Nine More Banks Fail with CIT a Packaged Bankruptcy While Gold Shines in a Jobless Recovery

There was tension-driven selling in the markets today despite the 'good news' in the headline economic numbers. The markets are on edge ahead of the ADP and BLS jobs numbers next week. The much touted theory of a 'jobless recovery' is started to show some big holes in credibility, as well it should.

Jobless Recovery

A jobless recovery is nothing more than a euphemism for a monetary asset bubble presenting an ongoing systemic moral hazard.

Yes, jobs growth lags GDP in the early stages, everyone knows this. A second year econ student might cite Okun's Law, although it is better called Okun's observation, to show that lag, but it is not relevant to this topic. Beyond early stage lags in the typical postwar recession, a business cycle contraction, what is meant by the jobless recovery is the post tech bubble recovery of 2001-5 wherein jobs growth lagged economic growth in a way we have not seen after any postwar recession, with the median wage never recovering. "Jobless recovery" is a relatively recent phenomenon in the economic lexicon, much younger than 'stagflation' which was thought highly unlikely if not impossible by economists based on their theories, until it happened.

It was the housing bubble and an explosion in unproductive financial activity crafted by the Fed and the Wall Street banks that provided the appearance of economic vitality in 2001-7. It was no genuine recovery despite the nominal GDP growth. It indicates a need to deflate the growth numbers more intelligently, if not more honestly, and future economists are likely to 'discover' this, although John Williams of Shadowstats has done a good job of demonstrating the distortions that have crept into US economic statistics. The tech bubble was perhaps an unfortunate response to the Asian currency crisis and fears of Y2K. What was done to promote recovery from the tech collapse and create the housing and derivatives credit bubble was pre-meditated and criminal.

The current state of economics is most remarkable for its arrogant complacency in the face of two failed bubbles, a near systemic failure, a pseudo-scientific perversion of mathematics exposed, and an incredible capacity for spin and self-delusion. The people wish to believe, and Wall Street and the government economists are all too willing to tell them whatever they wish to hear, for a variety of motives. And there is an army of salesmen and lobbyists and econo-whores touting this fraud around the clock.



The Failure of Financial Engineering

The next bubble should provide the coup de grâce when it fails, although the fraudsters might try and spin ten years of a stagflationary economy as 'the new normal.'

There are good reasons for this failure of American "monetary capitalism," and it has to do with an oversized financial sector and a surplus of white collar crime that both distort and drain the productive economy. The current approach is to pump money into a failed system without attempting to reform it, to fix its fundamental flaws, to make an honest accounting of the results. The result are serial bubbles and the foundation for long duration zombie economy with a grinding stagflation that may morph into a currency crisis and the fall and reissuance of the dollar, as we saw with the Russian rouble. It will stretch the political fabric of the US to the breaking point. This is how oligarchies and their empires fall.

CIT Staggers Into Bankruptcy

Trader confidence was shaken by more indications that business lender CIT will declare a preplanned bankruptcy next week.

Approaching Crash in Commercial Real Estate

Also roiling the markets was a shocking warning by billionaire Wilbur Ross of an approaching meltdown in the Commercial Real Estate market which has been anticipated and warned about by non-shill market analysts.

Gold Holds Steady

Gold showed a remarkable resilience today against determined short selling in the paper Comex markets. Here is a decent summary of the case that the gold bulls have been making, in addition to the standard observations about dollar weakness. Gold Bullion Market Reaching the Breaking Point

Bank Failures Hit 115

Meanwhile, nine more commercial banks rolled over this week. Calculated Risk reports that the unofficial FDIC list of problem US banks now numbers 500.

Here is the list from FDIC of all Official US Bank Failures since 2000.

All of the nine banks were taken over by the US Bank National Association (US Bancorp), and were part of the FBOP company in Oak Park, Illinois, one of the largest privately held bank holding companies in the US. It is reported that all nine were heavily invested in real estate lending.

California National is the fourth largest bank failure this year. It lost about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares, in addition to overwhelming losses in California real estate.

North Houston Bank, Houston, TX, with approximately $326.2 million in assets and approximately $308.0 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Madisonville State Bank, Madisonville, TX, with approximately $256.7 million in assets and approximately $225.2 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Citizens National Bank, Teague, TX, with approximately $118.2 million in assets and approximately $97.7 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Park National Bank, Chicago, IL, with approximately $4.7 billion in assets and approximately $3.7 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Pacific National Bank, San Francisco, CA, with approximately $2.3 billion in assets and approximately $1.8 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

California National Bank, Los Angeles, CA, with approximately $7.8 billion in assets and approximately $6.2 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

San Diego National Bank, San Diego, CA, with approximately $3.6 billion in assets and approximately $2.9 billion in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Community Bank of Lemont, Lemont, IL, with approximately $81.8 million in assets and approximately $81.2 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Bank USA, National Association, Phoenix, AZ, with approximately $212.8 million in assets and approximately $117.1 million in deposits was closed. U.S. Bank National Association, Minneapolis, MN has agreed to assume all deposits. (PR-195-2009)

Healthcare and Financial Reform: Don't Have a Cow, Man

Change we need. But who is we?

We the people, or we the campaign contributors and corporate power brokers?

"I never thought it was humanly possible, but this both sucks and blows.”

He straddles all, so pleases none,
And spread too thin, gets nothing done.
Aye, carumba.

Congress Ignores and Then Censors Only Witness Critical of Derivatives Banking Reform

A Brilliant Warning On Robert Rubin's Proposal to Deregulate Banks, circa 1995

There is little doubt in this mind that the GDP number will be revised lower, and the chain deflator lowball will prove to be transitory, and the recovery will be ephemeral, at least based on real numbers. The Clunkers programs pulled sales forward, which is a useful thing only if there is the follow up of systemic reform. The consumer is flat on their back, and median wages and employment are going nowhere. One can stoke monetary inflation with enough Fed expansion, but without the vitality that bestows permanence and self-sufficiency.

A reader sent in this prescient warning from 1995, when then Treasury Secretary Robert Rubin, late of Goldman Sachs, mentor to Larry and Timmy of the current US ship of state, wanted to unleash the power of the big money center banks to ensure their "efficiency and international competitiveness."

If only the US had rejected the Rubin - Greenspan doctrine then, and firmly said no to freewheeling finance, and not succumbed to the hundreds of millions of dollars in lobbying and donations spread about Washington in that 1990's campaign by Wall Street that culminated in Fed preemptive action, followed by a massive lobbying campaign led by Sandy Weill.

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of Glass-Steagall effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright...

As the push for new legislation heats up, lobbyists quip that raising the issue of financial modernization really signals the start of a fresh round of political fund-raising. Indeed, in the 1997-98 election cycle, the finance, insurance, and real estate industries (known as the FIRE sector), spends more than $200 million on lobbying and makes more than $150 million in political donations. Campaign contributions are targeted to members of Congressional banking committees and other committees with direct jurisdiction over financial services legislation.

PBS Frontline: The Long Demise of Glass-Steagall

One might be tempted to conclude from this that they bought the attention of the Congress for their agenda then, and based on additional substantial contributions, have held it ever since.

As you may recall, it was in December, 1996 when Alan Greenspan made his famous 'irrational exuberance' speech. And then shortly thereafter laid the groundwork for the tech bubble of 1999, and the series of bubbles that are the basis of the American economy even today, and the long twilight of the US dollar.

Based on our read, the financial reform plans crafted by Tim Geithner, Larry Summers, and their friends on Wall Street is merely a continuation of the Rubinomics. Is there any wonder, as we have Rubinomics Recalculated by Obama.

