FedUpUSA

Archive for the ‘Defaults’ Category

What Took You So Long? (Put-Backs and Blow-Ups)

Posted by Karl Denninger

IRA put forward a nasty report on the “putback and blowup” risk issue related to the banks and fraudulent mortgages:

The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat one another. The GSE’s are going to tear 50-100bp easy out of the flesh of the banking industry in the form of loan returns on trillions of dollars in exposure, this as charge-offs on the several trillion in residential exposure covered by the GSEs heads north of 5%. The damage here is in the hundreds of billions and lands in particular on the larger zombie banks, especially Bank of America (BAC) and Wells Fargo (WFC).

….

The action “arises out of the alleged fraudulent acts and breaches of contract of Countrywide in connection with fifteen securitizations of pools of residential second-lien mortgages” Take particular care to savor the fact that these are second lien pools and that, where defaults have occurred on the primary mortgage, loss severities on the seconds will tend to be 100%. Or the cost could be more than par if you count the cost of remediation and recovery efforts.

Sigh…. how long does it take folks?

On April 20th, 2007 I wrote the following:

Why? Because every last one of the stated income loans that has been made can be PUT BACK ON THE LENDERS IF IT DEFAULTS.

And by the way, this is not limited to Countrywide (CFC). It applies to IndyMac, Downey, AHM, Washington Mutual and every other lender in the ALT-A space.

Let me restate that again so that everyone gets it – every single ALT-A lender is at risk of having every defaulted loan – no matter how long it has been since it was securitized and sold off – PUT back on them if there is any material misstatement in the paperwork!

To those of you who are claiming that this is a “Subprime” problem, that it is “contained”, that it is limited to “poor people who can’t pay their bills” or anything like that, let me point out that you are one hundred percent full of crap.

Emphasis in the original.

And on April 17th:

So while mortgage companies may maintain that they have “little” exposure to defaults because they sold these loans off to the bond market without recourse, if in fact 60 percent of the ALT-A stated income products have incomes fraudulently inflated by 50% or more those mortgage companies can probably be forced to take back each and every one of those loans.

HALF of all stated-income loans?

This will BANKRUPT every single one of these companies if it happens.

Now go look at the big bank’s balance sheets for second line (HELOC, silent seconds, etc) exposure.  70% of the outstanding dollar volume was written in California, Florida, Nevada and Arizona – on bubble houses.  The clear majority of those have a first that is underwater and thus the recovery value on those HELOCs, if they default or are “put back” due to fraud, IS ZERO.

When you look at these large banks balance sheets and then take out of their capital the likely losses under this sort of analysis you find that every single one of them will be driven into regulatory capital trouble at best.

This is just one of the issues we have ducked instead of facing.  The other big one is commercial real estate securitizations – S&P put out a report the other day in which it essentially said “if the banks have to eat the reduced value now they’re all insolvent.”

We in fact have fixed none of the underlying issues that brought down Fannie, Freddie, AIG, Bear and Lehman.  The only reason we have seen supposed “improvement” in the markets is that the government has given permission to lie to financial institutions in the exact same form and fashion (that is, hiding actual liabilities and probable losses) that brought down ENRON.

But the underlying loss is still real, still present, and still out there.  Refusing to recognize it doesn’t make it go away.  It just sweeps it under the carpet with the hope (wish really) that the institution will be able to screw you, the consumer, out of enough money to cover the shortfalls before they’re forced to recognize the already-occurred losses and thus declare bankruptcy.

If this was all “the government” that was stuck with these bad loans that were unmarketable (since they have a zero recovery value under legal collection methods they truly can’t be sold for more than a few pennies to one of those “shark” companies that cheats on the law when it comes to those rules) we might have a situation where the government could try to shift it onto the taxpayer through opaque bailouts of Fannie, Freddie and The Fed.

But a good part of this debt was in fact securitized and distributed.  Those holders, such as the FHLB that recently filed suit, aren’t the government and have no reason to sit there and absorb a loss that occurred as a consequence of allegedly-fraudulent underwriting.  For that matter neither does Fannie and Freddie, as despite their “conservatorship” they remain a publicly traded corporation and intentionally absorbing losses caused by other party’s frauds could open their directors and officers up to a derivative action (read: lawsuits a-plenty.)

No folks, these losses won’t be “buried and monetized.”  They will travel back up the chain to the last remaining standing organization that touched them, which just happens to be the zombie banks, since all the “independent brokers” that fed the bilge into these securitization factories are long gone, dead and buried.  Thus the ticking bomb will wind up exploding on the balance sheets of those “too big to fix” institutions we refused to resolve last year because we lacked the political will to go in a close one or more of these banks, and when it happens….. it will rock our world.

You’ve had nearly three years warning Washington – and investors.

When – not if – this goes off I don’t want to hear “nobody saw it coming” from The Halls of Congress and elsewhere in DC because I will be happy to run a campaign advertisement against anyone who so bleats with a copy of my TICKERS from 2007 documenting that in fact some people did see it coming – and were intentionally ignored.

(The Supreme Court recently made such speech legal…. and for that I must extend my heartfelt thanks!)

An Introspective Look At The Future Of America

By Craig Harris
earthblog.news@gmail.com

As we close out 2009 and look forward into 2010 and beyond, this has been a year of near financial catastrophe and monumental change, none of which benefited America or ordinary Americans. Late in 2008 and throughout 2009, events have happened in the US which would have been labeled unfathomable just a few short years ago, and yet already these monumental changes are expected to be filed into the memory hole and Americans are expected to believe nothing has changed.

As we exit the year, we are told the US is a laissez-faire free market economy and yet the US government is now the largest owner of housing in the US as well as the owner of last resort for some of the largest and completely insolvent US corporations. The Federal Reserve, a privately and anonymously owned and controlled corporation chartered with issuing the nations currency, were given the green light by themselves to transfer to themselves and their shareholders the people’s wealth in the form of their future labor. The FED balance sheet has ballooned to become a junk bond warehouse as they overtly and covertly buy their own debt, immune from any sort of oversight, regulation or auditing and operating above the law. Along with that, increasingly coercive brute force measures are now routinely necessary to manage and manipulate so called “free market” asset prices which are cheerled by so called “financial news media” whose board members and management are all the same people who transferred the people’s wealth to themselves. The corporate media party line idea of a “free market US economy” now seems like a distant memory and it all feels like systemic fraud, corruption, malfeasance and organized crime at the very highest levels.

