Friday, August 21, 2009

August 21 2009: The camera follows us in slo-mo

G. G. Bain Dog Day Afternoon July 6, 1911
Heat wave in New York City. "Licking blocks of ice on a hot day."

Ilargi: Borrow money from the Chinese and the Japanese and sell your failed banks to the Spanish, the Canadians and the Dutch. Voilà, the new American economic model, an integral part of the reason for Ben Bernanke to pat his own back this weekend, for saving the world from financial disaster, down at Jackson Hole, celebrating his successes with the rest of the planet’s prophets and saviors. For this occasion, I would suggest we all for once turn our focus away from finance and the economy, and concentrate on finding a way to keep those people in that hole where they belong for the rest of their lives and cut all communication lines. That would be a worthy cause and a noble achievement.

If Meredith Whitney is right and 300 banks are soon about to fail (I'd make it an even 1000 within perhaps a year), how would that influence Bernanke's re-election campaign? We’re at 81 today, just 219 to go. Nothing that couldn't be done before Christmas. $3.4 trillion worth of houses are at risk of default, now, today, not just next year, because the owners are underwater on their loans. The $3 trillion and change commercial real estate "industry" is rolling downhill at a speed that defies gravity. There are well over 8000 banks left to stick a fork in. Take your pick.

Sure, home sales are up a little, what with another 16% drop in prices in the past year, record-low mortgage rates and the FHA closing back in on no money down loans. Plus, "Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage.", says John Mauldin. Some industry. Some future. I’ve recommended a mortgage moratorium before, and I’ll do it again, with a twist. Here you go: forbid all government agencies, including GSE's, FHA, FHLB, the whole cabal, from accepting any loans or securities for one month. That's all, just one month. No backdating or any of those tricks either. Just send all relevant personnel on a 4-week unpaid leave.

The result would be the complete demise of the US housing industry. For one month. Just for fun, just to make sure we all understand what kind of industry it is. A Bulgarian one. How many homes do you think would be sold in that one month period? It wouldn't be zero. But it might come close. You see, not all loans go straight to the government, i.e. the taxpayer i.e. you. Or at least they didn't use to, but there is a bit of snag appearing in the field. The lenders that didn't have a yellow brick road to Fannie and her family have names like Countrywide, WaMu, Silverton, Colonial and Guaranty. And yes, they are all gone.

So the government, i.e. you, is the only remaining game in town. What that effectively means is that you are responsible for your own children, if they are thick enough to try, paying way too much for their homes. After all, if you wouldn't buy up the loans through your ownership of the GSE's et al, home prices would have to fall precipitously in order for any homes to be sold at all. Wouldn't you like to shed that guilt? It could soon start keeping you up at night, you know. Yes, I know, if you own a home with a mortgage, it would be bad news for you, and potentially very bad, but who are you to choose your own interests over those of your own children?

And besides, the present game can't last forever. The biggest scam in US history, which started in the 1930's, is on the verge of coming to an unceremonious end. Real estate prices that are artificially kept high by a collusion between the government and the banking world can only last so long, because it has one big glaring weakness. That is, it needs for people to either have money of their own, or, the favorite option by far of course, access to credit. Alas, people have little of neither left. And that leaves you, and all of us, with nothing to do but listening to a giant slo-mo sucking sound as prices fall slowly, too slow to reignite a market, saved from freefall by your tax money, which provides the main lenders with the necessary time to park ever more of their toxic losses in the GSE's.

All we need is one month of vacation for everyone linked to both the government as well as the housing industry. If we do it tomorrow, your children can have an affordable home before New Year's Day. They may have to take you in, that's true, since you'll lose yours. But hey, get your preferences straight already, will you? And besides, it's you, with your tax money, who's keeping the cards from collapsing. And we both know there's no way you can afford it. For that matter, you can't even afford that recovery that pops the corks up Jackson's Hole.

Michael Moore - Capitalism - A Love Story (2009) - Movie Trailer 2

Bank Failure Friday
by Rolfe Winkler

Another big one bites the dust.  Guaranty is the 81st failure of the year.  Plus two more in Georgia.

Below this evening’s failure news I’ve got more detail about the Deposit Insurance Fund, including an interesting tidbit about why FDIC collected so little in premiums from 1996-2006.


  • Failed Bank: eBank, Atlanta GA
  • Acquirer: Stearns Bank NA, St. Cloud MN
  • Vitals: As of 7/10/09 assets of $143 million, deposits of $130 million
  • DIF Damage: $63 million

  • Failed Bank: First Coweta, Newnan GA
  • Acquirer: United Bank, Zebulon GA
  • Vitals: As of 7/31/09 assets of $167 million, deposits of $155 million
  • DIF Damage: $48 million

  • Failed Bank: CapitalSouth Bank, Birmingham AL
  • Acquirer: IBERIABANK, Lafayette LA
  • Vitals: As of 6/30/09 assets of $617 million, deposits of $546 million
  • DIF Damage: $151 million

  • Failed Bank: Guaranty Bank, Austin TX
  • Acquirer: BBVA Compass, Birmingham AL
  • Vitals: As of 6/30/09 assets of $13 billion, deposits of $12 billion
  • DIF Damage: $3 billion (!)

There was a confusing article in Bloomberg yesterday, which suggested FDIC is considering a new $5.6 billion fee on banks to replenish the DIF.

Just so folks are clear, that $5.6 billion was already assessed.  Banks accrued the expense on June 30th and will pay the cash into the DIF on September 30th.  That was a special assessment of 5¢ for every $100 of deposits.

We will be getting an update on the DIF’s funded status next Thursday, when FDIC publishes its Quarterly Banking Profile.

But here’s what we know about the DIF’s status right now:

  • DIF balance at 3/31 = $13.0 billion
  • Contingent Loss Reserve at 3/31= $28.5 billion (i.e. reserves set aside for current and future losses)
  • Q2 assessments = $8.9 billion ($5.6 billion one-time assessment + $3.3 billion scheduled quarterly assessment)

That’s $50.4 billion of firepower.  Since March 31st, we’ve had new bank failures that will cost an estimated $19.2 billion.

If FDIC appears to have a decent amount of reserves, will they have to draw on their credit line at Treasury?  It’s possible.

The issue is the liquidity of their assets.  A huge chunk of their balance sheet is made up of assets received from failed banks.  REO, toxic loans, etc.  That’s not cash they can use to finance bank seizures and sales.  If they run out of cash, they may have to borrow from Tim Geithner.

I’m working on getting more information about the composition of the DIF, in particular how much cash they have on hand.  I’ll follow up when I know more.

And now for tonight’s tidbit: I have been critical of FDIC in the past for not collecting deposit insurance premiums from most banks between 1996 and 2006. I wasn’t aware that FDIC was prevented by law from doing so during that period because the DIF was above 1.25% of insured deposits.

I was wrong to be critical of FDIC on this point.  It was Congress’ fault, not theirs.

They changed the law back in 2006, by the way, right before Sheila Bair was installed as Chairwoman.  For those interested, it’s 12 USC Section 1817 (b).

U.S. Existing Home Sales Jump to Highest Level in Two Years
Sales of existing U.S. homes jumped more than forecast in July to the highest level in almost two years, signaling the housing crisis that crippled the world’s largest economy is easing. Purchases climbed 7.2 percent to a 5.24 million annual rate, the most since August 2007, the National Association of Realtors said today in Washington. The gain was the biggest since records began in 1999. The median price fell 15 percent.

Foreclosure-driven declines in prices, government credits for first-time buyers and near-record-low borrowing costs may keep stoking demand, helping the economy recover from the worst recession since the 1930s. Ongoing job losses are a reminder that more Americans will probably lose their homes, indicating a rebound will be slow to take hold. "The housing market remains on the road to recovery due to good affordability," Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said before the report. Even so, "it’s probably relegated to the slow lane until joblessness and credit standards ease."