Thanks to Mark for sharing this on a day in which I had not intended to post anything. There seem to be about 12,000 regular visitors to Le Cafe each day. Although this is not a lot by internet standards, I have to say that based on their valuable comments and exceptionally well-informed messages sent in by email, that when it comes to astute readers, we have an embarrassment of riches. And for this we give thanks and are grateful.

NY Times
End Bank Law and Robber Barons Ride Again
Published: Sunday, March 5, 1995

To the Editor:

Re "For Rogue Traders, Yet Another Victim" (Business Day, Feb. 28) and your same-day article on Treasury Secretary Robert E. Rubin's proposal to eliminate the legal barriers that have separated the nation's commercial banks, securities firms and insurance companies for decades: The American Bankers Association, Senator Alfonse M. D'Amato, Representative Jim Leach and Treasury Secretary Rubin are gravely misguided in their quest to repeal the Glass-Steagall Act.

Their contention that insurance companies, commercial banks and securities firms should be freed from legislative obstructions is predicated on fallacious, historically inaccurate statements. If the Baring Brothers failure does not give them pause, a history lesson is our only hope before the Administration and bank lobby iron out their differences and set the economy back 90 years.

The argument that American financial intermediaries will become "more efficient and more internationally competitive" is false. The American financial system is the most stable, most profitable and most dynamic in the world.

The notion that Glass-Steagall prevents American financial intermediaries from fulfilling their utmost potential in a global marketplace reflects inadequate understanding of the events that precipitated the act and the similarities between today's financial marketplace and the market nearly a century ago.

Although Glass-Steagall was enacted during the Great Depression, it was put in place because the Aldrich-Vreeland Act of 1908, the blue-sky laws following 1910 and the Federal Reserve System of 1913 failed to keep the concentration of financial power in check. The investment climate that ultimately led to Glass-Steagall was one filled with emerging markets, interlocking control of productive resources and widespread bank ownership of securities.

Ever since railroad securities began driving secondary capital markets in the late 1860's, "emerging markets" have existed for investors looking for high-yield opportunities, and banks have been primary agents in industrial development. In the 19th century, emerging markets were scattered throughout the United States, and capital flowed into them from New York, Boston, Philadelphia and London. In the same way, capital flows from the United States, Japan and England to Latin America and the Pacific rim -- today we just have more terms to define the market mechanisms.

The economy and financial markets were even more interconnected in the 19th century than now. Commercial and investment banks could accept deposits, issue currency, underwrite securities and own industrial enterprises. With Glass-Steagall lifted, we will chart a course returning us to that environment.

J. P. Morgan and Andrew Mellon made their billions through inter locking directorates and outright ownership of hundreds of nationally prominent enterprises. Glass-Steagall is one crucial piece of a litany of legislation designed to place checks and balances on the concentration of financial resources. To repeal it would be tantamount to bringing back the days of the robber barons.

The unbridled activities of those gifted financiers crumbled under the dynamic forces of the capital marketplace. If you take away the checks, the market forces will eventually knock the system off balance.

MARK D. SAMBER
Stamford, Conn.
Feb. 28, 1995

The writer is a management consultant specializing in business history.

About The Jobless Recovery ....

For the first time we had a 'jobless recovery' after the tech bubble bust thanks to the wonders of Greenspan's monetary expansion and the willingness (gullibility?) of the average American to assume enormous amounts of debt, largely based on home mortgages, the house as ATM phenomenon. Not to mention the large, unfunded expenditures of the government thanks to tax cuts and multiple wars.





Now the pundits are talking about the hopes for another jobless recovery.

Who is going to go deeply into debt this time? It looks like its the government's turn. And the expectation is that foreigners will continue to suck up the debt.





If you think this explosion of Federal debt will facilitate a stronger US dollar you might be suffering from ideological myopia or some other delusion.

Some years ago we forecast that the financiers and their elites would take the world down this road of leveraged debt and malinvestment, and then make you an offer that they think you cannot refuse. They will seek to frighten you with a collapse of the existing financial order, because that is what they fear the most themselves, for their own unique positions of power.

The offer will be a one world currency, which is a giant step towards a one world government, managed by them of course. Once you control the money, local fiscal and social preferences start to matter less and less.

This theory seems more plausible today than it did then.

Restoring Glass-Steagall

"Successful crime is dignified with the name of virtue; the good become the slaves of the wicked; might makes right; fear silences the power of the law." Lucius Annaeus Seneca

Restoring Glass-Steagall is such an obvious move that one has to wonder why it is not being more seriously considered.

Granted, it took a multi-year lobbying effort and the expenditure of many millions of dollar to subvert a national regulatory and political process to overturn it, largely led by Sandy Weill of Citigroup. Frontline: The Long Demise of Glass-Steagall.

And with the return of the Clinton crowd as Obama's key financial advisers, led by Larry Summers and young Tim, supplemented by more mercenaries from the-investment-bank-that-must-not-be-named, perhaps it is unreasonable to expect the Reformer to enact such a simple, time-tested reform.

Perhaps Barney Frank and Chris Dodd can bring the Princes of Wall Street down to Washington again, profusely thank them for taking time from their busy day to speak to the people's representatives, privately thank them for their generous campaign contributions, and simply ask them what they will accept as regulation again.

It is important to bear this in mind, because it tends to knock down the assertion that the current financial crisis is somehow an act of God, something that just happened. There was an intent to subvert the regulatory process, to increase leverage beyond what has long been known to be prudent, and to engage in systemic fraud with a group of enables and agencies, such as the ratings firms, in order to reap fabulous personal profits for a small group at the expense of the many. There was planning, premeditation, malice aforethought. They may not have intended to harm; they just did not care. They really truly did not care, if they got theirs.

Until the banks are restrained, and the financial system reform, and balance restored to the economy, there will be no sustained recovery.

And there can be no better start than to stop the gambling with the public money that is the core of the existing US banking system. The parallels with organized crime and the subversion of the public interest through graft and corruption are compelling. And one thing we must accept is that the financiers will never be able to reform themselves, to regulate themselves, to even tell the truth overmuch about regulation while they are still 'in the game.' It goes against their very nature, their creed, the rules of their profession. They keep what they kill, and everything that is not theirs is fair game.

How bad does it have to get in the US before the people finally speak out? Wait and see, because it will be getting worse, a lot worse than you might imagine. And each day of delay adds a pound of misery for your children and grandchildren to carry. Do you really think so little of them?

Volcker’s Advice

NY Times
October 22, 2009

To the Editor:

Re “Volcker’s Voice, Often Heeded, Fails to Sell a Bank Strategy” (front page, Oct. 21):

As another older banker and one who has experienced both the pre- and
post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn
King, governor of the Bank of England) that some kind of separation between
institutions that deal primarily in the capital markets and those involved in
more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements,
would go a long way toward building a more robust financial sector.

John S. Reed
New York, Oct. 21, 2009

The writer is retired chairman of Citigroup.

Above all, reforming the cesspool that is the US electoral process of campaign financing, which is an advert for graft and soft bribery, would help as well. There is no foolproof regulatory process when those who control it are 'on the take' or even more openly working for those who seek to subvert it.

Tavakoli on Goldman's Lies of Omission

Lies of omission and forgetfulness are difficult to prove and even harder to prosecute. "Not that I recall" and "not to my knowledge" are favorite defense statements, adornments to a plea of inanity much favored by the corporate upper crust, made famous by Skilling and Lay. Among politicians it is known by the weighty phrase, plausible deniability.

Janet Tavakoli asks, Did Goldman Lie? One is tempted to ask, 'were their lips moving?'

But why the bluff? Why did Goldman have to pretend it was not concerned at all about AIG, even as the phone records show they were involved in intense and continuing discussions at the highest levels in the bailouts, with a unique and privileged presence in discussions with the government and the Fed in which their own place in the bailout queue must have been surely discussed? And at the time their own man was the Chairman of the NY Fed.