During 2009 we have seen the continued collapse of American industry amid wave after wave of layoffs. The corrupt corporate media cartel likes to trot out a group of FED sponsored shills who call themselves “professors” to call this a “jobless recovery” although it’s difficult to imagine a recovery where American industry has collapsed and is now owned by the government. US cities both large and small have been decimated by the loss of the US manufacturing base. Detroit now resembles a third world country with a 50% unemployment rate. Ransacked, foreclosed houses go for a dollar apparently because no one who has a choice is willing to own property or live there. The US has an officially stated unemployment rate of ten percent and a real unemployment rate of over 20 percent. Wall Street may have recovered due to a direct injection of capital from the future labor of the people, but there has been no action taken whatsoever to improve the situation of the average citizen as the disconnect between the ruling Oligarchs and Wall Street, the real economy and the lives of ordinary Americans continues to widen. The people’s bailout money, which represents the future labor of Americans, went directly into the pockets of the people who created the crisis in the first place because they are in the enviable position of being “too big to fail”. Interestingly, or sadly, the same people and institutions responsible for and who profited from the catastrophe are still in charge and have handed even more power and control to themselves. Although there has been talk in Washington of “too big to fail” being undesirable, the result of the post collapse policies have resulted in ever fewer, ever larger players with more power and control and instead of being “too big to fail” now wield so much money and power that they demonstrate wholesale ownership of the entire US political body.

Due to the post collapse monetary and fiscal policies, the people have now been saddled up with an unpayable level of debt. The cause of the near total collapse of the financial system was too much debt and the “solution” has has been even more debt piled on to the original debt. During the year, the Dallas FED estimated the financial obligations of the US government at 99 trillion dollars. The head of the TARP program estimated the bailout cost at 24 trillion dollars. Totaled together the US has in the neighborhood of 120 trillion dollars of current and future obligations on an annual revenue of around 2 trillion dollars which is falling due to high unemployment, higher state and local taxes and fees and lower wages. Cutting that down to size, imagine earning 200,000 a year and having a debt of 12 million dollars. In short, the US dollar has become a token of an unpayable debt and thus the anchor of the entire global financial system is a ponzi fraud. It becomes impossible to compute the value of anything as measured in a fraudulent currency that represents an unpayable debt.

The banking system is not lending money because it’s still insolvent. The people, having lost over 5 trillion dollars in the real estate bust are also collectively insolvent. Many US states and cities are bankrupt or near bankrupt. One in nine Americans subsist on food stamps. Even as a college education has become unaffordable to most Americans, college graduates now find themselves jobless. One in seven households now have their adult children living back at home due to the inability to find a job. The homeless population is growing and tent cities sprouted up across America during 2009. The estimated homeless population in LA alone is 40,000 people a night. People in the US if they have a job are working longer and harder to make the same income. Wages have remained stagnant and the real cost of living continues to spiral ever higher for ordinary Americans. The new man in charge, elected on a platform of “change”, has delivered his change in the form of change=no change, or how do you like your change now?

By any metric you choose, whether it’s the median home costing half the median income even at artificially low interest rates, to the ballooning cost of insurance, healthcare, education or anything else people spend their money on, the US is experiencing a rapid decline in the standard of living for ordinary Americans and an emerging ultra rich ultra powerful shadow oligarch rule amid a generalized and widespread financial and social decay. The US population is becoming a nation of voiceless serfs with fewer and fewer remaining civil and property rights and a rapidly decaying standard of living, the antitheses of everything America is said to represent and strive for.

The hypocrisy and fraud of the oligarch rule corporate media story line is now nearly impossible for an educated, informed adult to digest. As Jim Grant pointed out recently, according to Section 19 of the Coinage Act of 1792, the penalty prescribed for any official who fraudulently debased the people’s money is death, yet in 2009 debasing the people’s money resulted in a “man of the year” award from the self serving corporate media who will be next in line for a bailout from the people for their good service to the new oligarch rule. This organized crime, this theft, occurring right out in the open, may explain why employees of the largest US financial institution are now not allowed to gather in groups larger than 12 outside and their executives are carrying firearms. In an affront to the intelligence and sensibility of any citizen of this planet, the new US president expanded a war he was elected to end and started a new frontier in Pakistan, for that he was awarded a Nobel Peace Prize. The people who were awarded hundreds of billions of dollars of the people’s money because they lost all their money are skimming millions and billions off the top for themselves and their associates in what they call “bonuses”. 2009 has been a year of egregious assault on the American public by the people in charge.

The “people’s representatives” as they like to be called, no longer represent the people at all but instead solely represent and pledge allegiance to the special interests and corporate lobbyists who have bought and paid for their votes, along with the media oligarchs who control who sits in the seats. Regardless of whether they call themselves Democrats or Republicans, they are a group of self important, self serving, morally bankrupt, corrupt, clueless buffoons and criminals running unchecked by a complicit corporate media.

Every American should be ashamed, embarrassed and sad that their country has been bought and sold to an organized criminal enterprise which includes the entire political body and the media. The only thing the “people’s representatives” have in common is contempt for the people they are ostensibly representing. It is revolting for any American to watch these cretins heaping praise Ben Bernanke at the congressional theater of the absurd. His institution has already debased the dollar by 95% and failed miserably in every mandate they had since they took over in 1913. If any American has managed to retain or save any money, he can now put it on deposit in their banking system and earn a negative real return (a loss of his purchasing power) while at the same time the banks will take his deposit and loan it to his brother at 30% interest. So Mr Bernanke the money printer has control over the largest legal loan sharking operation ever concocted and it is funded by the America people, against the America people.

During 2009, the leadership has taken actions which benefit the corporations and special interests who own them, while showing nothing but wanton disregard for the millions of citizens whose lives their sponsors have destroyed. What we are headed towards in the US if we are not there already, is a Straussian society of ultra rich, ultra powerful oligarchs and a serfish powerless population with no middle class to speak of. The US president De Jour is, and from here on out will be a yes man, subservient to the ultra powerful too big to fail oligarchs who control the money and power and are responsible for putting him in the drivers seat. This is not compatible whatsoever with prosperity, democracy or anything else the US still holds itself out as. Here at the end of 2009, the United States has morphed into a bankrupt fascist oligarchy which owns the military machine as a policy enforcement tool, the entire political body and the media. It isn’t going to fix itself because the fraud, corruption and malfeasance is systemic. It meets every definition of organized crime and it’s all happening right out in the open.

In my way of thinking, this is not at all unlike the breakdown of the Soviet Union where for a period of time a sort of mafia of oligarchs weilded the wealth and power, carved up the remaining wealth of the country among themselves and had their way with the country amid a climate of manufactured fear, chaos and decay. The key point being that the people in control are out to make money and increase their power at the expense of the citizens. Mr Orwell said “the purpose of power is power” and that statement needs to be well understood. These megalomaniac, sociopathic aspirations of ever more power and control by an elitist group of criminals come at the expense of America and future Americans. It doesn’t matter whatsoever to the oligarchs because they have property waiting in Croatia. When the remaining wealth has been extracted from America, they will all pull out and the citizens will be left with a rusted out bankrupt hull. I believe the circumstances for this eventuality have already been created, just not yet realized due to the enormous size of the economy and the momentum it has. In other words, I believe it’s collapsing as fast as it can although living through it seems like slow motion. When viewed from the future in a historical context however, I think it will have seemed fairly rapid.

