allowance increase for Social Security recipients reflecting last year’s high headline inflation; a sharp drop in final tax settlements; a reduction in withholding tax rates; and a one-time payment to Social Security recipients. These factors provided a transitory boost to real incomes, which will be absent during the second half of the year. As a result, real disposable income is likely to decline modestly over this period.

Second, households are still adjusting to the sharp drop in net worth caused by the persistent decline in home prices and last year’s fall in equity prices. This suggests that the desired saving rate will not decline sharply. That means consumer spending is unlikely to rise much faster than income. In other words, weak income growth will be an effective constraint on the pace of consumer spending.
Dudley also lays the framework for a failed Fed exit before they even make the attempt, saying it is the expectation and not the action itself (or lack thereof) that could send inflation raging. Yes, that totally makes sense. (?!)

Why do I believe it is so important to explain the issue of “how” having just argued that “when” is not yet a pressing issue? The reason is that if people believe—correctly or incorrectly—that the Federal Reserve could have a problem managing a smooth exit from its accommodative policy stance, this belief alone could have the adverse effect of causing inflation expectations to become less well anchored and risk premia on long-dated debt securities and loans to rise. These effects could conceivably make it more difficult to generate a sustainable economic recovery.

This risk seems significant. For example, just last week a major bank published a survey of a broad array of 1800 investors. Of those surveyed, 20 percent thought that inflation might average more than 2.5 percentage points per year above their assessment of the Federal Reserve’s target. This outcome presumably reflects two factors—the balance-sheet expansion of the Fed and the large fiscal deficit.

You hear that, inflationistas? It's your fault if this plan doesn't materialize into a clean Fed break from its bloated balance sheet.

The magic, says Dudley, is in how the Fed handles the reserves it is holding on banks' behalf, satisfying capital requirements without the inflationary consequences. That's all well and good but what happens to the banks after the Fed cuts the cord to get out of the inflation trap?

[I]f the monetary base is growing rapidly, as it has been over the past year, the view is that this growth will ultimately lead to inflation.

Is this concern well founded? The answer is that in a world where banks could not be paid interest on excess reserves, these persistent high reserve balances would indeed have the potential to prove inflationary.2 In that world, the excess reserves are likely to lead ultimately to an overly accommodative monetary policy. The story goes like this: If banks are earning no interest on their excess reserve holdings, they will be willing to lend those reserves out to any creditworthy borrowers as long as the interest rate is positive after adjusting for risk. The borrowers would then spend these monies, thereby boosting economic activity. The funds would not disappear, but instead would flow back into the banking system as they were deposited by those who had received the income generated by the increase in spending, thus replenishing the reserves that had been lent out in the first round of lending. This would result in a new stock of excess reserves that would then lead to a second round of credit creation and a further increase in economic activity. This cycling of excess reserves into credit creation, and the corresponding increase in economic activity, would continue until the excess reserves were fully absorbed by an increase in currency outstanding and/or an increase in required reserves associated with the rise in the amount of banking deposits. Inflation would rise as the excessive credit creation generated by the excess reserves led to an overheated economy and a rise in inflation expectations.

But that is not the world in which we now live. Because the Federal Reserve now has the ability to pay interest on excess reserves (IOER), it also now has the ability to prevent excess reserves from leading to excessive credit creation. Because the Federal Reserve is the safest of counterparties, the IOER rate effectively becomes the risk-free rate.3 By raising that rate, the Federal Reserve raises the cost of credit more generally because banks will not lend at rates below the IOER rate when they can instead hold their excess reserves on deposit with the Fed. Because banks no longer seek to lend out their excess reserves, there is no increase in the amount of credit outstanding, no redeposit of the excess reserves, no increase in economic activity and no risk that excessive credit creation will fuel an inflationary spiral.

