Talking To A Runaway Printing Press

I might of linked to one of these videos a while back, but am not sure.

Nonetheless it's worth another watch:

My Analysis = Money In The Bank

Last week, in reference to Wells Fargo's sham *trading* profits I wrote:

Bond markets have rallied in the past year. Most of these Big Bank earnings from the likes of JPM, BAC, WFC, are from simply marking up the paper value of their fixed income - much of which is still very toxic. They aren't dumping any of these securities, so the risks of these long-term instruments have not been eliminated or even mitigated. Note the banks deceptively refer to these unrealized, and unsustainable gains as *trading profits*...

And financial blogger Reggie Middleton confirmed that. He writes:

Other income was higher owing to fair value option impact on Merrill Lynch structured notes (the highly suspect, level 3 asset, non-market price based opinion of management) which resulted in 1Q10 gain of $226 million against loss of $1.6 billion in 4Q09 as well as minimal write downs on legacy assets (again, the highly suspect, formula driven opinion of management) against write-down of $1.0 billion in 4Q09. Although it shouldn’t be necessary, I will still state that gains in these areas during an era of highly suspect asset values should be viewed with a very jaded eye.

Why mention this?

To make a point. Realize that I didn't read Reggie's - or anyone else's - analysis before offering my own. Without even going near a news story or a balance sheet I KNOW what the banks are doing. They are playing games with the *mark-to-model* license granted them by Big Government incumbents. Again, Bank of America is not selling those Merrill Lynch *assets*; they are just marking them up. They aren't selling them for the same reason those overpriced McMansions are just sitting there on the market - because the sellers don't want to hit the *reality* bid.

I was at dinner a couple of weeks ago with some highly compensated *analyst*. He was singing the praises of the big banks, particularly Bank of America. I scoffed and told him it'd be trading at $5 a share yet again. He scoffed back; told me that it most certainly would not; that banks were *what he covered*.

What he *covered*? Was I supposed to bow in deference?

CaptiousNut - Did you short Bank of America at $40, like I did? Did you predict it was going to $2.50?

CaptiousNut - How leveraged are the banks? What happens to the value of their collateral with 7% mortgage rates?

The self-proclaimed expert had no answer to that. And we made a gentlemanly bet about the future path of the stock.

Look, just because the Federal government is bailing out the banks, that doesn't mean common shares of their stock will maintain value - no less appreciate. Consider Fannie Mae and Freddie Mac. The Feds have made their bondholders 100% whole and still their stocks essentially went to zero.

Obviously, the Feds have demonstrated that plutocrats people with money in the bank....their money is safe in the sense that Big Government will simply print (more) currency and hand it over to the banks should they suffer a *run* or become functionally insolvent.

So rest assured, your nominal wealth is safe. Just don't ask about its *purchasing power*.

Later in the evening, I hit the expert one more time:

CaptiousNut - Look, you can focus all you want BAC bouncing from last March....but the fact remains, the stock is at a 14 year low, has no dividend, and has enough unrecognized losses for the next decade.

Goldman Jerks - Still Stealing Hand Over Fist

Click here and watch the video. Your mind will be blown, your jaw dropped, and your blood boiled over.

Ben Bernanke...

....and Alan Greenspan, as *professionals*, were not allowed to participate!

I especially chuckled at the screaming, *bubble within a bubble* analogy.

It is somewhat surreal these days, to look about and see people still making highly leveraged investments in over-priced stocks, bonds, and real estate, still squandering all their *home equity* for their brats' useless college education, and still scurrying around in much the same manner that they always did. And, not to pick on the lumpen masses....note that *governments* have also been recidivating.

Last year's financial meltdown wasn't simply a one-off event.

Unfortunately, the end-of-the-worlders will eventually (soon?) have their day.

What Else Would You Expect?

It's hard to keep track of just how much money they are *printing* these days:

• For Fannie Mae and Freddie Mac bondholders.
• For automakers.
• For state governments.
• To keep entitlements from dipping.
• Billions in backstops for Citigroup, AIG, BAC, etc.
• Never ending unemployment benefits.
• Cash for clunkers.
• First-time homebuying tax credits.
• FDIC losses.
• Etc.

And they won't stop either - not until the whole shebang blows up.

The Broad Daylight Rape Of Joe Taxpayer

Banks Borrow More From Fed; Wall Street Takes Pass

WASHINGTON (AP) — Banks borrowed more over the past week from the Federal Reserve's emergency lending program, while Wall Street firms took a pass for the fifth week in a row.

A Fed report released Thursday said commercial banks averaged $18.98 billion in daily borrowing over the past week. That compared with a daily average of $18.47 billion in the previous week.