And as someone asked, Why pick on Goldman? Well, they seem to be at the center of everything.

No answers yet, and there may never be a way to penetrate the financial Star Chamber that is the Obama Treasury and the NY Fed. But here is some additional information worth reading.


Goldman's Lies of Omission
By Janet Tavakoli
October 28, 2009

In my opinion, David Viniar’s (CFO of Goldman Sachs) comments in the fall of 2008 were a lie, and for that matter, Lloyd Blankfein’s (CEO of Goldman Sachs) later comments to the Wall Street Journal were disingenuous.

In the context of what was happening near the time of AIG’s implosion, the key question was “What is going on between Goldman and AIG?” Their rhetoric surrounding this issue is a deft dodge. They may claim they didn’t “technically” lie, but Goldman’s business exposure to AIG posed both credit risk and reputation risk. They seem to overlook elements of the former and put insufficient value on the latter.

Goldman should have plainly stated that it was owed billions in additional collateral from AIG — after already having collected billions — due to credit default swap contracts and other trading positions. Whether or not Goldman thought its credit risk was totally hedged is a separate, albeit important issue, and I’ll get to that later.

Among the proximate causes of AIG’s failure were previous calls for collateral made by its credit default swap trading counterparties, including Goldman Sachs. They were entitled to pressure AIG on its prices and demand more collateral; I had publicly challenged AIG’s prices myself more than a year earlier. These actions gave a major push to AIG’s subsequent credit downgrade, which tripped contract triggers that AIG had unwisely permitted its more clever counterparties to insert. (The credit default swap market is not standardized.) This meant AIG had to come up with collateral equal to the entire remaining amount of the credit default swap contract.

Unfortunately, AIG was essentially bankrupt at this point and it couldn’t meet its obligations. The government could have stepped in and renegotiated its contracts. [Goldman’s “hedges” might have disputed whether a reduced payment triggered a restructuring event, if applicable, in their contracts.] But that isn’t what happened...

Click here for the rest of the story: Goldman's Lies of Omission - (pdf) Tavakoli Finance

GMAC Becomes First 'Bank' To Come Back for a Third Bailout

This just goes to show how much good planning in the form of strong lobbying efforts, massive campaign contributions, and big tips to the staff can give you a better position at the table. It makes all the difference in the US free-wheeling market for taxpayer funds.

There will be more players rolling over, and the poorly connected, broken banks will come staggering back from the land of green shoots with leaking balance sheets and bleeding income statements. The big Banks will keep taking chips and tips from Ben and Tim, a little peek at the hole cards, a friendly dealer on the flop, until the time comes to turn over that last river card, and move on to a differet town and a new game.

Where's GMAC at this table? Are you kidding me? They are outside parking cars.


Wall Street Journal
GMAC Asks for Fresh Lifeline
By DAN FITZPATRICK and DAMIAN PALETTA

Lender in Advanced Talks for Third Slug of Taxpayer Cash -- at Least $2.8 Billion

In a stark reminder of how some battered financial firms remain dependent on government lifelines, GMAC Financial Services Inc. and the Treasury Department are in advanced talks to prop up the lender with its third helping of taxpayer money, people familiar with the matter said.

The U.S. government is likely to inject $2.8 billion to $5.6 billion of capital into the Detroit company, on top of the $12.5 billion that GMAC has received since December 2008, these people said. The latest infusion would come in the form of preferred stock. The government's 35.4% stake in the company could increase if existing shares eventually are converted into common equity.

The willingness by Treasury officials to deepen taxpayer exposure to GMAC reflects the troubled company's importance to the revival of the auto industry. Founded in 1919, GMAC has $181 billion in assets and is a major financier for 15 million borrowers and thousands of General Motors and Chrysler car dealerships.

The new capital would help firm up GMAC's balance sheet and solidify its auto-loan business. GMAC provides the vast majority of wholesale financing for GM dealerships across the country, meaning thousands would be unable to bring new vehicles onto their lots if GMAC were to collapse.

Federal officials also are moving to shore up GMAC's ability to fund its daily operations, with the Federal Deposit Insurance Corp. telling the company Tuesday the agency will guarantee an additional $2.9 billion in debt, according to people familiar with the discussions. The FDIC guarantee will make it easier for the company to sell debt to investors. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year.

The FDIC approval came just four days before the expiration of the regulator's program that guarantees debt issued by certain banks. It ended months of tense negotiations between GMAC and regulators. Without a deal, the company would have been forced to further reduce its lending volume. New-car loans by the company tumbled 55% to $5.6 billion in the second quarter from a year earlier.

As part of the agreement, GMAC agreed to keep interest rates on deposit accounts offered through its banking unit at certain levels, according to people familiar with the situation.

While GMAC would be the only U.S. company to get three capital injections from the government since the financial crisis erupted two years ago, thousands of banks and other financial firms remain weakened by exposure to fallen real-estate values and clobbered financial markets.

Among U.S. banks that got a total of $204.64 billion in aid through the Troubled Asset Relief Program, just one-third of the capital has been repaid so far. Government officials are skeptical that some banks now wanting to escape the government's grip are strong enough to do so, with Bank of America Corp.'s attempt to repay bailout funds snagged by a disagreement over how much additional capital the bank must raise to satisfy regulators, people familiar with the situation said...

The US Dollar Rally of 2008: The Consequence of a Bull Market in Fraud

The theory of a short squeeze in Eurodollars which we had first put forward last year "The Dollar Rally and Deflationary Imbalances in the US Dollar Holdings of Overseas Banks" seems to be confirmed by this paper from the NY Federal Reserve bank, and the latest figures on cross border currency transactions from the BIS.

"Highlighting the international dimensions of the financial crisis that began in the fall of 2007, authors Niall Coffey, Warren B. Hrung, Hoai-Luu Nguyen and Asani Sarkar examine the difficulties international firms encountered obtaining U.S. dollars and the ensuing effects on the foreign exchange (FX) swap market. Analysis shows that as firms increasingly turned to the FX swap market to obtain funding, the dollar “basis”—the premium paid for dollar funding—became persistently large and positive, primarily as a result of higher funding costs paid by smaller firms and non-U.S. banks." The Global Financial Crisis and Offshore Dollar Markets

Further, the latest data from BIS shows that the dollar rally tracked the acquisition of eurodollars with a significant correlation. This is shown on the chart at the right.

After the Federal Reserve alleviated the short squeeze through dollar forex swaps "The Fed's Currency Swaps" with the central banks in the affected regions, the dollar squeeze dissipated and the dollar fairly quickly resumed its downward trend. There is a case to be made that some of the big US money center banks were using the dollar shortage to reap windfall profits, but this could have also been a side effect of the seizing in the short term credit markets.

But much of the European outrage, as least, was in feeling that they had been 'set up' by the very banks that had sold them the foully rated instruments in the first place. A classic face ripping, as they say at Wall and Broad. And this similar to the reason is why the Chinese government declared that its own institutions could walk away from derivatives arrangements that had been sold to them by the Wall Street wiseguys under false pretenses. US towns and states are not so fortunate it appears.

What does this mean? It implies rather strongly that those looking for a repeat of the sharp dollar rally from last year are very likely to be sadly disappointed.

This was no flight to safety; this was the consequence of a massive fraud in dollar denominated financial assets having been sold to gullible foreign investors and their banks. Note too that the eurodollar positions do NOT account for the dollar rally in 2006. This is what was expected, because there was no corresponding spike in LIBOR to indicate a squeeze. Rather, that earlier dollar rally was due to foreign investment in US equities and financial assets at the height of the post tech crash Dollar Assets Bubble.

Here is a brief piece on The Backwardation in LIBOR and Its Divergence from Effective Fed Funds which shows the signs of the 'eurodollar squeeze' as opposed to net foreign investment in financial assets.

