FedUpUSA

Archive for the ‘Banks’ Category

On April 25, 2008, a group of concerned citizens, from across the country, who met on an online forum called Market-Ticker.org decided that it was necessary to start tying to wake people up to the fact they were being robbed. Not only were they being robbed, but the robbery was about to become brutal.

Just a few days after Bear Stearns was forcibly merged into JPMorgan, using YOUR tax dollars, we stood in downtown New York city, with signs and literature, educating the public about what had just happened. We were well-received by many people, but there were almost as many people who thought we were nuts.

After watching this video, and seeing for yourself what has happened since April of 2008, NOW how nuts do you think we are?

It has been a hard road to haul, trying to wake people up. It was hard being ridiculed and laughed at. It was hard seeing friends and loved-ones walking straight into an abyss of perpetual debt and even harder knowing that they were condemnig their children to the same fate.

Along the way, as economic conditions became more obvious, and our government’s role in perpatuating fraud and protecting the guilty at the expense of the innocent became more clear, finally, it appeared the cavalry might have arrived. FedUpUSA owes a debt of gratitute for Rick Santelli’s loss of composure on CNBC TV in February of 2009. What we had failed to accomplish, seemed to occur overnight: people started awakening from their stupor. ‘Tea Parties’ started springing up overnight in response to what can only be described as the cries of a modern-day Paul Revere, people got up off their couches and started taking their message to the streets.

Our work, however, is not over; it has just begun. Unless we address the ROOT of the problem, we cannot hope to derail the fraud and stop the corruption. The root of the problem is, no more and no less, our economic system. Our economic system is based upon a lie. The is that MONEY = DEBT. Our Founding Fathers knew this and proscribed a NON-debt denominated monetary system. This was intended to be money, the quantity of which was controled ONLY by the production of people – their human labors.

Absolutely all the corruption that now exists in our government can be traced back to the nature of our current financial system. Until or unless this system is changed, there is no hope to ever get out of debt.

Thankfully, there are some very smart people who have figured this out – and not only realize the source of the catastrophe we now face, but have come up with a solution:

Freedom’s Vision – In a Nutshell…

“It’s not WHAT backs our money, it’s WHO controls the QUANTITY!”

-Bill Still

Private Central Banks control the production of money in the United States, not our Congress as dictated by the United States Constitution. This has given them the POWER to control our economy and our politicians.

It is critical WHO controls the money system which is different than the banking system.

The system of backing our money with DEBT ensures that the system will fail, we are at or approaching the mathematical limits now. This system is controlled by Bankers, not Congress.

The quantity of money and debt is wildly out of control.

History shows that severe upheaval and “other events,” such as wars, follow such times. It is our intention to break that chain so that those other events do not occur.

Freedom’s Vision is comprised of three parts – Economic Reform, Political Reform, and Future’s Vision.

Our immediate mission is to:

“Enact monetary and political reform capable of transitioning our economy from its current debt and derivative entangled state to a prosperous & sustainable system that works to keep the quantity of money under control for the very long term.

Monetary Reform ends the process of debt backing our nation’s money at the Federal level, it establishes procedures to correctly measure our economy and through transparency coupled with checks and balances works with Congress to ensure that the quantity of money never gets out of control.

While the systems of control are simple and intuitive, the very difficult part is transitioning our economy from its current debt saturated and derivative entangled state to a sustainable and prosperous future.

Significant tax money would be returned to the people used to pay down debt for those who have it, thus deleveraging and providing immediate relief to all citizens. This first step also makes the banks more healthy.

Through the unique procedures contained within, the debts would be brought back to manageable limits on all levels. Derivatives would be untangled. All banks would survive the transition and come out of the transition ready to do meaningful and REAL business.

All businesses would immediately benefit as the economy rapidly, but in a controlled fashion, cleanses away the debt and leverage that is holding us back.

State economies will be cleansed and will take more control over their own destiny through the use of state chartered banks that will provide funding and bank control for that state, enabling low and no interest loans for the needs of the state much as the Bank of North Dakota has since the year 1919.

The dollar system that emerges would look and feel to most people almost exactly as it looks and feels today, but without the problems associated with never ending inflation.