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay 2.25 percent in interest for the loans.



The identities of banks with their hands out for cheap Federal bailout money ARE NOT RELEASED???

That means that the government knows which banks are in trouble, is giving them taxpayer dollars, AND is concealing their identities from the public!!!

Wonderful.

(Artwork by Nicholas Pussin. Photo from that 1972 horror movie that killed the whitewater rafting industry for a couple of decades - at least.)

Housing - The Blue State Bailout

Below find a foreclosure map that Fed Chairman Ben Bernanke just presented. Click image to enlarge.



Do you see what I see? Ben practically put up a Red/Blue State election map - with the notable exception of Florida, a 50/50 state marked by a heavy concentration of speculating Northeasterners and Midwesterners.



UPDATE - Hello Malkin-ites!

By the way, I am well aware, as the first commenter pointed out, that there are many, many ways to interpret these highly correlated maps.

UPDATE 2 - My illiberal Communist buddy just said to me, "Well, that's because we have the minorities...What you need to compare is the foreclosure rate between Red State and Blue State non-minorities..."

Say what??? Didn't we end up in a Civil War the last time it was decided to *not count* everyone equally?

Like I said, there are many, many ways to interpret the maps. The most practical application for them I can think of is, well, ribbing your illiberal acquaintances.

Be Wary Of Servants Of Society, The Planet, The System, And The Greater Good

What to think when even the icons of free market capitalism are appealing for the Big Government bailouts?

Steve Forbes recently phoned in an interview to CNBC in which he advised the Feds to "suspend mark-to-market accounting" for toxic, bidless, mortgage related securities.

He's far from the only such obvious hypocrite on this issue, but a hypocrite nonetheless. Why would the yield-hungry, strong hands buy mortgage debt if the Feds artificially inflate its value? You can't very well on one hand decry a lack of liquidity and then take steps to aggravate the dearth.

These exceptional arguments, are unfailingly based upon "avoiding systematic risk", "maintaining confidence and integrity in the marketplace", and serving "the greater good". If you listen to Federal officials justify their bailout of Bear Stearns against the accusations that they are saving "Wall Street instead of Main Street", they invariably assert that the latter's welfare redounds from the former's. In other words, while they may admit to holding their noses and bailing out the fats cats,...it's for the good of society. So we should all just trust them, our politicians and bureaucrats.



Meanwhile, it's yet to be demonstrated how $4-$5 gasoline from Fed-induced inflation contributes to the greater good.

Greater good arguments are the foundation of all political rhetoric. No pol will ever stand up and put forth proposals for "minority interests", "a generous lobbyist", "in the furtherance of my incumbency status", or for "my family, friends, Law school classmates, and cronies".

Examples:

The whole gamut of environmental regulations strangulations is marketed as "saving the planet".

The War on Terrorism is against an "existential" threat to our nation.

Taxes, although mostly for income redistribution, are pumped as for societal infrastructure. And don't you dare ever bring up questions of "efficiency"!

I even read justifications for regulating homeschooling in California along the lines that "...if we (the state) don't oversee these homeschoolers now, SOCIETY will be paying for it later on..." Meanwhile there's probably not a single homeschooled kid wandering the streets homeless or in the prison system. Sure, those religious spelling bee champs are a real burden on "society".



Neither I, nor anyone else, have any idea how bankrupt Bear Stearns was or what it's "spiralling" effect would have meant for the Main Street economy. The point I want to make is that everyone should be extremely cynical about "greater good" argumentation.

If Steve Forbes thinks mortgage securities should now be exempt from current accounting procedures because they are opaque and illiquid, then why didn't he object in recent years to banks marking them at unsustainably high levels? If he was against mark-to-market from the get-go then he'd be on firmer ground.

Let the record show that the Feds did a similar thing back in the 1980s with the S&Ls. With a wink and a nod they allowed the banks to delay recognizing losses for years. Steve Forbes and other interventionists would point to this as evidence that the Fed's stabilization worked but did it?

It ended up costing taxpayers $125 billion!

Now, if the Fed had allowed events to run their course, perhaps watching several banks fail and a panic ensue, what would have happened?

Well, maybe the financial sector would have learned a lesson? Maybe they would have learned not to traffic in opaque, illiquid securities? Maybe a smaller panic twenty years ago would have precluded the super-sized one we are facing today?

These days I am a big believer in failure as the needed fertilizer for future success.

I say, let there be chaos, volatility, and fortunes won and lost. Society is disserved by sheltering consumers and corporations from the consequences of bad decisions.