The financial markets have deteriorated into a Las Vegas casino atmosphere where the the only consistent winners are the house and the too big to fail entities trading on foreknowledge and inside information shared freely between the treasury and the few remaining large trading houses. The entire system is bankrupt, fraudulent, corrupt and irretrievably broken. The anchor of the global financial system, the US dollar, has become the worlds largest ponzi scheme and the remaining 95% of the worlds population would like a new, viable standard. At this point however, despite any action the FED may or may not take, the US debt is far too large to ever be repaid. It is questionable if the interest payments will even be serviceable if interest rates were to rise, and the only reason interest rates are low is because the FED is using brute force. At this time the only way out without a complete collapse is to inflate away the debt, thus turning a deflationary collapse into a long period of inflationary decay and declining standard of living.

I have been of the opinion that what we saw in October 2008 was a collapse of the global fiat financial system which was more or less expected due to the collapse of the real estate bubble. I have reminded my subscribers that when I was forecasting a drop in real estate prices of as much as 50% during the heyday of the mania, that sounded unfathomable. What I believe is in store for our future sounds nearly as unfathomable now as that idea did back then. I believe the reason it sounds unfathomable is due to the constant barrage of lies, misinformation and propaganda from the tight knit corporate media oligarchy which has essentially merged with the new power structure of the US in a corrupt, overt form of fascism that would make Mussolini blush or Goebbels the propagandist nod in approval.

Over a period of decades and with one FED induced serial bubble after another, the financial system finally reached an unsustainable level of debt and leverage in 2008. When the FED started raising interest rates, when the real estate bubble burst, it involved so much debt and leverage that the whole system failed, pricing models and risk models failed, and the banking system quickly became insolvent.

I believe we have already had a systemic collapse, and the only thing the FED can do now is alter the look and feel of the collapse and to manage the allocation of the remaining wealth. In the end, whether by deflationary collapse or inflationary decay, the result of the collapse will feel the same to the US general population regardless of the interim path taken.

If the FED had done nothing, the whole system would have quickly degenerated into a deflationary collapse and failure of the financial system due to insolvency. The course the FED chose however is the one myself and many others predicted beforehand…the FED chose to solve the problem of too much debt by creating even more debt by taking the unprecedented action of buying it’s own debt under euphemisms like “quantitative easing” and “debt monetization” and also covert buying to artificially force negative real return rates of interest. Through this course of action, the FED so far has been able to turn what would have been a rapid deflationary collapse into a decaying inflationary depression which is euphemistically called “a recession that is now over” by the six people who control 96% of the global media and attempt to pass off propaganda as “news” to a woefully mis informed, dumbed down and apathetic general public.

Going forward, If the FED doesn’t buy enough of their own debt, then interest rates on the long end would rise and the risk becomes a deflationary collapse into insolvency for the FED and it’s banking system. If interest rates remain effectively at zero on the short end and artificially suppressed by quantitative easing on the long end, then the real estate market can recover and the banks can regain solvency. If interest rates rise as the free markets would argue for however, then the real estate market sinks even further, the US dollar rises, and greater insolvency of the banks follows. The higher interest rates go, the thinner the knife edge gets and the FED would quickly find itself staring into another October 2008 collapse kind of situation. On the other hand, if by buying enough of their own debt they can keep short and long term interest rates down, then the free money percolates through the banking system, puts pressure on the dollar, lifts commodity and real estate prices and pulls out of the collapse via inflating away the debt so long as they can avoid run away hyperinflation in the process. This is the path we have traveled throughout 2009.

The key point is that the FED has had the option of doing two things…creating even more debt in order to save itself and the banking system, or do nothing and watch themselves collapse into a mass of failure, loss of power and control, insolvency and domino style bankruptcy and default. They have chosen the expected course, which is to increase the debt and print money, which is the way they save themselves and their banking system. In short, given a choice between saving the people and saving themselves after a collapse, they have taken the expected course which is to attempt to save themselves. What else would you expect? If they had wanted to save the people they would have taken the peoples bailout money and handed it to them in the form of a check. Instead they handed it to the banks.

Although they have been somewhat successful in reducing the insolvency of the banking system, they have effectively created a giant wealth transfer mechanism whereby all the money that disappeared in the collapse was re created out of thin air and given to the banks and wall street. I think of it as a sort of shell game. The money disappeared from Mom and Pop’s 401k and re appeared on the balance sheets of the banks via freshly created new money (debt). As a result, we have something still called “free market capitalism” which is not free market capitalism at all. We have emerged from this crisis with a sort of financial oligarchy where a few entities who control all the wealth and power also control politics and media. Understanding this will help to understand issues like “healthcare reform” which will involve you paying more and getting less, with the primary beneficiaries being the oligarchies who control health care and insurance.

The one major point I have to make at this time is throughout 2009, there was no action taken that put the average citizen in a better position, but instead during the course of the year there was a gigantic wealth transfer from the citizens to the banking system, effectively orchestrated by the so called “people’s representatives” who are in fact, all owned by the banking system and Wall Street with half a dozen or so oligarchies and lobbyists in a public display of fraud, malfeasance and corruption that sets a new historical precedent.

I have been and remain of the opinion that the ultimate “solution” to this crisis will be for the entities who now control the wealth and power to accumulate even more wealth and power via a global central bank and global currency which now for the first time in public has been discussed on and off throughout 2009 and described as the New World Order by such luminaries as Henry Kissinger. So looking out beyond 2010, I see a new global reserve currency emerging and a global central bank which will effectively also be a global governing authority where the heads of state effectively report to the group of central bankers and their anonymous shareholders who effectively control the money, power and politicians on a global scale. When the global currency is introduced, only then do I expect a sort of collapse of the US dollar versus this global currency. In this way, the world can carry on while the former global reserve currency called the US dollar will be free to depreciate to a level where solvency is regained and the now unpayable US debt is inflated away to the point where it can be repaid in depreciated dollars. US citizens will experience a continued decay as the US becomes to resemble more and more, a third world country. Detroit is already there. The corporate media won’t show it to you but if you do a youtube search on Detroit what you see will shock you.

My view of the world tends to be the long view. Throughout 2009 I have been positioned and trading in in various hard assets including but not limited to gold silver, back month crude oil, Soybeans, raw land and Americana. I own and trade some Chinese shares but no US equities or bonds. I have lost confidence in the US leadership. I have lost confidence in the fairness of the “system” where some elite entities are free to keep the profits and nationalize their losses. I have opted to opt out by embarking on a long term effort to transfer more and more capital “off wall street” and their organized crime ring they call the banking system, and instead investing in things without fraudulent or impaired balance sheets. At some point in the future, I want to be short US 10 and 30 year bonds because it is nonsensical to me that anyone would be willing to loan a bankrupt country money for 30 years at an interest rate of 4% or so. The only reason this situation exists today is due to the FED monetizing debt and attempting to manipulate the long end using brute force.