Existing home sales were forecast to rise to a 5 million annual rate, according to the median forecast of 64 economists in a Bloomberg News survey. Estimates ranged from 4.8 million to 5.25 million. June’s pace was unrevised at 4.89 million. Sales had reached a 4.49 million pace in January, their lowest level since comparable records began in 1999. Purchases of existing homes increased 5 percent compared with a year earlier. The median price dropped to $178,400 from the $210,100 in July 2008. The number of previously-owned unsold homes on the market jumped 7.3 percent to 4.09 million in July, a "notable" increase, according to Lawrence Yun, the Realtors’ chief economist.

At the current sales pace, it would take 9.4 months to sell those houses, the same as in June. A seven months’ supply is usually consistent with stabilization in prices, Yun said last month. The share of homes sold as foreclosures or otherwise distressed properties held to 31 percent in July, he said. Today’s report showed sales of existing single-family homes increased 6.5 percent to an annual rate of 4.61 million. Sales of condominiums and co-operatives climbed 13 percent to an 630,000 rate. Purchases increased in three of four regions, led by a 13 percent jump in the Northeast.

The figures are compiled from contract closings and may reflect purchases agreed upon weeks or months earlier. Many economists consider new-home sales, recorded when a contract is signed, a more timely barometer of the market. The Commerce Department may report next week that purchases of new houses rose in July to the highest level since November, according to the Bloomberg survey.

Home Depot Inc., the largest home-improvement retailer, is among businesses cutting costs to ride out the housing recession. The Atlanta-based company reported second-quarter profit that fell less than analysts estimated and raised its annual earnings forecast after trimming expenses, even as it projected a sales decline for the year. "Performance across most of our regions is better," Chief Executive Officer Frank Blake said on a conference call with analysts on Aug. 18. "But caution is still appropriate," and "we remain concerned by the high level of foreclosure activity," he said.

About $3.4 trillion worth of houses are at risk of default because the owners owe more than the property is worth, Santa Ana, California-based First American CoreLogic said last week. By putting more homes on the market, foreclosures are keeping inventory higher than levels consistent with stable prices. Obama administration efforts to revive housing include an $8,000 federal tax credit for first-time buyers who complete the transaction before Dec. 1. The government also is offering lenders incentives to modify the terms of delinquent mortgages, and the Federal Reserve is buying mortgage-backed securities to help reduce borrowing costs.

Improving Home Sales Belie Market Reality
The housing market has come out of its tailspin, lifted by falling home prices, low mortgage rates and an $8,000 federal tax credit offered to some first-time home buyers. But stability, to say nothing of strength, still looks a long way off. The National Association of Realtors is expected to report Friday morning that sales of existing homes rose for the fourth consecutive month in July, up 2.2% from June, on a seasonally adjusted basis. Problem is, a lot of the action is in distressed properties.

A survey conducted in June of 1,500 real-estate agents sponsored by the trade publication Inside Mortgage Finance found that 36% of all sales involve "nondistressed" properties. Of the nondistressed sales, only 31% were what the survey described as "unforced or optional." The rest were sales by homeowners in some kind of financial or personal crisis. "Think about that for a minute," John Mauldin of Millennium Wave Advisors wrote this week. "Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage." And only a third of the remaining one-third -- roughly 10% of overall sales -- comes from "something we could call a normal selling process."

That first-timer credit has sparked sales, and the NAR expects a flurry of sales in the next few months, as the credit expires Nov. 30. At the low end, it is a "feeding frenzy," says Jim Klinge of Klinge Realty in San Diego. Meanwhile, the Mortgage Bankers Association said Thursday that the number of homeowners behind on their mortgage payments hit a new high during the second quarter, with more than one in eight homeowners delinquent or in the foreclosure process.

So it is likely that sales will stay mired on the low end of the housing barbell. Last July, sales of existing homes hit a five-month high, leading the NAR to openly hope a sustained upturn was coming. It wasn't. Today, home sales are roughly where they were last year. Given the state of the consumer and the rise in foreclosures, they may be at this point again next year.

Unemployment Rates Rose in 26 U.S. States in July
Unemployment rates rose in 26 U.S. states in July, a sign the labor market will take time to improve and budget crises in capitals across the nation may deepen. California, Nevada, Rhode Island and Georgia all reached their highest level of joblessness since records began in 1976, with California’s rising to 11.9 percent from 11.6 percent the previous month, the Labor Department reported today in Washington. The number of states with at least 10 percent unemployment held at 16. The figures are a blow to states already hammered by falling income and sales-tax receipts and underscore economists’ projections that the national unemployment rate will reach 10 percent by early next year. Companies will probably trim payrolls at a slower pace in coming months as factories and the housing market show signs of stabilization.

"State revenues could fall short of expectations if consumer spending doesn’t pick up and if the labor market fails to improve," said Alex Miron, an economic analyst at Moody’s in West Chester, Pennsylvania. "We’re going to see higher unemployment over the month ahead." Florida’s unemployment rate last month matched June’s 10.7 percent, which was revised up from 10.6 percent and was the highest level since October 1975. Unemployment in Georgia, the ninth-largest U.S. state by population, exceeded 10 percent for a second straight month, increasing to 10.3 percent from 10.1 percent. Alabama’s jobless rate also stayed above that threshold, increasing to 10.2 percent from 10.1 percent.

"I’ve had interviews but it is really competitive, and comes down to me and maybe 50 other people in the final interview," said John Johnson, 27, of Stone Mountain, Georgia, who has put in "several hundred" applications since losing his job at a rental-car company in October. "It seems like the unemployment rate is up every month." Unemployment in the District of Columbia exceeded 10 percent for a third consecutive month, while dropping to 10.6 percent from 10.9 percent. In Texas, the second-biggest state by population behind California, unemployment rose to a 21-year high of 7.9 percent after a plunge in natural-gas prices undermined an economy that was spared the brunt of the recession before this year.

Payrolls in the world’s largest economy fell by 247,000 last month, less than forecast, while the jobless rate unexpectedly fell to 9.4 percent from 9.5 percent, the first decline since April 2008. The unemployment rate will average 9.8 percent next year, according to a Bloomberg survey of economists. The White House said this month that the U.S. jobless rate is still likely to reach 10 percent. The economy has lost about 6.7 million jobs since the recession began in December 2007. Michigan, the heart of the U.S. auto industry, dropped to 15 percent unemployment from 15.2 percent, while maintaining the highest jobless rate in the country. General Motors Co. and Chrysler Group LLC have emerged from bankruptcy, and the slump in auto production is easing as the federal "cash-for-clunkers" program spurs demand for fuel-efficient cars.

Financial firms, meanwhile, continue to trim payrolls. New York City’s unemployment rate jumped to 9.6 percent in July --the highest since June 1997 -- from 9.4 percent, while the state’s rate fell to 8.6 percent from 8.7 percent in June, according to the state Labor Department. New Jersey’s rate increased to 9.3 percent in July, the highest since 1977, from 9.2 percent, the U.S. Labor Department report showed.

Some Americans are finding the only way to secure work is by moving to another state. Sara Smithback, 23, relocated from her home in suburban Chicago to take a job in Houston. "I was definitely more flexible than I originally thought I would be," said Smithback, who started applying for jobs in October during her last year as a student at the University of Chicago. "Most of the places I interviewed at were hiring, but couldn’t hire as many people as they normally would. It was much more selective," she said. She ultimately took a position at Reasoning Mind Inc., a nonprofit organization that designs math programs for elementary schools. "I feel really lucky to have found something," she said. "I like the job so far, it’s been interesting. It’s not something I had ever thought about doing before."