The foreign banks have now unwound a significant amount of the dodgy US dollar financial assets that caused the short squeeze through their fraudulent valuations.

Yes, there will be more rallies in the ongoing decline in the US dollar. There always are countertrends in every long term trend. This is how traders make and lose their gains, as the market makers skin them slowly but surely. We can only wonder for now how much money has come into the US equity and bond bubble in the past six months, and how much is leveraged via the dollar carry trade.

But we ought not to see such a large rally in the dollar again unless there is a precipitous decline in stocks that forces a painful unwinding of the dollar carry trade. Foreign banks ought to be on the lookout for this development, because it is in their regions that the short squeezes have most of their effect. The Fed is awash in dollars and does own a printing press, and is not afraid to use it.

And for those desperately waiting for a free ride and easy money from a synthetic dollar short on debt, they should be reminded that the chief monetarist himself, Milton Friedman, also reminded that "There Ain't No Such Thing As a Free Lunch."

Or more civilly perhaps, "even fraud has its limits in conferring more value upon that which has less."

Tim Geithner's $14 Billion Gift of Taxpayer Funds to Goldman Sachs: Crisis Profiteering?

Tim Geithner should be given the option to resign immediately, or be fired. He is either incompetent, too conflicted to do his job with the banks properly, or possibly both.

Stephen Friedman should be investigated for $5.4 million in profits made through potential insider trading. His breach of fiduciary responsibility as chairman of the NY Fed is shocking.

The entire integrity of the Federal Reserve bank should be called into question. There is no place for the Fed to be the primary regulator of the financial system given their penchance for secrecy and cronyism, and their inability to manage their own shop from such scandalous conflicts of interest. They are a private company owned by the banks. The proposal to give them that level of public policy discretion and authority is patently absurd. This trend to outsourcing of responsibility so the politicians can critique the results as outsider observers must stop.

Obama's administration of the financial system, cloaked in secrecy, potential conflicts of interest, and enormous payoffs to campaign contributors demands a Congressional investigation, except those that would be doing the investigating are most likely also involved in the scandal, on both sides of the aisle. Big Finance did not buy the US government overnight.

An appointment of an independent prosecutor to investigate the Treasury and Fed bailouts is the decent thing for the Justice Department to do in any presidential adminstration, much less a reform government that had promised transparency and an end to lobbyists running the political process. And some of the lobbyists may actually be on the payroll in key government positions. But since there is no tawdry sexual misconduct involved the Americans may not have a sufficient level of interest to demand it.

From what we can see, Obama appears to be heavily influenced by a cartel of special interests including Big Healthcare and Big Finance, that are heavy campaign contributors of money and people for his administration.

Will we see a new phrase, crisis profiteering, enter the American lexicon? Because it is not too great a leap to say that the relief funds that should be flowing to the American public, from their own debts and taxes, are being waylaid by a small group of financiers and diverted to their own personal bonuses, stocks options, dividends, and profits, and the campaign contributions and lobbyist proceeds being taken by the politicians overseeing the distributions.

Shame. Shame and scandal. And it may yet end in disgrace.


Bloomberg
New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers
By Richard Teitelbaum and Hugh Son

Oct. 27 (Bloomberg) -- In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.

Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.

Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.

By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.

The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.

Subprime Mortgages

CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.

Habayeb, who left AIG in May, did not return phone calls and an e-mail.

Goldman Sachs

The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.

In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.

AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.

New York Fed

The New York Fed, one of the 12 regional Reserve Banks that are part of the Federal Reserve System, is unique in that it implements monetary policy through the buying and selling of Treasury securities in the secondary market. It also supervises financial institutions in the New York region.

The New York Fed board, which normally consists of nine directors, in November 2008 included Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Friedman. The directors have no direct role in bank supervision. They’re responsible for advising on regional economic conditions and electing the bank president.

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.

“There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”

Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.

Unwinding Derivatives

In March 2009, congressional hearings and public demonstrations targeted AIG after it was disclosed it had paid $165 million in bonuses that month to the employees of AIGFP, which is unwinding billions of dollars in derivatives under the supervision of Gerry Pasciucco, a former Morgan Stanley managing director who joined AIG after the CDS payments were mandated.

Far more money was wasted in paying the banks for their swaps, says Donn Vickrey of financial research firm Gradient Analytics Inc. “In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.

A spokeswoman for Geithner, now secretary of the Treasury Department, declined to comment. Jack Gutt, a spokesman for the New York Fed, also had no comment.

One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.

A Range of Options

People familiar with the transaction say the New York Fed considered a range of options, including guaranteeing the banks’ CDOs. They say that by buying the securities, AIG got the best deal it could.

According to a quarterly New York Fed report on its holdings, the $29.6 billion in securities held by Maiden Lane III had declined in value by about $7 billion as of June 30.

Edward Grebeck, CEO of Stamford, Connecticut-based debt consulting firm Tempus Advisors, says the most serious breach by the government was to keep the process of approving the bank payments secret.

“It’s inexcusable,” says Grebeck, who teaches a course on CDSs at New York University. “Everybody should be privy to the negotiations that went on. We can’t have bailouts like this happening behind closed doors.”

Secret Deliberations

The deliberations of the New York Fed are not made public. In this case, even the identities of the AIG counterparties weren’t disclosed until March 2009, when U.S. Senator Christopher Dodd, head of the Senate Finance Committee, demanded they be made public.

Bloomberg News has filed a Freedom of Information Act request seeking copies of the term sheets related to AIG’s counterparty payments, along with e-mails and the logs of phone calls and meetings among Geithner, Friedman and other New York Fed and AIG officials. The request is pending.

The Federal Reserve has been reluctant to publish information on its efforts to stabilize the financial system since the crisis began. The Fed has loaned more than $2 trillion, yet it refuses to name the recipients of the loans, or cite the amount they borrowed, saying that doing so may set off a run by depositors and unsettle shareholders.

Bloomberg LP, the parent of Bloomberg News, sued in November 2008 under the Freedom of Information Act for disclosure of details about 11 Fed lending programs. In August, Manhattan Chief U.S. District Judge Loretta Preska ruled in Bloomberg’s favor, saying the central bank had to provide details of the loans.

The Fed has appealed to the Second Circuit Court of Appeals, and the data remain secret while the appeal proceeds.

‘Cataclysmic Financial Crisis’

Information on the borrowers is “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” attorneys for Bloomberg said in the Nov. 7 suit.

Questions about the New York Fed transactions may be answered by Neil Barofsky, inspector general for the Troubled Asset Relief Program, or TARP. He is working on a report, which may be released next month, on whether AIG overpaid the banks. TARP is the vehicle through which the Treasury invested more than $200 billion in some 600 U.S. financial institutions.

William Poole, a former president of the Federal Reserve Bank of St. Louis, defends the New York Fed’s action. The financial system had suffered through months of crisis at the time, he says. The investment bank Bear Stearns Cos. had been swallowed by JPMorgan; mortgage packagers Fannie Mae and Freddie Mac had been taken over by the government; and the day before AIG was rescued, Lehman Brothers Holdings Inc. had filed for bankruptcy.

‘Enough Trouble’

“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”

Still, officials at AIG object to the secrecy that surrounded the transactions. One top AIG executive who asked not to be identified says he was pressured by New York Fed officials not to file documents with the U.S. Securities and Exchange Commission that would divulge details.

“They’d tell us that they don’t think that this or that should be disclosed,” the executive says. “They’d say, ‘Don’t you think your counterparties will be concerned?’ It was much more about protecting the Fed.”

‘An Outrage’

Friedman’s role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.

Both purchases took place before the payments to Goldman Sachs were publicly disclosed under pressure from Senator Dodd in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a share, meaning Friedman had paper profits of $5.4 million.