For this dynamic to work correctly, the Federal Reserve needs to set an IOER rate consistent with the amount of required reserves, money supply and credit outstanding consistent with its dual mandate of full employment and price stability. If demand for credit exceeds what is appropriate, the Federal Reserve raises the IOER rate to reduce demand. If the demand for credit is insufficient to push the economy to full employment, then the Federal Reserve reduces the IOER rate, recognizing that the IOER rate cannot fall below zero. This does not differ much from how the Federal Reserve has behaved historically—set the fed funds rate at a level consistent with the desired level of economic activity and inflation over time.

So how does the IOER rate relate to the fed funds rate? The two rates are likely to track each other closely in most circumstances.4 First, banks generally do not have any incentive to sell fed funds at rates below the IOER rate. Only nondepository institutions—such as the government sponsored enterprises (GSEs)—that can buy and sell fed funds but are not able to hold excess reserves with the Fed, might have an incentive to sell fed funds at rates below the IOER rate. But even in this case, the fed funds rate would not likely fall far below the IOER rate. After all, if the fed funds rate were to fall significantly below the IOER rate, banks could purchase the fed funds and hold them as reserves with the Fed, earning the difference. The ability of banks to engage in arbitrage should limit the size of the deviations between the IOER rate and the fed funds rate. Thus, through the IOER rate, the Federal Reserve can effectively retain control of monetary policy.
And there it is again:

Making policy during a crisis involves making tough choices. Perfect solutions are not always achievable or even legally feasible. I can assure you that our decisions have been made carefully, always with an eye toward finding the right balance between the risks and rewards of alternative options. Most critical is our commitment never to take actions that might compromise our ability to retain our control of monetary policy and that might undermine our ability to achieve our dual mandate of full employment and price stability.
All in all, there is nothing of value to be found in Dudley's words as they are essentially a recycled version of the same "official" Fed press release on its balance sheet. Defending the temple, as it were, and whereas some weeks back the Fed seemed disorganized and inclined to disagreement in its ranks, they've greased up the machine and are now mostly singing the same tune about their plan to pull out before its too late.

The Good, the Bad, and the Less Bad for Richmond Fed


We know the Girl Scout cookies are in there, Richmond



I'm starting to sympathize for Richmond Fed and it's not because I have a huge gaping soft spot for their president. The trouble with Bernaulson and Fedgate is all but over now that Hank Paulson admitted to the alleged threats, Congress got to ream him over TARP and everyone is happy. But Bank of America is still in trouble, making it the Citigroup of the 5th District. Poor Richmond. Don't cry, Jr Deputy Accountant is rooting for Bank of America to pull it off. Sadly, it is our humble opinion that BAC's $77,874,726,000,000 in derivative exposure may become a tad bothersome as commercial real estate continues to unravel and consumer credit defaults rise. Bank of America comes 2nd only to JP Morgan in exposure, just a few trillion above Goldman Sachs. That's got to be a hard sandwich to find yourself the meat in, BofA.

Worse, Richmond doesn't perform well in the Fed's Beige Book released today (AP) though compared to other districts, unemployment is low and manufacturing is looking up:

Retail sales dipped, big-ticket sales "languished" and sales of U.S.-made cars stayed in the "doldrums," while foreign-made autos fared better. Tourism was mixed. Manufacturing activity strengthened. Demand was stronger for clothing, chemicals, food, printing, publishing, rubber and plastics. A chemical maker in South Carolina reported growth in orders from China, India and other East Asian markets.

Housing activity was mixed. Real-estate agents in Fairfax, Va., described the heart of the local market as "hot," with houses in $400,000-to-$1.2 million range selling fastest. Agents in Washington, D.C., made similar observations. But agents in North Carolina's Greensboro and Asheville reported sluggish sales. Commercial real-estate activity weakened.