Leading Us On?
by Michael Panzner

About once a month, I put together a MarketWrap commentary for Financial Sense Online, a long-time favorite of mine. In today's edition, entitled "Gotta Wonder," I touched on a statistical series that appears to have gotten some bulls all juiced up:
This morning, the Conference Board reported that its index of U.S. leading indicators rose in July for a fourth straight month. Although the measure came in slightly short of estimates, optimists were quick to hail the recent trend as proof that "government efforts to stem the financial crisis and revive the economy are paying off," according to Bloomberg. Being the cynic that I am, the first question that popped into my mind is which "government efforts" are they referring to?

Do they mean the trillions in taxpayer funds being spent to bail out their friends on Wall Street (and elsewhere)? Or are they talking about the spinning and propagandizing that has been going on since the crisis began? Then again, maybe they are referring to something else -- like playing games with the numbers and the markets? How else, for instance, can one explain the mind-boggling divergence between current conditions and the outlook for the months ahead highlighted in the following graph?

Meredith Whitney Predicts More Than 300 Bank Failures
Meredith Whitney, the analyst who predicted that Citigroup Inc. would cut its dividend last year, said the number of U.S. bank failures will quadruple as lenders struggle with bad loans. "There will be over 300 bank closures," Whitney said in an interview with Bloomberg Television from Jackson Hole, Wyoming. "The small-business owner on Main Street continues to see liquidity come away."

Unemployment has risen to the highest since the early 1980s and Americans are falling behind on mortgage payments at a record pace, forcing regulators to seize 78 lenders in 2009, the most in 17 years. Ebank of Atlanta was closed today for being "critically undercapitalized," the Office of Thrift Supervision said. Colonial BancGroup Inc. was shut Aug. 14 and taken over by BB&T Corp. in the biggest failure since Washington Mutual Inc. collapsed in 2008.

The FDIC plans to ease rules to allow private-equity investors to acquire insolvent banks, the New York Times reported today, citing unidentified people briefed on the situation. The move would help reduce the number of failed banks the FDIC needs to support as their number increases, the newspaper said. Whitney said that even though the panic of the financial crisis has passed, investors have been "overzealous" in estimating bank profits for the next few years.

Analysts polled by Bloomberg project earnings for the industry will surge more than ninefold this year and 57 percent in 2010 as lenders recover from the worst crisis since the Great Depression. "Many banks may be OK for while, but the real driver for the economy, which is consumer spending, I don’t expect that to come back anytime soon," she said. Financial companies in the Standard & Poor’s 500 Index have collectively rallied 140 percent in the past five months after falling to the lowest level since 1992.

FDIC Is Set to Loosen Rules to Buy Failed Banks
In an attempt to attract more buyers for failed banks, the Federal Deposit Insurance Corp. is expected next week to soften its proposed restrictions on private-equity firms buying collapsed lenders, according to people familiar with the matter. While FDIC officials still are hammering out details of the final rule, the agency is expected to back away from some parts of its July proposal, including a requirement that buyout firms that bid on failed institutions maintain much thicker capital cushions than banks, these people said.

The FDIC, grappling with 77 bank failures this year, the most since 1992, is trying to strike a delicate balance. It wants to lure more capital into the banking industry but is wary of putting banks in the hands of investors who might promote risky lending practices or ditch the investments if profits don't quickly materialize. The FDIC's original proposal sparked an outcry among private-equity firms, which warned that the rules were unnecessarily onerous and would deter them from bidding on failed banks.

Some recent FDIC auctions of failed banks have suffered from lackluster interest from buyers, participants said. Private-equity firms have placed some bids but notched few victories. One exception was the sale of BankUnited FSB, Coral Gables, Fla., in May to a group led by W.L. Ross & Co. The FDIC's board is expected to vote on the private-equity rules Wednesday. An FDIC spokesman said the board hasn't made a final decision. The FDIC is expected to retreat from its July proposal that private-equity firms have a Tier 1 capital ratio of at least 15% in order to bid on failed banks, and instead require ratios of at least 10%, said the people familiar with the matter.

It isn't clear whether that threshold will be in the form of Tier 1 or another type of capital. To be considered well-capitalized, banks need to maintain Tier 1 ratios of at least 5%. The FDIC set the bar higher for private-equity firms to compensate for their generally larger risk appetites. The FDIC also is expected to ease provisions, opposed by private equity, that would require buyout firms to serve as a "source of strength" to banking subsidiaries. Such a rule would require the private-equity firm to act as a financial backstop if its banking unit runs into trouble.

The rules aren't expected to be completely watered down. Buyout firms still will have to hold on to bank charters for at least three years, limiting their ability to turn quick profits. Since the FDIC proposed the rules, the private-equity industry has flooded the agency with letters, criticizing the proposal. But others have pushed for tougher regulations.

As US Bank Failures Rise, More Foreign Banks May Make Bids
As a wave of bank failures sweeps across the U.S., a few foreign banks are stepping into the auction ring. Regulators will likely be most comfortable with those foreign banks that already have a commercial presence and proven track record in the U.S. Banco Bilbao Vizcaya Argentaria SA (BBV) is expected to be the first foreign company to buy a failed bank in this crisis; on Wednesday, the Federal Deposit Insurance Corp. told the Madrid company it won the bid for Guaranty Financial Group Inc. (GFG) in Texas. Friday, the FDIC is expected to take Guaranty into receivership.

Other foreign banks with a U.S. presence interested in gobbling up failing U.S. banks are French bank BNP Paribas (BNPQY), through its San Francisco subsidiary Bank of the West; Toronto-Dominion Bank (TD), through its Portland, Maine, subsidiary TD Bank; and Rabobank, the El Centro, Calif., subsidiary of Rabobank Group of Utrecht, Netherlands. Any additional capital to help cushion the blow to the FDIC and the financial system from bank failures would be welcome. So far, 102 banks have failed in the two years since the financial crisis erupted, 77 this year and 25 in 2008. The failures are depleting the FDIC's insurance fund. Moreover, "foreign banks have been good corporate citizens," said Peter Winter, a bank analyst with BMO Capital Markets - they haven't burdened the U.S. taxpayer with any bailout money.

In April, Bank of the West agreed to manage New Frontier Bank for the FDIC. The agency took the Colorado bank into receivership, but failed to find a buyer; Bank of the West's next step might well be a purchase. "Bank of the West remains focused on our organic growth strategy and we do monitor acquisition opportunities, particularly FDIC-assisted transactions, that would augment our growth," Bank of the West spokesman Jim Cole said. UnionBanCal Corp. in San Francisco, owned by Bank of Tokyo-Mitsubishi UFJ Ltd, is also expected to be among potential buyers. A spokesman for the bank declined to comment.

Some foreign banks have already made bids without winning. TD Bank tried to acquire BankUnited, which failed in May, and Rabobank bid for County Bank in Merced, Calif., which failed in February, though both bids were unsuccessful, according to documents posted on the FDIC's Web site. TD is understood to have made another attempt, for Colonial Bank, which failed last week and was sold to BB&T Corp. (BBT) of Winston-Salem, N.C. A TD spokesman declined to comment about Colonial.

Like BBVA, TD has built a sizable U.S. presence. It acquired Banknorth Group Inc. of Portland, Maine, and Commerce Bancorp Inc., of Cherry Hill, N.J. Its chief executive, Ed Clark, said in a video message in June, posted on the bank's Web site, that any deal would likely be in East Coast cities. "For the moment," buying failed banks with FDIC assistance "are the kind of deals we're looking at," he said. Radobank is planing to open branches and buy banks outside major metropolitan areas, like the central Californian coast, said Sean Dowdall, its executive director of marketing. It looked at several failed banks and bid for one. It will likely look at more, he said. Having a strong U.S. presence is critical, investment bankers and lawyers said.

A buyer must have the staff to take over the failed bank and its branches over a single weekend. And the FDIC may well be uncomfortable handing over a failed bank to a company with no regulatory history in the U.S., said Barry Taff, the head of mergers and acquisition practice with law firm Silver, Freedman & Taff LLP. BBVA won Guaranty against competition from U.S. Bancorp (USB) and a group of private-equity firms including Blackstone Group, Carlyle Group, Oak Hill Capital Partners and billionaire Gerald J. Ford, a former bank CEO.