I have never been able to shake this "for the best" image from my head.

Enjoy:



There most certainly is an ideal of greater good.

It just seems these days, its protectors are as artless as Kathy Bates.

Nobody Verifies Anything!!!

The Federal Reserve is "injecting liquidity" to ease the banking/credit/mortgage crisis, right?

Who among the lettered hasn't read that somewhere?

Well, it's all garbage. Realize that while on one hand, the government is making highly publicized little debt purchases, on the other hand, it is selling, er underwriting, make that CREATING OUT OF THIN AIR, a ton more new Treasury bonds. Remember, we need them to finance our deficit spending.

Read the following excerpts from this article A Little Acid Test for Fed "Liquidity"



So it's difficult to understand why investors would get all excited about the Fed temporarily buying up a few billion in government securities, when we've got a Federal government that's simultaneously and permanently issuing and then constantly rolling over many, many times that amount. It's an escape into dreamland to believe that Fed actions have any chance at all of providing more "liquidity" when the Federal government's deficits suck up in a matter of weeks every bit of liquidity that the Fed has provided in a year. These Fed actions are nothing but marginal tinkering around the edges of the global financial system, and investors are starting to catch on.

If investors think the Fed buying up a few billion of Treasury and agency debt means a hill of beans, they might do well to remember that the U.S. government is running up annual deficits in the hundreds of billions. In fact, the U.S. Treasury will float tens of billions of new debt in December alone (most of which will be sopped up by foreigners, who have increased their holdings of Treasuries by well over $200 billion in the past year). This will be mixed in with refinancings.

Last week, for example, the Treasury auctioned $21 billion in 3-month bills and $20 billion in 6-month bills. In doing so, the Treasury offset every bit of the Federal Reserve's actions this week, even if it turns out that the $40 billion "term auction facility" represents new liquidity and not just rollovers. Why aren't investors just as interested in that? When the Fed does open market operations, all it's doing is buying up (temporarily or permanently) a tiny fraction of U.S. Treasury debt and replacing it with currency and bank reserves. But every time the Federal government issues more debt to finance its deficits, the new issuance cancels out any beneficial increase in liquidity the Fed could possibly provide.

More interesting is to watch what happens on Thursday. That's when we get $34 billion of repos coming due. If the Fed does little more than $20 billion through its "term auction facility," that will put the total for the week at $40 billion, versus $39 billion expiring, and it will be clear that this whole maneuver is simply a way for the Fed to temporarily refinance its expiring repos using a slightly longer 28-day maturity, rather than any effort to actually increase the amount of reserves.

In any event, banking conditions aren't likely to change even if $40 billion in additional 28-day repos actually materialize. Indeed, a Bloomberg report noted "A Fed official told reporters that the U.S. central bank's efforts won't add net liquidity to the banking system. The plans are aimed at buttressing so-called term funding markets, such as for one-month loans, rather than overnight cash." Should be interesting.

Finally, it's worth repeating that the total amount of outstanding repos has increased by only $18 billion since March, nearly all of which has been drawn out as currency in circulation. Most likely, the Fed will enter a "permanent" open market operation on the order of $10-20 billion at some point in the coming weeks to formalize that increase in outstanding currency. That move will probably be met by ridiculously over-hyped reporting as well. But it's entirely predictable.

In short, Wall Street analysts aren't paying attention to the data if they believe that the Fed is "pumping" hundreds of billions into the economy to provide some kind of "safety net" for the banking system or the mortgage market. Is it really too much to ask that they make some attempt to understand the subject about which they opine incessantly?

As for the Fed itself, it's a great gift to offer people hope, but a great disservice to offer people false hope, and I think that's what the Fed is doing. What's going on in the mortgage market is not a crisis of confidence that we can talk ourselves out of - it's a problem of structural insolvency, where many borrowers literally don't have the means to service their debt over the long-term, because many of them were counting on rising home prices over the short-term. By acting as if a few billion in repos will substantially change this equation, the Fed is raising hopes, and setting the markets and the economy up for disappointment that will be far worse as a result. Bernanke would be better off admitting that the Fed has no chance of providing meaningful "liquidity" when the Federal government is issuing Treasuries at ten times the rate the Fed can absorb them. At that point, Americans would see better that the resources we need to invest, compete and become a financially sound nation are being hoarded by the Federal government and sent up in flames.



The guy also has another recent article titled Vanishing Act - Are the Fed and the ECB Misleading Investors about "Liquidity"?

I really do pity the Morons who not only read the news but actually believe it.

The Government can't do squat for you. Don't ever forget it.