The unemployment rate for the metro area of Washington-Arlington-Alexandia rose to 6.6 percent in June, from 6.2 percent in May.
Some are even saying that the recession is over in Richmond, though that might be getting a tad ahead of ourselves. When the last critical components catch up and fall apart accordingly, you may then call the all clear to come out of the bunker (I heard the Richmond bunker has a massive stash of Girl Scout Cookies, though this has not been confirmed by my sources. Fucking Girl Scouts don't return phone calls.) but until then, you know where to find me.

iStockAnalyst
:

In July, the seasonally adjusted manufacturing index — our broadest measure of manufacturing activity — jumped to 14 from June's reading of 6. Among the index's components, shipments leaped 14 points to 16, new orders rose eight points to finish at 24, and the jobs index edged up one point to end at -5.

Other indicators also suggested mostly stronger activity. The orders backlogs index eased four points to 4, while the measure for delivery times edged up two points to 2. The capacity utilization index doubled, adding seven points to 14, while our gauges for inventories grew at a considerably slower pace. The finished goods inventory index retreated 14 points to 26, and the raw materials inventory index moved down 10 points to 8.

MP: The Richmond Fed Manufacturing Index has increased for five straight months (March-July), the first five-consecutive monthly increase in the index's history (back to 1994). Further, the Manufacturing Index has increased by 69 points from the December 2008 low reading of -55 to 14 points in July, suggesting that the recession has ended in the Richmond Fed region (MD, VA, WV, NC, SC and DC).

Richmond's latest Manufacturing Index

Oh, and just in case all of this isn't enough for Richmond to have to chew on, it has also pissed off LandAmerica creditors for its choices in staff:

The former top lawyer at LandAmerica has taken a job as a vice president and general counsel at the Federal Reserve Bank of Richmond, upsetting some of the creditors owed money by her bankrupt former employer.

Michelle Gluck, who formerly managed 125 lawyers at LandAmerica’s Richmond office and has also worked at Kmart, Best Products and the Sports Authority (two of which also filed bankruptcy), will take over from James McAfee, who retired in May.

Gluck started working for LandAmerica in 2004. (You can see her company bio here.)

Several of LandAmerica 1031 Exchange’s former customers are owed hundreds of thousands each for money they thought was held in trust and intended for future property transactions. Instead, they say, their money went to pay previous exchange clients, whose money was invested in auction rate securities that lost their value when the auction market collapsed.

“We think it’s ludicrous,” said Paul Bosse, a Realtor in California whose wife is an exchanger. “She is being hired by a governmental agency for a position of trust, but she shouldn’t be until her knowledge of or involvement in Ponzi scheme is investigated by the proper authority.”
(source)

For the record, Jr Deputy Accountant will be sending this article to Mr Bosse in the hopes that he will realize that Richmond Fed is, in fact, an organization, not a government agency. If anything, the Fed Board of Governors is far closer to a governmental agency than Richmond could ever hope to be. Should you care to discuss how this works further (it might help with your rage against their new hire), I am available at the e-mail address to your right -----> Additionally, I would love to explain why her (alleged) involvement in (or knowledge of) some kind of Ponzi scheme would make her a perfect candidate for the Fed. Should you need more information than that, I would be happy to put you in touch with Eliot Spitzer. xoxo Jr

Richmond's Lacker guessed recently that the recession will end later this year. And we will still pay $15,000 if he'll crack SF Fed's Yellen upside the head at the next FOMC meeting. Pleeeeease?

[Update: we tried Googling Mr Bosse but he was nowhere to be found, or maybe there were too many of them. Hopefully he practices safe Internets practices and routinely Googles himself - it's good for you]

[Update update: we now know why we couldn't find Mr Bosse... because it is Busse. Good job, Richmond BizSense, thanks for making our job that much harder. Thankfully for us, Mr Busse is on top of it. Thanks, PB!]

California Fights Back: Vendor Sues State after $28,000 IOU Payment




I won't mention names nor agencies but there are times when this may cross my mind. Don't be surprised if your tax refund check bounces next year, that's all I'm saying.