Please follow this link to learn more details about Freedom’s Vision Monetary Reform

Political Reform works to separate special interest money from politics, thus ensuring that long term decision making can be made and that WHO controls the quantity of money remains in the hands of the people.

The short list of benefits can be found here – Benefits of Freedom’s Vision.

Swarm Politics is our method of implementing Freedom’s Vision.

Future’s Vision comes into play as the transition of our economy to Freedom’s Vision is being implemented. This third piece of the puzzle provides long term goals and focus for our nation working towards creating real and meaningful jobs while moving our nation ahead with purpose.

None of these procedures are yet set in stone, there is still much room to improve and work on them. We will be working towards creating actual legal language as we proceed. We need your help to create and enact Freedom’s Vision so that we secure our money, our freedom, our future.

Freedom’s Vision – Securing Our Money, Our Freedom, Our Future!

Mortgage Principal Writedown Won’t Save Housing

By: Diana Olick

CNBC Real Estate Reporter

And so it begins. Big gun lawmakers are making the move toward principal writedowns as the last resort to save the housing market.

In a letter to the CEOs of Bank of America, Wells Fargo, JP Morgan Chase and Citigroup, House Financial Services Committee Chairman Barney Frank wrote, “To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages.”

I agree and disagree with that statement: I agree that temporary modifications (even though the Treasury calls them permanent) are going to keep some borrowers in their homes for a while, but are really just prolonging the agony. I disagree that principal reductions will create truly sustainable mortgages.

The problem is prices. Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they’d all be insolvent.

That’s why the Obama Administration has created this kind of shell game in the first place.

I stole that shell game idea from housing consultant Howard Glaser: “We’re spending tens of billions of dollars on a tax credit to get people to purchase homes, we’re spending federal money to keep them in their homes through the modification program, and now we’re going to pay them to move out of their homes. This is not a sustainable system for the housing market. It’s a shell game. Bernie Madoff could have created this system,” Glaser told me today.

Chairman Frank is focusing on second liens, blaiming them for holding up the first lien modification process. But the largest second lien holders are also the largest first lien holders. “Large numbers of second liens have no real economic value,” writes Frank. He’s right.

These lenders are getting pennies on the dollar even when they do get some kind of payoff, and they get nothing in a foreclosure. His theory is that if you get rid of the second lien then the first lien can be written down just fine and dandy. But the banks don’t want to write down the first liens either. Why? Simple math.

Politicians want to keep borrowers in the homes because that’s the compassionate thing to do. The big bad banks just want to cut their losses right? Well, maybe not. Sure they want to cut their losses, but they also want to save the value of the housing market, and foreclosure is how they’re doing it.

Take Las Vegas as an example. Foreclosures are the whole market there, but there is actually very little inventory on the market. Why? Because banks are holding onto inventory, releasing it slowly and measurably, so as to put a bottom under prices.

I realize this is not the compassionate argument to make, but the fact is that most troubled borrowers are never going to get out from under these bad loans, even with reduced principal, and many many of them don’t want to. If you foreclose on the properties, take them back, hold them a bit, don’t write down the losses, and then slowly sell them back onto the market to hungry cash investors or buyers with good, well-underwritten loans, then home prices will stabilize.

As for the borrowers, the rental market is ripe. Rent rates are low, vacancies are high, and the hit to personal credit isn’t going to matter as much a few years from now when banks are desperate once again sell mortgages.

Breaking the American Bank – Banking Propaganda and Using the American Middle Class as a Credit Card for Wall Street Excess. How About we let the Average American Borrow from the Federal Reserve at 0 Percent and cut out the Loan Shark?

Posted by mybudget360

Banks are showing their true colors and what little regard they have for the average American.  As they advertise with cute and friendly faces assuring consumers they are looking out for their best interest, behind their backs they send in a locust of lobbyist onto Washington to do everything in their power to gut any sensible financial regulation.  The vultures are picking off every piece of what used to be the middle class.  This is the model of the new banking and financial system that many will have to contend with.  Americans have seen their access to loans and credit contract at the fastest pace in history while banks have now opened up an unlimited credit card with the taxpayer paying the bill for too big to fail.  Banks are doing their best to create a narrative that “if we didn’t bailout the banks then the world would have ended storyline” but the vast majority of Americans did not support the banking bailout.