The most important consideration for the FDIC is to limit the cost to its insurance fund, with which it covers losses from the failed bank's troubled loans. BBVA's bid is believed to have been significantly better to the FDIC than the next best offer. Most recent deals the FDIC struck with buyers of failed banks included loss-sharing agreements, and with such an agreement in place, a foreign bank has the opportunity to strike a deal with virtually no risk, said Taff, who advised on 11 failed bank deals in this crisis.

Who Killed 21 Georgia Banks?
"It does gall you. Just because we’re a little bitty county doesn’t mean we don’t need a bank. It wasn’t our fault."
— Hazel Bedingfield, 79, who now travels 24 miles for her Social Security payment at her new bank

You deposit your paycheck on Friday and can’t get money out on Saturday. But don’t worry, the FDIC will cut you a check on Monday morning. Your county commissioner tells the evening news: "The bank failure opens up an opportunity for another bank to set up here. Until then, customers will have to find another bank in a surrounding county." Your bank might have been built in 1905. It may have survived two world wars and a Great Depression. It was sold in 2000 and rebranded when the new owners moved headquarters to Atlanta…you can guess the rest.

This happened to citizens in Gibson, Ga. And it could happen to you tomorrow. The Feds raid your bank on Friday…They escort the CEO out. Then they empty the vault. Right now, aren’t you wondering how much longer will this go on? The short answer: about $13 billion worth of FDIC intervention. I’m wondering if that’ll be enough. Gargantuan, unfounded suburban growth ringing ‘round the Peach State’s metropolis Hotlanta takes the brunt of the blame for bank collapses left and right. Especially those construction loans. A typical example of why these failed, according to FDIC investigation: Over 75% of the loan money was handed out before a single day of on-site construction began.

But here’s a big reason: Banks invest in other banks. Some banks never see nice depositors walk up to their ATMs or get lollipops at the counter. The wholesale bank’s only clients are other banks. If some of those big-ticket clients fold, well, there goes the bank. Silverton was just such a bank, with about 1,500 client banks in 44 of the 50 states. This earned Silverton the nickname "the Mini-Federal Reserve."

The trouble came from the chunks of real estate loans Silverton sold to other banks in "low-growth" areas: deposit-rich regions that are "loan poor." Guess that means places that aren’t Nevada, California or Georgia. It didn’t stop Florida Community Bank from adding a stake in the now-defunct Silverton bank to its $978 million dollar asset base. And the FCB ranks among the weakest financial institutions in Florida. We are not surprised.

Even Atlanta’s Federal Home Loan Bank, as 2009 dawned, was straddling the mere 3% capital ratio that would set a regulator’s teeth on edge. (The culprit there was the unwinding private-label mortgage-backed securities.) Now get this. The Georgia banks facing FDIC conservatorship often depend on loan advances from the Federal Home Loan Bank of Atlanta to stay afloat, and the FHLB gets paid first, before depositors — costing the FDIC even more millions — even if the collateral isn’t there to do it.

Georgia regulators OK’d any fly-by-night bank startup. After all, who didn’t want a cut from making loans to real estate developers? At the start of the housing collapse, Georgia had 334 banks. That’s more than in California, which has four times Georgia’s population. Dan Amoss, the editor of Strategic Short Report, points a finger at this failed bank and offers some advice:
"A perfect example is Integrity Bank in Georgia, which should have been shut down long before it was allowed to attract new deposits with high CD rates. "Also, note to Whiskey readers: If your CD rates seem too good to be true, your bank may not be healthy, and you may have to deal with the hassle of not accessing your money while the bank is resolved."

All last week, Dan and I fired e-mails back and forth about the next U.S. bank to fail: The Great Southern behemoth: Colonial BancGroup. Then, on Friday Aug. 14, it finally happened… BB&T to Swallow Colonial Whole: What Bones Will It Spit Out? Colonial tapped the FDIC’s matchmaking skills to shack up with BB&T. Expect this marriage to look like the 20-something who marries the wealthy old man because she can’t wait to max out his credit cards. Dan bet me last Friday that dilutive stock offerings were on the way.

Sure enough, come Monday, BB&T offered 26.6 million brand-new shares to some willing dupes. Like the other Southern banks we’ve been talking about, Alabama-based Colonial’s arms stretched into bad places like Georgia and Florida. And here’s what helped shake Colonial’s foundation. They call it warehouse lending. That’s short-term financing that independent mortgage bankers relied on to do business. Fannie, Freddie or Ginnie did not guarantee these loans.

Back in the 2007’s warehouse-lending heyday, the market was a $200 billion business. Lately, of course, the rich well dried up, to just $25 billion in lending. Colonial held the big 25% chunk of it. So now that it has dropped out of the race, who’s left? The other warehouse-lending trendsetters already lie in the grave. The biggest tombstones: Countrywide and WaMu. And there’s a fresh hole dug for a new occupant: Guaranty Bank of Texas, which issued the FDIC red alert last month. Finally, we have National City (acquired by PNC).

What does this tell us? If all the big enablers for these loans are shutting up shop under duress, it makes you think there could be something wrong with the product. Instead of letting the free market eat the gross error of overexuberance, the industry is lobbying Washington to give government-backed Fannie Mae, Freddie Mac and Ginnie Mae a bigger role in warehouse lending.

Don’t Let the GSEs Take Over

Let’s flash back to a nice piece of advice that still holds true for Fannie, Freddie and fast-growing Ginnie. Back in March 2002, the prescient Chris Mayer (before he joined the Agora family) wrote a missive for called "Mortgage Market Socialization." Take a look at this bit of prophecy:
"Forgotten is the truism that periods of prosperity necessarily precede periods of crisis. Thus, caution becomes heresy and optimism becomes the new religion. "The only way to correct this problem is the same way all socialistic practices are corrected — the government’s involvement must be severed completely.

Just because the GSEs have led a charmed life so far is no reason to infer that their future will always be so bright. Socialism is not dead; it is alive in institutions like the GSEs. "The longer the GSEs are able to expand as they have, the more certain it becomes that someday taxpayers will have to bear the cost of such excess. Like Russian roulette, the longer you play, the more certain it becomes that you will bear the risk for playing."

I don’t know about Congress, but I think you Shooters would be eager to put down this particular gun. We’ve already paid about $86 billion in bailouts and what’s it gotten us? But since Fannie and Freddie backs or owns more than half of the single-family mortgages — probably yours — how about we just don’t load any more bullets? Here’s the directionless drivel from Tim Geithner, recently before the Senate Banking Committee, as reported by Bloomberg:
"Fannie Mae and Freddie Mac will remain in limbo, as the U.S. Treasury secretary said the government doesn’t have time now to deal with the future of the two mortgage-finance companies it seized in September.

"We did not believe that we could at this time — in this time frame — lay out a sensible set of reforms to guide, to determine what their future role should be. We’re going to begin a process of looking at broader options for what their future should be… "We just didn’t think it’s an essential thing to do just now, but it is an essential thing to do."

Doesn’t this fill you with confidence? You see, Shooters, this whole mess began at an exclusive resort island off the coast of Georgia…The ol’ Jekyll Island Club set the foundation for sopping up and propping up incompetence in 1913.

In New Phase of Crisis, Securities Sink Banks
U.S. banks have been dying at the fastest rate since 1992, mainly because of bad loans they made. Now the banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks. Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history, and broker a sale of the Texas bank to Banco Bilbao Vizcaya Argentaria SA of Spain. Guaranty's woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation's worst lenders.

