Greek Default And Devaluation: Would It Even Matter? [View article]
The fact the troika is going to the lengths it is in restructuring Greek debt, while avoiding a credit event which would trigger CDS an avalanche of payment obligations, underscores the importance of CDS which tend to be poorly understood, opaque and reported on a net basis.
Interlocking relationships can arise through any number of possible linkages, including inter-bank lending, holding common assets and writing of credit insurance. Simply suggesting there are interlocking financial relationships between financial institutions does not in itself adequately address the danger of CDS and counter party risk.
Had this risk been recognized and addressed in further detail, it would have improved an otherwise excellent article.
The Subprime Debacle, Act II Part II [View article]
Obviously others were aware of the widespread collusion, deception, corruption and racketeering taking plaguing Wall Street but, predictably, when the problem came to light the Treasury and Fed responded to a very complex problem with only liquidity measures.
And while there was a liquidity crisis, it was borne of a solvency issue that remains to this day. Only through unprecedented purchases of MBS by the Fed, fraudulent stress tests which allowed the banks to raise capital, low interest rates and a steep yield curve, relaxed accounting standards and other devices have the banks been able to remain viable while burdened by toxic assets and fundamental solvency issues.
For reasons not entirely clear, we refuse to address the criminal activities that defined the sub-prime crisis and remaining solvency issues. Quoting Charles Hugh Smith “The U.S. government and the Fed had a stark choice: either impose the rule of law and indict and convict hundreds, if not thousands, of people who perpetrated and profited from the systemic fraud and embezzlement at the heart of the mortgage and mortgage-securities industries, or socialize the corrupted, poisoned markets and use taxpayer funds to prop up the wizened shell of a stripmined market and reward the criminals with freedom.
They chose to reward the criminals and prop up a simulacrum market with only one buyer: the Federal Reserve. You can go to the the Fed's balance sheet and see the $1.2 trillion in mortgage-backed securities it owns. There is no effort to hide the brazen socialization of what once was a private-sector, free market.
When the well has been poisoned, the only players dumb enough to drink from it are the taxpayers, who have no choice as the politico toadies of the investment banking/financial Power Elites have funneled some $13 trillion in cash, backstops and guarantees into their "partners" who fund their campaigns and write the laws via their lobbyist proxies.
By failing to cleanse the financial sysytem of endemic corruption and force banks to deal with fundamenatal solvency issues we are underwriting economic policies designed to perpetuate failure and misery. QE2 will be nothing more than Japan2.
Wall Street Breakfast: Must-Know News [View article]
With a deteriorating US economy and the mosaic of snippets from above, including fading recoveries in Japan and the eurozone, it's easy to agree with Roubini's sober, if not somber, assessment of the global economy. Consistent with this, the Fed is likely to join Japan in further quantitative easing which is likely to depreciate the value fiat currencies prompting European central banks to suspend gold for bond swaps. This appears to the mean view to which all other views revert.
Edward, you make a number of well substantiated points which support your broader thesis that banks are being kept alive through fraudulent accounting, punishing rates on savings and artificially low interest rates that permit interest rate arbitrage.
All of these measures, by design, work to the advantage of large banks and enable the steady transfer of wealth from households and others to larger financial institutions. Even if there is not loan demand today, the transfer of wealth will weaken the capacity of future borrowers to enable lending institutions to shoulder increasing levels of NPL's.
This will ensure weaker loan demand in the future, diminished economic activity and the need for greater cash cushions to offset growth in NPL's. In broad terms, we are repeating the mistakes of Japan.
Tim is basically living in the past as president of the NY Fed; the fact that he largely responsible for the fate of the dollar and the future of our finances has not dawned on him.
The very essence of being Secretary of the Treasury may be so challenging, he takes comfort and solace in dispensing financial huggies to his former buddies who secretly view him as a water boy. The G20 dismissed him and his message as being irrelevant.
Stress tests, recapitalization and PPIP's were announced to be essential to revitalization the banking sector. PPIP never happened and the perceived success of the banking system rests upon a raft of fraudulent accounting gimmicks including effective repeal of FAS 157, whatever guideline which permits banks to recognize income when their bond prices decrease and the ability to shuffle about, increase or decrease reserves at will.
As to the stress tests, at the end the amount of additional capital required was "negotiated" rather than determined by hard analytics.
