FedUpUSA

Archive for December 21st, 2009

I was down in Washington on a business trip. That ended at four and I
headed for a bar. I found a spot between Pennsylvania and Kentucky
Avenues. Nice place. Two barkeeps, me and another guy who looked like
he had been drinking gin for the past few hours. Quiet, just the way I
like it.

Sure enough, at five the place fills up. It’s a young crowd. Good
looking. Well dressed. This looked like an Ivy League group. I was
thinking that they could be DOJ, possibly IRS (they looked too happy,
but who knows). They could have been Treasury folks; the headquarters
is not far off. Anyway, they had two drinks gossiped for and hour and
left. I stayed.

At one point I happened to look under the now empty stool next to me.
Some folded up papers. Being the nosey S.O.B. that I am, I picked them
up and took a look. Bingo!

I am just guessing, but these initials could stand for Geithner,
Volker, Summers, Goolsbee and Romer. Of course they could stand for
anything. I will leave it to you to draw any conclusions that might be
appropriate after a look at this. Judging from the notes that were
taken, this must have been an interesting meeting. I am using the
Scribd format so you can enlarge this. Enjoy!

Found Memo

If you haven’t as yet, take a look at the ‘labels for this post’. Life is a comedy. We’re all a part of it. Happy Holiday.
bk

In A Case for the Inflation Camp Robert P. Murphy asks When Will the Inflation Genie Get Out of the Bottle? Murphy’s concern is over “excess reserves”.

My reason for expecting large-scale price inflation is fairly straightforward: I see no coherent strategy for Bernanke to remove the excess reserves from the banking system. …

After reviewing the evidence and the theories offered by the two camps, I still believe that Bernanke’s unprecedented infusions of new reserves will lead to rapid price increases. These increases may not show up in the price of US financial assets, but they will rear their ugly heads at the gas pump and grocery checkout. Moreover, I think the genie may already be slipping out of the bottle. His escape will only be hastened once the year-over-year CPI figures show moderate inflation.

Steve Saville’s Concern Over Excess Reserve

Steve Saville expresses his concern over excess reserves in Bank Reserves and Inflation.

The reason that bank reserves aren’t added to the money supply is that they do not constitute money available to be spent within the economy; rather, they constitute money that could be loaned into the economy or used to support additional bank lending in the future.

Bank lending in the US has declined on a year-over-year basis, so we know that the spectacular increase in reserves has not YET contributed to monetary inflation.

If the private banks were to join the inflation party then the risk of hyperinflation would greatly increase, and hyperinflation — leading to what Mises called a “crack-up boom” — would be the worst of all possible outcomes. In particular, it would be an order of magnitude worse than the deflation that many people still seem to be worried about.

So, let’s hope that the banks don’t start lending out their excess reserves. The situation is bad enough already.

Gary North’s Concern Over Excess Reserves

Inquiring minds note Gary North’s concern over excess reserves in The Federal Reserve’s Self-Imposed Dilemma.

The Federal Reserve System faces a dilemma of its own creation: the doubling of the monetary base.

The only thing that is keeping this from creating mass inflation is the decision of commercial bankers to deposit the bulk of this increase with the Federal Reserve. The banks are not lending out this money. Neither is the FED. This money does not legally belong to the FED.

AN EASY SOLUTION WITH DISASTROUS CONSEQUENCES

There is an easy solution to this problem. The Federal Reserve knows exactly what the solution is. Nobody mentions it. The suggestion that the Federal Reserve would attempt it would probably bust the bond market. The Federal Reserve would announce that, from this point on, all money deposited by banks as excess reserves will be charged a storage fee. This fee could be 2%.

Not only would banks not make any interest on the money deposited with the Federal Reserve, they would begin suffering a loss of 2% per annum on the money held as excess reserves. …

Lots of Concern Over Excess Reserves

That’s a lot of concern over excess reserves. And if I looked around, I am quite sure I can find even more concern over excess reserves.

Here is a current chart that shows what everyone is concerned about.