So as we head off into 2010, I see a lot of uncertainty in the short term. If interest rates rise and the US dollar gets stronger, by mid year I would expect a repeat of October 2008. What I expect to happen over the longer term however is that the FED will ultimately print enough money to attempt to slowly inflate the debt away to a manageable amount amid a generalized and severe decay in terms of the standard of living for Average Americans. At some point along the line, I expect the world reserve currency role to be moved into a global currency and for the US dollar to be allowed to float against it without the benefits associated with the world currency role, and for the US standard of living to continue to decline and eventually decay into a societal collapse followed by something different. I expect China to emerge as the dominant economic power in the world and to purchase a large amount of US assets. Somewhere along the line I also expect the Nobel Peace Prize recipient to bomb Iran because he will be ordered to do so by the people who control the money.

Personally, based on what I see coming over the long term I have elected to forego city life and have embarked on a long term project in the picturesque Appalachian foothills in an effort to increase my degree of self sufficiency and insulate myself from the continued decay and declining standard of living sweeping the country. My long view for the US is high inflation which will not show up in the government’s fraudulent statistics, along with a declining standard of living, increasing decay and ultimately leading to chaos, societal and government collapse in the US within a decade or two, maybe sooner.

I would like to end by quoting Marc Faber with one of the most compelling quotes of 2009. I find this quote compelling because the price of anything as measured by a fraudulent standard is meaningless. To me, it is a gift to be able to still exchange US dollars for anything with real value.

“I would buy every three months some gold and not worry so much about the price because the weight stays the same”

Good morning, worker drones: This Week in Mayhem

by Project Mayhem

Project Censored releases top censored news stories of 2009, Market Skeptics highlights catastrophic fall in global food production, gold bounces off $1100, Copenhagen succeeds in building global governance framework, Pakistan and Yemen sink further into chaos..

LAST WEEK IN MAYHEM

Project Censored releases list of 25 censored news stories of the past year

* 1. US Congress Sells Out to Wall Street
* 2. US Schools are More Segregated Today than in the 1950s
* 3. Toxic Waste Behind Somali Pirates
* 4. Nuclear Waste Pools in North Carolina
* 5. Europe Blocks US Toxic Products
* 6. Lobbyists Buy Congress
* 7. Obama’s Military Appointments Have Corrupt Past
* 8. Bailed out Banks and America’s Wealthiest Cheat IRS Out of Billions
* 9. US Arms Used for War Crimes in Gaza
* 10. Ecuador Declares Foreign Debt Illegitimate
* 11. Private Corporations Profit from the Occupation of Palestine
* 12. Mysterious Death of Mike Connell—Karl Rove’s Election Thief
* 13. Katrina’s Hidden Race War
* 14. Congress Invested in Defense Contracts
* 15. World Bank’s Carbon Trade Fiasco

http://www.projectcensored.org/top-stories/category/two-thousand-and-ten-book/

2010 Food Crisis for Dummies

The countries that make up two thirds of the world’s agricultural output are experiencing drought conditions.

The following article is HIGHLY recommended for anyone trading in the commodities futures markets or interested in possible future outcomes in 2010.

“If you read any economic, financial, or political analysis for 2010 that doesn’t mention the food shortage looming next year, throw it in the trash, as it is worthless. There is overwhelming, undeniable evidence that the world will run out of food next year. When this happens, the resulting triple digit food inflation will lead panicking central banks around the world to dump their foreign reserves to appreciate their currencies and lower the cost of food imports, causing the collapse of the dollar, the treasury market, derivative markets, and the global financial system. The US will experience economic disintegration.

So far the crisis has been driven by the slow and steady increase in defaults on mortgages and other loans. This is about to change. What will drive the financial crisis in 2010 will be panic about food supplies and the dollar’s plunging value. Things will start moving fast.”

http://www.marketskeptics.com/2009/12/2010-food-crisis-for-dummies.html

Gold bounces off $1100

Gold has bounced off $1100, as expected, but the question  is whether this level will hold.  This is almost impossible to predict…what we do know is that gold is going much higher intermediate-term.  Short-term, we could see pricing pressures on gold until we get a new leg down in the economic crisis and/or war in Central Asia.  Things are heating up around the world, particularly in Yemen and Pakistan.  Regardless, we expect a hard floor for the gold price in the range of $1000-1050.  We will watch carefully for the next two business weeks leading into Jan 1st, as this will involve year-end mark-to-market for gold on many balance sheets so expect volatility.  In terms of the next year (2010) we are expecting a dollar crisis so it would be wise to own gold under such circumstances.

Tarpley – Hyperinflation possible in 2010
http://eclipptv.com/viewVideo.php?video_id=9059

Gerald Celente – 2010 – Prepare for the Worse
http://eclipptv.com/viewVideo.php?video_id=9060

Copenhagen Treaty yields start of Global Governance

The Copenhagen treaty was a success despite the massive scientific scandal; the global bankster-gangsters got precisely what they wanted.  The objective was to establish the framework for a world government, which is often called ‘global governance’ in policy planning circles. The seeds of this were successfully planted.  There were two main accomplishments at Copenhagen:  1) agreement on a global transaction tax on GDP, paid to the World Bank  and 2) agreement on preliminary funding for global governance, conservatively $100bn by 2020 but we believe this number will be much much higher (probably in trillions).

“In 2004, it was less than $300 million. But in 2005, the trade really started to soar, ending the year with $10.8 billion-worth of transactions. A year later, in 2006, the “carbon” market had grown to $31 billion. In 2007, again it more than doubled its turnover, to $64 billion. Last year, it did it again, reaching a colossal $126 billion. By 2020, some estimates suggest the annual value will reach $2 trillion.”

http://eureferendum.blogspot.com/2009/12/protecting-big-carbon.html

“This is the biggest heist in history. As they poured carbon over snow-covered Denmark from their gas-guzzling jets, world leaders were congratulating themselves on securing a deal which will make their backers and financiers a trillion pounds a year. These riches will come from buying and selling permits, the so-called ‘carbon credits’ which allow industry and electricity generators in developed countries to emit carbon dioxide.

The frenzied negotiations we have just seen were never about ’saving the planet’. They were always about money.”

http://www.dailymail.co.uk/debate/article-1237235/ANALYSIS-Saved–trillion-pound-trade-carbon.html

Copenhagen accord keeps Big Carbon in business

“The part played at Copenhagen by all the tree-huggers, abetted by the BBC and their media allies, was to keep hysteria over warming at fever pitch while the politicians haggled over the real prize, to keep the Kyoto system in place.