Guaranty owns roughly $3.5 billion of securities backed by adjustable-rate mortgages, with two-thirds of the loans in foreclosure-wracked California, Florida and Arizona, according to the company's latest report. Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank's capital. Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions. "Under most scenarios, they were good and prudent investments -- as long as we didn't have a housing or banking crisis," says John Stein, president and chief operating officer at FSI Group LLC, a Cincinnati company that invests in financial institutions.

The specter of a systemic collapse in the U.S. banking system has faded, largely because the government has shored up the industry with $250 billion in taxpayer-funded capital since last fall, most of it going to big banks. But more than 20% of all banks reported a net loss in the first quarter, the latest period for which the Federal Deposit Insurance Corp. has figures, and problems are now building in small and medium institutions. Mortgage-delinquency rates and losses on credit cards are at all-time highs. The accumulating bad assets and need for capital mean few banks are lending aggressively, creating a drag on the economic recovery.

Many analysts and bankers are increasingly worried that the boomerang effect that killed Guaranty will cripple many small and regional banks already weakened by losses on home mortgages, credit cards, commercial real-estate and other assets imperiled by the recession. "There is no question that these securities will be...for some of these banks the straw that breaks the camel's back," says Cassandra Toroian, founder and chief investment officer of Bell Rock Capital LLC in Rehoboth Beach, Del., which manages money for financial-services companies and wealthy individuals.

Thousands of banks and thrifts scooped up securities tied to the housing market or other financial institutions in the past decade. Such investments were alluring because they seemed certain to outperform Treasury bonds, municipal bonds and other humdrum holdings that dominated the securities portfolios at most banks for generations. As of March 31, the 8,246 financial institutions backed by the FDIC held $2.21 trillion in securities -- or 16% of their total assets of $13.54 trillion.

The problems also underscore how the boom in securitization of loans instilled a belief that risks could be controlled, an idea embraced first by financial giants like Citigroup Inc. and Merrill Lynch & Co. and then smaller institutions reaching for higher profits. "We saw them as a safe investment, and now we wish we didn't have them," says Robert R. Hill Jr., chief executive of SCBT Financial Corp, a Columbia, S.C., bank with 49 branches. The bank has less exposure than some other small institutions, with the crippled securities representing about 10% of its investment portfolio. The overall impact on the U.S. banking industry's second-quarter results isn't clear, because disclosure of losses and even the types of securities owned vary widely from bank to bank. Some obscure their troubled holdings in a vague line item titled "other" in financial statements.

"The very depth of the problem is very difficult for us to get our hands on," says Jim Reber, president of the ICBA Securities, the brokerage unit of the Independent Community Bankers of America, a trade group of 5,000 small banks and thrifts. "These securities have declined in value, and it is not clear when they are going to come back in value, if at all." Red Pine Advisors LLC, a New York firm that helps small banks value illiquid investments, is picking up about 25 new clients per quarter as banks scramble to assess what they own. "Some of these banks that made these investments didn't know what they were buying. Others just bought too much," says Wade Vandegrift, a principal at Red Pine.

Last month, dozens of small and regional banks said their financial results were bruised by a deterioration in their securities portfolios. Riverview Bancorp, of Vancouver, Wash., eked out a $343,000 profit, but the 18-branch bank took a $258,000 charge on a pool of securities it holds. First Defiance Financial Corp. had a write-down of $874,000 on four investment pools valued at $2.3 million. Officials at the Defiance, Ohio, bank with 35 branches said it owns even more of those kinds of securities, but their performance is holding up so far.

The sickened securities fall into two categories. Guaranty is among nearly 1,400 banks that own mortgage-backed securities that aren't backed by government-related entities such as Fannie Mae and Freddie Mac. Such "private issuer" and "private label" securities are carved out of loans originated by mortgage companies, packaged by Wall Street firms and then sold to investors. During the buoyant housing market, many of those securities earned top-notch grades from major rating agencies, giving bank CEOs, finance chiefs and treasurers comfort. "A lot of community banks are located in communities that weren't growing, and there wasn't a lot of loan opportunity. They needed some place to invest their money," says J. Stephen Skaggs, president of the Bank Advisory Group LLC in Austin, Texas. So, they snapped up securities.

Small and regional financial institutions own about $37.2 billion of private-issuer and private-label securities, Red Pine estimates. But regulators are pressuring banks to write down the value of their mortgage-backed securities, now being downgraded as more borrowers fall behind on payments for the underlying loans. Banks also are being battered by more than $50 billion of trust preferred securities, financial instruments that are a hybrid between debt and equity. From 2000 to 2008, more than 1,500 small and regional banks issued trust preferred securities, according to Red Pine data. In a process similar to the securitization of subprime mortgages, Wall Street brokerage firms bought the securities from individual banks and packaged them into so-called collateralized-debt obligations. The firms then sold slices of the CDOs to investors, marketing them as lucrative but low-risk.

Many of the buyers were small and regional banks, which were confident they could evaluate other banks and attracted to the interest promised by the issuing financial institution. But as banks struggle with rising loan losses, some issuers of trust-preferred securities no longer can afford their obligations. In the first half of 2009, 119 U.S. banks deferred dividend payments on their trust-preferred securities, while 26 defaulted on the securities. The consequences are cascading down to banks that bought the securities. One banking lawyer who asked not to be identified describes the result as a "wonderful chain of stupidity."

Huge holdings of trust-preferred securities doomed six family-controlled Illinois banks that collapsed last month. Their capital ratios tumbled below minimum requirements when regulators forced the banks to write down the value of the securities, says Lyle Campbell, who ran the family's banking business. The six failed banks, three of which opened in the Civil War era, had about $1.38 billion in combined assets. Their collapse is expected to cost the FDIC's strapped insurance fund $267 million. "A lot of these banks had no business buying this stuff," says Ms. Toroian, a former bank analyst. "These are banks that survived the Great Depression, and now they can't survive this financial crisis because they made some bad mistakes in their investment portfolios."

Guaranty's push into mortgage-backed securities underscores how easy it was for regional and small banks to double down on their real-estate bets when times were good. Founded in 1938 as Guaranty Building & Loan in Galveston, near the Gulf of Mexico, the institution had swelled to $2 billion in assets and about 30 branches when the Texas real-estate bubble burst. In 1988, regulators declared Guaranty and more than 100 other savings and loans insolvent. Guaranty was brought back from the dead by Temple-Inland Inc., a conglomerate that owned timberland, paper mills, a railroad and a small mortgage company. With government help, the Austin company combined the S&L and two other failed Texas thrifts into a new thrift that was twice as big.

By 2005, Guaranty had $18 billion in assets and 150 branches in Texas and California. That year, Guaranty bought nearly $3 billion of triple-A-rated mortgage-backed securities, according to company filings. Its holdings ballooned to $3.2 billion from $420 million a year earlier. Under pressure from shareholders such as billionaire Carl Icahn, Temple-Inland spun off Guaranty in 2007. The housing market was sliding, but Guaranty didn't waver from its self-confidence.

"While the deterioration in the housing and credit markets is clearly significant, and could continue, it is important to note that we did not originate or purchase subprime loans, we have very few 2006 and 2007 vintage single-family mortgage loans, we buy straightforward structured mortgage-backed securities, and lending to home builders is a long-time core competency for us," Guaranty President and Chief Executive Kenneth R. Dubuque wrote in his first shareholder letter.

Mr. Dubuque, who stepped down from Guaranty in November, couldn't be reached for comment. All of the mortgage-backed securities Guaranty bought from 2005 to 2007 were created from option adjustable-rate mortgages, which let borrowers decide how much to pay each month. And of the 45 private-label mortgage-backed securities in Guaranty's investment portfolio at the end of 2007, at least 26 were created from loans made by American Home Mortgage Corp., Countrywide Financial Corp., IndyMac Bancorp or Washington Mutual Inc. All of those lenders have since collapsed or been sold because of massive loan losses.