Reserve Balances with Federal Reserve Banks

click on chart for sharper image

Money Multiplier Theory

The chart shows an unprecedented amount of excess reserves, almost $1.2 trillion.

According to Money Multiplier Theory (MMT) and Fractional Reserve Lending, this amount may be lent out as much as 10 times over and when it does, massive inflation will result.

Money Multiplier Theory Is Wrong

The above hypotheses regarding “Excess Reserves” are wrong for five reasons.

1) Lending comes first and what little reserves there are (if any) come later.
2) There really are no excess reserves.
3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely “fictional”.
4) Banks are capital constrained not reserve constrained.
5) Banks aren’t lending because there are few credit worthy borrowers worth the risk.

Let’s explore each of those points in depth.

1: Lending Comes First, Reserves Second

Australian economist Steve Keen has made a strong case that lending comes first and reserves later in Roving Cavaliers of Credit. I discussed that at length in Fiat World Mathematical Model.

That point alone should seal the hash of the debate but it keeps coming up over and over. So let’s try one more time.

Inquiring minds are reading BIS Working Papers No 292, Unconventional monetary policies: an appraisal.

Note: The above link is a lengthy and complex read, recommended only for those with a good understanding of monetary issues. It is not light reading.

The article addresses two fallacies

Proposition #1: an expansion of bank reserves endows banks with additional resources to extend loans

Proposition #2: There is something uniquely inflationary about bank reserves financing

From the article….

The underlying premise of the first proposition is that bank reserves are needed for banks to make loans. An extreme version of this view is the text-book notion of a stable money multiplier.

In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans.

The main exogenous constraint on the expansion of credit is minimum capital requirements.

A striking recent illustration of the tenuous link between excess reserves and bank lending is the experience during the Bank of Japan’s “quantitative easing” policy in 2001-2006.

Japan’s Quantitative Easing Experiment

click on chart for sharper image

Despite significant expansions in excess reserve balances, and the associated increase in base money, during the zero-interest rate policy, lending in the Japanese banking system did not increase robustly (Figure 4).

Is financing with bank reserves uniquely inflationary?

If bank reserves do not contribute to additional lending and are close substitutes for short-term government debt, it is hard to see what the origin of the additional inflationary effects could be.

There is much additional discussion in the article but it is clear that MMT theory as espoused by Murphy, Saville, North and others did not happen in Japan nor is there any evidence of it happening in the US, nor is there a sound theoretical basis for it.

In fiat based credit systems, lending comes first, reserves come second, and extra reserves do nothing much except pay banks to sit in cash in cases where interest is paid on excess reserves.

I will touch more on reserves coming after lending in the discussion of points 3 and 4 below.

2: There Are No Excess Reserves

Let’s now turn our attention to the idea there are excess reserves. To do that, let’s consider nonperforming loans, total loans and leases, and allowances for loan and lease losses.

Total Nonperforming Loans

click on chart for sharper image

The above chart is from St. Louis Fed based on Reports of Condition and Income for All Insured U.S. Commercial Banks.

Percentage of nonperforming loans equals total nonperforming loans divided by total loans. Nonperforming loans are those loans that bank managers classify as 90-days or more past due or nonaccrual in the call report.

Nonperforming loans have soared to a record five percent for this series.

The above chart just gives a percent. We need to quantify the amount. The following chart will help do just that.

Total Loans and Leases of Commercial Banks

The above chart of total loans and leases shows a total of nearly $7 trillion, of which five percent is nonperforming. In other words there is about $350 billion of nonperforming loans on the books of banks (that are admitted to).

That last part about admitted to is crucial. Nonperforming loans do not include off balance sheet garbage, various swaps with the Fed, or ridiculous mark-to-fantasy valuations of assets held on the books.

Total Loans and Leases of Commercial Banks Percentage Change

On a percentage basis the drop in loans and leases is unprecedented.

But wait. Banks might have made provisions for those loan losses already, might they not? Well … in a single word, No (as the following chart shows)

Assets at Banks whose ALLL exceeds their Nonperforming Loans

The above chart courtesy of the St. Louis Fed.

Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings (and capitalization ratios) are wildly over-stated.

Excess Reserves? You still think so?

3: Bank reserves are “Fictional”, there are essentially no reserves at all.

To see if we can prove this statement we can look at total lending vs. base money supply and M2.

Karl Denninger at Market Ticker has a nice chart of total lending based on Federal Reserve Z.1 Flow of Funds data.

Cumulative Debt

click on chart for sharper image

Base Money Supply

Note the rampant increase in base money which is the source of those so-called excess reserves.

Let’s do a little math.

There is 2,000 billion base money.
There is 52,000 billion lending.
The ratio of base money to lending is 3.8%

Prior to the ramp in base money (which by the way was the Fed’s feeble attempt to supply reserves after the fact), there was $800 billion base money supporting $52,000 billion in lending. Not too long ago, the ratio of base money to lending was a mere 1.5%.

Want to use M2 instead?

M2 Money Supply

click on chart for sharper image

Using M2 as money supply available for lending makes the ratios better. However, the largest component of M2 is savings accounts at almost $5 trillion of that $8.5 trillion M2.

However, money in savings accounts is not there. Reserve requirements on savings accounts are zero. It has all been lent out. Moreover, Greenspan authorized sweeps in 1994 to specifically allow banks to “sweep excess reserves” from checking accounts into savings accounts so the money could be lent out.

There is no money in savings accounts or checking accounts other than an electronic mark that says there is. Both contain money only in theory. That money that has already been lent out and redeposited, over and over and over.

Reserves? There are no reserves. Indeed, reserves are best thought of as negative.

Fractional Reserve Lending is really Fictional Reserve Lending.

4: Banks are capital constrained not reserve constrained

Number four gets down to the heart of the matter. Banks are not lending because they are capital constrained, not because of any reserve issues.

The Bank of International Settlements (BIS) sets standards that pertain to asset quality and required capital that the banks must hold.

Here are some resources:

• International Convergence of Capital Measurement and Capital Standards
• Minimal Capital Requirements

The first document is a whopping 284 pages long while the second is 150 pages long. I do not advise reading either. I include them for completeness.

Capital requirements

Wikipedia explains Capital Requirements and Capital Adequacy Ratio in brief form but the articles need work. Nonetheless, they seem to be a reasonable although complex overview.

From Wikipedia: The capital ratio is the percentage of a bank’s capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord.

Here is a chart on risk weightings. Remember what happened to those AAA rated loans?

Risk Weightings

Fed Can Provide Liquidity Not Capital

Flashback March 01, 2008: Poole, Paulson, Bernanke on Bailouts and Bank Failures

Fed Governor William Poole on Moral Hazards:

I am more skeptical of the financial strength of the GSEs, and believe that we could see substantial problems in that sector. According to the S&P Case-Shiller home value data released earlier this week, as of December 2007 average prices had declined by 15 percent or more over the past 12 months in Phoenix, San Diego, Miami and Las Vegas. We can add Detroit to the danger list as the home price index for that city is down by almost 19 percent over the 24 months ending December 2007. With house prices falling significantly in a number of large markets, many prime mortgages issued a few years ago with a loan-to-value ratio of 80 percent may now have relatively little homeowner equity, which increases the probability of default and amount of loss in event of default.

As I have emphasized before, the Federal Reserve can deal with liquidity pressures but cannot deal with solvency issues. I do not have any information on the GSEs that the market does not also have. Nevertheless, in assessing the risk of further credit disruptions this year, I would put the GSEs at the top of my list of sources of potentially serious problems. If those problems were realized, they would be a direct result of moral hazard inherent in the current structure of the GSEs.

First Nationalized Bank Of Fannie

Poole hit the nail on the head. Fannie Mae and Freddie Mac blew up and were nationalized. They did not run into reserve constraints. They ran smack up against capital constraints.

Also note that the Fed did not bail them out. Taxpayers did, authorized by Congress. The losses might hit $400 billion.