Via the Examiner
:

SACRAMENTO, CALIF. — A vendor who provided 1,200 embroidered polo shirts and uniforms to a state-run youth camp and got paid with an IOU filed a lawsuit Wednesday against the state of California.

Nancy Baird, the owner of an EmbroidMe franchise in Paso Robles, sued state Controller John Chiang and state Treasurer Bill Lockyer in U.S. District Court in San Francisco.

California started issuing thousands of IOUs instead of checks to contractors and vendors this month while lawmakers and Gov. Arnold Schwarzenegger negotiated a plan to close the state's $26 billion deficit.

Baird's lawsuit argues that the IOUs are unconstitutional and violate contract laws. She is seeking class-action status.

Baird received an IOU for nearly $28,000 on July 23 after providing shirts to a youth camp run by the California National Guard. She said she was unable to redeem the IOU at her bank because she had not been a customer long enough.

"I sat in my car and I cried," said the 58-year-old Templeton resident. "This is the money I need to keep me going for the next couple of months."

The treasurer understands the public's frustration but believes the IOUs are legal, said his spokesman Tom Dresslar.

"He feels bad about the hardship they've endured and that's one of the reasons he tried so hard to convince the banks to continue accepting IOUs from their customers," Dresslar said.

Officials in the controller's office declined to comment, saying they had not received the complaint.
That's funny because the state seems to be fairly quick when it comes to cashing incoming payments.

"The treasurer understands the public's frustration but believes the IOUs are legal, said his spokesman Tom Dresslar"

This isn't The Secret, you asshats, it is the livelihood of human beings and you cannot take what rightfully belongs to the people of your state. Sorry, not our problem.

Taxpayers: 2 State: 0 (or have you forgotten Prop 1A?)

Hey Does Anyone See Anything Wrong with the Top Bay Area Employers?


Every night we proudly declare
that Oakland can kiss our a$$


Top San Francisco employers according to the San Francisco Center for Economic Development:


LARGEST EMPLOYERS IN SAN FRANCISCO BAY AREA (by # of employees):
1 City & County of San Francisco 28,000
2 University of California, San Francisco 18,000
3 Wells Fargo & Co. 153,000
4 State of California 227,531
5 California Pacific Medical Center 5,569

That's great, CPMC still has debutantes to fundraise on their behalf. Meanwhile?

From the Fed's own Beige Book, "in the metro area of San Francisco-Oakland-Fremont, the unemployment rate rose to 10.3 percent in June, from 9.8 percent in May." (AP)

Sheila Bair Asks: Who's Your Daddy, TBTF?


pig, nut, same thing.

This is actually pretty hilarious. Or would be more so if it weren't actually happening and wasn't because the FDIC neglected to collect sufficient insurance premiums for a decade.

American businesses are paying some banks' bills for re-stocking the nation's deposit insurance fund.

In May, amid a rash of costly bank failures tied to the depressed U.S. housing market, the Federal Deposit Insurance Corp. decided to charge the nation's banks $5.6 billion to re-stock the FDIC's deposit insurance fund. Banks, rather than taxpayers, foot the bill for cleaning up failed institutions and paying back stranded depositors.

In many cases, large banks are passing the cost of that emergency FDIC assessment along to some of their business customers.

Banks' fee policies have drawn scrutiny from lawmakers and a cash-strapped public after the U.S. Treasury Dept. spent hundreds of billions to support the nation's largest banks.

Mike Moebs, founder of Moebs Services Inc., which collects fee data from nearly every U.S. bank and credit union, calls the FDIC-related account fees a " double whammy" for affected taxpaying businesses. As taxpayers, they fund the Treasury's ability help banks with billions in capital, "and then they get hit with higher fees with these assessments," Moebs said.

Each bank's recent FDIC assessment was mostly determined by its level of assets, and the charges in many cases were hefty. JPMorgan Chase & Co. (JPM), for example, paid $675 million out of second-quarter earnings and Wells Fargo & Co. (WFC) paid $565 million.