Jerry Jordan, former president of the Federal Reserve Bank of Cleveland, says Friedman should have resigned from the New York Fed as soon as it became clear that Goldman stood to benefit from its actions.

“It’s an outrage,” Jordan says. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.”

98,600 Goldman Shares

Friedman remains a member of Goldman’s board and held a total of 98,600 shares of the firm’s stock as of Jan. 22.

Vickrey says that one reason the New York Fed should have insisted on discounted payments for AIG’s CDSs is that the banks likely had hedges against their insured CDOs or had already written down their value. On March 20, Goldman Sachs CFO David Viniar said in a conference call with investors that Goldman was protected.

“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”

In any event, former St. Louis Fed President Poole says the entire process should have been public and transparent. “There should be a high bar against not disclosing,” Poole says. “The taxpayer has every right to understand in detail what happened.”

[Hat tip to Janet Tavakoli et al. for sending this news piece to us. We have been following it for some time. The Friedman scandal was a particular red flag.]

Dumping Equities to Support Bucky and El Bondo Mondo?

As noted last week there will be a record issuance of US Treasuries this week by Team Obama.

So, could money be flowing out of stocks as a reaction to the dumping of support in preparation for the liquidity required by the notes, purposefully by design, as speculated by Denver Dave? In the manner of pushing the investor around, like the vegetables on your plate?

Or not. One can only wonder in this brave new world of opaque quantitative easing and Federal Reserve innovations.

A quick message of inquiry to Treasury Tim and Zimbabwe Ben brought no response, as they are tied up all day in a Working Groups meeting. Lloyd and Jamie are attending on speakerphone to maintain a low profile, obtain status updates, and provide direction as required to their staffs at the Treasury, the Fed, and their proprietary trading desks, not necessarily in that order.

But tonight, I will be having a beer, with the most interesting man in the world.



Unless he must do a new roadshow presentation for his creditors.

Stay thirsty my friends.

Fun with Max Keiser and Paul Craig Roberts, and A Dash of Marc Faber

As always overstated, but interesting nonetheless, despite the short but obnoxious commecial at the beginning.

Max Keiser is an ex-patriate American living in Paris. Paul Craig Roberts is a former official with the Reagan Treasury.

Max's forte is excess, with valid points throughout.

Paul Craig Roberts talks about stagflation, with the Fed monetizing within a Depression.



"The dollar will go to a value exactly zero eventually, but not right now."

CapMark Eats Its Balance Sheet - Declares Bankruptcy

We are watching a train wreck in slow motion, with the Fed and Treasury putting on a smoke and mirrors show to hide the gory details of perfidy.

Recovery without jobs, solvency, real consumption, or increased manufacturing is not a recovery. This is the corpse of an economy coughing up the remnants of its vitality in response to the Fed's monetary Heimlich maneuver.

And when it is done there will be nothing left, except a pile of markers and an unpayable debt, insolvency and default.

Oh, the dollar will surely stagger for a while, and do some turns and twists to confound the speculators, but its condition is worsening. And what is unthinkable to those who maintain a studied ignorance of history will be a fait accompli... fin du régime, le siècle du dollar.

WSJ
Capmark Seeks Chapter 11
By MIKE SPECTOR, LINGLING WEI AND PETER LATTMAN
October 26, 2009

One of the nation's largest commercial-real-estate lenders filed for bankruptcy protection in Delaware, the latest sign that problems in that market are far from over.

Capmark Financial Group Inc. has been one of the biggest lenders to U.S. investors and developers of office towers, strip malls, hotels and other commercial properties. An independent company that used to be the commercial lending unit of GMAC LLC, a financing affiliate of General Motors Co., it has been in financial straits for months and warned in September that it might have to file for Chapter 11 reorganization.

In its bankruptcy filing, Capmark listed assets of $20.1 billion and liabilities of $21 billion as of June 30. Citigroup Inc. is the agent on much of Capmark's secured debt. Other holders of Capmark's secured debt include hedge funds Paulson & Co., Anchorage Advisors and Silverpoint Capital, a person familiar with the matter said. (The asset - liabilities balance does not seem all that bad. Just how dodgy and marked to fantasy are those assets anyway? - Jesse)

Some of Capmark's debt that can't be repaid might be converted to stock, the person said. Current plans call for all Capmark businesses to be preserved as part of a reorganized company or "sold as going concerns for full value," the same person said.

The filing comes amid similar troubles in the commercial-property arena. Mall-giant General Growth Properties and hotel-chain Extended Stay Inc. filed for bankruptcy in the past year, and more commercial-company real-estate ventures could fail amid an inability to refinance debts and reduced customer traffic as consumers continue to pull back.

The difficulties are a blow to Capmark's private-equity owners. In 2006, a group led by Kohlberg Kravis Roberts & Co., Goldman Sachs Capital Partners and Five Mile Capital Partners paid $1.5 billion in cash to acquire lender GMAC's commercial real-estate business, which they renamed Capmark.

At the time, Capmark proclaimed it was poised to tap capital markets and realize the full potential of all its businesses, which include lending to commercial-property developers and investors; managing investment funds that bought commercial-real-estate debt; and collecting payments on loans, or "servicing." GMAC, meanwhile, boasted the deal would free up $9 billion in capital it could redeploy.

But the deal didn't work out for any of the parties. GMAC suffered heavy losses on its real-estate loans and faced further pressures on its car-financing operations when the auto market collapsed. It eventually had to tap federal bailout money.

KKR, which has written its Capmark investment down to zero, declined to comment. A Capmark spokeswoman didn't respond to requests for comment.

Capmark, based in Horsham, Pa., recently reported a $1.6 billion second-quarter loss. The company deteriorated along with the deep problems plaguing the commercial-property market. Capmark has originated more than $10 billion in commercial-real-estate loans, according to Moody's Investors Service.

One of Capmark's deals was the landmark Equitable Building that rises 33 stories above downtown Atlanta. In 2007, San Diego real-estate firm Equastone LLC paid $57 million for the office tower and took out a $51.9 million mortgage from Capmark Bank. Equastone planned to expand the tower and attract a tenant with pockets deep enough to rename the building.

In April, Capmark Bank foreclosed on the building after Equastone defaulted on the debt.

Adding to Capmark's pressures, the Federal Deposit Insurance Corp. had notified the company it must raise capital and boost liquidity at its Utah bank, which has roughly $10 billion in assets. The bank makes and holds commercial mortgages.

The bank isn't part of Capmark's bankruptcy filing. Capmark Bank got a $600 million capital infusion from its parent company in late September.

Capmark has retained law firm Dewey & LeBoeuf LLP and financial advisers Lazard Frères & Co. LLC, Loughlin Meghji + Co. and Beekman Advisors Inc.

The company has about 1,800 employees located in 47 offices world-wide. It recently reached an agreement to sell its North American servicing and mortgage-banking operations to a new company owned by Warren Buffet's Berkshire Hathaway Inc. and Leucadia National Corp. for as much as $490 million.

Under the deal's terms, the sale could occur while Capmark is in bankruptcy but would require a bigger cash payment.

Here Comes the Monetary Expansion Bubble

The best looking economy that debt money can buy. We have included some graphs to put this in perspective. But the bottom line is that the economy may be growing nominally based on an explosion in Federal Debt. We are almost certain that the debt is being applied in ways that will do no good, provide no sustained benefit, to anyone except a few narrow sectors and especially the FIRE sector.

Too bad the chain deflator is broken, but it may catch up on adjustments. These positive numbers, especially if there is an upside surpise, are due to an unprecedented monetary inflation, not seen since the early 1930's, and a bringing forward of future sales in automobiles through government programs.