Delinquency rates on Guaranty's portfolio jumped to as much as 40% last fall from a range of 4% to 22% in 2007. Last month, banking regulators forced the company to write down the mortgage-backed securities by $1.45 billion, or more than a third of their value in November. The write-downs plunged Guaranty's total risk-based capital ratio, a measurement of its ability to absorb future losses, to negative 5.5%, classifying the bank as "critically under-capitalized." The Office of Thrift Supervision took over Guaranty's board, and the FDIC rushed to find a buyer.

Most Failing Banks Are Doing It the Old-School Way
by Floyd Norris

Banks are now losing money and going broke the old-fashioned way: They made loans that will never be repaid. As the number of banks closed by the Federal Deposit Insurance Corporation has grown rapidly this year, it has become clear that most of them had nothing to do with the strange financial products that seemed to dominate the news when the big banks were nearing collapse and being bailed out by the government. There were no C.D.O’s, or S.I.V.’s or AAA-rated "supersenior tranches" that turned out to have little value. Certainly there were no "C.D.O.-squareds."

Staying away from strange securities has not made things better. Jim Wigand, the F.D.I.C.’s deputy director of resolutions and receiverships, says banks that are failing now are in worse shape — in terms of the amount of losses relative to the size of the banks — than the ones that collapsed during the last big wave of failures, from the savings and loan crisis. The severity of the current string of bank failures shows that many of the proposed remedies batted about since the financial crisis erupted would have done nothing to stem this wave of closures.

These banks did not get in over their heads with derivatives or hide their bad assets in off-balance sheet vehicles. Nor did their traders make bad bets; they generally had no traders. They did not make loans that they expected to sell quickly, so they had plenty of reason to care that the loans would be repaid. What they did do is see loans go bad, in some cases with stunning rapidity, in volumes that they never thought possible.

The fact that so many loans are souring is a testament to how bad the recession, and the collapse in property prices, has been. But looking at some of the banks in detail shows that they were also victims of their own apparent success. Year after year, these banks grew and grew, and took more and more risks. Losses were minimal. Cautious bankers appeared to be missing opportunities. As the great economist Hyman P. Minsky pointed out, stability eventually will be destabilizing. The absence of problems in the middle of this decade was taken as proof that nothing very bad was likely to happen. Any bank that did not lower its lending standards from 2005 through mid-2007 would have stopped growing, simply because its competitors were offering more and more generous terms.

Take the recent failure of Temecula Valley Bank, in Riverside County, Calif. For most of this decade, it grew rapidly. Deposits leapt by 50 percent a year, rising to $1.1 billion in 2007, from less than $100 million in 2001. That growth was powered by construction loans, on which it suffered virtually no losses for many years. By 2005, loans to builders amounted to more than half its total loans — and to 450 percent of its capital. Temecula appeared to be very well capitalized. But virtually all that capital vanished when the boom stopped. When the F.D.I.C. stepped in last month, the bank had $1.5 billion in assets. The agency thinks it will lose about a quarter of that amount.

Across the country, at Security Bank of Bibb County, Ga., the story was remarkably similar. Its fast growth was powered by construction loans, although in this case the loans mostly financed commercial buildings, not houses. When those loans went bad, what had appeared to be a well-capitalized bank went under. The F.D.I.C. estimates its losses will be almost 30 percent of the bank’s $1.2 billion in assets.

In both of those cases, to get another bank to take over the failed bank, the F.D.I.C. had to agree to share future losses on most of the loans. That is one reason the agency’s estimates of its eventual losses could turn out to be wrong. In the best of all worlds, the loss estimates would be too high because the economy and property prices recover rapidly. But if the recovery is slow, the losses could grow. In either case, the F.D.I.C. may soon need to seek more money to pay for failing banks. It could seek that cash from the Treasury, where it has a line of credit, or it could seek to raise the fees it charges banks.

So far this year, the F.D.I.C. has closed 77 banks, and there almost certainly will be more on Friday, the agency’s preferred day for bank closures. Last Friday there were five. Not since June 12 has there been a Friday without a bank closing. By contrast, there were three failures in 2007 and 25 in 2008. Of the 77 failures in 2009, the F.D.I.C. could not even find a bank to acquire eight of them. Of the other 69, the agency signed loss-sharing agreements on 41. By contrast, the agency found acquirers for all of the 25 failed banks in 2008, and had to sign loss-sharing agreements for just three of the banks.

"Loss-sharing" is something of a misnomer. In practice, the vast majority of the losses are borne by the F.D.I.C. Typically, it takes 80 percent of the losses up to a negotiated limit, and 95 percent of losses above that level. Although the losses on current failures stem mostly from construction loans, it is possible that commercial real estate will be the next big problem area. Losses in that area were growing at the Temecula bank, although its portfolio was relatively small. During the credit boom, loans on those properties became easier and easier to get, on more and more liberal terms. Unlike residential mortgages, commercial real estate loans typically must be refinanced every few years. With rents and values down in many areas, that will not be possible for a lot of buildings, and some owners are just walking away from their buildings.

Two years ago, when the subprime mortgage problems began to surface, Washington took great comfort from solid balance sheets, which regulators thought meant the banks could easily weather the problem. Last year, we learned that the regulators, like the bankers, did not comprehend the risks of some of the exotic instruments dreamed up by financial engineers. This year we are learning that the regulators, like the bankers, also failed to understand the risks of the generous loans that the banks were making in the middle of this decade.

Synovus bank unloading repo homes to clear bad loans
Columbus-based Synovus is in the midst of a massive purge of distressed property, mostly foreclosed homes and vacant lots. Through auctions run by contractors, the banking company has sold thousands of properties over the past four months as it works to cleanse a balance sheet hammered by bad real estate bets, many in the troubled metro Atlanta market. The sell-off continues this week and next as the bank plans to auction off about 150 distressed properties through a combination of online and live auctions. Properties on the block include homes from Carrollton to Canton and vacant lots from Newnan to Austell.

Minimum bids at one auction hosted by Williams & Williams range from $10,000 for a 2-bedroom, 2-bath home in Cartersville to $50,000 for a 5-bedroom, 3-bath house in Woodstock. Many banks are selling repossesed homes, but the numbers for Synovus are eye-popping. Synovus sold $400 million worth of distressed assets in the second quarter alone and plans to sell $600 million more over the third and fourth quarters. The bank has recorded large losses on the transactions, including $165 million in the second quarter.

The bank, which is averaging returns of about 45 cents on the dollar, expects to lose $300 million more in the second half of the year through asset sales. A Synovus spokesman said auctions have been a successful way of selling assets, with five planned this quarter.

Wall Street analysts cheer the company’s aggressive actions, saying they put it on the road back to profitability. With bad loans cleared off the books, money that’s been siphoned off to cover loan losses can be used to boost earnings. Jennifer Demba, an analyst at SunTrust Robinson Humphrey, recently upgraded Synovus’s stock to a "buy" rating. "As promised, Synovus was very aggressive in disposing of problem assets, and investors should be pleased with the [loan loss reserve] build," Demba wrote in a recent report.

Other large Georgia banks, including United Community Banks, are making significant progress in disposing of their problem loans. But Georgia’s biggest bank, SunTrust, would not talk about its plans for selling distressed property. Some smaller banks grumble, worrying that the property dumps by the big players causes housing prices to tumble even further. "It’s definitely going to have an impact on those banks that do have toxic assets they are trying to get rid of," said Carolyn Brown, president of the Community Bankers Association of Georgia. "They all are trying to get the best dollar they can obtain."

Insurers’ Biggest Writedowns May Be Yet to Come
by Jonathan Weil

How many legs would a calf have if we called its tail a leg? Four, of course. Calling a tail a leg wouldn’t make it a leg, as Abraham Lincoln famously said. Nor does calling an expense an asset make it an asset. This brings us to the odd accounting rules for the insurance industry, including Lincoln National Corp., which uses Honest Abe as its corporate mascot. Look at the asset side of Lincoln National’s balance sheet, and you’ll see a $10.5 billion item called "deferred acquisition costs," without which the company’s shareholder equity of $9.1 billion would disappear. The figure also is larger than the company’s stock-market value, now at $7 billion.