But those two banks, along with many others, are passing their FDIC bills to some business customers.

"We decided to pass along the FDIC insurance increase," said Thomas Kelly, a JPMorgan spokesman. He noted the New York bank, which has 5,000 branches across the country, offers a program under which affected customers, including some small businesses, can earn account credits to offset the fee.

San Francisco-based Wells Fargo, which has more than 10,000 branches, confirmed that it's passing along FDIC fees to some business customers, including some small businesses.

"Customarily, we pass this fee on," said Julia Tunis Bernard, a Wells Fargo spokeswoman. She said the fees affect business customers that account for "a very small portion of our total deposit customer base."

A spokesperson for Fifth Third Bancorp. (FITB) said the Cincinnati bank began passing along its $55 million in special assessment costs along to commercial customers in March.

A spokesman for KeyCorp (KEY) said it charges FDIC-related fees for a "limited number" of business checking accounts and has raised those fees "to recoup the actual FDIC assessment for their balance."

"There is no mark-up," Key's spokesman said.

Representatives from Bank of America Corp. (BAC), Citigroup Inc. (C), SunTrust Banks Inc. (STI), BB&T Corp. (BBT) and Capital One Financial Corp. (COF) could not immediately say whether they'd raised account fees to offset the FDIC's special assessment.

In addition to one-time assessments from the FDIC, banks must also pay ongoing insurance premiums based on deposits. Those rates had fallen near zero in recent years, but have more recently soared to offset current and projected losses from failed banks.
(source)

I remind dear reader that 64 banks have failed so far in 2009. And we are only 2 "magical" quarters in. Get used to it.

NYSE/SEC Act on Trading Rumor, Find Fraudster Dead in His Home



I really hate to use "wtf" as often as I do but sometimes when the world is going absolutely ape shit, it is really the only statement that makes sense. Trust me, I would love to be able to look at some of these stories with a more critical eye and say "well, in this particular instance it appears as though logic has been averted, leaving us only with this bizarre and complex series of events that continue to baffle the mind."

Instead, I present you with a true WTF about trading, fraud, rumors, and of course suicide, because let's face it, no good tale of global fraud would be complete without the "and the chickenshit killed himself when all was said and done" ending.

I hate to throw Bernie Madoff any bones but at least he took his punishment and knows he'll die in his prison cell.

Reuters:

A phone call to the New York Stock Exchange from an investor worried that he'd just been duped helped spark a chain of events early last week that led U.S. authorities to file fraud charges against a Kuwaiti financier, who was later found dead in his home.

Early on July 20, an individual investor called to tell regulators at the exchange he had purchased shares of Harman International Industries Inc on news reports it was the target of a takeover -- reports on some smaller websites that the caller was starting to question.

NYSE Regulation, the oversight body that provided this account, said the tip reinforced suspicions about trading activity that in-house surveillance tools were picking up related to Harman shares, which jumped at least 33 percent before markets opened that Monday morning.

NYSE's market police then scoured news on the listed company, and called it when the source of the takeover report was not immediately clear. The company knew nothing about such reports, and, just before U.S. markets opened, issued a public statement saying so.

With financial markets digesting the statement -- and mainstream media starting to connect the dots to unusual faxes some outlets received on the weekend -- NYSE Regulation contacted the U.S. Securities and Exchange Commission to help it identify where the market-moving news came from.

In an interview, NYSE Regulation said it then checked the tape for recent trading in Harman shares, and quickly identified a short list of brokerages that made large purchases, and sold the shares at handsome profits on Monday.

"This was a good old rumor manipulation case," said John Malitzis, executive vice president of market surveillance at the arms-length oversight body. "Somebody issues an unsubstantiated rumor ... and does so in order to benefit from the impact that that rumor will have on the stock price."

Staff "did some quick and dirty detective work, closely with the Commission's enforcement staff, to address the potential fraud here," he told Reuters.

Three days later, the SEC sued Kuwait-based Hazem Khalid Al-Braikan for reaping more than $5 million of suspicious profits from "trading around" the fraudulent takeover reports for Harman, as well as Textron Inc, which was the subject of phony bid offers in April.

Three days after that, Al-Braikan, 37, was found dead in an apparent suicide.


This might be a great time to revisit the tale of our favorite Madoff whistleblower while we're on the topic of financial fraud and trying to squeeze out the very last of Madoff's relevance, no?

AccountingNation:

Harry Markopolos, the whistleblower who was responsible for sparking the SEC investigation, was just recently named the CFE of the Year by the Association of Certified Fraud Examiners at their annual Fraud Conference in Vegas. If you’ve been living under a rock for the past couple of months, you can read more about the Madoff situation and Markopolos’ involvement HERE.

You can check out the Conference Recap website for some clips of his presentation. Being a CFE myself, I decided to take a minute out of my day to take a look. After doing so…I came away with one impression…some people should leave trying to be funny to the professionals. I kid you not…here is one of his lead-ins:

“I started this case my underwear were white, they quickly became brown, and oftentimes turned yellow”


WTF??? I’m quoting here…no literary freedom on my part. There were plenty of other attempts at humor thrown out there by Harry (or as I like to call him…..Captain Hilarious), but this one kills two birds with one stone (i.e. poor taste and not funny).


So why is it Markopolos was over there in dirty draws for nearly a decade with no action on the part of regulators while a case like this is suddenly "wrapped up" in a week?

Well because the guy was foreign, duh.

Rumors are a "hot button" issue for both the SEC and self regulatory organizations, or SROs, such as NYSE Regulation, Malitzis said. Amplifying this particular case was the revelation that the investor in question was outside of the United States.

"Whenever we see a foreign account, this is a high priority for us and the SEC," Malitzis said, adding the SEC is "highly sensitive" to possible foreign fraud. "That's a risk ... that if we don't act quickly we can't freeze the assets," he said.

The SEC has "the time between when the trade occurs and, generally, settlement. Once the trade settles the cash is in the account and 'poof' it's gone outside the United States."

Twenty-four hours after receiving the phone call, regulators -- the SEC, NYSE Regulation, and the Chicago Board Options Exchange, which now oversees U.S. options markets -- identified Al-Braikan as the holder of the brokerage accounts, some of which also bought call options.
Pay attention, American scammers. If you're going to fly under the SEC's (broken, inept, useless, et al) radar, make sure you're running your fraud out of your mother's Texas basement or from your sick NY digs otherwise you're going to feel the heavy hand of regulation come down on your ass and it won't be pretty.

Latvian Banker Taking Souls as Collateral



I hope the Goldman rats are paying attention, this Latvian banker might be on to something. Too bad I missed this story earlier in the month when it was still LOL-worthy, hopefully no one will be offended that I'm a tad late. I am still trying to negotiate the terms of my last loan which involved not only my soul (thanks a lot, Chase!) but my first born. Don't worry, I was able to rescue the kid from the Wells Fargo vault.

CNBC:

Ready to give your soul for a loan in these difficult economic times? In Latvia, where the crisis has raged more than in the rest of the European Union, you can.

Such a deal is being offered by the Kontora loan company, whose public face is Viktor Mirosiichenko, 34.

Clients have to sign a contract, with the words "Agreement" in bold letters at the top. The client agrees to the collateral, "that is, my immortal soul".

Mirosiichenko said his company would not employ debt collectors to get its money back if people refused to repay, and promised no physical violence.

Signatories only have to give their first name and do not show any documents.

"If they don't give it back, what can you do? They won't have a soul, that's all," he told Reuters in a basement office, with one desk, a computer and three chairs.
Oooh, how about this possibility: the Fed could start taking souls as collateral for TALF loans too!

Who wants to dare me to walk into Bank of America and offer my soul as my only tangible asset? Come on, anyone?