If you want to see how quickly credit is contracting take a look at this:

The chart above merely highlights what you already know. Banks no longer trust the average American.  While they based all their bailouts on the idea that taxpayer money was needed to keep banks lending this has been a lie.  In fact, banks need the money to plug the hole that their toxic assets are burning on their balance sheets.  You can also look at the amount of credit card offers you are getting in the mail to gauge how quickly the market has changed.  No longer do banks want to give credit out (that is, unless it is government backed like mortgages which they are all the more willing to lend out).

The U.S. has over 8,000 banks with the large concentration of assets in 10 banks.  These banks continue to use bailout funds to plug the problems from the boom years.  But this is not in the best interest of average Americans.  If Wall Street and politicians were honest, the bailouts would have been labeled as a massive charity to the elite of the country who made disastrous bets over the past decade.  The public takes the lumps while Wall Street actually gets richer.  While banks don’t want to reel in their spendthrift ways, Americans are pulling back:

Americans are now having to save more and more of their money as is expected in a tough economy.  Yet banks are back to gambling in the stock market while shutting down lending to consumers.  Banks are playing the poor me card by arguing that with too much tight regulation, they can’t make loans because they are worried about future balance sheet problems.  Thanks for telling us after you took the public money under false pretenses!  But this is all a political ploy to steal from the working class.  With so many people just unable to even service the debt and rising bankruptcies, banks are now going after good customers who pay their bills on time each month just because they are running out of “options.”  Don’t be fooled.  They are reaping billion dollar profits because they are using excuses to squeeze the golden goose dry.  How about we allow the typical American to borrow at the subsidized low rate from the Federal Reserve directly?  Why in the world do we need banks to operate as loan sharks in between?  What we need is to transform the banking industry into a utility model.  A model designed to serve the people, not the banks.  After all, why should they get the privilege of borrowing at criminally low rates while everyone else has to pay the interest and subsidize their gambling adventure?

Even after all the correction in the market American households still carry an inordinate amount of debt:

A giant portion of income simply goes to pay off debt.  A large part of the debt is interest or money the banks can suck out of the neck of middle class Americans.  Banks live off this margin.  Take for example a $100,000 30 year fixed rate mortgage at 6 percent:

Principal:             $100,000

Total Interest:   $115,838

In the end, you are paying more than the initial cost and all that interest goes to who?  What purpose does it serve?  Banks are delusional and want the public to believe in the propaganda that they need to charge a higher rate because of “risk” in the loan.  Are they kidding?  We already know that they are being supported by the entire Federal Reserve and U.S. Treasury.  They can make the most insane kind of bets and ultimately the taxpayer will eat the bill.  And keep in mind many of these banks are borrowing at low levels from the Federal Reserve.  Why not allow the public to keep some of that interest?  How is this bad?  If banks were lending their own money it would be a different story but they are not.  They are creating a dishonest narrative and most Americans are not buying it because they operate in reality and not some parallel universe where you can create something out of nothing.

Just think of the billions charged in overdraft fees.  This is criminal.  Why not just default debit cards to stop once the account is dry?  Instead they want people that charge a $2 burger a $39 over draft “convenience fee” for this nonsense.  Are you kidding?  Most people don’t want this.  They find out the hard way and now billions have left the wallet of consumers for this nice little loan shark fee.  $39 can buy you lunch for a few days so this is nothing to laugh at when 38,000,000 Americans find themselves on food assistance.  The bulk of the billions are paid by the poor.  Good job banks for helping your fellow Americans.  Yet banks are leeches sucking the productive life blood out of the economy with gimmicks like this.  Time to break the banks up and turn them into utilities.

Take for example JP Morgan.  They announced a Q4 profit of $3.28 billion.  Where did they make their money?

“(Huff Po) JPMorgan’s biggest trouble spots were in consumer banking and credit card lending. The bank’s retail financial services division, which includes its mortgage operations, lost $399 million. That was worse than the final quarter in 2008, when credit markets had essentially shut down because of the collapse of banks including Lehman Brothers.

The company reported increases in mortgages that were charged off, or classified as uncollectible, including prime mortgages, the highest quality home loans. It also reported an increase in home equity loan charge-offs.”

