P.S.: GASG stands for "Gambling Addiction Support Group" which was the name
of the email list that was the predecessor to this blog.
Voltron says: The government has been making a lot of noise about "mortgage scams" advising people not to pay fees and to use only free government approved housing counselors. The government approved housing counselors are not allowed to advise you to default even if it is in your best interest - at least not until ALL of your retirement savings are drained. They exist to protect the banks. The government wants to steer you away from companies like "You Walk Away LLC" that look after your interests. The government is creating a straw man - the fact is most mortgage fraud being investigated by the FBI is perpetrated by well known mortgage servicers. They will intentionally mar your credit rating to prevent you from refinancing while they concoct fees, game the system and force a foreclosure.
If you have a mortgage, you should read this: http://www.msfraud.org/howtheysteal.html
Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be — presto! — better-than-expected numbers.
But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.
With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.
Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”
"I've accepted the point of view that if a loan is not in default, it's
worth what it says it's worth. And that means I think the markdowns are
excessive in the sector."
|The Daily Show With Jon Stewart||M - Th 11p / 10c|
Voltron says: If the results are good, why did the Treasury ominously want to delay them to avoid the banks earnings season?
Voltron says: Due to the expiration of California's foreclosure moratorium. How much longer can they put it off? Has the situation improved since the first time they stalled?
Voltron says: First the Treasury put such large restrictions on who could participate in the government subsidized Public-Private Investment Fund (PPIF) that only BlackRock, Pimco and the holders of toxic assets themselves could participate. Evoking wartime Liberty Bonds they now want to create bonds to give "mom and pop" and opportunity to "participate in the recovery" Voltron asks: is there a way to short this?
Voltron's Executive Summary: The TARP watchdog, Harvard Law Professor Elizabeth Warren, issued a tough six month assessment. Treasury has spent $590 billion of the original $700 billion, but has used "no cost guarantees" and the FED's balance sheet to leverage up to over $4 trillion without additional approval, and they still have not put a dent in the problem. The Treasury's approach might work if the problem is just a lack of credit but if the banks are actually insolvent (they are), it's just a big waste of time and money, which will limit our options in the future.
In case no one is keeping track, Bernanke has now fired every bullet from his 2002 “helicopter drop” speech Deflation: Making Sure "It" Doesn't Happen Here.
Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.
1. Reduce nominal interest rate to zero. Check. That didn’t work...
2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work...
3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work...
4. Make low-interest-rate loans to banks. Check. That didn’t work...
5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work...
6. Lower rates further out along the Treasury term structure. Check. That didn’t work… Voltron says: expect much more of this - still won't work any better.
7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work...
8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work… Voltron says: so far the treasury debt purchases has been of a pre-announced amount ($200 billion), so you can expect that to ramp up to "unlimited" at which point hyper-inflation is guaranteed.
9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work… Voltron says: There is no explicit cap yet.
10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work...
11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work...
12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work...
13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work…
Voltron says: so the only bullets left are more buying of treasuries with printed money to attempt to cap the long treasury yields. This is guaranteed to cause hyperinflation and cause treasurys - the final bubble - to crash.
Voltron says: The central banks and IMF will empty their vaults of gold to keep the price down and mask inflation. Consider this: British Prime Minister Gordon Brown, when he was chancellor of the Exchequer (equivalent of US Treasury Secretary) sold 400 tons (60%) of his country's gold reserve between 1999 and 2002 for an average price of $275 per ounce! At the last G-20 meeting he was pushing the IMF to sell more gold.
From the March Fed meeting minutes:
In the discussion of monetary policy for the intermeeting period, Committee members agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate. Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability.
According to the Financial Times, “Tim Geithner warned on Sunday that the US government would consider ousting board members at American banks as a condition for giving the institutions “exceptional” assistance in the future.”
When a bank is undercapitalized and new lending and borrowing are encumbered by an overhang of bad, dodgy or toxic assets, the one thing you should not do is offer public financial support to rectify this situation on terms that are very painful for the key decision makers in the banks, painful that is, for those who decide on whether to accept the state’s financial aid.
Voltron says: because it's a quasi-legal end-run around an irate congress. The government always likes to cast it's bailouts as "insurance" because they can claim that it won't cost anything if they never have to pay out. With one hand the FDIC is assuming that they will not lose any money on the loans they will insure, but with the other hand, they are selling loans at 50 cents on the dollar. If genius is the ability to hold two contradictory thoughts in your mind at the same time, the FDIC chairman is clearly a genius.
There's only been one great depression, so economists comparing today to the great depression is like a doctor who has only ever seen one really sick person. When presented with another sick person, the doctor is either going to think that this person has the same illness, which is probably incorrect, or the doctor is going to admit he has no idea what is wrong with the patient, which is unlikely.
My other favorite analogy is that studying economics to make money is like studying gynecology to get p****. It doesn't work that way!