Consumer credit is lousy but that only puts it on par with all of the other asset sectors. From Rosenberg's daily missive:
Whether this is due to a lack of demand (the National Association of Credit Managers index fell in May) or supply, the reality is that banking sector is contracting and once the fiscal largesse is through the system, so will the economy. Banking sector assets contracted at a 10.8% annual rate and the declines were broad based:
-Residential mortgages fell 10.4% at an annual rate; -Home equity loans of credit fell 4.5%; -Commercial real estate loans slipped 8.9%; and, -Consumer credit slid at a 16.6% pace (with credit cards down an amazing 24.8%).
Did Bailouts Work or Is It All Just a Lie? [View article]
With the disappearance of the shadow banking system, I think there are remaining liquidity problems within the financial sector but injecting liquidity into the traditional banking system, whose problems stem from solvency, will not solve these problems.
Additionally, we avoided the really tough problems of addressing impaired assets by relaxing accounting standards and more or less finessed the entire matter and have provided little guidance as to when assets will be marked to market. It's a massive mistake to incorporate accounting standards into pro and counter cyclical tools as this will only increase the arc of the pendulum.
In agreeing with the author, I think when we hit the next rough patch in the road we will see solvency issues reappear as well as a host of other problems following from lack of financial reform. Banking has never been more concentrated and we have not removed the incentive for risky behavior and we have not removed the threat of TBT.
Worries of a New Debt Contagion Rattle Wall Street [View article]
Under the IMF/EU proposed plan Greece's debt to GDP will actually worsen between now and 2014. Some feel it will peak in 2015, strongly underscoring the point that the issue of sovereign debt will be with us for some time and during this period it is certain to spread to other countries.
Before I share some material from the FT, let me add that the level of restructuring being proposed for Greece, as measured by the primary deficit, is of epic proportions and few countries have successfully achieved this order of change. This points to how far out of control matters are in Greece and how difficult it will be to rebalance the primary account. From the FT:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
Hidden Benefits of a Greek Debt Default [View article]
I'm sure there are bankers supporting "reform" and additional lending to Greece but the primary culprits behind this bankrupt idea are the political leaders who supported the eurozone and the technocrats in Brussels who embrace collectivism in any and all forms. On any given day, you can see thousands of these little creatures, who populate the EU, EUC, ECB, ESCB and EuroStat, donned in trench coats scurrying about with Blackberry's while busily texting and planning the economic revival of Western Europe. For these progressives, a default within the EU would represent failure of the EU of the itself; this would create a serious fissure in the groundless arguments for collectivism and the need for thousands of apparatchiks. Who knows they might have to join the ranks of many in Greece and get a real job.
Sweden Did Not Nationalize Entire Banking System [View article]
Rather than deal with the myriad problems within the banking sysytem, we have devised an elaborate scheme to work around the underlying problem and treat the symptoms. Here is a more complete checklist (developed my someone else) and current status as to how we have handled the banking crisis:
1- Have the Federal Reserve reduce Fed Funds Rate to Zero Done
2- Have the Federal Reserve hold down rates for a historic length of time i.e. a "very extended period" Done
3- Have Federal Reserve flood market with money (i.e. Quantitative Easing) Done
4- Have Government initiatives that support asset appreciation (i.e. housing, auto programs) Done
5- Have accounting changed that forced asset liquidation for mal-investments (see Accounting) Done
6- Change Margin requirements or Leverage Pricing ISE had instituted special rebates for specific option liquidity providers - April 1 Done
NYSE Euronext's U.S. Options Exchanges Announce New Pricing and Fee - April 5 Done
ISE to Introduce a Modified Maker/Taker Fee Schedule - March 29 Done
New interest rate futures contracts and futures options on Eurodollar & US Treasuries Done
7- Spin or exaggerate economic news through the media in a positive manner only In Process
8- Decrease risk premiums and increase levels of speculation Returning
Phantom volume at 3 am on Sunday night In Process
Is volume merely hiding in plain sight, dark pools and structured notes? In Process
The obvious overhang of CFTC position limits In Process The cross-pollination of inter-continental routing capabilities In Process
9- Establish a Carry Trade that will flow monies to US assets (i.e. re-establish Yen Carry Trade) In Process Market Melt Up? More Like Yen Meltdown In Process
10- Weaken the US$ to solidify Carry Trade returns and reduce currency risk Expected
11- Give the market a surprise jolt -> China revising currency peg (China biggest US collateral holder) Expected
12- Increase the Velocity of Money by instilling an inflation worry in the public Failing to mixed
13- Place restrictions on market shorting (i.e. shortages on key dates) Expected
Risky Behavior Drives Out Prudent When Risk Is Rewarded [View article]
Even more interesting is that a risk manger at C tesified that, at a certain times, up of 80% of the MBS they were buying and selling to the agencies was known to be defective. It's fraud and you can read more here:
So what did they know and when did they know? When it comes to the mortgage meltdown at Citigroup (NYSE: seekingalpha.com/symbol/c), the former chief underwriter for Citigroup's consumer-lending group has testified before the Financial Crisis Inquiry Commission that he warned Robert Rubin (Robert Rubin news) and others at the bank that the majority of mortgages (mortgage news) it was buying to repackage were defective.
Richard Bowen says he started issuing warning all the way back in 2006. He gave one 2007 email back a memorable subject line: "URGENT-READ IMMEDIATELY-FINANCIAL ISSUES." He warned of the risks that these mortgages represented. The email was sent to Robert Rubin, the CFO Gary Crittenden (Gary Crittenden news) and the chief risk officer David Bushnell. The bank said Bowen's warning was taken seriously; by then, the bank was already suffering. In some cases, his warning seems to have been discounted. "We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80 percent of production." He says he saw up close how risk management practices changed.
Many astute commentators have suggested that Greece is the canary in the coal mine, with the coal mine being the entire sixteen country currency union.
It will be interesting to see how this plays out and if other, larger countries such as France are drawn into the morass of deceit and debt. France's deficit is a little over 8% and its deficit is around 76%, well above the treaty limit of 60%.
It may take some time and clever accounting may delay the arrival of light and clarity but with the zone on its back in economic terms and its currency under pressure, unsustainable financial chicanery will eventually surface.
It's looking as if most of the sixteen countries comprising the zone lied to gain entry, making it a zone built upon lies rather than adoption of a currency.
Paul Krugman: The Return of Glass-Steagall [View article]
As I’ve written repeatedly, I don’t think that too-big-to-fail is at the heart of our financial problems. ______________________...
Prior to Lehman failing, the policy of too big to fail was very much in force as evidenced by the intervention in Bear, Freddie and Fannie. Lehman was allowed to fail which set the stage for the ensuing panic which was only stopped after the "crafting" of TARP and massive liquidity injections. It is clear that removing TBT roiled the markets and then reinstating TBT calmed the markets.
Obama Backs Volcker in Dramatic About Face [View article]
1) If banks have access to the Fed window and take FDIC insured deposits, their activities must be constrained to limit risk and push banks towards their core mission of lending.
2) We do not want to go through another period where financial instituitions are declared too big to fail and saved through taxpayer funded rescue plans such as TARP; the answer is to limit their size and linkages so they do not remain too big to fail.
3) Proprietary trading was not the cause of the recent meltdown but it is an activity far removed from the core mission of lending and is symptomatic of the risk appetite of banks and underscores the need to limit risk activities until too big to fail has been resolved, until there is a resolution authority or until banks revoke their bank charters.
Greek Default And Devaluation: Would It Even Matter? [View article]
Interlocking relationships can arise through any number of possible linkages, including inter-bank lending, holding common assets and writing of credit insurance. Simply suggesting there are interlocking financial relationships between financial institutions does not in itself adequately address the danger of CDS and counter party risk.
Had this risk been recognized and addressed in further detail, it would have improved an otherwise excellent article.
The Subprime Debacle, Act II Part II [View article]
And while there was a liquidity crisis, it was borne of a solvency issue that remains to this day. Only through unprecedented purchases of MBS by the Fed, fraudulent stress tests which allowed the banks to raise capital, low interest rates and a steep yield curve, relaxed accounting standards and other devices have the banks been able to remain viable while burdened by toxic assets and fundamental solvency issues.
For reasons not entirely clear, we refuse to address the criminal activities that defined the sub-prime crisis and remaining solvency issues. Quoting Charles Hugh Smith “The U.S. government and the Fed had a stark choice: either impose the rule of law and indict and convict hundreds, if not thousands, of people who perpetrated and profited from the systemic fraud and embezzlement at the heart of the mortgage and mortgage-securities industries, or socialize the corrupted, poisoned markets and use taxpayer funds to prop up the wizened shell of a stripmined market and reward the criminals with freedom.
They chose to reward the criminals and prop up a simulacrum market with only one buyer: the Federal Reserve. You can go to the the Fed's balance sheet and see the $1.2 trillion in mortgage-backed securities it owns. There is no effort to hide the brazen socialization of what once was a private-sector, free market.
When the well has been poisoned, the only players dumb enough to drink from it are the taxpayers, who have no choice as the politico toadies of the investment banking/financial Power Elites have funneled some $13 trillion in cash, backstops and guarantees into their "partners" who fund their campaigns and write the laws via their lobbyist proxies.
By failing to cleanse the financial sysytem of endemic corruption and force banks to deal with fundamenatal solvency issues we are underwriting economic policies designed to perpetuate failure and misery. QE2 will be nothing more than Japan2.
Wall Street Breakfast: Must-Know News [View article]
Rally Is Not Structurally Based [View article]
Art Cashin embraces this view and believes that money is leaving debt and going into equities, cautioning things could change in a moment.
Hiding Bank Losses [View article]
All of these measures, by design, work to the advantage of large banks and enable the steady transfer of wealth from households and others to larger financial institutions. Even if there is not loan demand today, the transfer of wealth will weaken the capacity of future borrowers to enable lending institutions to shoulder increasing levels of NPL's.
This will ensure weaker loan demand in the future, diminished economic activity and the need for greater cash cushions to offset growth in NPL's. In broad terms, we are repeating the mistakes of Japan.
The Trouble With Tim's Treasury [View article]
The very essence of being Secretary of the Treasury may be so challenging, he takes comfort and solace in dispensing financial huggies to his former buddies who secretly view him as a water boy. The G20 dismissed him and his message as being irrelevant.
Stress tests, recapitalization and PPIP's were announced to be essential to revitalization the banking sector. PPIP never happened and the perceived success of the banking system rests upon a raft of fraudulent accounting gimmicks including effective repeal of FAS 157, whatever guideline which permits banks to recognize income when their bond prices decrease and the ability to shuffle about, increase or decrease reserves at will.
As to the stress tests, at the end the amount of additional capital required was "negotiated" rather than determined by hard analytics.
Consumer Credit: Not So Rosy [View article]
Whether this is due to a lack of demand (the National Association of Credit Managers index fell in May) or supply, the reality is that banking sector is contracting and once the fiscal largesse is through the system, so will the economy. Banking sector assets contracted at a 10.8% annual rate and the declines were broad based:
-Residential mortgages fell 10.4% at an annual rate;
-Home equity loans of credit fell 4.5%;
-Commercial real estate loans slipped 8.9%; and,
-Consumer credit slid at a 16.6% pace (with credit cards down an amazing 24.8%).
Did Bailouts Work or Is It All Just a Lie? [View article]
Additionally, we avoided the really tough problems of addressing impaired assets by relaxing accounting standards and more or less finessed the entire matter and have provided little guidance as to when assets will be marked to market. It's a massive mistake to incorporate accounting standards into pro and counter cyclical tools as this will only increase the arc of the pendulum.
In agreeing with the author, I think when we hit the next rough patch in the road we will see solvency issues reappear as well as a host of other problems following from lack of financial reform. Banking has never been more concentrated and we have not removed the incentive for risky behavior and we have not removed the threat of TBT.
Worries of a New Debt Contagion Rattle Wall Street [View article]
Before I share some material from the FT, let me add that the level of restructuring being proposed for Greece, as measured by the primary deficit, is of epic proportions and few countries have successfully achieved this order of change. This points to how far out of control matters are in Greece and how difficult it will be to rebalance the primary account. From the FT:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
Hidden Benefits of a Greek Debt Default [View article]
Sweden Did Not Nationalize Entire Banking System [View article]
1- Have the Federal Reserve reduce Fed Funds Rate to Zero Done
2- Have the Federal Reserve hold down rates for a historic length of time i.e. a "very extended period" Done
3- Have Federal Reserve flood market with money (i.e. Quantitative Easing) Done
4- Have Government initiatives that support asset appreciation (i.e. housing, auto programs) Done
5- Have accounting changed that forced asset liquidation for mal-investments (see Accounting) Done
6- Change Margin requirements or Leverage Pricing
ISE had instituted special rebates for specific option liquidity providers - April 1 Done
NYSE Euronext's U.S. Options Exchanges Announce New Pricing and Fee - April 5 Done
ISE to Introduce a Modified Maker/Taker Fee Schedule - March 29
Done
New interest rate futures contracts and futures options on Eurodollar & US Treasuries Done
7- Spin or exaggerate economic news through the media in a positive manner only In Process
8- Decrease risk premiums and increase levels of speculation Returning
Phantom volume at 3 am on Sunday night In Process
Is volume merely hiding in plain sight, dark pools and structured notes? In Process
The obvious overhang of CFTC position limits In Process
The cross-pollination of inter-continental routing capabilities
In Process
9- Establish a Carry Trade that will flow monies to US assets (i.e. re-establish Yen Carry Trade) In Process
Market Melt Up? More Like Yen Meltdown In Process
10- Weaken the US$ to solidify Carry Trade returns and reduce currency risk Expected
11- Give the market a surprise jolt -> China revising currency peg (China biggest US collateral holder) Expected
12- Increase the Velocity of Money by instilling an inflation worry in the public Failing to mixed
13- Place restrictions on market shorting (i.e. shortages on key dates) Expected
Risky Behavior Drives Out Prudent When Risk Is Rewarded [View article]
So what did they know and when did they know? When it comes to the mortgage meltdown at Citigroup (NYSE: seekingalpha.com/symbol/c), the former chief underwriter for Citigroup's consumer-lending group has testified before the Financial Crisis Inquiry Commission that he warned Robert Rubin (Robert Rubin news) and others at the bank that the majority of mortgages (mortgage news) it was buying to repackage were defective.
Richard Bowen says he started issuing warning all the way back in 2006. He gave one 2007 email back a memorable subject line: "URGENT-READ IMMEDIATELY-FINANCIAL ISSUES." He warned of the risks that these mortgages represented. The email was sent to Robert Rubin, the CFO Gary Crittenden (Gary Crittenden news) and the chief risk officer David Bushnell. The bank said Bowen's warning was taken seriously; by then, the bank was already suffering. In some cases, his warning seems to have been discounted. "We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80 percent of production." He says he saw up close how risk management practices changed.
Read more: www.fiercefinance.com/...
Subprime Sovereign Debt [View article]
Many astute commentators have suggested that Greece is the canary in the coal mine, with the coal mine being the entire sixteen country currency union.
It will be interesting to see how this plays out and if other, larger countries such as France are drawn into the morass of deceit and debt. France's deficit is a little over 8% and its deficit is around 76%, well above the treaty limit of 60%.
It may take some time and clever accounting may delay the arrival of light and clarity but with the zone on its back in economic terms and its currency under pressure, unsustainable financial chicanery will eventually surface.
It's looking as if most of the sixteen countries comprising the zone lied to gain entry, making it a zone built upon lies rather than adoption of a currency.
Paul Krugman: The Return of Glass-Steagall [View article]
______________________...
Prior to Lehman failing, the policy of too big to fail was very much in force as evidenced by the intervention in Bear, Freddie and Fannie. Lehman was allowed to fail which set the stage for the ensuing panic which was only stopped after the "crafting" of TARP and massive liquidity injections. It is clear that removing TBT roiled the markets and then reinstating TBT calmed the markets.
Obama Backs Volcker in Dramatic About Face [View article]
1) If banks have access to the Fed window and take FDIC insured deposits, their activities must be constrained to limit risk and push banks towards their core mission of lending.
2) We do not want to go through another period where financial instituitions are declared too big to fail and saved through taxpayer funded rescue plans such as TARP; the answer is to limit their size and linkages so they do not remain too big to fail.
3) Proprietary trading was not the cause of the recent meltdown but it is an activity far removed from the core mission of lending and is symptomatic of the risk appetite of banks and underscores the need to limit risk activities until too big to fail has been resolved, until there is a resolution authority or until banks revoke their bank charters.