The only tree they were concerned with hugging was the money tree and all the vast political apparatus that now supports it, allowing governments to tax and regulate us into handing over ever more of our money, largely without realising it, every time we drive a car, fly in a plane, pay our electricity bill or carry out any of a vast range of activities that involve the emission of CO2. ”

http://www.telegraph.co.uk/comment/columnists/christopherbooker/6845686/Copenhagen-accord-keeps-Big-Carbon-in-business.html

Saudis rain missiles down on Yemen

Saudi warplanes rain ‘1,011 missiles’ on Yemen
“Houthi fighters say Saudi warplanes have fired some 1,011 missiles on the borderline with Yemen where the Shia population is already under heavy state-led and US-aided bombardment. “

http://www.presstv.ir/detail.aspx?id=114162&sectionid=351020206

US air raids kill 63 civilians in Yemen
“Yemen’s Houthi fighters say scores of civilians, including many children, have been killed in US air-raids in the southeast of the war-stricken Arab country.”
http://dprogram.net/2009/12/19/us-air-raids-kill-63-civilians-in-yemen/

Obama Ordered U.S. Military Strike on Yemen Terrorists
“The Yemen attacks by the U.S. military represent a major escalation of the Obama administration’s campaign against al Qaeda.”

Pakistan on brink ;  Obama feigns surprise

Internally displaced Pakistani women and children, aka alQueda

Pakistan continues to deteriorate, as we have been expected since the election of Obama.  There is definitely a new war brewing in the region.  The most likely conflict is either an event justifying going into Pakistan, or an event justifying going into Iran.  In either case, doing so would land us in deep deep trouble, and would escalate into a regional war.  Pakistan is a nuclear-armed country, with ballistic and cruise missiles, and Iran has advanced Russian weaponry.  War in either country would be a big mistake with catastrophic consequences for the world, but our fearless leaders do not seem to care about the people of the world or their lives.  Regardless, the CIA and ISI are doing an excellent job of destabilizing Pakistan, which seems to be the policy objectiive.

Pakistan political crisis deepens

“THE political crisis in Pakistan has deepened after the Government’s anti-corruption agency sought a warrant for the arrest of the country’s Interior Minister.”

http://www.theage.com.au/world/pakistan-in-crisis-as-creeping-coup-unfolds-20091219-l6lf.html

Symptom of a Deeper Malady Pakistan’s Refugee Disaster

In the meantime, with the winter months fast approaching, hundreds of thousands of “unintegrated” refugees who do not find more durable shelter, even as military sweeps continue, could face exposure and starvation. Some aid groups are demanding that the United States pressure Pakistan to respect international humanitarian law and allow independent access to the refugees.

THIS WEEK IN MAYHEM

source: cmegroup

Not much happening this week due to the Christmas holiday. Tuesday brings us the GDP number and existing home sales, Wednesday is new home sales, and Thursday is durable goods orders and jobless claims.  This week we are watching Yemen and Pakistan.

Have a great week and Merry Christmas

Project Mayhem Research (PMR) is a DC/Baltimore-based grassroots think tank dedicated to exposing corruption worldwide. PMR is affiliated with Zerohedge.com, a popular and growing anti-corruption site, through contribution of free articles for the public. Topics include the politics of war and weapons systems, unexpected applications of cybernetics, the growing international surveillance state, global warming ‘deindustrialization’ economics, broad systemic international corruption , in-depth policy analysis of studies from bank and military funded research groups, genetic analysis and surveillance of pandemic influenza, corruption in the international gold market, the power structure and history of the global elite, and analysis of their political objectives expressed through monopolistic international finance capital (read: powerful banks) between now and 2050.

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There Is No Way Out Of This Box….

Each and every one of these positions has been brought up by myself in the past in previous Tickers.  We have seen time and time again over the last two and a half years that banking regulators coddle the regulated entities and enable lying, cheating and in many cases outright fraud.

As our government has fiddled our financial system has burned.  It has not been stabilized by the actions of The Fed and Treasury; rather, it has been made more dangerous and less stable while those who committed evil and knowingly-unsound acts have been allowed to further asset-strip Americans and enrich themselves.

But irrespective of what people - including Congress, The Administration or even Wall Street want, the math simply can’t be argued with.

Beware and be prepared America.

By Bill Bonner

12/04/09 London, England – Early this week, the world’s largest central bank, the Federal Reserve, announced plans to exit its monetary stimulus efforts. It unveiled a new tool – reverse repos – to help speed the work.

The term, “unintended consequences” was probably invented to describe such tools. Give the feds a saw and they will cut off their fingers. Give them a pistol and they will blow off their toes. Give them a chainsaw…please!

The private sector debt crisis of 2008-2009 will almost certainly lead to a public sector debt crisis sometime between now and eternity, if not sooner. In the standard narrative, governments must stimulate their economies out of the slump. Leading economists propose it, then defend it…and then, when it doesn’t work, they call for more of it.

Now those economists are claiming victory and many are calling on the Fed to withdraw its monetary stimulus before it shows up as consumer price inflation. They’re hoping the Fed can head it off by sopping up the surplus liquidity before it is too late.

Optimists expect mild inflation in a decent recovery. Pessimists fear the feds may have waited too long; they think they see higher rates of inflation coming. Here on the back page we see no recovery…nor any inflation. At least, not yet. Instead, we are blind. We see nothing. But as for what is coming…a slow motion depression wouldn’t surprise us. Neither would the collapse of the public debt market

There is always a wide gap between the feds’ reach into the economy and their grasp of what they are really doing. When the Fed increased reserves in the banking system, the idea was simple enough. More reserves would allow the banks to lend more. In turn, more credit would allow consumers to spend more. Ergo, the recession would soon be over.

But the more reserves the Fed pumped into the banking system, the more reserves the bankers didn’t lend out. In 24 months, excess reserves (beyond what was needed for loans) expanded 500 times from the level they had been for the previous 30 years. If the banks chose to lend these reserves they could multiply them into another $10 trillion to add to the money supply. Instead, in the third quarter, the US suffered a record contraction of bank lending, according to the Federal Deposit Insurance Corporation. Lending to households and business is in a steep decline. Nothing like it has happened since WWII. Total credit outstanding is falling too. The banks are barely even lending to the US government from which they got the money in the first place.

“Banks, in aggregate, just absorbed the additional reserves by allowing their ratio of reserves to deposits to balloon,” reports Charles Goodhart in The Financial Times, “…so the multiplier collapsed to zero… Why?”

Quantitative easing had “unintended consequences.” Bankers competed for yield with the deepest pockets in the monetary universe – the central bank itself. When the feds bought Treasury bills they drove yields down to such skimpy levels that the incentive for risky private loans was nearly lost all together. Better to leave the money on deposit at the Fed.

No loans, no multiplier. No multiplier, no recovery. Instead, the feds take a dollar’s worth of supposedly “idle” resources out of the private economy (actually, savings that people hoped to spend or invest later); squander it on bribes, bailouts or boondoggles; and get 90 cents worth of ‘recovery.’ Then, when a real recovery doesn’t come, they spend two dollars.

Where this will end up? With the multiplier out of action, consumer price inflation – and a recovery – seem far away. And the feds are helpless. What? What about more government spending? Or dropping hundred-dollar bills from airplanes? But those tools have self-mutilating effects too. They jeopardize governments’ access to deficit financing.

“Britain risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full-blown debt crisis over coming months,” said an article in Tuesday’s Daily Telegraph.

Sooner or later, lenders will worry about inflation and the risk of default. They’ll demand higher interest rates. Treasury bond yields will rise, in real terms, even in a deflationary world. These higher rates affect public finances like a cold draft on a pneumonia patient. As governments pay more to borrow, their condition deteriorates. The odds of default increase. Some, like Dubai World, will be forced to postpone payments. Others just shake and shiver. The slow motion depression continues. If we are lucky…and nothing goes wrong.

Regards,

Bill Bonner,
for The Daily Reckoning

By Economic Forecasts & Opinions

Stock markets around the world cracked on Friday with the Dow Jones industrial average down more than 150 points (Fig. 1), and commodities plunging as Dubai debt woes unnerved investors, and sent tremors of uncertainty throughout all markets.

The crisis flared after Dubai, a part of the United Arab Emirates (UAE) federation, asked to delay interest payment for six months on $60 billion of debt issued by the state-run conglomerate Dubai World and its main property unit Nakheel.

Concerns that a government-backed investment company risked default ripped through world markets. Investors read it as a sign of yet another sovereign implosion after Iceland and Ireland, and recoiled from risk and piled into dollars.

Las Vegas on Steroids

Dubai World has served as Dubai’s main driver of growth, operating ports, transportation groups, spearheading real-estate & infrastructure projects both at home and abroad. Its real-estate subsidiary Nakheel built Dubai’s iconic palm-tree-shaped island, packed with luxury villas and hotels, many still under construction. Real estate and construction accounts for about 23% of Dubai’s GDP.

With little oil, Dubai financed much of this rapid real estate development with debt. After incurring its estimated $80-$90 billion of debt in a four-year construction boom to transform its economy into a regional financial and tourism hub, Dubai suffered the world’s steepest property slump in the first global recession since World War II.

Deutsche Bank estimates that Dubai’s property prices, both commercial and residential, have halved since August last year, and could fall a further 15-20% this year.

U.S. Banks Less Exposed

Most analysts believe U.S. banks are probably less exposed than European rivals to a potential debt default by Dubai World, but a lack of transparency and the interconnection of the modern financial system make it difficult to know which institutions are ultimately exposed.

Dubai World’s largest creditors are reportedly domestic banks in Dubai and Abu Dhabi. MarketWatch noted data from the Bank for International Settlements which put cross-border banking exposure for the UAE as a whole at $123 billion at the end of June. Of that total, European banks hold 72%, with the United States and Japan only holding 9% and 7% of the exposure, respectively. The United Kingdom is by far the biggest creditor with a share of 41%.

Reminder of Other Risks

On a global scale, Dubai World’s debt problem seems relatively minor, but it illustrates the impact from one tiny country in an increasingly interconnected world. The Dubai news also cast doubt over the strength of the U.S. economic recovery, and the prospects for a bottoming of property prices.

Commercial Real Estate

As pointed out in my previous article that the commercial real estate sector posed a much greater threat than the over-hyped “mother of all carry trades.”  The Dubai debt crisis further reinforces this viewpoint.

The potential for contagion from Dubai’s debt woes could further unhinge an already fragile U.S. commercial real estate sector, whose values have already fallen 42.9% from their 2007 peak, close to the lowest since 2002, according to Moody’s. (Fig. 2) The latest Moody’s projection is for prices to bottom at 45-55% below their peak, but could drop as much as 65% from their peak in a “stress case”.

As commercial property values fall, debt defaults rise. The $3.4 trillion outstanding in debt backed by commercial real estate poses a real threat to the recovery. Trepp LLC reported that last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8%, more than six times the year earlier level. Hotel loans, at 8.7% distressed, have begun falling into delinquency faster than any other kind of commercial real estate debt.

Write-downs and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg. Any further deleveraging and the resulting credit tightening from commercial real estate would impede the financial sector and probably derail the U.S. economy sending it into another recession. 

Housing Market Mortgage Crisis

So far, the appearance of recovery in the housing sector is being driven primarily by reduced prices combined with federal programs to lower mortgage rates with the goal of bringing more buyers into the market.

Based on a study released by Zillow.com, the foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. (Fig. 3) While subprime borrowers are still a factor in the current foreclosure epidemic, it’s becoming increasingly apparent that the weak labor market is the driving force behind the mortgage crisis we face today.

According to the Mortgage Bankers Association, one in seven U.S. home loans was past due or in foreclosure as of Sept. 30, putting that quarterly delinquency measure at its highest level since the report’s inception, 1972, and up from one in ten at the beginning of the year.

The continued surge in delinquencies suggests that a recovery in the housing market could be hindered by the weak job market as well as by further fallout from the easy money and loose lending practices of the past. The foreclosures and delinquencies are expected to keep rising well into 2010, not leveling off until the unemployment rate starts to moderate.

In a study by First American CoreLogic found that one in four of all U.S. mortgage-borrowers owe more than the value of their properties in the 3rd quarter. And many experts didn’t expect U.S. home prices to hit bottom until early 2011, perhaps falling another 5-10%, as more foreclosures get pushed onto the market.

Negative equity is another outstanding risk hanging over the mortgage market.

Dubai Is No Lehman

The circumstances behind Dubai’s moves are murky, making it hard to gauge the exact risk to the pertaining bonds and Dubai’s own general creditworthiness. UBS cautioned that Dubai’s overall debt “might be higher than the generally assumed $80 billion to $90 billion, due to potential off-balance sheet liabilities. These could include unlimited and unquantifiable amount of credit default swaps (CDS) and other derivatives against the underlying assets, and once unraveled, could potentially erupt into a subprime-like crisis.

The current expectation; however, is that there’s a good chance that Dubai’s problems will probably prove a local issue. Most likely, Dubai, or its neighboring emirate, Abu Dhabi, won’t risk tarnishing their images and reputation further, and will come up with a reasonable resolution.

Even if Dubai goes into sovereign default, the amount is probably not enough on its own to threaten the financial system since any actual losses would be a fraction of the total. So, the problems in Dubai are unlikely to be as serious as last year’s Lehman Brothers collapse, nor is it a reflection on the ability of emerging markets to lead a global economic recovery.

Rational Expectations?

But Dubai could well spur a broader crisis of investor confidence in overly leveraged economies as market confidence world-wide is still fragile from the severity of the financial crisis.  The debts of many emerging markets have risen even further as the countries governments have fought the ravages of the global recession by issuing more stimulus debt to fill the gap voided by private investment.