These costs are just that -- costs. They include sales commissions and other expenses related to acquiring and renewing customers’ insurance-policy contracts. At most companies, such costs would have to be recorded as expenses when they are incurred, hitting earnings immediately. Because it’s an insurance company selling policies that may last a long time, however, Lincoln is allowed to put them on its books as an asset and write them down slowly -- over periods as long as 30 years in some cases -- under a decades-old set of accounting rules written exclusively for the industry.

Those days may be numbered, under a unanimous decision in May by the U.S. Financial Accounting Standards Board that has received little attention in the press. The board is scheduled to release a proposal during the fourth quarter to overhaul its rules for insurance contracts. If all goes according to plan, insurers no longer would be allowed to defer policy-acquisition costs and treat them as assets. One question the board hasn’t addressed yet is what to do with the deferred acquisition costs, or DAC, already on companies’ books. While there’s been no decision on that point, it stands to reason that insurers probably would have to write them off, reducing shareholder equity. The board already has decided such costs aren’t an asset and should be expensed. If that holds, it wouldn’t make sense to let companies keep their existing DAC intact.

The impact of such a change would be huge. A few examples: As of June 30, Hartford Financial Services Group Inc. showed DAC of $11.8 billion, which represented 88 percent of its shareholder equity, or assets minus liabilities. By comparison, the company’s stock-market value is just $7.3 billion. MetLife Inc. showed $20.3 billion of DAC, equivalent to 74 percent of its equity. Prudential Financial Inc.’s DAC was $14.5 billion, or 78 percent of equity. Aflac Inc. said its DAC was worth $8.1 billion as of June 30, which was more than its $6.4 billion of equity. Genworth Financial Inc. listed its DAC at $7.6 billion, or 76 percent of net assets. That was more than double the company’s $3.4 billion stock-market value.

The rules on insurance companies’ sales costs are a holdover from the days when the so-called matching principle was more widely accepted among accountants and investors. At life insurers, for example, it’s common to pay upfront commissions equivalent to a year’s worth of policy premiums. By stretching the recognition of expenses over the policy’s life, the idea is that companies should match their revenues and the expenses it took to generate them in the same time period. The problem with this approach is that deferred acquisition costs do not meet the board’s standard definition of an asset. That’s because companies don’t control them once they have paid them. The money is already out the door. There’s no guarantee that customers will keep renewing their policies.

Even the industry’s normally friendly state regulators don’t recognize DAC as an asset for the purpose of measuring capital, under statutory accounting principles adopted by the National Association of Insurance Commissioners. To be sure, the FASB’s decisions to date are preliminary. How to treat acquisition costs is one of many issues the board is tackling as part of its broader insurance project. Others include the question of how to measure insurers’ liabilities for obligations to policy holders.

Meanwhile, the London-based International Accounting Standards Board is working on its own insurance project and has said it would take a more accommodating approach to policy- acquisition costs. Insurers would be required to expense them immediately. However, the IASB has said it would let companies record enough premium revenue upfront to offset the costs. That way, they wouldn’t have to recognize any losses at the outset. So far, the U.S. board has rejected the IASB’s method.

The wild card in all this is Congress. Last spring, the insurance industry joined banks and credit unions in getting U.S. House members to pressure the FASB to change its rules on debt securities, including those backed by toxic subprime mortgages, so that companies could keep large writedowns out of their earnings. Because the FASB caved before, it’s a safe bet the industry would go that route again. With so much riding on the outcome, we should expect nothing less. What’s at stake isn’t the real value of the industry’s assets, but investors’ perceptions of how much they’re worth. Honest Abe wouldn’t be fooled.

Firms Move to Scoop Up Own Debt
A number of corporations are quietly buying back bonds on the cheap in the open market as the financial system works its way out of crisis mode. They are taking advantage of depressed prices to save millions of dollars in interest and debt-repayment costs. In the recent round of second-quarter financial filings, companies including Beazer Homes USA Inc., Hexion Specialty Chemicals Inc., Harrah's Entertainment Inc. and Tenet Healthcare Corp. disclosed they had bought slugs of their bonds from the market at discounts to the debt's face, or par, value. Until the disclosures, investors were mostly in the dark about the purchases.

Bankers said the trend could signal that corporate executives think the worst of the credit crisis is over and are feeling better about the economic outlook, because they are using cash to buy back debt instead of hoarding it. But the moves also reflect how companies and private-equity firms are coming to grips with the new reality. Companies with below-investment-grade credit ratings have roughly $1.4 trillion in debt coming due through 2014, according to Standard & Poor's data. With markets unlikely to allow them to easily refinance most of that debt, companies are doing whatever they can now to pay some of it down or buy extra time to repay.

"The real issue for companies now is how they delever, and every little bit counts," says Judith Fishlow Minter, a managing partner at North Sea Partners LLC, a private investment bank in New York. While many companies are purchasing bonds through publicly announced tender offers, those that conduct buybacks without formal notification can often do so without driving prices higher. "No one wants to announce a bond or loan buyback until they have to, as that will move prices," said Tom Newberry, head of leveraged finance at Credit Suisse in New York. "Those firms that can do this quietly and under the radar screen can buy more cheaply and chip away at their maturities."

Chemicals producer Hexion, which is controlled by Apollo Management LP, spent $26 million in the first quarter buying back notes with a face value of $196 million, paying an average of 13 cents on the dollar. Between April and August, Hexion spent another $37 million purchasing $92 million in debt at an average of 40 cents on the dollar. While the buyback enabled Hexion to book a gain of $182 million, the company still has $3.5 billion in outstanding debt. An Apollo spokesman declined to comment.

In addition to open-market bond buybacks, others are getting lenders' consent to push out the maturity dates of loans. Many also are selling secured junk bonds to replace bank loans that impose strict financial-performance standards known as covenants. But while buybacks and bond tenders are helping companies shrink debt loads at the margin, the challenges ahead are immense. Buying back debt cheaply also is advantageous because a company can record accounting gains, reflecting the difference between what it paid and the value of the bond on its books, boosting bottom lines.

"You can rearrange the deck chairs all you want, but these are mostly short-term fixes," said Daniel Toscano, a former Wall Street banker. "At some point, something's got to give and someone in the food chain will lose money." Most of the debt buybacks took place between March and August, a period in which average high-yield-bond prices rose from 59 cents to 85 cents for every dollar of debt. Leveraged loans issued by companies with speculative-grade ratings traded between 66 cents and 86 cents, according to Standard & Poor's Leveraged Commentary & Data.

The run-up in prices will make it more expensive for companies to repurchase debt, but with many bonds still trading well below par value, firms still may find it a worthwhile move. In July, hospital operator Tenet Healthcare bought back $68 million in debt from the open market, spending $60 million in cash, the company disclosed this month. Biggs Porter, Tenet's chief financial officer, said the company ended the second quarter with a "strong cash balance" and undertook the buybacks to reduce total debt and annual interest expenses. The move was "opportunistic as it wasn't part of a broader plan, and relative to what we would earn on our cash in the bank, it made economic sense," Mr. Porter said.

In the second quarter, Beazer spent $58 million buying back $115.5 million in bonds, paying an average of 50 cents for each dollar in debt. The bonds represented 8% of Beazer's debt. Effectively, the Atlanta company paid half of what it would have had to pay had it allowed the debt to mature on time. In its earnings conference call this month, Beazer Chief Financial Officer Allan Merrill said the purchases were "part of efforts to address our capital structure," and the company expects to take more steps to reduce debt. Beazer declined to elaborate. "I'd characterize this as the credit-repair phase," said Matt Eagan, high-yield portfolio manager at Loomis Sayles in Boston.