Political Failure

Read what Treasury Secretary Henry Paulson said yesterday:



But Paulson said it was crucial to avoid a "market failure" in housing that could bring on "chaos."

"I want markets to work," he said in the interview. "I would define a market failure as the system not being able to cope in a way where foreclosures took place that would otherwise not have taken place if there was a smaller volume. So foreclosures take place that aren't in the investor's interest, aren't in the homeowner's interest, aren't in the community's interest, aren't in the greater economy's interest."

The result could be a plunge in home prices that would "force market values down in a way...in which the market wasn't intended to work," Paulson said.




Listen up here now Hank,

A MARKET IS NOT DESIGNED - IT HAS NO AUTHOR - THEREFORE THERE ARE NO "INTENTIONS" TO BE UNSATISFIED.

A free market is merely the coincident of personal liberty; it exists so long as parties can freely exchange goods, services, and currency.

Any attempt to stabilize prices - as today's pols are intent upon - is a violation and repudiation of a free market. Hank is correct in a self-fulfilling sort of way. Yes, there'll always be *market failure* where there's government meddling.

Open any economics text book and you'll find plenty written on "market failure", "externalities", "social costs", etc.

Of course, there's far less instruction on GOVERNMENT FAILURE.



Here's another line from that article:

The administration's jawboning of lenders has angered some people who say foreclosures should be allowed to rise and put further downward pressure on home prices -- which in turn could make housing more affordable for renters who are waiting to buy.

In deference to full disclosure I want to add that I am one of those renters "waiting" on falling prices. BUT, I don't believe the government is currently or in the future capable of buffeting real estate prices. Home prices are slow to come down, IMO, because longer term Treasuries have been so strong.



Treasury bonds have been rising into the fierce winds of inflation and our fiscal deficits. From where I sit this makes no sense at all - then again, the price of Florida condos made no sense to me back in 2005 either.

Marginalizing Ben Bernanke

I am aware of the financial news scuttlebutt but twelve years of experience has conditioned me not to pay too much attention to it.

The other day, while idly watching my son at the park, I grabbed the only reading material I could find in my car - the April 2007 Futures magazine. (I DID NOT buy it. My buddy in Manhattan made me steal something from his contemptible roommate. This is just the type of service that I provide for my friends.)

Page 22 excerpts from Steven K. Beckner's Market Watch column:

Bernanke told the House Budget Committee there had been "no material change" in the Fed's economic forecast in the wake of the market slide and said he saw no "liquidity crunch" in the world or any breakdown in the workings of financial markets. He said he still expects moderate, if not improving, growth as the housing market stabilizes.

...Upside inflation risks, the Fed chief said, are the Fed's predominant concern.

Just to remind y'all the Dow dropped 416 points on Feb 27th, 2007. The media clowns attributed most of it to "subprime woes" but Wall Street roundly declared them "contained". Such was the backdrop to Bernanke's Congressional testimony two weeks later.

Let's fast forward to what we do know FOR A FACT today.

• Subprime mortgage problems have not been "contained"; they are actually proving contagious.
• August's market meltdown proves that the financial markets are prone to crunches of "liquidity". A liquidity crisis is not a singular landmine to avoid - it's an endless minefield. Or one can better think of it as a permanent gun pointed at the head of our financial system.
• Six months after his testimony, the "moderate growth" from a "stabilizing housing market" has not materialized. If fact we have been riding lower growth and a worsening housing market. What a sage!
• And back in April, with oil trading $64, soybeans trading $7.60, wheat trading $5.00, and gold trading $700 Bernanke was most concerned about "upside inflation risks". Yet today, on the eve of another Bernanke rate cut, gold is pushing $800, wheat is almost 70% higher, soybeans over $10, and oil is trading at $93 per barrel - I guess aside from the higher commodity prices, upside inflation risks can be brushed aside.

Remember when Bernanke dropped rates 50 basis points last month with the fierce intimation that it was "one and done"?

The guy is provably a walking monthly-contradiction of whatever he said last. Perhaps when oil is $100 a barrel he'll go back to worrying about "upside inflation risks"? In that case, you'll know to brace yourself for another "liquidity crunch"!

As I have said before, the hardest part about trading the financial markets is NOT UNDERESTIMATING the stupidity of all parties. For example, the Fed Chairman may well be a vacillating dolt, doing long term harm to our economy for short term feel-good, stock and bond upticks. Nevertheless, fund managers and sheepish investors (who should be farsighted) may go hog wild and bid up securities again after the inevitable rate cut tomorrow. I seemingly spend all my mental energy trying to figure out who the biggest Morons are, and how to bet against them.

It ain't so easy.