The spread of credit-default swaps on developing-nation’s bonds jumped 14 basis points after the Dubai news broke, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. There is also a clear sign of potential contagion effects of global risk aversion on basically all risky assets, with the dollar and yen being the prime beneficiaries.

Rational expectations or not, for now, the Dubai crisis is simply a reminder that the severe global recession has relegated much debt to near junk status, and there still remains a high degree of uncertainty as to the percentage recoverable on all outstanding debt which is going to be coming due over the next 5 years.

Despite some seminal signs of green shoots in the news headlines during this 9 month liquidity driven rally in many asset classes around the globe, we should be reminded that all that glitters is not gold, and that the global economic recovery is still on shaky ground.

#  “I know the odds are against me, but if there’s a win I’m gonna find it!”  ~Goku  #

Economic Forecasts & Opinions

Karl Denninger Speaks at the American Liberty Alliance Tour in Tallahassee, Florida – October 2, 2009

If you don’t yet fully understand what is being perpetrated upon us in this country, you will wonder no longer, after watching these videos.

Note: The videos are misnumbered, but presented here in their correct order.

Part 1:

Part 2:

The Banking System Is Insolvent – October 1st, 2009

The entire banking system and likely The Fed, given the quantity of Fannie and Freddie paper it has been and is “eating”, is insolvent. These facts are why the government is lying – they’re well-aware of the near-zero cure rates and know that these facts mean that the banking industry has nowhere near sufficient capital to withstand these losses without folding like a paper cup getting stomped on by an elephant.

Well put and sadly true. Our entire banking system has been insolvent for some time, and this fact has been hidden from the public by a series of lies, misdirection and obfuscation. Read the rest at the link above.

? Washington’s Blog.

Why isn’t the government breaking up the giant, insolvent banks?

We Need Them To Help the Economy Recover?

Do we need the Too Big to Fails to help the economy recover?

No.

The
following top economists and financial experts believe that the economy
cannot recover unless the big, insolvent banks are broken up in an
orderly fashion:

• Nobel prize-winning economist, Joseph Stiglitz

• Nobel prize-winning economist, Ed Prescott

• Dean
  and professor of finance and economics at Columbia Business School, and
  chairman of the Council of Economic Advisers under President George W.
  Bush, R. Glenn Hubbard

• MIT economics professor and former IMF chief economist, Simon Johnson (and see this)

• President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)

• Deputy Treasury Secretary, Neal S. Wolin

• The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine

• The Congressional panel overseeing the bailout

• The head of the FDIC, Sheila Bair

• The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz

• Economics professor and senior regulator during the S & L crisis, William K. Black

• Economics professor, Nouriel Roubini

• Economist, Marc Faber

• Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

• Economics professor, Thomas F. Cooley

• Former investment banker, Philip Augar

• Chairman of the Commons Treasury, John McFall

Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.

In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer – who was Ben Bernanke’s thesis adviser at MIT – say that – at the very least – the size of the financial giants should be limited.

Even the Bank of International Settlements – the “Central Banks’ Central Bank” – has slammed too big to fail. As summarized by the Financial Times:

The
report was particularly scathing in its assessment of governments’
attempts to clean up their banks. “The reluctance of officials to
quickly clean up the banks, many of which are now owned in large part
by governments, may well delay recovery,” it said, adding that
government interventions had ingrained the belief that some banks were
too big or too interconnected to fail.

 

This was dangerous because it reinforced the risks of moral hazard
which might lead to an even bigger financial crisis in future.

If We Break ‘Em Up, No One Will Lend?

Do we need to keep the TBTFs to make sure that loans are made?

Nope.

Fortune pointed out
in February that smaller banks are stepping in to fill the lending void
left by the giant banks’ current hesitancy to make loans. Indeed, the
article points out that the only reason that smaller banks haven’t been
able to expand and thrive is that the too-big-to-fails have decreased
competition:

Growth for the nation’s smaller banks
represents a reversal of trends from the last twenty years, when the
biggest banks got much bigger and many of the smallest players were
gobbled up or driven under…

 

As big banks struggle to find a way forward and rising loan losses
threaten to punish poorly run banks of all sizes, smaller but well
capitalized institutions have a long-awaited chance to expand.

BusinessWeek noted in January:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…

At a congressional hearing on small business and the economic
recovery earlier this month, economist Paul Merski, of the Independent
Community Bankers of America, a Washington (D.C.) trade group, told
lawmakers that community banks make 20% of all small-business loans,
even though they represent only about 12% of all bank assets.
Furthermore, he said that about 50% of all small-business loans under
$100,000 are made by community banks…

Indeed, for the past two years, small-business lending among community
banks has grown at a faster rate than from larger institutions,
according to Aite Group, a Boston banking consultancy. “Community banks
are quickly taking on more market share not only from the top five
banks but from some of the regional banks,” says Christine Barry,
Aite’s research director. “They are focusing more attention on small
businesses than before. They are seeing revenue opportunities and
deploying the right solutions in place to serve these customers.”

And Fed Governor Daniel K. Tarullo said in June:

The
importance of traditional financial intermediation services, and hence
of the smaller banks that typically specialize in providing those
services, tends to increase during times of financial stress. Indeed,
the crisis has highlighted the important continuing role of community
banks…

For example, while the number of credit unions has declined by 42
percent since 1989, credit union deposits have more than quadrupled,
and credit unions have increased their share of national deposits from
4.7 percent to 8.5 percent. In addition, some credit unions have
shifted from the traditional membership based on a common interest to
membership that encompasses anyone who lives or works within one or
more local banking markets. In the last few years, some credit unions
have also moved beyond their traditional focus on consumer services to
provide services to small businesses, increasing the extent to which
they compete with community banks.

Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.

Specifically
since Glass-Steagall was repealed in 1999, the giant banks have made
much of their money in trading assets, securities, derivatives and
other speculative bets, the banks’ own paper and securities, and in
other money-making activities which have nothing to do with traditional
depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still
have trillions in bad derivatives gambling debts to pay off, and so
they are only loaning to the biggest players and those who don’t really
need credit in the first place. See this and this.

So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.

The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:

The
largest banks often don’t show the greatest efficiency. This now seems
unsurprising given the deep problems that the biggest institutions have
faced over the past year.

 

“They actually experience diseconomies of scale,” Narter wrote of
the biggest banks. “There are so many large autonomous divisions of the
bank that the complexity of connecting them overwhelms the advantage of
size.”

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

Many
community banks have thrived, in large part because their local
presence and personal interactions give them an advantage in meeting
the financial needs of many households, small businesses, and
agricultural firms. Their business model is based on an important
economic explanation of the role of financial intermediaries–to
develop and apply expertise that allows a lender to make better
judgments about the creditworthiness of potential borrowers than could
be made by a potential lender with less information about the
borrowers.

A small, but growing, body of research suggests that the financial
services provided by large banks are less-than-perfect substitutes for
those provided by community banks.