Wait.  So mortgages are being charged off as foreclosures remain high.  And this has spread to so-called prime mortgages as the unemployment and underemployment rate remains at 17.9 percent.  So let us write off mortgages to average Americans.  Where in the world did they get those billions?  Maybe they made good money in their credit card unit:

“The credit-card lending division lost $306 million during the final three months of 2009. Results would’ve been worse had the bank not had a payment holiday in the period.”

More losses here?  So we’ve ruled out credit cards and mortgages which have become the life blood for Americans.  We’re running out of places to look for where they can make a $3 billion profit:

“Despite the ongoing problems with consumer banking, JPMorgan is still performing well because of its robust investment banking unit. As long as stock and bond markets continue to improve, the bank will be able to churn out profits and reward its employees handsomely.

JPMorgan’s investment bank earned $1.9 billion during the fourth quarter, while its asset management division generated $424 million in net income.

Fees from financing debt and stock offerings continued to surge in the fourth quarter. Debt financing fees jumped 58 percent to $732 million from the same quarter a year earlier, while stock financing fees climbed 66 percent to $549 million.”

And there you have it.  We are financing Wall Street’s wonderful gambling casino once again while the traditional banking model has collapsed.  How this isn’t the number one priority for the government and the people to fix is simply astounding.  How we have had no serious financial reform after 26 months of the Great Recession boggles the mind.

Squeezing the Last Drop of Productivity from the American Working Class – 18 Percent National Underemployment and why Wall Street and the Government are Cheering Your Financial Failure.

Posted by mybudget360

The American financial press cheered on Friday when “only” 36,000 jobs were lost in February.  This if you haven’t noticed now passes for good economic news.  The unemployment rate remained unchanged because the actual workforce continued to show a decline yet Wall Street somehow viewed this as positive developments.  And why not?  The middle class is under assault from every angle.  Things are so twisted with propaganda that many Americans now believe that the banking elite are actually looking out for the well being of American workers.  As news of the job losses somehow echoed as positive developments, more and more Americans are continually being kicked out of their homes from banks they helped to bail out.  Irony has no meaning to Wall Street.

And if we look at the details of the jobs report, it turns out that 17.9 percent of Americans are either unemployed or underemployed or flat out have stopped looking for work:

Source:  BLS

This wasn’t the only spin going on in the media.  Before the jobs report came out there was a preemptive flow of information trying to justify the job cuts by blaming it on the weather.  Yes, now instead of blaming the financial catastrophe on the actual perpetrators in Wall Street who systematically looted the American system and turned our economy into a giant casino that they leeched onto, we are now to believe people are losing their jobs because of the weather:

“(CNSnews) Ahead of Friday’s announcement, Goldman Sachs predicted that the storm might skew the job loss number by as much as 100,000 – a prediction that was embraced by officials in the Obama administration.

“The blizzards that affected much of the country during the last month are likely to distort the statistics,” Larry Summers, director of the White House’s National Economic Council, said in an interview with CNBC. “So it’s going to be very important … to look past whatever the next figures are to gauge the underlying trends.”

If the storm caused a skewing of job loss numbers I wonder how many job losses can be linked to Goldman Sachs and their casino style gambling in the derivatives markets and mortgage backed securities?  Then again, people should be happy that the unemployment rate remained steady at 9.7 percent even though more Americans are working part-time with no benefits and many others have simply fallen off the payrolls.  This is supposedly the new American dream for the middle class through the eyes of Wall Street who are selling capitalism but living in a world of corporate handout socialism.

There is a new show called Undercover Boss where a CEO goes undercover to work in the trenches with the proletariat.  As it turns out, the middle class is being worked to death and as we all know, the CEO can’t even do the job most workers do on a daily basis.  Even Henry Ford understood the interworking of the cars he was putting out.  In the end the CEO reveals his identity and gives a nice little handout to the worker and all is well in TV land.  The check is a token of what CEOs actually make.  This is the ultimate reflection of our trickle down economy where those at the top act like sociopaths and rulers of the universe but when it comes to doing the daily tasks of their company, they have no clue.  This is the de facto rule running on Wall Street.  In fact, CEO pay has grown outrageously over the past few decades as the middle class has gotten poorer:

Source:  American Progress

In reality, part-time employment has spread even to poor CEOs making 300 to 400 times the average American worker salary.  Poor CEOs and Wall Street executives need time off to enjoy their tax payer funded yachts and all expense hedonism trips to the Caribbean.  They would like to convince each other that the money they have is all through their will power and market prowess but in reality it is nothing more than being part of a corporatocracy and buying out the government with an army of lobbyist and insiders.  You have to be a self indulgent narcissist to take the economy to the brink of financial destruction in the case of many Wall Street firms and still reward yourself with outrageous bailouts.  The fact that average Americans are still not protesting in mass about this tells me that many actually believe what Wall Street is saying.  You see this when many would rather blame the working class for the ills of today than focus their energy where it really needs to go.

Wall Street loves this economic crisis.  They receive trillions in bailouts yet convince the public that what is occurring today is merely the “market” correcting itself.  So as most Americans have more and more troubles keeping up with their daily bills, companies are squeezing every little excess from those currently working.  Those that have jobs out of fear will work harder and probably demand less merit increases in the current economy.  After all, the head guy is only making 300 times what you make even though he can’t even understand the main function of the organization.  So what if the low level guy is selling toxic crap to some homeless person with no income and giving him access to a $500,000 loan.  These Wall Street tycoons are big picture thinkers and can’t be worried with the day to day operations of the proletariat unless it means turning it into a caricature for mass viewing and quick TIVO access.

You don’t think productivity actually increased?  Take a look at this:

Source:  BLS

This recession has been fantastic for productivity.  Just look at the above chart.  American workers have been doing their part during this recession.  After all, now you can hire a cadre of “contract” workers and not have to pay them one cent in healthcare support or even contribute to their pension.  Once the job is done you can kick them to the curb.  After all, this is capitalism so long as those at the top have managed to setup sweetheart deals and golden parachutes.  This is how the top 1 percent makes sure their hold on 40 percent of the nation’s wealth isn’t damaged.  And if you think financial institutions deserve this bailout money and their outrageous bonuses then companies like Circuit City or Mervyns would still be around today if that model applied across the board.  But this doesn’t apply to the general economy.  This applies to Wall Street and somehow the absurdity of it all still goes on.  The worst financial crisis since the Great Depression and not one solid reform has been enacted.  26 months of job losses and nothing.  Who is running the show?

The rise of the part-time work force is nothing new as we become more and more like Japan.  Japan bailed out their financial institutions after their failed stock market and real estate bubbles popped and today, their working class is made up of one-third part-time workers:

“(LA Times) In the world’s second-largest economy, the global financial crisis has forced part-time workers such as Kudo to face a harsh new reality.

Over the last few years, temporary employees have gone from being a rarity in Japan to accounting for one-third of the workforce of 67 million. They enjoy far fewer protections than full-time workers — placing their necks squarely on the layoff chopping block.

By March, the government predicts, 85,000 part-timers will fall prey to haken-giri, or temporary-worker cutbacks — a relatively small number compared with U.S. layoffs but high for a nation where job security has long been a staple.

On Wednesday, embattled Prime Minister Taro Aso made the plight of part-timers a major piece of a proposed stimulus package. Aso pledged to create 1.6 million jobs, partly by turning part-time jobs into full-time ones.”

Japan’s headline unemployment rate is 4.9 percent.  Just like our headline unemployment rate, the devil is really in the details.  If we continue on this path part-time work may be all that is left.

Is The Federal Reserve Insolvent?

Submitted by Tyler Durden

With Geoffrey Batt

The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed’s endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world’s largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed’s balance sheet and while we briefly note the liability side, our, and everyone else’s, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed’s capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.

First, we present the Fed’s assets broken down by key segments. The chart below shows the most recently disclosed asset holdings as per the H.4.1 statement. Of the $2.3 trillion in assets, the vast majority, or $1 trillion is held in MBS. As pointed out previously, this is only the settled amount – in reality the Fed has already purchased $1.22 trillion in MBS, which will settle over time. In practice, this merely means that the potential for asset impairment at the Fed is even greater by about 20%.The chart also shows what happens to MBS holdings if haircuts of 5%, 10% and 15% are applied.

Like any balance sheet, where there are assets, there are liabilities, and some version of capital/equity. The Fed’s liabilities are two principal components: currency in circulation, which has been at about $900 billion for an extended period of time, and the much more relevant recently line item called “Bank Deposits”, which has been popularized as Reserves with Federal Reserve Banks (or excess reserves). The Reserve line has increased from essentially nothing to nearly $1.3 trillion in the span of a few months. Furthermore, as more and more MBS purchased are settled, the excess reserve line will soon reach at least $1.6 trillion, if not more, if indeed Q.E. 2 is launched at some point in the future. The persistent discussions of potential inflation center precisely on the interplay between the green and blue blocks in the chart below: as long as the Currency in Circulation is flat, and Bank Deposits keep rising, the probability of inflation is slim to none. In essence, excess reserves exist only due to the Taylor rule implied negative Fed Funds rate. Should there be a material shift from green to blue, or from excess reserves to currency in circulation, that is when the hyperinflationary threat becomes all too real, as suddenly far too much money will chase a fixed amount of assets. This is also where the discussion about all the various mechanisms that the Fed has at its disposal to moderate tightening comes into play, whether it involves selling of assets, increase of the rate on reserves, or some combination inbetween (we point readers to yesterday’s paper from the Minneapolis Fed which discusses these options, and the caveats associated with each). While the asset reallocation debate is very interesting, it is not the topic of this discussion.

The one item on the balance sheet that is often ignored, is the Fed’s “Equity”, or as it is defined, “Capital.” As previously pointed out, this line item is currently $53.3 billion. It is shown graphically in the leftmost column of the chart below, which depicts actual Fed liabilities. Where the interesting part comes in, is when one analyzes what happens to the Fed’s capital when the abovementioned MBS haircuts are applied.

A 5% realized haircut on MBS alone would result in a complete elimination of the Fed’s capital balance. Applying a 10% or even 15% haircut, results in a capital deficiency of $50 billion and $100 billion respectively. This deficiency will grow as more and more MBS are settled, and as the serious delinquency rate on MBS keeps increasing (no danger in this moderating any time soon). 

Now in an environment, such as the one we live in today, when mark-to-myth is the new normal, and when banks are encouraged to come up with creative ways to indicate that their Residential and Commercial Loan portfolios are worth par (despite recent disclosures by the FDIC), to assume that the Fed would do something that lowly depositor banks are told not to do, would be folly. Yet, for those who prefer to live away from Never Never land, and brave this thing called reality, just what will happen if and when the Fed finally does disclose that it is, for all intents and purposes, insolvent?

The pragmatics among you will say: this is irrelevant, the Fed can just print more money and fill in any capital hole. Well, yes and no. As an increase in cash would have to be offset by a comparable increase in some asset, it is not that simple. For a refined analysis of what would happen in that moment of clarity when the world realizes the world’s biggest bank is broke, we turn to a presentation by Chris Sims, given before Princeton University, titled “Fiscal/Monetary Coordination When The Anchor Cable Has Snapped.” We encourage all readers to read this powerpoint cover to cover, as it discusses precisely the issues were are faced with today: namely a monetary policy that has run amok, seignorage, exploding excess reserves, the impact of these on “power money”, and, in general, a Fed balance sheet that is increasingly reminiscent of a drunk, rapid and schizophrenic bull in a China store.

Among other relevant things we note that as the author points-out that “Interest bearing deposits at the Fed do not (yet) count against the Federal debt ceiling” and “if substantial interest is paid on reserves, they could constitute a major leak in the US system for legislative control of debt creation or they are not backed by the full faith and credit of the US government, which has implications for inflation control” – the consequences here are material – with a $1 trillion plus in vacuum interest-collecting paper which in all other world would be counted toward the debt ceiling, the US debt subject to limit would increase from the $12.5 trillion currently to about $13.7 trillion. Add in $6 trillion from the GSEs and America is already at the dreaded $20 trillion threshold. And furthermore, what happens to the interest payments by the Fed should rates go up to 100 bps, 200 bps? On $1.6 trillion in excess reserves this is a material amount that would reinforce inflation in a circular loop, further justifying why the Fed is mortally worried about a rise in rates.

As for the topic at hand, we turn to pp 23-24 of the presentation:

• Central bank operations generate fluctuating levels of net earnings (seigniorage), most of which are turned over to the Treasury as revenue
• Central bank balance sheets sometimes go into the red. The Treasury may then recapitalize it by creating, and giving to the central bank, new government debt
• [The Fed's] Independence meant that the legislature and the Treasury did not complain [much] about seignorage fluctuations or about the effect of interest rate changes on the Treasury’s interest expense
• Fed can always “print money” to pay its bills.
• There is no possibility of a run on the Fed, since its liabilities make no conversion promise.
• A commitment to a path for inflation or the price level makes the balance sheet matter.
• Without Treasury backing, the Fed must rely on seigniorage to raise revenues, and that can conflict with inflation-control goals.

So here is the crux of the issue: the only way to deal with a mark-to-market of the Fed currently is to embrace monetization. It is no longer a question of semantics, of who promised what: it is the only mechanical way by which the Fed can dig itself out of a capital deficiency. With GSE delinquencies exploding, and with the Fed (and Congress) singlehandedly facilitating imprudent lender policy by allowing ever more borrowers to become deliquent without consequences, the MBS delinquency rate will likely hit 10% over the next 6-12 months. At that moment, someone will ask the Fed: “what is the true basis of your capital account?” And when the Fed is forced to justify a valid response, is when monetizaton will begin.

Since the market deals in expectation absolutes, all it would take for rates to breach the inflection point black swan and commence going up, is the mere possibility of open monetization.

What we hope to show with this exercise is that no course of action, even the one currently employed by the Fed, can continue in perpetuity: you can’t have infinitely low housing rates in an environment of exploding delinquencies, as even more MBS are onboarded on the taxpayer’s balance sheet. The reality is that inflationary conerns will come to a fore, and have a material impact on rates, the second all these speculations are voiced in a more reputable arena. At that point the game will be up; the Fed’s attempt to continue the status quo will be over, and the relentless rise up in rates will begin, culminating with the long-awaited Minsky moment.

As for the timing of this development? We will join the Bob Janjuah camp on this one. While few have the guts to take the money printer head on, doing so early is certainly suicidal. Yet with each passing day, all those who are fully aware that the Fed’s course is one of self-destruction, grow bolder, until finally one day a new class of investors – the Fed vigilantes will emerge, looking for cheap opportunities to make a killing (think ABX) on the other side of the “Fed trade”, which ultimately will lead to a systemic catharsis of unprecedented proportions.

At that point neither gold, nor lead will be in any way useful. Beta and gamma radiation will make sure of that.

ADMISSION By FDIC: Massive Balance Sheet FRAUD

Posted by Karl Denninger

Oh, The Off-Balance Sheet Lies Are International?

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BY RACHAEL LEE COLEMAN

rcoleman@MiamiHerald.com

The Swaps That Swallowed Your Town

By Gretchen Morgenson

AS more details surface about how derivatives helped Greece and perhaps other countries mask their debt loads, let’s not forget that the wonders of these complex products aren’t on display only overseas. Across our very own country, municipalities, school districts, sewer systems and other tax-exempt debt issuers are ensnared in the derivatives mess.

Like the credit default swaps that hid Greece’s obligations, the instruments weighing on our municipalities were brought to us by the creative minds of Wall Street. The rocket scientists crafting the products got backup from swap advisers, a group of conflicted promoters who consulted municipalities and other issuers. Both of these camps peddled swaps as a way for tax-exempt debt issuers to reduce their financing costs.

Now, however, the promised benefits of these swaps have mutated into enormous, and sometimes smothering, expenses. Making matters worse, issuers who want out of the arrangements — swap contracts typically run for 30 years — must pay up in order to escape.

That’s right. Issuers are essentially paying twice for flawed deals that bestowed great riches on the bankers and advisers who sold them. Taxpayers should be outraged, but to be angry you have to be informed — and few taxpayers may even know that the complicated arrangements exist.

Here’s how municipal swaps worked (in theory): Say an issuer needed to raise money and prevailing rates for fixed-rate debt were 5 percent. A swap allowed issuers to reduce the interest rate they paid on their debt to, say, 4.5 percent, while still paying what was effectively a fixed rate.

Nothing wrong with that, right?

Sales presentations for these instruments, no surprise, accentuated the positives in them. “Derivative products are unique in the history of financial innovation,” gushed a pitch from Citigroup in November 2007 about a deal entered into by the Florida Keys Aqueduct Authority. Another selling point: “Swaps have become widely accepted by the rating agencies as an appropriate financial tool.” And, the presentation said, they can be easily unwound (for a fee, of course).

But these arrangements were riddled with risks, as issuers are finding out. The swaps were structured to generate a stream of income to the issuer — like your hometown — that was tethered to a variable interest rate. Variable rates can rise or fall wildly if economic circumstances change. Banks that executed the swaps received fixed payments from the issuers.

The contracts, however, assumed that economic and financial circumstances would be relatively stable and that interest rates used in the deals would stay in a narrow range. The exact opposite occurred: the financial system went into a tailspin two years ago, and rates plummeted. The auction-rate securities market, used by issuers to set their interest payments to bondholders, froze up. As a result, these rates rose.

For municipalities, that meant they were stuck with contracts that forced them to pay out a much higher interest rate than they were receiving in return. Sure, the rate plunge was unforeseen, but it was not an impossibility. And the impact of such a possible decline was rarely highlighted in sales presentations, municipal experts say.

Another aspect to these swaps’ designs made them especially ill-suited for municipal issuers. Almost all tax-exempt debt is structured so that after 10 years, it can be called or retired by the city, school district or highway authority that floated it. But by locking in the swap for 30 years, the municipality or school district is essentially giving up the option to call its debt and issue lower-cost bonds, without penalty, if interest rates have declined.

Imagine a homeowner who has a mortgage allowing her to refinance without a penalty if interest rates drop, as many do. Then she inexplicably agrees to give up that opportunity and not be compensated for doing so. Well, some towns did exactly that when they signed derivatives contracts that locked them in for 30 years.

Then there are the counterparty risks associated with municipal swaps. If the banks in the midst of these deals falter, the municipality is at peril, because getting out of a contract with a failed bank is also costly. For example, closing out swaps in which Lehman Brothers was the counterparty cost various New York State debt issuers $12 million, according to state filings.

Termination fees also kick in when a municipal issuer wants out of its swap agreement. They can be significant.

New York State provides a good example. An Oct. 30, 2009, filing describing its swaps shows that for the most recent fiscal year, April 2008 to March 2009, the state paid $103 million to terminate roughly $2 billion worth of swaps — more than a quarter of which resulted from the Lehman bankruptcy in September 2008.

(You can find this report online at bit.ly/cS8ZFV.)

As of Nov. 30, 2009, New York had $3.74 billion worth of swaps outstanding. Even so, New York doesn’t have as much of a problem with swaps as other jurisdictions. Still, New York could have spent that $103 million on many other things that the state needs.

The prime example, of course, of a swap-imperiled issuer is Jefferson County, Ala. Its swaps were supposed to lower the county’s costs, but instead they wound up increasing its indebtedness. Groaning under a $3 billion debt load, the county is facing the possibility of bankruptcy.

Critics of swaps hope that increased taxpayer awareness of these souring deals will force municipalities to think twice. “When municipalities enter into these swaps they end up paying more and receiving much less,” said Andy Kalotay, an expert in fixed income.

Why is that? One reason, Mr. Kalotay said, is the use of swap advisers.

“The basic problem is the swap adviser gets paid only if there is a transaction — an unbelievable conflict of interest,” he said. “It’s the adviser who is supposed to protect you, but the swap adviser has a vested interest in seeing something happen.”

WHAT is especially maddening to many in the municipal securities market is that issuers are now relying on the same investment banks that put them into swaps-embedded debt to restructure their obligations. According to those who travel this world, issuers are afraid to upset their relationships with their bankers and are not holding them accountable for placing them in these costly trades.

“We need transparency where Wall Street discloses not only the risks but also calculates the potential costs associated with those risks,” said Joseph Fichera, chief executive at Saber Partners, an advisory firm. “If you just ask issuers to disclose, even in a footnote, the maximum possible loss or gain from the swap they probably wouldn’t do it. And if they did that, then investors and taxpayers would know what the risks are, in plain English.”

Mr. Fichera is right. At this intersection of two huge and extremely opaque arenas — the municipal debt market and derivatives trading — sunlight is sorely needed.

All You Need To Know About Bank Balance-Sheet Fraud

Posted by Karl Denninger