Maybe after 30,000 years when we've had 1,000 depressions, I'll trust economists.
I think comparisons to the Japanese "lost decade" are more apt, but for what it's worth, the link below contains so charts of how we are tracking compared to the great depression (worse) and how governments have responded (more aggressively)
"The Fed's problem is that the market realizes that $300 billion in Treasury buybacks is just a drop in the bucket compared to $2.5 trillion in estimated net Treasury issuance this fiscal year," said strategists at UBS Securities.
Voltron says: will the Fed raise or fold? I'm betting they are going all in.
Voltron says: Loan losses of 3.5% may not seem like much, but when you are leveraged 30:1, you're wiped out.
"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators," according to the author, Mike Mayo of CLSA.
Voltron says: As I predicted the IMF and central banks are dumping gold to mask inflation. If you buy gold, don't use leverage or you will get squeezed out.
"...we don't want to change the bankers, because if we do, if we put honest
people in, who didn't cause the problem, their first job would be to find
the scope of the problem. And that would destroy the cover up ... as long as
I keep the old CEO who caused the problems, is he going to go vigorously
around finding the problems? Finding the frauds?"
Banks may be able to finance the sale of their own troubled loans, lending money to the public-private partnerships that buy the assets. A bank's loan to the partnership would be buttressed by an FDIC guarantee. Administration officials confirm that the Treasury may allow such seller financing. The move essentially replaces junky mortgages on the bank's books with an FDIC-guaranteed loan. With its risks so limited, the bank has every reason to pass off its weakest assets as better than they are, argues Fuqua School of Business finance professor Campbell R. Harvey. "They will want to unload the worst possible things at the highest possible price," he says. "And if they're doing the financing, it's even more likely that they will be able to do that." Government officials say they will charge more for loans used to buy the riskiest assets.
Say a private investor in one of the partnerships owns big stockholdings in a bank putting assets out to auction. By overbidding for the bank's sludge loans, the investor could help drive up the banks' shares and make a tidy profit. His stake in the partnership might take a hit if the assets eventually aren't worth what the auction price suggests. But the government would shoulder most of any big losses. As long as the private investor's stock market gains exceed his loss in the partnership, the deal's a winner.
Government officials see this ploy as too risky for most investors to try. But the Treasury would be hard-pressed to prevent such maneuvers, short of barring a slew of hedge funds and other big bank investors from bidding in the auctions at all. Besides, it's impossible to disentangle all the connections between banks and money managers. "How do you find a private money manager that doesn't have a relationship with a bank?" asks Albert "Pete" Kyle, a University of Maryland finance professor.
In the public-private partnerships, the private partners are supposed to figure out how much to bid for assets, keeping the government well away from the business of pricing deals. But the way the deals are structured, the FDIC and Treasury will absorb as much as 93% of any losses, while getting to keep just half of any profits. "The government's going to be on the hook for the [deals] that are bad," says Brookings' Young. With their own downside so limited, the private partners are likely to be drawn to the riskiest deals, which offer the highest potential payoffs—and the government the biggest potential losses. One option under consideration is including multiple private partners in each partnership as a check on one another's excesses.
For all the talk of toxic assets, some banks may want to hold on to their suspect loans in the belief that they will eventually pay off. The Treasury and the Fed, however, are breathing down the banks' necks to unload problem debts.
What to do? A bank could effectively swap its existing portfolio of junky loans for another one very similar—only this time limiting the downside by using government loans and guarantees. The bank would auction off its loans to a public-private partnership. Then, using a portion of the auction proceeds, it would set up a different public-private partnership that would of course have access to government loan guarantees and matching funds. The bank would use the new partnership to buy a portfolio of similar problem assets twice the size of its old portfolio. The bank would then split any gains from the new portfolio 50-50 with the feds—but risk no more than the sliver of equity it contributed to the deal. The Administration may seek to block such maneuvers.
Perhaps the most intricate maneuvers will likely stem from "layering" the government's many programs of the last six months. Starting with some of the capital infusion received last fall from the Treasury, a bank could invest in a private partnership that buys toxic assets using a loan guaranteed by the FDIC. Those assets could then be chopped up and sold as securities to other investors—who put together the financing for the deal by availing themselves of another program of low-risk loans from the Federal Reserve. Thus the original bank's capital at risk in this web of deals would be almost nil. "[This] is going right back to the practices that got us into this problem—except using government leverage," Young says. "It might lead to an even wilder party than we saw before."
How much leverage could investors or banks pile up? "As much as you can get away with, of course," says the bank analyst at one investment management firm. He thinks the recent outcry over bonuses at American International Group (AIG) may promote some self-restraint. "You're going to get caned in public these days, rather than getting caned in private," the analyst says. "There's not much appetite for that."