Fannie Mae is not a bank, but for all practical purposes it may as well be. Much lending growth comes from the GSEs. Money (credit really), is borrowed into existence, and redeposited elsewhere, and lent out over and over again.

When Fannie Mae and Freddie Mac ran into problems, capital was provided after the fact, not by the Fed but by taxpayers. The same applies to Citigroup, Bank of America, Wells Fargo on down the line.

In the March 2008 Poole post, I also commented on Bernanke.

Bernanke Expects Bank Failures

Testifying before Congress on Thursday, Bernanke stated Banks should seek more capital.

“Among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system,” he said in response to a question during semi-annual congressional testimony.

“They have already sought something of the order of $75 billion of capital in the last quarter. I would like to see them get more,” Bernanke said.

“They have enough now certainly to remain solvent and remain … well above their minimum capital levels. But I am concerned that banks will be pulling back and not making new loans and providing the credit which is the lifeblood of the economy. In order to be able to do that … in some cases at least, they need to get more capital,” Bernanke added.

Bernanke certainly blew it about the large banks being well capitalized. However, he was certainly correct with “In order to be able to [lend] … in some cases at least, they need to get more capital“

Note that this was a capital concern not a reserve concern.

Capital Is The Problem At Virtually All Banks

Flash forward August 19, 2009: Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks.

Here is an interesting followup email from ABO [a Bank Owner and CEO] regarding bank capital.

ABO Writes:

I talked to a friend this morning who is retired from both the Federal Reserve of Kansas City and RSM McGladrey. He now does consulting work with the FDIC, due diligence and other regulatory work. He said the picture he is seeing is worse than at any time in his life and CAPITAL is the problem with virtually all banks.

Inquiring minds will also be interested in an August 24, 2009 post Critically Under-Capitalized Banks Direct Result of “Wonderful Chain of Stupidity”. That post also shares some emails with “ABO” including …

Hiding The Losses

ABO Writes:

Take a look at how the FDIC is selling failed banks. It is a little different than in the past. The FDIC is using a loss sharing agreement that is usually around 80-20 and has certain guidelines on timing of the losses. I would guess that the losses on the failed banks are dragged into the future somewhat rather than being recognized at the time the bank is closed. This method would be less of an immediate hit to the fund and would probably create a contingent liability rather than a direct one. The banks that agree to this loss sharing plan are relying on the promise of the FDIC to make good on future guarantees for losses. The losses are not backed by the full faith of the government.

The Fed and FDIC always want to delay addressing the problems, hoping they will go away. Such structural problems seldom do.

Amazingly Financial Group was considered “well capitalized” right up to the brink of failure. When the bank did fail, the hit to FDIC was not immediately taken but stretched into the future.

The WSJ article notes ‘There are 1,400 banks that own mortgage-backed securities that aren’t backed by government-related entities such as Fannie Mae and Freddie Mac.” What we don’t know is how many of those banks are levered up enough in garbage mortgages to fail.

Note too that those garbage trust-preferred securities problems are on top of the widely expected fallout from commercial real estate problems affecting small to medium-sized regional banks. Thus, banking woes are much deeper in many areas than either the FDIC or Fed is admitting.

FDIC Allows Banks To Hide Insufficient Capital

Let’s flash forward once again.

Dateline December 15, 2009: FDIC Approves Giving Banks Reprieve From Capital Requirements

The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets.

Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board. The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books.

Executives from Citigroup, JPMorgan, Bank of America, Wells Fargo & Co., Capital One Financial Corp. and the American Securitization Forum met FDIC officials Dec. 2 to discuss capital requirements related to the FASB measure.

The executives proposed that “the transition period should extend beyond 2010 to a point in the economy where unemployment is lower and issuers are less capital-restrained from growing their balance sheet and providing credit,” according to a paper the ASF presented the FDIC.

Citigroup suggested three years to offset assets and liabilities brought onto balance sheets, Chief Financial Officer John Gerspach said in an Oct. 15 letter to regulators. Requiring banks to “assume the risk-based capital effects immediately, or even over one year, is an undeniably severe penalty,” he wrote.

Fictional Capital

Not only are there no reserves, the above should prove without a doubt there is insufficient capital for banks to lend.

Amazingly, the Fed and banks have the gall to proclaim banks are well capitalized.

Global Implications Of Stronger Capital Rules From Basel

Just to prove capital is not just a US concern, please consider Japan Banks Fall on Stronger Capital Rules From Basel.

Global regulators have been wrestling with plans to tighten bank supervision following the worst economic crisis since World War II. The Basel Committee said yesterday banks’ core capital should exclude stock or instruments that may require lenders to make payments to third parties, as these could reduce reserves needed for meeting losses.

“The tightening of Tier 1 quality standards is overall negative for the Japanese banks because they have weak Tier 1 quality,” said Stephen Church, a research partner at Japaninvest KK, an independent research firm, in Tokyo. “The stock market is differentiating between those banks which have stronger Tier 1 and those which are weaker.”

The committee also said banks should have an “appropriate” period of time to replace such instruments.

Hopefully that proves beyond a shadow of a doubt that banks are capital restricted. Thus, even if banks had excess reserves (which they clearly don’t), banks would not be lending anyway.

Of course, the idea that banks need reserves in the first place is fallacious.

Let’s tie a bow on this five point package with …

5: Banks aren’t lending because there are few credit worthy borrowers worth the risk.

Even if banks had the capital to dramatically increase lending (which they don’t), banks would still have to make the determination they want to lend.

Backdrop Banks Face

• Yahoo! reports Credit card chargeoffs rise in November
• Bloomberg reports Seven U.S. Banks Are Seized, Raising Year’s Failure Toll to 140
• Bloomberg reports Banks Take Losses on Short Sales as Foreclosures Soar.
• Bloomberg reports ‘Shadow Inventory’ of U.S. Homes Climbs.
• Yahoo!Finance reports Commercial Real Estate Loans A Growing Problem For Banks
• CNNMoney Reports Bernanke: Weak recovery ahead

If you were a bank would you be anxious to lend into that? If you were a business would you want to expand into that?

Please consider the latest Fed Senior Loan Survey.

Demand for C&I loans from small firms

Lending Standards For Small Firms

85.5% of banks responding to the survey have lending standards that basically remained the same yet 44.6% of banks report moderately weaker demand for loans, with only 8.9% reporting moderately stronger demand for loans.

In spite of all the claims that banks are not willing to lend, the data suggests that the predominant factor is there are fewer businesses wanting loans.

Arguably (but there is no way to tell from the tables) fewer still credit worthy businesses want loans.

Those who want banks to increase lending, I have to ask “For What? To Who? At What Rate?”

There are actually plenty of reasons for banks not wanting such as rising unemployment, rising taxes, uncertainty over health care costs, proposed cap-and-trade costs, increasing consumer frugality, rampant overcapacity, and boomer demographics.

One Unaddressed Point

Gary North proposes Bernanke can force banks to lend. Really? When Bernanke knows banks are capital constrained? When it is obvious that it would be suicidal?

Bear in mind that Bernanke has recently talked about upping the interest on reserves, not making it negative. Moreover, by paying interest on reserves, the Fed can very slowly recapitalize banks over time while simultaneously and subtly suggesting that banks not take excess risks.

With that in mind, let’s try and stay within the solar system of 99.9% probability rather than the universe of theoretically possible negative 2% rates on reserves.

Excess Reserve Recap

1) Lending comes first and what little reserves there are (if any) come later.
2) There really are no excess reserves.
3) Not only are there no excess reserves, there are essentially no reserves to speak of at all. Indeed, bank reserves are completely “fictional”.
4) Banks are capital constrained not reserve constrained.
5) Banks aren’t lending because there are few credit worthy borrowers worth the risk.

Reserves? There are no reserves. Indeed, reserves are best thought of as negative. Instead, in cases of “too big to fail”, capital (not reserves), is supplied after the fact by taxpayers (not the Fed).

Thus, concern that excess reserves will lead to lending and inflation is totally unfounded in theory and practice.

Fractional Reserve Lending is really Fictional Reserve Lending. In practice, the major constraints to lending are insufficient capital and willingness of credit worthy borrowers to seek loans.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html  to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Adam Smith, Charles Darwin and George Washington are not only rolling in their graves, they are dancing the macarena. A new study by the UMich School of Business has found what everyone has known since the crisis began, if not centuries prior: that the biggest, crappiest banks were guaranteed to get more bailout funding the more political ties they had (and more kickbacks they had offered). Is this sufficient to claim that capitalism in its purest sense has been corrupted beyond repair, courtesy of political intervention and constant pandering? Probably not, but it sure makes a damn good argument. In any case, the data is sufficient for all bears to start keeping a track of which banks are increasing their lobbying efforts and funding: those are the ones where the greatest weakness is likely still to be uncovered (if it hasn’t already). And while the political relationship probably is not a big surprise to any realistic readers, another finding of the study makes a solid case for abolition of the “apolitical” Federal Reserve:

A new study by Ross professors Ran Duchin and Denis Sosyura found that
banks with connections to members of congressional finance committees
and banks whose executives served on Federal Reserve boards were more
likely to receive funds from the Troubled Asset Relief Program, the
federal government’s program to purchase assets and equity from
financial institutions to strengthen its financial sector.

The unsupervised Federal Reserve gets to make or break banks, presumably under the gun of its one and only master, Goldman Sachs, which has already destroyed its major historical competitors: Bear Stearns and Lehman Brothers. This is a sufficient condition to not only audit the central bank but to immediately seek its abolition, and also to commence anti-trust proceedings against Goldman Sachs which is not only a monopoly, but by extension has veto power over the very regulatory mechanism that is supposed to keep it “fair and honest.” The system is truly broken.

More findings from the study:

Further, their research shows that TARP investment amounts were
positively related to banks’ political contributions and lobbying
expenditures, and that, overall, the effect of political influence was
strongest for poorly performing banks.

Can someone reminds us what the core premise of capitalism is again, and why we pretend to live in anything other than a hard core socialist society?

One of the professors of the study had this to say:

“Our results show that political connections play an important role in
a firm’s access to capital. The effects of political ties on federal capital investment
are strongest for companies with weaker fundamentals, lower liquidity
and poorer performance — which suggests that political ties shift
capital allocation towards underperforming institutions.”

The US financial system now need a new four letter acronym: everyone knows TBTF. We hereby annoint the Too Blatantly Briby To Fail (TB²TF) category of financial institutions. We posit that in 5 years there will be two banks in the former group: JP Morgan and Goldman Sachs, while every single other bank will make up the latter.

Among the specific data findings:

The researchers used four variables to measure political influence: 1)
seats held by bank executives on the board of directors at any of the
12 Federal Reserve banks or their branches (the Federal Reserve is
involved in the initial review of CPP applications from the majority of
qualified banks); 2) banks with headquarters located in the district of
a U.S. House member serving on the Congressional Committee on Financial
Services or its subcommittees on Financial Institutions and Capital
Markets (which played a major role in the development of TARP and its
amendments); 3) banks’ campaign contributions to congressional
candidates; and 4) banks’ lobbying expenditures.

They found that a board seat at a Federal Reserve Bank was
associated with a 31 percent increase in the likelihood of receiving
CPP funds, while a bank’s connection to a House member on key finance
committees was associated with a 26 percent increase, controlling for
other bank characteristics such as size and various financial
indicators.

The last data point is truly troubling: while it is one thing to pander to corrupt politicians, at least when their transgressions are made public they can and will be booted out. Yet what checks and balances exist to punish current and former Fed staffers who endorse near-bankrupt companies, in self-evident conflict of interest acts, for enhanced survival? As the Fed is accountable to nothing and nobody, save Goldman Sachs, one can argue that Goldman decides the fate of the very core of the US financial system: which firms get the thumbs up and down treatment. This is an unbelievalbe travesty of both the constitutional and the tenets of capitalism and must be rectified immediately. It certainly helps that the president, being a Constitutional law professor, will surely get right on it.

“Our findings also suggest that qualified financial institutions were
more likely to receive an investment from CPP if they were bigger and
had lower earnings and lower capital,” said Duchin, U-M assistant
professor of finance. “This is consistent with an investment strategy
seeking to support systematically important institutions experiencing
financial distress.”

If this study’s finding are confirmed and repeated independently by other research teams, it is safe to say that any pretense America has to being an efficient capitalism system (where those who can no longer compete, disappear) can be used to wipe the nation’s collective backside. Between this, and a choice of US dollars and Treasuries, Cottonelle is starting to see some serious competition.

h/t Geoffrey Batt

The two specialists on using email as a key prosecutorial device (both from the pitching and catching end), discuss the validity of bringing up emails to the public domain in the AIG case. Why this hasn’t been done already, especially with round after round of public outcry and various regulatory agencies involved, is a mystery which can only be solved if one realizes that those in charge have nothing to gain from uncovering the dirty truths at the heart of the crash that almost cost Goldman Sachs a bankruptcy, scratch that, a liquidation (of course, nothing could be further from the truth, sayeth His Holiness Viniar. We, on the other would point out that in this case (and incalculable others) Viniar himself would probably be the only exception to the prio statement, thus invoking a nightmarish analysis of non-exclusive Venn diagrams and other logical gibberish).

Here is Dylan and the former enemies, now best talking head buddies.

Visit msnbc.com for breaking news, world news, and news about the economy

So, Citigroup. Our favorite zombie bank.

We’ve given you tons of funds. You acted like you were paying some of it back, when in reality it was just cash from our coffers being shuffled around, since you got a handy $38 billion dollar tax break at the same time.

$C, are we really supposed to believe you can’t afford to shovel your sidewalks?

$BAC, $JPM, you ain’t got no alibi, either. Look, TD shoveled THEIR sidewalks, okay? And they’re run by a Canadian dude who you’d think would be even more likely to just say “Ten inches of snow is nothing, ya hosers” and leave it there.

TIME commenter “deconstructiva” offered the following explanations:

…possible reasons….
1. After bonuses, there wasn’t enough cash to hire a shoveler.
2. Choice of paying back bailout money or hire a shoveler.
3. All shovelers are currently busy shoveling …something else.
4. They did hire shovelers. Alas, they hired the duck kind and they’re all in Vikram Pandit’s office suite eating his giant tubs of multi-flavored holiday popcorn.
5. To save money, Pandit is shoveling the walks of all Citi branches himself. He’ll get around to that one so stop complaining already.

Really though, we’re just waiting for someone to request bailout money because of the unexpected Northeast snowstorm, be it banks, automakers, or retailers.

(h/t anonymous $C employee.)

(snippet)
If the government stays on the course it’s been on for the past forty years without a radical change, the federal government will soon have a $10 trillion budget.

In other words, the federal budget deficit will be $1.4 trillion. Just to make the size more visible, that’s $1,400 billion.

Our colleague Rob Arnott, who always does terrific research, wrote in his recent report that “at all levels, federal, state, local and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company–only Japan, Lebanon and Zimbabwe are higher. That’s only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time.”

Add the unfunded portion of entitlement programs and we’re at 840% of GDP.
The world has not seen such debt levels in modern history. This debt is not serviceable. Imagine that total debt is 557% of GDP, without considering entitlements. The interest on the debt will consume all the tax revenues of the country in the not-too-distant future. Then there will be no way out but to create more debt in order to finance the old debt.

It assures a period of economic devastation. In a last, desperate attempt, politicians at the federal and local levels will raise taxes to astronomical heights to raise revenues. And that only assures destruction of the economy. Forget the fable of economic recovery. Unless there is a change in Washington by next year’s election, there will be no way to turn back.

Japan’s recession is now 19 years old. It has the highest debt-to-GDP level (227%) of any industrialized country.
LINK HERE

Serious U.S. mortgage delinquencies up 20 percent
LINK HERE

Prepare for the Great Depression.
Survival Seeds