We would submit that despite the myths that have been spread, the programs instituted by FDR were significantly effective in providing the impetus to lift the US out of the Depression. However, most of the programs were later overturned by the Supreme Court, and the Fed prematurely tightened its monetary policy, caused an 'echo slump' in the late 1930's.

There is a difference this time. FDR had accompanied his dollar devaluation (vis a vis its then gold standard, about 40%) and stimulus with programs that targeted job creation and reforms of the financial sector. There was the creation of the SEC, the advent of Glass-Steagall, and widespread investigations of the corruption of the late 1920's.

We are seeing little to none of that today, since the stimulus is largely in the form of monetary inflation and debt creation, with a small amount going to jobs, and the vast majority of the money flowing to a relatively few Wall Street banks.

Stay out of the way of the propaganda rally, but watch for the double dip W in real life.

Bloomberg
GDP Probably Grew as Stimulus Took Hold: U.S. Economy Preview
By Timothy R. Homan

Oct. 25 (Bloomberg) -- The economy in the U.S. probably grew in the third quarter at the fastest pace in two years as government stimulus helped bring an end to the worst recession since the 1930s, economists said before reports this week.

The world’s largest economy grew at a 3.2 percent pace from July through September after shrinking the previous four quarters, according to the median estimate of 65 economists surveyed by Bloomberg News. Other reports may show sales of new homes and orders for long-lasting goods increased.

Americans flocked to auto showrooms and real-estate offices last quarter to take advantage of government programs such as “cash-for-clunkers” and tax credits for first-time homebuyers. Growing demand caused stockpiles to keep falling, which will prompt companies to rev up assembly lines and help sustain the recovery into 2010 even as unemployment climbs.

“The recovery is off to a decent but unspectacular start,” said Joe Brusuelas, a director at Moody’s Economy.com in West Chester, Pennsylvania. “While another large drawdown in inventories will be a drag on third-quarter growth, it sets the stage for a longer and stronger upturn in manufacturing.”

The Commerce Department’s report on gross domestic product is due Oct. 29. The four consecutive decreases through the second quarter marks the longest stretch of declines since quarterly records began in 1947. The economy shrank 3.8 percent in the 12 months to June, the worst performance in seven decades.

Stocks Climb

Stocks have rallied as earnings at companies from Caterpillar Inc. to Morgan Stanley topped estimates. Profits exceeded expectations at about 80 percent of the companies in the Standard & Poor’s 500 Index that have released results, according to Bloomberg data. That marks the highest proportion in data going back to 1993. The S&P 500 closed at a one-year high on Oct. 19.
Consumer spending last quarter probably jumped at a 3.1 percent annual rate from the previous three months, the biggest gain since the first quarter of 2007, the GDP report is also projected to show.

September readings on household purchases, due from the Commerce Department on Oct. 30, may show the quarter ended on a soft note after the Obama administration’s car incentive expired the month before. Spending probably fell 0.5 percent last month as car sales slowed after jumping 1.3 percent in August, the biggest gain since 2001.

The so-called cash-for-clunkers program offered buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The plan boosted sales by about 700,000 vehicles, according to a Transportation Department estimate.

Homebuyer Credit

The administration’s $787 billion stimulus package, signed into law in February, included an $8,000 tax credit for first- time homebuyers that expires at the end of November.

New-home sales last month increased 2.6 percent to an annual pace of 440,000, the highest level since August 2008 and reflecting the boost from the credit, according to economists surveyed. The Commerce Department’s report is due Oct. 28.

Lawmakers in Washington are debating an extension of the credit through June, and are discussing expanding it to all buyers under an income cap.

A report from S&P/Case-Shiller home-price index due Oct. 27 may show home values in 20 U.S. metropolitan areas declined in the year ended August at the slowest pace since January 2008, according to the survey median.

More Orders

Orders for durable goods rose 1 percent in September, economists project the Commerce Department will report Oct. 28. A gain would be the fourth in the last six months and indicates companies are starting to invest in new equipment.

Business spending and housing “stand ready to provide the oomph necessary to generate continued optimism until consumer activity stabilizes,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

Optimism among U.S. consumers in October is forecast to rise even as unemployment probably also increased, economists said. The Conference Board’s confidence index, due Oct. 27, climbed to 53.5 from 53.1, according to the survey median.

The economy will likely grow at a 2.4 percent annual rate from October through December, according to a Bloomberg survey earlier this month. GDP will also expand 2.4 percent next year and 2.8 percent in 2011, the survey showed, compared with an average of 3.4 percent growth over the past six decades.

“This has been the mother of all recessions in our working lifetime,” Jim Owens, Caterpillar’s chief executive officer, said on a conference call last week. The Peoria, Illinois-based company, the world’s largest producer of backhoes and bulldozers, predicted on Oct. 20 that sales may rise as much as 25 percent next year.



You might be surprised to see this chart of GDP in the United States from 1929 to 1940. See The FDR-Failed Myth for more information. If there is a difference with our current monetary expansion, which is on a par with the Fed actions in 1933 and the exit from the domestic gold standard, it is that the vast majority of the liquidity is going directly to the banks this time, and not to the public and for specific employment projects. It is a New Deal for the wealthy financiers.

NAV Premiums of Certain Gold and Silver ETFs and Funds

Of Bubbles and Busts: Which Way for China?

"Mischief springs from the power which the monied interest derives from a paper currency which they are able to control, and from the multitude of corporations with exclusive privileges...which are employed for their benefit." Andrew Jackson

While the crowd has been chortling over the anticipated decline and fall of the American Empire, they may also be overlooking the dangerously unstable bubble in China, and the implications for that phenomenon when the global economy shifts again.

There has been little doubt in our minds for a long time that China was in an impressive growth cycle that was fueled by overly cheap money and a spectacular equity bubble. This is why we posted that documentary about the Crash of 1929 yesterday, in commemoration of the 80th anniversary of Black Thursday tomorrow.

The collapse of bubbles will not be in the US alone, and the description and atmosphere as described in that film sounds much more like China today than it does the US.

The reasoning behind this is fairly straightforward.

It may be hard to remember from the current lofty heights of the 'China miracle' but their economy was a train wreck in the latter part of the 20th century. Prior to 1980 the state owned People's Bank controlled all the financial resources of the command driven economy. The government created State Chartered Banks (SCB's) in the 1980's, but their business activities were still driven by state policy initiatives, and they quickly became burdened by bad debts.

A speculative push and some tax breaks for foreign direct investment helped to further distort the economy, which led to a severe domestic slump, with banks burdened by Non-Performing Loans. But it was still a centralized economic regime, with a reminder served by the brutal suppression of the student demonstrations in Tiananmen Square in 1989.

In 1994 China tried to cure the serious problems in their domestic economy by devaluing the yuan from 5 to 8.3 to the US dollar in order to facilitate an export driven recovery. That is a 40% devaluation! All your costs were just marked down 40% relative to the competition.

China was able to make key investments in the 1996 Democratic party campaign, and Bill Clinton championed China's favored nation status in 1998, smoothing the way for China's admission into the World Trade Organization in 2000, while still maintaining a deeply devalued currency that was 'pegged' to the US dollar.

As a general note, a country does not engage in unrestricted trade with another country that maintains a currency peg after a devaluation, unless there is some significant ulterior motive. The rational economic response is to first maintain trade tariffs to control the flow of goods and the de facto subsidies and barriers imposed by an artificially manipulated currency. Whenever anyone says that a currency that is 'pegged' and subject to tight exchange controls is not manipulated, except in highly unusual circumstances such as a gold standard, the people in the room just should laugh them on their way out the door.

Pegging the yuan to the dollar helped to encourage foreign direct investment, and helped to stabilize the artificially low prices that US importers could achieve, most notably the Arkansas based WalMart.

Those are the roots of the China bubble: cheap money. It used to be said that the Japan Miracle was a result of their real estate price explosion, the 'monetization of the land.'

 This is a bit of an oversimplification since was a bubble fueled by government industrial policy known as mercantilism. But using this analogy, China was monetizing the cheap labor of its people, as a means to provide cheap goods to the West, and allow business to erode the wage gains which labor had achieved through the worker's union movements of 1930 to 1970. And if one looks at the progress of the US median wage from 1980 to 2009, it worked. The US middle class is flat on its back.

All that history aside, what is going to happen now with China? It was important to take some time to establish the roots of its current bubble, because people have become wide-eyed and accepting of the miracle. Yes, cheap labor helps, but there are plenty of countries around the world that have cheap labor. It tends to get less cheap when the country develops, and when the domestic economy and education and infrastructure improves, while the government can continue to provide subsidies via tax breaks and cheap currency and subsidized debt from banks that are still controlled by the State.

The trade surpluses that have created China's enormous two trillion dollar reserves are a direct result and indicator of the China bubble formulated by Western banks and a domestic government made increasingly nervous by popular unrest due to their economic blundering. Those surpluses in turn have fueled a monumental asset bubble in China that they must handle with care.

The China miracle is a new paradigm in the same way that the tech bubble introduced a new era of permanent prosperity in the US in 2000, and trading margin created a vibrant US economy in 1929. There are many true believers in this miracle, most notably Jimmy Rogers, but that does not mean it is not simply what it is: a bubble created by monetary and policy manipulation.

China is faced with a period of transition. It must move from a export economy to a more balanced domestic consumption economy. This will raise living standards and education levels, and disposable incomes of its people. If a ruling party is an oligarchy, whatever political label one wishes to attach to it, then they are often jealous and insecure of their power base, and anxious about losing control.

If there is a continuing collapse in trade, and the world economy, the theory of decoupling promoted by analysts like Peter Schiff appears to be exceptionally unlikely, unless China can make the transition to either a regional predatory power or more domestically self sufficient.

China can do this, but it is quite important to remember that they do not have market capitalism at their backs and a history of well regulated banks and markets to help them allocate their new found riches in productive, non-corrupt ways. The China miracle is highly dependent on Western multinationals.

In some dimensions, China is more like the US in 1929 than the US itself resembles that paradigm today. This would imply that China is more likely to experience the kind of devastating crash and long economic Depression if world trade collapses.

As you may recall, the US was a heavy net exporter and an economic miracle itself in the 1920s having largely escaped the economic devastation of the first World War.

Perhaps this is a long way of saying that the outcome for China is hardly pre-determined, but it is not nearly so rosy as the believers in the miracle might think. They will have a choice, but that choice is going to lead them to a crossroads quickly, between becoming a free nation with a burgeoning middle class that is increasingly free to make its own choices, or a military dictatorship that seeks to establish client states to provide raw materials and receive its manufactured goods in return.

We should expect the 'One World Government' crowd to make another play when things get particularly bad. Never waste a crisis. The oligarchies do not particularly care whether your flag is red, yellow, or red, white and blue, as long as they are in control. Early on Bill Gates went to China, and upon his return said, "This is my idea of capitalism." The China Bubble and the Convergence of Oligarchies

So, in summary, there is a great deal of facade around the China miracle that is of recent and somewhat shaky construction than most people realize. The Chinese economy is still highly artificial and centrally controlled, with enormous rot underneath that shiny facade in the form of bad debts, malinvestment and over capacity in some areas with insufficient development in others.

China will continue on, as well as the US. The question is really about how and what they will become, and what investment opportunities and perils they represent to the individual. Will the yuan appreciate if the economy collapses into a nasty deflation, as the deflationary theorists think happens when a currency credit bubble breaks?

Oh, if only life were that simple and linear. The strength of a currency can fluctuate short term in response to temporary contractions and squeezes, as the US dollar had done in reaction to the eurodollar short squeeze caused by the collapse of dollar securitized debt assets and some remarkably bad risk management practices by the large European banks.

At the end of the day, a currency is going to be supported by the underlying value of what it represents, because unless it is specie, that is all it represents. And in many ways this is one of the most quiet, almost hidden reasons for the rush to commodities and the bull market in gold. Investors around the world are running from bubbles and monetary manipulation, and seeking safer harbors in those things that have undeniable value and usefulness, or have stood the test of time as nations and currencies have risen and fallen.

Empires may dwindle, but all bubbles collapse, and sometimes spectacularly.

The Great Crash of 1929: Remembering the 80th Anniversary of Black Thursday

This is a 55 minute video from the award winning "American Experience" PBS series that covers The Great Crash of 1929.

It contains many 'first person' stories and interesting tidbits not normally covered in standard documentaries. The music and contemporaneous movie clips create a wonderful sense of the atmosphere of the times. The insights into some of the great personalities from that era like Jesse Livermore and Charlie Mitchell are unique.

It may be ironic that this film was produced by a company based in the UK, and not an American company. It is based in part on a book by William Klingaman. It also is worth reading, and is not heavy like some of the more didactic works. Galbraith's book is short and is a good start of course. After that everyone has their favorites.

The quality of this online video copy detracts a bit from the piece, but the price is right.

It is remarkable how, despite the technology and the sophistication, the basic schemes and pitfalls of Wall Street have changed so little in their substance over these many years.

It is well worth watching as we approach the 80th anniversary of Black Thursday, October 23, 1929. As they did not know what they before them, so we also do not realize what the future will bring. As surely as it was then for the great credit and equity bubble, it is for us now in our own credit, financial assets, and currency bubble: the party is over.

Direct link to The Great Crash of 1929

Absolutely Breath-taking Failure at 1100 in the Last Thirty Minutes of Trade

We set a technical short at the top of the range around 1100, and caught this downdraft. But it does not help that we're making money but don't know why. We were mostly just killing time and playing Fallout 3.

Rumours abounding.

Dick Bloviate downgraded WFC, but the unspoken reasons why are the most interesting? Something wicked after the bell? Executive pay? Earnings?

Hedge funds front running their pending indictments?

Nervy longs watching for a serious move to the exits? Typical wash and rinse at day's end in a late stage Ponzi market? The trading desks casting for shorts?

We would not call this one unless we break support at 1060 and spike it hard.

Just another day for the naturally efficient markets in the reign of The Great Reformer.

Stay thirsty my friends.

Jesse's Grand Unified Theory of the American Financial Crisis

The US financial crisis is always and everywhere caused by the triumph of short term greed in support of Ponzi schemes and frauds, perpetrated by a handful of Wall Street bankers and their accomplices in the political process and the media, facilitated by the wholesale weakening of the American mind and character and European and Asian greed and gullibility.

Everything else is commentary.

Trend Change: Official Purchases from Central Banks Supporting Gold Price

Starting in 1989, the world's Central Banks became steady net sellers of their gold reserves which had been accumulated over the years.

In addition to official gold sales, the banks also began to engage in gold leasing contract with bullion banks such as J. P. Morgan, Goldman Sachs, et al. The gold was leased, and the bullion bank sells it in the market, paying the lease difference in a sort of gold carry trade.

And now for something completely different, it appears that the world's central banks may once again become net buyers of gold, after a twenty year campaign of selling gold from their vaults into the public markets, creating a steady downward pressure on the price of gold, that contributed to its long bear market.

There is some thought that the central bank gold sales had been designed to support the strong dollar as the reserve currency of the central banks. Gold had been viewed as a threat. Documents which have been disclosed and quotations from the transcripts of central bank meetings do support a concern that the price of gold could rise, destabilizing the fiat regime which had been in place since the US went off the international gold standard in 1971.

Starting in 2001, gold began a bull market based in part by the decline of the US dollar as the undisputed reserve currency of the world. And now the banks are reconsidering their position, and in some cases nervous central bankers seeking to recover their leased bullion, even adding to their reserves by new purchases.

This is not to imply that gold will replace the dollar. Rather, if the intended target is indeed the SDR, which comes up for rebalancing in 2010, banks may need to have gold on hand since it is thought to be favored as a component of the basket of currencies of which the new SDR will be created.

With regard to the proposed IMF sale of 403 tons of gold, there is speculation that this amount may be spoken for already by a few central banks who wish to convert some of their existing US dollar reserves to gold. At a market price of $1,050 per ounce, that would be a total sale of about $13.7 billion. That would barely make a dent in China's dollar reserves should be they so inclined to cut a check.

And of course there are the usual rumours of bullion banks who are heavily 'naked short' gold, having sold the leased product, and are unable to buy physical bullion in size with which to deliver it. There is also some talk of bullion banks having engaged in 'fractional gold' sales to customers holding unallocated bullion. This is cited as one reason why the COMEX in the US has a rule that allows deliver in the futures markets to be made in paper,

Whatever the truth may actually turn out to be, there can be no disputing that an end to twenty years of steady selling of gold, a relatively small and tight market compared to most others, in which central gold reserves represent a significant source of supply, is significant news indeed.

"In its just released Gold Survey 2009 GFMS suggested that the official sector in aggregate became a net buyer in the second quarter of 2009 and forecast that the second half of the year would see further net purchases. This represents a remarkable change of direction for a market that has been used to absorbing substantial volumes of gold sold by central banks over the last decade."

"Over the next year or two this new trend may be obscured somewhat by the planned sales of 403 tonnes of IMF gold, assuming, of course, that there is no off-market transfer of some or all of this bullion to an official sector buyer, something we think improbable but by no means impossible. Once the IMF sales programme is completed, however, we would expect the official sector as a whole to have a broadly neutral impact on the market. This would represent a return to the situation prevailing in the 1970s and 1980s when the official sector was a net buyer in some years and a net seller in others. Besides the obvious supply/demand implications for gold, such a change from net sales to something close to ‘neutrality’ would be highly positive for gold prices, as it ought to provide a major boost to sentiment and confidence in the yellow metal."

GFMS Report

“Central banks stand ready to lease gold in increasing quantities should the price rise.” Alan Greenspan, July 24, 1998

A 'fractional reserve' bullion bank would be unnerved by this trend, with visions of potential insolvency if it continues and they are not able to cover their obligations. Talking their book would require them to be quite negative, in the hopes of creating supply in the form of a decent pullback, allowing them to cover their 'short positions' and failed to hedge them adequately.

The biggest forward hedger in the sector, Barrick Gold, was recently forced to capitulate and announce the need to raise billions to buy out of their forward obligations. This still does not help those who are in need of the physical product.

The situation in the silver market is even more potentially explosive, since the CFTC has allowed two or three banks to assume enormous short positions, unprecedented for any other commodity market, amounting to a massive naked short without any conceivable hope of being supplied at today's market prices. But as long as they can keep a few steps ahead of the need to deliver the goods, the game can go on.

A truly remarkable financial system, which can only serve to puzzle future generations. "What were they thinking?"

When the Financial Journalists Were Indeed 'Pimping' for Wall Street

Here is a interesting moment in US financial journalism on CNBC. It does not describe the basis of the lawsuit very well, and does become a bit surreal at times. There is a nearly priceless moment at the end when the frustrated Attorney General of California Jerry Brown asks Dennis Kneale and Michelle Caruso-Cabrera, "Are you pimping for (State Street Bank) the defendant?"

You can watch the video and assess things for yourselves.

This question of the role of financial journalism brings to mind a little remembered vignette from the 1930's. After the Crash and the slide into Depression, there were a number of government investigations conducted into the varieties of financial fraud, of which there were many, and became the basis for a number of laws, most of which were overturned just prior to our current series of crises starting in 2000.

There was a particularly colorful character named A. Newton Plummer. He was a culprit, a bagman I think they were called, but also had become a whistle blower, a witness, after having been apprehended.

And a right effective witness he proved to be, since he had kept a suitcaseful of cancelled checks that showed that a great many, if not most, of the financial journalists in the major eastern media were regularly 'on the take' from Wall Street, in promoting certain ideas, certain stocks, legislation, whatever was required. Apparently in those days of stock operators and pools, prior to the SEC, it was a common practice to deceive the small investor through the manipulation of price action and news. Can you imagine that. And in less-regulated, naturally efficient markets.

We do not hear much about A. Newton Plummer. But he did write a book about what he had done as the bagman, after his testimony was buried, deeply. Probably to help restore public confidence in the troubled financial markets of the Great Depression.

The Great American Swindle Incorporated
Plummer, A. Newton
A. Newton Plummer, 1932. 2,000 copies.

I have a copy of his privately published book. It is an interesting read. Everything he said was documented. It was a time when the news media was undoubtedly 'pimping for Wall Street.' And they helped to create a credit bubble, the bubble that broke the world, and blamed it on a spontaneous mass delusion, and financial innovations like consumer credit.

While CNBC has its journalistic standards, this does not seem to be their finest moment. Both Dennis and Michelle are seasoned journalists. But Jerry Brown is a consummate politician, and is to be baited carefully, and at your peril.

CNBC Interview with the California Attorney General

Things are much more sophisticated these days, and the times of 'yellow journalism' with moguls like W. Randoph Hearst starting wars and promoting causes using the power of their media conglomerates are a thing of the past.

But journalists who specialize in a specific sector all the time, whether it be finance or politicians, must be on their guard not to closely identify with the industry which they are supposed to be objectively covering. An emotional attachment can develop, a mindset can be imprinted, when you spend all day speaking with people who have a particular viewpoint of the world based on their own needs and objectives and biases.

And it still bothered me that I came away from this interview without understanding the nature of the lawsuit, and obtaining no real facts about it. Dennis Kneale seems to imply that the Pension funds were promised a specific price and it was delivered, and California was merely griping about the deal unjustifiably. And then Michelle engaged in what might be charitably called an ad hominem attack.

So here are the facts as reported by The New York Times:

Still, the lawsuit raises troubling questions about the bank’s practices and controls. It grew out of an inquiry by California state investigators who were looking into claims made against State Street by unidentified whistle-blowers that accused the bank of adding a secret and substantial markup to the price of their currency trades. The whistleblowers alleged that the scheme cost State Street clients about $400 million annually and dated back to 1998.

According to the California Attorney General, State Street executed about $35.2 billion in currency trades for Calpers, the California Public Employees’ Retirement System, and Calstrs, the California State Teachers’ Retirement System, from 2001 to this fall.

State Street tellingly referred to the state pension funds as “dumb” clients since they allowed the bank to handle foreign exchange transactions for them, according to a complaint filed by the whistleblowers. Smart clients, it said, traded directly with the bank and obtained better rates.

The lawsuit contends that State Street concealed fraudulent pricing practices by entering false exchange rates into electronic trading databases and reporting false prices in the account statements that it provided Calpers and Calstrs. The lawsuit also accuses State Street of deliberately failing to include time stamp data in its reports so that the pension funds could not verify the actual cost of the trade.

It sounds to me that State is being accused of conducting trades for a fee, but then padding the associated trades to skim a bit extra. This is not an unheard of practice, especially when a trading firm is dealing with what they consider to be a 'dumb client.' There is a mindset among some trading groups that says if you are dumb enough to do business with me, I am justified in ripping your face off, even if it is a little bit at a time. We will have to see how the court case proceeds to find out if the accusations are true.

Now, would it have been so hard for CNBC to find these facts out and ask about them rather than take such a stumbling and ill-prepared stance into the interview, and then insult the interviewee and disparage his motives?

They are capable of doing much better professional work than this.