One government planner counters that if each program's safeguards are good, layering "shouldn't be a problem." Final rules are expected in the next several weeks. Banks and investors, meanwhile, will keep trying to get the most out of Washington.
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn (£680bn) plan to revive the financial system.
The plans proved controversial, with critics charging that the government's public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.
Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions "gaming the system to reap taxpayer-subsidised windfalls".
Mr Bachus added it would mark "a new level of absurdity" if financial institutions were "colluding to swap assets at inflated prices using taxpayers' dollars."
The Treasury predicted in May 2007 that "we were nearing the worst of it in
terms of foreclosure starts" and the problem would subside after a peak in
2008. "What we missed is that the regressions didn't use information on the
quality of the underwriting of subprime mortgages in 2005, 2006 and 2007,"
Swagel said - Federal Deposit Insurance Corp. staff pointed that out at the
The ill-fated 2007 Treasury proposal to create a privately funded entity -
called MLEC, or Master Liquidity Enhancement Conduit - to buy up toxic
assets from the banks was developed by the Treasury's Office of Domestic
Finance and shared with market participants without involvement from other
Treasury senior staff. "The MLEC episode looked to the world and to many
within Treasury like a basketball player going up in the air to pass without
an open teammate in mind - a rough and awkward situation," he said. He
notes, though, that some elements of MLEC are present in the Obama
administration's Public Private Investment Partnership plan to joint venture
with big money investors to buy loans and securities "though with the (huge)
advantage of being able to fund the purchases through low cost government
financing and with taxpayers assuming much of the downside risk."
On the housing front, the Paulson Treasury staff did develop, though it
never proposed, a plan to offer a federal subsidy to lenders willing to
lower interest rates to reduce monthly payments for at-risk borrowers. A
similar plan eventually was embraced by the Obama administration. Federal
Reserve staff wanted to do more than the Paulson Treasury to aid homeowners
who were underwater - that is, with mortgages greater than the value of
their homes. "Among the White House staff in particular, but also within
Treasury. there was no desire to put public money on the line to prevent
additional foreclosures," Swagel said. "The cynical way of putting this was
that spending public money on foreclosure avoidance would be asking
taxpayers to subsidize people living in McMansions they could not afford
with flat screen televisions paid out of their home equity line of credit."
Swagel argued that - at least in late 2007 and early 2008 - there wasn't
much congressional interest in voting to spend money on foreclosures. "There
were constant calls for Treasury and the administration to do more on
foreclosure prevention, but this was just rhetoric." Housing policy, he
added, was "essentially static" until Congress passed the $700-billion
Troubled Asset Relief Program, and the FDIC offered ways to tap that fund to
avoid foreclosures, proposals that the Treasury considered badly flawed.
Treasury staff had "distinctly mixed feelings" about Secretary Paulson's
move towards "hardening the heretofore-implicit" government guarantee of
Fannie Mae and Freddie Mac's debt in July 2007. "Treasury Departments across
administrations had sought to remove the implicit guarantee, not to harden
it..[M] any people expressed to me their misgivings about what looked like a
bailout in which GSE bondholders and shareholders won and taxpayers . It was
hard to disagree," he said. Paulson soon shared those misgivings and
immediately set Treasury staff to work on the next step, the August move to
put the companies in conservatorship.
The surprises to the Treasury on Monday, September 15, after Lehman Brothers
filed for bankruptcy, were two-fold: "the breaking of the buck by the
Reserve Fund [a money market fund] and the reaction of foreign investors to
the failure of Lehman." Swagel says it was impossible for the Treasury to
anticipate that the Reserve Fund had so much Lehman paper, but, "We could
have known better that foreign investors were not prepared for Lehman to
* DOW closes just shy of 8,000
* Top story on Drudge Report: G-20 promises to send $1 Trillion to the IMF and World Bank: http://www.breitbart.com/article.php?id=D97ADJJO0&show_article=1
* Hanky panky in the gold market: http://seekingalpha.com/article/129128-did-the-ecb-save-comex-from-gold-default and http://www.safehaven.com/article-12991.htm
* Fannie and Freddie are forced to accept IOUs from a mortgage insurer: http://www.housingwire.com/2009/04/02/mortgage-insurance-woes-grow-for-fannie-freddie/
* Fed is unable to control treasury rates: http://market-ticker.denninger.net/archives/924-BEN-SOLD-TO-YOU!.html
* In a refreshing blast of honesty, Citigroup advises investors to effectively short citigroup (XLF): http://www.bloomberg.com/apps/news?pid=20601087&sid=a2dV4cMcTXEU
* U.S. Initial Jobless Claims Rose by 12,000 to 669,000: http://www.bloomberg.com/apps/news?pid=20601087&sid=a4zOwIH6psuw
...Our investigation suggests that by the time AIG had entered the [Credit Default Swap] fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.
As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.
The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are "valid legal contracts" is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering.