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Archive for January 18th, 2010

Worry Over the US$ and PIIGS

Inquiring minds are listening to an interview with Marc Faber on Tech Ticker: The Next Thing You Need To Worry About Is The PIIGS

After every financial crisis there’s a sovereign debt crisis, Marc Faber says. Countries that borrowed too much during the boom times start struggling to pay their competitors back, and eventually some of them default.

The countries most likely to blow up this time around are the “PIIGS”: Portugal, Ireland, Italy, Greece, and Spain. One ore more of them, Faber says, will likely default in the next couple of years. And, that could result in the death of the Euro currency.

Longer-term, Faber says, Japan and the US are in line for the same fate.

Question Of Timeframe

Marc Faber says “The US crisis won’t hit us this year or next year. But within 5-10 years, the United States will be forced to quietly default on its debt, most likely by printing money and destroying the value of the currency.”

I like that timeframe. People expecting the US$ to implode right here right now are simply too early in my estimation. As for five years from now, I will reassess later. There are too many things happening right here right now to worry about 5-10 years from now.

Certainly the PIIGS are near the top of today’s list of worries. Moreover, we can easily have a crisis in places eyes are not focused such as Mexico. Is anyone even looking at Mexico or what a housing crash might mean to Canada or Australia?

Let’s not forget that Japan’s rapidly aging demographics suggests that Japan crisis will hit before the US. Japan’s debt is approaching 200% of GDP, Japan is mired in deflation, and its aging workforce now needs to draw down on savings, in retirement. The belief that “Japan is a nation of savers and the US is a nation of spenders” is about to be shattered. Secular spending trends in both countries have peaked, in opposite directions.

Finally, the love affair with China is way overdone. The amount of fiscal stimulus and monetary printing is off the charts. China is a bubble waiting to burst. I am in the camp, and have been for years, that if China floated the RMB it might crash, not soar.

By the way, if you have not yet read Faber’s classic, Tomorrow’s Gold, I suggest you do. No, it’s not about “gold” as gold bugs think of it. It’s about an approach to investing.

If you do not have a copy, pick one up.

Just remember: It’s all too easy to focus on the long-term picture of the US$ while ignoring as critical, if not more critical issues elsewhere, right now.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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More Intentional Media Misdirection (Wall Street)

Posted by Karl Denninger

The headline screams:

Feds find little fraud at big Wall Street firms

While the American public and Capitol Hill lawmakers appear to blame wrongdoing on Wall Street as the primary cause of the global financial crisis, federal law enforcement agencies have had little success in finding and prosecuting instances of fraud at the nation’s major investment firms.

That’s because they’re not looking – that is, they’re willfully blind.

The article goes on to assert:

“Originating risky mortgages on its own does not violate the federal securities law,” Ms. Shapiro said

That’s true.

But lying about the quality of what you’re selling both violates Federal Securities Law and in addition violates ordinary fraud statutes.  When such solicitations are sent over wires (e.g. electronically) or via the mail both wire and mail fraud statutes are violated.  If and when two or more people collude to take such an action federal racketeering statutes may be violated as well.

Ms. Shapiro testified that the SEC had reached settlements with six Wall Street dealers to settle charges of fraud in connection with the auction-rate securities. The SEC secured $60 billion through the settlements to provide full refunds for investors in the securities.

But Ms. Shapiro (and Eric Holder of the Department of Justice) didn’t and still won’t pursue the larger issue, which was the issuance of literal trillions in securitized debt in 2004, 2005, 2006, 2007 and 2008 following FBI and HUD warnings that very high percentages of mortgages contained in these securities were rife with fraud – yet the offering circulars omitted any mention of these findings and warnings.

Indeed, the “auction rate security” issue – and the “pursuit” of Wall Street on these securities – rests on the precise same issue as does the above – that is, the willful and intentional misrepresentation of risks in the offering circulars for these securities in which self-dealing and the understatement of risk associated with same was intentionally omitted from the prospectuses.

The simple fact of the matter is that there’s no crime in speculating and being wrong. 

But there are multiple crimes committed when one intentionally obscures, either through omission or commission, risks that one knows of and/or has been explicitly warned about.

Henry Boerner, chairman of the Governance and Accountability Institute, said the publics rage against Wall Street is focused not so much on suspected criminal activity as on the unfairness, lack of ethics and irresponsibility of bankers. However, he said, it is the regulators who should be faulted for allowing Wall Street bankers to take risks, shatter the economy and walk away with big bonuses.

“Voters, constituents, investors, employees, borrowers, homeowners, public officials, entrepreneurs — all have been impacted by the risky and at times reckless behavior of the leaders of the nations largest financial services organizations,” he said.

Those who choose to accept risk, knowing fully what they’re doing, are not now and never have been the issue.  Such people deserve what they get – either for good or bad.

Attention is, has been, and should be focused on the willful and intentional lack of disclosure of known risks.  Given the fact that The FBI was warning of an epidemic of fraud in “alternative” mortgage loan products as far back as 2004 and there were multiple investigations and disclosures in both the media and by HUD in 2006 and 2007 there is absolutely no excuse for the lack of full, fair and proper disclosure in the “products” that Wall Street created and sold on in the years 2004, 2005, 2006, and 2007 – without which neither the bubble or collapse would have occurred.

It has been and is my assertion that massive violations of the law were in fact committed during this faux “boom” and the ensuing bust, that the so-called “earnings” reported during that period in fact were not earned, and that buyers of this “debt” were in fact sold securities that, had the actual known characteristics of the loans contained in them been disclosed, were utterly unmarketable.

U.S. Aid Benefits Banks, Not Homeowners

By PETER EAVIS

Government support for the economy has helped banks make all manner of windfall profits. But have outsize returns in banks’ mortgage operations deprived borrowers of lower mortgage rates?

In 2009, there was a big jump in an industry margin used to gauge the profitability of banks’ main mortgage business, selling home loans to government-supported Fannie Mae and Freddie Mac.

In theory, if that margin had remained at narrower, historical levels, mortgage rates for borrowers could have been lower. That might have caused sizable savings for homeowners over the life of their loans and breathed more life into the housing market.

Banks’ mortgage profits have come amid extraordinary government support for the housing market. Since 2008, the Treasury has spent $112 billion to shore up Fannie and Freddie. Further support has come from the Federal Reserve’s $1 trillion-plus of purchases of mortgage-backed securities since the start of 2009. All this has helped mortgage rates fall. But could they have been lower still?

Consider what happens when banks sell their loans to Fannie or Freddie. A bank might write a mortgage at 5.1% and sell it to Fannie, which guarantees the loan and sells it with other loans packaged as mortgage-backed securities, perhaps with a coupon of 4.35%. The difference of 0.75 of a percentage point is booked by the bank, which uses some of that revenue to cover costs in its mortgage business. From 2000 through 2008, that margin averaged 0.73 of a percentage point, according to Barclays Capital data. But in 2009, the average was a much wider 0.98 of a percentage point.

Any additional margin likely boosted banks’ bottom lines. And by a lot, potentially, given that $1.4 trillion of mortgages were written in the first three quarters of 2009, according to Inside Mortgage Finance. Indeed, Wells Fargo and Bank of America, which together account for 45% of the market, reported blowout mortgage earnings last year.

The cause of the wider margin: The Fed’s buying helped pull down coupons on Fannie and Freddie securities by more than mortgage rates. If banks had cut mortgage rates in line with those coupons, homeowners would have benefited. Instead, the benefit appeared to have accrued to the banks.

Banks say the higher margin only offset higher expenses. But basic costs, like the guarantee fee banks pay to Fannie or Freddie as well as loan-servicing costs—roughly 0.25 of a percentage point each—likely haven’t gone up excessively.

Jay Brinkmann, of the Mortgage Bankers Association, says banks needed to recoup a drop in the value of servicing-related assets last year. Lenders also face hedging costs when selling mortgages into a forward market, he says. Of course, since mortgage rates have come down so much, some might say it is nitpicking to focus on potential extra gains for banks. But mortgage rates still are relatively high on an inflation-adjusted basis. And though mortgage origination picked up in 2009 on the lower rates, it fell well short of previous low-rate years.

So should the Treasury have leaned on banks to charge lower mortgage rates, given the government’s desire to help homeowners? Sure, intervention would have risked making banks skittish, perhaps leading to less lending. But the main lenders all have strengthened their mortgage operations through big mergers, and the price at which they sold mortgages benefited a lot from the Fed’s buying.

As the government spends huge sums shoring up the housing market, it may want to look more closely at who is benefiting. Peter Eavis

Oh, The Truth Is The Banks Are Insolvent? (Still)

Posted by Karl Denninger

Gee, what have I been saying now for over two years?

Jan. 19 (Bloomberg) — The U.S. Treasury Department has failed to win agreements to get struggling borrowers’ home- equity debt reworked, among the biggest roadblocks to reducing foreclosures that may reach a record 3 million this year.

None of the lenders holding a combined $1.05 trillion in the debt has signed contracts requiring participation in the second-mortgage modification plan announced eight months ago. The largest banks remain “committed” to joining, Meg Reilly, a department spokeswoman, said in an e-mail.

Amusing.  My view as expressed somewhat-recently on this issue can be found here:

They are sitting on over a trillion of dollars of this paper (about $1.1 trillion to be exact) and several hundred billion is severely impaired or even worthless.  Wells Fargo, just as one example, has (as of its last 10Q) $106 billion of second lines outstanding on balance sheet, and God only knows how much in SPVs (Wells is known to have significant off-sheet exposure “inherited” from Wachovia.)  Let me put this in perspective for everyone.

Uh huh.

RealtryTrac says that three million foreclosures are likely this year and that as much as 23% of all mortgages are currently in negative equity – that is, any second line is severely impaired on that property and may be worthless.

All the BS and games has not changed a thing.  The big banks all claim to be “committed” to working with the Treasury on these programs, but the fact of the matter is that if they are forced to recognize reality they are insolvent.

But the conundrum is that in order to normalize the economy and lending environment we must stop playing games with home prices.  House prices must contract to where average Americans can afford to buy them without using exotic and tricky loans.

HAMP fails to do it – as Mark Hanson Advisers has noted there is no fix in the HAMP program as total DTIs – that is, total amount of debt service as a percentage of GROSS income – remains solidly in the unsustainable area.

As far back as the first few Tickers, dating to April of 2007, I wrote on the fact that sustainable loans are written on a 28/36 basis – that is, 28% DTI for housing expenses and a total debt-to-gross-income ratio (DTI) of no higher than 36%.

Treasury’s HAMP is still resulting in DTIs, on average, of 55% and while this is an improvement over the impossible-to-service 72.2% a 55% DTI is still impossible to service if there is even the smallest challenge in the borrower’s life.

Why isn’t there a focus on how banks managed to sell people not only first mortgages but also HELOCs when their DTIs were in the 70s?  That sort of “lending” is BY DEFINITION predatory as there is NO REASONABLE EXPECTATION that such a borrower would EVER be able to pay as agreed!

Remember, these DTIs are computed on gross income – that is, before both state and federal income and other taxes.  Further, it is widely agreed and understood that tax rates are at generational lows and as such the tax bite will only increase in years to come.

In short ALL of this so-called “lending” was a SCAM and Treasury is hell-bent and determined to cover up the underlying scam and screwing that the banks inflicted on borrowers instead of both putting a stop to it and punishing those who willfully and intentionally hosed The American Public.

The bottom line?  The banks are still insolvent, Treasury is still lying, the banks are still refusing to recognize losses that have already happened as a direct consequence of their intentional and outrageous conduct and all of this together will prevent any meaningful recovery the broader economy from taking hold.

We should have forced all of these banks through insolvency in 2007 and gotten it over with.  We still can and should.  The institutions that wrote these loans were radically irresponsible and protecting them from the consequences of their idiocy has provided only a temporary respite from the underlying reality – the amount of debt in the marketplace exceeds the ability of those who earn incomes to service it.

Until we face reality any alleged “recovery” is a chimera created by ever-increasing allowance of and reliance on fraudulent accounting, not fundamental improvement.

How the Average American household making $52,000 a Year is Coping while the Ultra Rich Pull Away. Examining the new Numbers on Income Distribution in the United States.

Posted by mybudget360

Now that tax season is rolling around average Americans are examining the implications of a difficult 2009 economy.  Yet the data on typical families shows that many Americans are falling further and further behind in this current economy.  It is sobering to realize that over 14 million American households live on $15,000 or less per year.  These statistics usually get lost in the noise of protecting the wealthy class with their generous tax breaks.  But when we examine the data even further we realize that even those with solid incomes of $100,000 to $200,000 per year are feeling the tax burden pinch with changes in the alternative minimum tax (AMT).  What we can gather from the data is the small elite, the top 1 percent have managed to setup a structure that manages to use the rest of the population to finance their adventure.  First, let us breakdown the numbers:

75,000,000 U.S. households (66 percent of all households) live on $75,000 a year or less.  54,000,000 live on $50,000 or less a year (47 percent of all households).  This is where the average American is financially in today’s economy.  And most of this money comes from a job that pays a weekly or monthly paycheck and not some dividend check from a trust fund.  You always hear that the top “x percent” pay all the taxes.  Well the burden is now falling squarely on people that make $200,000 or less a year.  Just run the numbers for a $50,000 household:

After taxes a tax payer here in California is taking home about $2,900 per month.  The notion that the very rich pay all the taxes is really a misnomer.  They also get the most breaks.  And the distribution is even more skewed.  It should be said that most of the taxes are paid by those under the top 1 percent umbrella.  But once you get over that hurdle, the numbers become more interesting.

The extremely wealthy are the people getting all the perks of the current system; accounting gimmicks, offshore accounts, capital gains tax rates that are favorable, and other items like carryover losses that most Americans never even deal with.  The bailouts, the tax breaks, and items that specifically only improve their bottom line.  First, let us move up the financial ladder:

In fact an income of $100,000 or more a year puts you in the top 15 percent of wealth earners in this country.  Looking at 2006 IRS records shows that an income of $108,904 would put you in the top 10 percent while an income of $388,806 would put you in the top 1 percent.  And here is the real break.  Because tax breaks become more generous for the ultra rich especially when a large number live off of capital gains and only pay 15 percent in taxes on this while working grunts have to pay every imaginable tax on the books.  Let us run the numbers for a family making $100,000 in California:

A single filer in California making $100,000 a year will take home roughly $5,000 per month.  They are paying in taxes nearly 40 percent per year.  But take for example someone that is taking in $100,000 a year in capital gains.  The W-2 worker is paying roughly $40,000 in taxes per year while the capital gains earner is paying $15,000 per year.  That is a significant difference but this is how the ultra wealthy protect their money.  This argument that all these gains are earned through the free market belies the fact that right now the vast majority are implementing bailout policies that are protecting the mega rich.  Why else do you think Wall Street is jumping up and down because of this 70 percent stock market rally while most Americans still have little faith in the economy:

Funny how only 12 percent actually think the economy is excellent or good.  Probably the people that have their money loaded up in Wall Street.  However the vast majority still see the economy as performing poorly because it is.  The unemployment and underemployment rate is up to 17.3 percent and would be higher if we calculated the numbers more accurately.  For example, we have people that are simply dropping out of the work force and no longer impact the headline rate.  So for many Americans, the recession is still dragging them further into a slump.

And this observation is not limited just to the facts.  Take a look at some analysis (a 2005 article before the bust):

“(NY Times) The Times analysis also shows that over the next decade, the tax cuts Mr. Bush wants to extend indefinitely would shift the burden further from the richest Americans. With incomes of more than $1 million or so, they would get the biggest share of the breaks, in total amounts and in the drop in their share of federal taxes paid.

One reason the merely rich will fare much less well than the very richest is the alternative minimum tax. This tax, the successor to one enacted in 1969 to make sure the wealthiest Americans could not use legal loopholes to live tax-free, has never been adjusted for inflation. As a result, it stings Americans whose incomes have crept above $75,000.

The Times analysis shows that by 2010 the tax will affect more than four-fifths of the people making $100,000 to $500,000 and will take away from them nearly one-half to more than two-thirds of the recent tax cuts. For example, the group making $200,000 to $500,000 a year will lose 70 percent of their tax cut to the alternative minimum tax in 2010, an average of $9,177 for those affected.

But because of the way it is devised, the tax affects far fewer of the very richest: about a third of the taxpayers reporting more than $1 million in income. One big reason is that dividends and investment gains, which go mostly to the richest, are not subject to the tax.”

And this is exactly what we saw in the following five years and are still seeing.  Republicans and Democrats alike seem destined to protect this elite group.  Hedge fund gains and Wild West gambling on Wall Street allowed the ultra rich to pull away from the average American pack while not even paying their fair share in taxes.  This is still going on by the way since the system also allows carryover losses in stocks and wonderful loopholes to game the system.

“Another reason that the wealthiest will fare much better is that the tax cuts over the past decade have sharply lowered rates on income from investments.

While most economists recognize that the richest are pulling away, they disagree on what this means. Those who contend that the extraordinary accumulation of wealth is a good thing say that while the rich are indeed getting richer, so are most people who work hard and save. They say that the tax cuts encourage the investment and the innovation that will make everyone better off.

“In this income data I see a snapshot of a very innovative society,” said Tim Kane, an economist at the Heritage Foundation. “Lower taxes and lower marginal tax rates are leading to more growth. There’s an explosion of wealth. We are so wealthy in a world that is profoundly poor.”

Of course that was their impression before they realized all the wealth of the average American was merely debt financed gains pushed out by Wall Street.  It was all hat and no cattle.  The real wealth, financial wealth is controlled by the top 1 percent who control the levers of 42 percent of our nation’s financial wealth.

“But some of the wealthiest Americans, including Warren E. Buffett, George Soros and Ted Turner, have warned that such a concentration of wealth can turn a meritocracy into an aristocracy and ultimately stifle economic growth by putting too much of the nation’s capital in the hands of inheritors rather than strivers and innovators. Speaking of the increasing concentration of incomes, Alan Greenspan, the Federal Reserve chairman, warned in Congressional testimony a year ago: “For the democratic society, that is not a very desirable thing to allow it to happen.”

And this is an enormous issue of framing the argument with phony data.  “Poor people don’t pay taxes.”  Actually they do.  A poor person who buys a $100 TV here in California pays the same 9.25% sales tax as the wealthy person.  They also pay into the Social Security and Medicare system.  But again, the uber wealthy only like to look at Federal tax rates and frame the issue to their own liking.  What about the hidden tax of inflation that has pushed up the cost of food and education?  Remember that estate tax debate?  Most of us have heard of it but this turns out to be an incredibly narrow issue that only helps the ultra rich:

Source:  IRS

So we had a major debate for 50,000 tax filers in a nation with over 113,000,000 households?  The top 1 percent are betting on you not doing the numbers.  They want to keep the game going because it is rigged in their favor.  The banking bailouts are largely a transfer of wealth to those who least need it.  Until we get this thing under control, the average American is going to feel the pinch of the economy deeper and deeper.

The Banking Oligarchy Must Be Restrained For a Recovery to Be Sustained

Brilliant article really, in its simplicity.

Despite Obama’s recent brave words, the US is lagging the world recognition that because of systemic distortions in the financial system the banks are in fact exercising a tax on the real economy that is impeding global recovery. As recently noted in London’s Financial Times regarding the structural imbalances in the financial system:

“…as long as they are not addressed, the banks will make profits – or more accurately, extract rents – out of all proportion to any contribution they make to the wider economy.”

The US is going in absolutely the wrong direction, lessening competition and strenghtening the grip of a financial oligarchy through its policy of focusing relief efforts on a small group of Too Big To Fail Banks, at the expense of the broad economy. Despite assurances to the contrary, this is the policy being administered by Washington.

This institutionalization of distortion was easier to understand under the Bush Administration with Treasury Secretary Hank Paulson guiding policy, and the Clinton Administration under banking insider Robert Rubin. But why this sort of response from the new reform government? The answer most likely is centered on three men: Larry Summers, Tim Geithner, and Ben Bernanke. None of the three has practical experience in business. All three are creatures of the banking system, and are heavily indebted to the status quo.

The first practical step for Obama would be to dismiss Summers and Geithner, and if he is wise, the person or persons who recommended them. He also should encourage the Congress to investigate the bank bailouts in general, and tie this to Bernanke’s reappointment to the Chairmanship and the movement to audit the Fed.

The most recent scandal regarding the collusion between the government and the Fed to mask the backdoor bailouts to a few big banks via AIG should be proof enough that the Fed has no intentions of acting honestly and openly, and is far exceeding its mandates in its aggressive expanding its balance sheet and the selective monetization of private debts.

There are disturbing indications that the US is using a few of its large banks as elements of its policy to achieve certain objectives in the world markets. Such collusion between the corporate and the government sectors is the prelude to fascism.

We should keep in mind that financial crisis was indeed created during both Democratic and Republican administrations, and that simply replacing the Democrats with traditional opponents is unlikely to achieve genuine change.

Change is what is required. But while the foul stench of corruption hangs over the political process in Washington, where Big Money readily buys influence and control over legislation and regulation, there will be no significant changes, and no economic recovery. Recovery will be in appearance only.

Financial Times
How the big banks rigged the market
By Philip Stephens
18 January 2010

When Lloyd Blankfein met politicians in London a little while ago he brushed aside warnings that investment banks faced higher taxes if they ignored the rising public outcry about multibillion-dollar bonus pools. The Goldman chief executive seemed to believe governments would not dare.
That misjudgment – a measure of the breathtaking hubris that, even after all that has happened, continues to separate bankers from just about everyone else – may explain Goldman’s response to the British government’s decision to apply a 50 per cent tax to this year’s payouts

In the description of Whitehall insiders, Goldman executives reacted with anger and aggression. The threat was that the bank would scale back its business in London. For a moment it seemed Gordon Brown’s administration might wobble. In the event, Goldman’s lobbying failed to persuade it to soften the impact of the tax.

Britain, of course, is not alone. France has imposed its own bonus tax. Barack Obama’s administration has just announced a levy to recover an estimated $90bn (£55bn, €63bn) over 10 years. The centre-right government in Sweden has gone further by introducing a permanent “stability levy” to discourage excessive risk-taking.

It is a measure of how far the political debate has shifted against the financial plutocrats that George Osborne, the Tory shadow chancellor, has applauded the Swedish plan. If the Tories win the coming general election, they would support a worldwide levy along similar lines. It is “unacceptable”, Mr Osborne remarked the other day, for the banks to be paying big bonuses rather than building resilience against future crises.

So far, so encouraging. But the process cannot end here. Irritating as it may be to Mr Blankfein, a one-off bonus tax is not going to change anything in the medium to long term. Levies such as that in Sweden mark a recognition that the profits and remuneration policies of the banks are more than a fleeting problem. But forcing bankers to strengthen balance sheets with money they would rather put in their own pockets addresses only part of the problem.

The next stage must be scrutiny of the structural distortions that allow these institutions to rack up such huge profits. Broadly speaking, the leading players in at least three areas of investment banking – wholesale markets, underwriting and mergers and acquisitions – have been operating natural oligopolies.

Their profits have been in significant part a reflection of the absence of robust competition. There are different reasons for this in the different areas of business – what economists call asymmetries in some and market dominance in others. But as long as they are not addressed, the banks will make profits – or more accurately, extract rents – out of all proportion to any contribution they make to the wider economy.

Read the rest of this article here.