It is simply not true
that we need the mega-banks. In fact, as many top economists and
financial analysts have said, the “too big to fails” are actually
stifling competition from smaller lenders and credit unions, and
dragging the entire economy down into a black hole.

The Giant Banks Have Recovered, And Are No Longer Insolvent?

Have the TBTFs recovered, so that they are no longer insolvent?

Negatory.

The giant banks have still not put the toxic assets hidden in their SIVs back on their books.

The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.

The
overhang of derivatives is still looming out there, and still dwarfs
the size of the rest of the global economy. Credit default swaps have arguably still not been tamed (see this).

Indeed, Nobel prize winning economist Joseph Stiglitz said recently:

The
U.S. has failed to fix the underlying problems of its banking system
after the credit crunch and the collapse of Lehman Brothers Holdings
Inc.

 

“In the U.S. and many other countries, the too-big-to-fail banks
have become even bigger,” Stiglitz said in an interview today in Paris.
“The problems are worse than they were in 2007 before the crisis.”

 

Stiglitz’s views echo those of former Federal Reserve Chairman
Paul Volcker, who has advised President Barack Obama’s administration
to curtail the size of banks, and Bank of Israel Governor Stanley
Fischer, who suggested last month that governments may want to
discourage financial institutions from growing “excessively.”

While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to “creative accounting”, such as Goldman “skipping” December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

Some
very smart people say that the big banks – even after many billions in
bailouts and other government help – have still not repaired their
balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can’t prove they are solvent, they should be broken up.

The Government Lacks the Power to Break Them Up?

Does the government lack the power to break up the TBTFs?

Wrong.

One of the world’s leading economic historians – Niall Ferguson – argues in a current article in Newsweek:

[Geithner is proposing that] there should be a new “resolution
authority” for the swift closing down of big banks that fail. But such
an authority already exists and was used when Continental Illinois failed in 1984.

Indeed, even the FDIC mentions Continental Illinois in the same breadth as “too big to fail” banks.

And William K. Black (remember, he was the senior regulator during the S&L crisis, and is a Professor of both Economics and
Law) – says that the Prompt Corrective
Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government
to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.

Whether or not the banks’ holding companies can be broken up using the PCA, the banks themselves could be. See this

And no one can doubt that the government could find a way to break up even the holdign companies if it wanted.

FDR seized gold during the Great Depression under the Trading With The Enemies Act.

Geithner
and Bernanke have been using one loophole and “creative” legal
interpretation after another to rationalize their various
multi-trillion dollar programs in the face of opposition from the
public and Congress (see this, for example).

And the government could use 100-year old antitrust laws to break them up.

So
don’t give me any of this “our hands are tied” malarkey. The Obama
administration could break the “too bigs” up in a heartbeat if it
wanted to, and then justify it after the fact using PCA or another
legal argument.

Is Temporarily Nationalizing the Giant Banks Socialism?

Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.

That
may be true. But government regulators in the U.S., Sweden and other
countries which have broken up insolvent banks say that the government
only has to take over banks for around 6 months before breaking them up.

In
contrast, the Bush and Obama administrations’ actions mean that the
government is becoming the majority shareholder in the financial giants
more or less permanently. That is – truly – socialism.

Breaking
them up and selling off the parts to the highest bidder efficiently and
in an orderly fashion would get us back to a semblance of free market
capitalism much quicker.

The Real Reason the Giant Banks Aren’t Being Broken Up

So what is the real reason that the TBTFs aren’t being broken up?

Certainly, there is regulatory capture, cowardice and corruption:

• Joseph Stiglitz
  (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the
  financial industry because it is politically difficult, and that he
  hopes the Group of 20 leaders will cajole the U.S. into tougher action

• Economic historian Niall Ferguson asks:
  

  Guess
  which institutions are among the biggest lobbyists and campaign-finance
  contributors? Surprise! None other than the TBTFs [too big to fails].

• Manhattan Institute senior fellow Nicole Gelinas agrees:
  

  The
  too-big-to-fail financial industry has been good to elected officials
  and former elected officials of both parties over its 25-year life span

• Investment analyst and financial writer Yves Smith says:
  

  Major financial players [have gained] control over the all-important over-the-counter debt markets…It is pretty hard to regulate someone who has a knife at your throat.

• William K. Black says:
  

  There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

  Instead, the Treasury and the Fed are urging us not to
  examine the crisis and to believe that all will soon be well. There
  have been no prosecutions of the chief executives of the large nonprime
  lenders that would expose the “epidemic” of fraudulent mortgage lending
  that drove the crisis. There has been no accountability…

  The Obama administration and Fed Chairman Ben Bernanke have
  refused to investigate the nature and causes of the crisis. And the
  administration selected Timothy Geithner, who with then Treasury
  Secretary Paulson bungled the bailout of A.I.G. and other favored “too
  big to fail” institutions, to head up Treasury.

  Now Lawrence Summers, head of the White House National Economic
  Council, and Mr. Geithner argue that no fundamental change in finance
  is needed. They want to recreate a secondary market in the subprime
  mortgages that caused trillions of dollars of losses.

  Traditional
  neo-classical economic theory, particularly “modern finance theory,”
  has been proven false but economists have failed to replace it. No
  fundamental reform can be passed when the proponents are pretending
  that there really is no crisis or need for change.

• Harvard professor of government Jeffry A. Frieden says:
  

  Regulatory
  agencies are often sympathetic to the industries they regulate. This
  pattern is so well known among scholars that it has a name: “regulatory
  capture.” This effect can be due to the political influence of the
  industry on its regulators; or to the fact that the regulators spend so
  much time with their charges that they come to accept their world view;
  or to the prospect of lucrative private-sector jobs when regulators
  retire or resign.

• Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.

But there is an even more interesting reason . . .

The number one reason the TBTF’s aren’t being broken up is [drumroll] . . . the ‘ole 80’s playbook is being used.

As the New York Times wrote in February:

In
the 1980s, during the height of the Latin American debt crisis, the
total risk to the nine money-center banks in New York was estimated at
more than three times the capital of those banks. The regulators,
analysts say, did not force the banks to value those loans at the
fire-sale prices of the moment, helping to avert a disaster in the
banking system.

In other words, the nine biggest banks were all insolvent in the 1980s.

And the Times is not alone in stating this fact. For example, Felix Salmon wrote in January:

In
the early 1980s, when a slew of overindebted Latin governments
defaulted to their bank creditors, a lot of big global banks, Citicorp
foremost among them, became insolvent.

So the
government’s failure to break up the insolvent giants – even though
virtually all independent experts say that is the only way to save the
economy, and even though there is no good reason not to break them up – is nothing new.

William K. Black’s statement that the government’s entire strategy now – as in the S&L crisis – is to cover up how bad things are (“the entire strategy is to keep people from getting the facts”) makes a lot more sense.