Meanwhile, Hovnanian Enterprises Inc. paid $223 million to buy back $578 million in debt, mostly during February and April. The home builder in June tendered for some of its bonds. Units of casino operator Harrah's, which was taken private in 2008, paid an average of 48 cents on the dollar to purchase $788 million in debt during the second quarter, according to Harrah's filings. The company has taken other steps to reduce debt in recent months through tenders and bond-exchange offers. A Harrah's spokesman declined to comment.

China’s 2% Inflation Estimate Puzzles Economists as Prices Fall
A Chinese government estimate that inflation may be 2 percent for 2009 is puzzling economists after prices fell for six of the past seven months. The Ministry of Commerce made the estimate in a statement on its Web site yesterday, citing rising demand and gains in commodity prices. "It’s just impossible," Wang Qian, a Hong Kong-based economist at JPMorgan Chase & Co., said today. Inflation would have to jump to more than 6 percent for the rest of the year to bring the average to that level, said Wang, who forecasts a 0.5 percent decline in prices for 2009.

The People’s Bank of China said last month that consumer prices may rebound after bottoming out in the third quarter. Central banks around the world are gauging the risk that monetary policies aimed at easing the worst economic slump since the Great Depression will trigger inflation. Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong, also said that a 2 percent increase is "not possible" and speculated that the commerce ministry may have been referring to the possible gain in a single month.

In July, prices fell 1.8 percent from a year earlier, the biggest drop since 1999. China’s gross domestic product expanded 7.9 percent in the second quarter from a year earlier as the economy rebounded from the weakest growth in almost a decade.

Bernanke, Trichet See End to Global Slump, Caution on Recovery
Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet said the world economy is pulling out of its deepest slump since the 1930s while cautioning that threats to a recovery remain. "Prospects for a return to growth in the near term appear good," while "critical challenges remain," including possible further losses for financial firms, Bernanke said today. Trichet said the presence of "green shoots" isn’t enough for him to declare the recovery sustainable and that policy makers "have an enormous amount of work to do."

The mixed outlook was one of the main themes struck on the first of two days of the annual central bankers’ symposium in Jackson Hole, Wyoming, hosted by the Kansas City Fed bank. Monetary policy makers from South Africa to Mexico and economists dissected the causes of the financial crisis and debated how to prevent or mitigate the next one. As the policy makers and academics gathered by the Teton mountains, economic reports showed unexpectedly strong signals of a rebound in the U.S., Germany and France. U.S. purchases of previously owned homes climbed 7.2 percent in July to the highest level in almost two years, signaling the housing crisis that crippled the world’s largest economy is easing.

U.S. stocks gained for a fourth day, with the Standard and Poor’s 500 Index rising 1.9 percent at 5:01 p.m. in New York. Benchmark 10-year notes yielded 3.57 percent, up 13 basis points from yesterday. Following last week’s data showing the euro-area’s two largest economies pulled out of a recession in the second quarter, Markit Economics reported today that German services expanded this month for the first time since September. Its gauge for French manufacturing rose to its highest in 15 months. "There is a sense here that things have stabilized since the panic," said John Taylor, a former U.S. Treasury official and now a professor at Stanford University in California, who attended the symposium. "But things still look pretty flat and nobody is saying there is going to be a sharp rebound."

After giving welcoming remarks at a dinner the previous evening, Bernanke, 55, opened the formal part of the conference today with a speech defending the Fed’s responses to the crisis over the past year and those of counterparts around the world. A "strong and unprecedented international policy response" averted "the imminent collapse of the global financial system," Bernanke said. Even with the economy on the mend, Bernanke said "strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit." Recovery "is likely to be relatively slow at first, with unemployment declining only gradually from high levels."

Bernanke’s note of caution underscored the Fed’s decision last week to leave interest rates near zero for an "extended period" and to delay by a month the scheduled end to its $300 billion program to buy U.S. Treasuries. At lunch, Bank of Israel Governor Stanley Fischer told attendees that "despite the encouraging signs of recovery, it is too early to declare the economic crisis over." The former vice chairman of Citigroup Inc. also said the global banking system may require "radical restructuring" to avoid future financial crises. While economists predict the U.S. will return to growth this year, they say the jobless rate is likely to rise beyond 10 percent, restraining consumer spending and casting a cloud over the strength of the recovery.

Later in the day, Trichet, 66, spoke from the audience during a debate period, saying, "I am a little bit uneasy when I see that because we have some green shoots here and there, we are already saying, ‘Well, after all, we are close to back to normal.’" "We know that we have an enormous amount of work to do and we should be as active as possible," Trichet said without elaborating on a forecast. Bundesbank President Axel Weber, speaking on CNBC, said at the gathering that it’s "too early to say it won’t be a bumpy road ahead."

Separately, the Organization for Economic Cooperation and Development will next month upgrade its outlook for the economy of its 30 nations, which include the U.S. and Japan, Secretary General Angel Gurria said. The Paris-based group said in June that the combined economy of the world’s most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010. "We’re confirming a positive trend but are still cautious," Gurria said in an interview in Jackson Hole. "There are risks that are important."

Economists forecast the U.S. economy will expand at a 2.2 percent annual rate in the third quarter, according to the median estimate in an August survey by Bloomberg News. The International Monetary Fund last month predicted the world economy will grow 2.5 percent in 2010 after contracting 1.4 percent this year. One academic paper presented at the symposium said large financial crises can impair long-term economic growth by increasing government debt and reducing tolerance for risk. "Many systemic banking crises have had lasting negative effects on the level of gross domestic product," Bank for International Settlements economist Stephen Cecchetti said in the paper, written with BIS economists Marion Kohler and Christian Upper.

Meredith Whitney, the analyst who predicted that Citigroup Inc. would cut its dividend last year, outlined one key risk to the recovery by predicting the number of U.S. bank failures will quadruple as lenders struggle with bad loans. "There will be over 300 bank closures," Whitney said in an interview with Bloomberg Television in Jackson Hole. "The small-business owner on Main Street continues to see liquidity come away."

Geithner Says No Tilt to Goldman
Treasury Secretary Timothy Geithner said Friday that government officials acted appropriately in their dealings with Goldman Sachs Group Inc. during the heat of the financial crisis last year. Some lawmakers have questioned whether ties between government officials and Goldman Sachs influenced their decisions about which financial firms should be saved. The government's rescue efforts weren't intended to benefit Goldman but to prevent a broader collapse of the financial system, Mr. Geithner said in an interview with The Wall Street Journal and Digg, an online site where 39 million users share articles with one another and rate their popularity. Mr. Geithner was responding to questions submitted and voted on by Digg users in partnership with the Wall Street Journal.

"We have been forced to do just extraordinary things and, frankly, offensive things to help save the economy," Mr. Geithner said. "I am completely confident that none of those decisions…had anything to do with the specific interest of any individual firm, much less Goldman Sachs." Questions were raised about the government's decision to allow the collapse of Lehman Brothers, a Goldman Sachs competitor, and the decision to prop up American International Group Inc., a counterparty to Goldman that subsequently paid the Wall Street firm about $13 billion.

Much of the criticism has been aimed at former Treasury Secretary Henry Paulson, the onetime chief executive of Goldman Sachs who was aided at Treasury by a bevy of advisers with ties to the firm. Mr. Paulson told lawmakers during a congressional hearing last month that government ethics lawyers gave him a waiver allowing him to talk with his former company last fall "when it became clear that we had some very significant issues with Goldman Sachs." While he was instrumental in the rescue of AIG, he told lawmakers he "had no role whatsoever in any of the Fed's decision regarding payments to any of AIG's creditors or counterparties."

Neither Federal Reserve Chairman Ben Bernanke nor Mr. Geithner, who previously headed the Federal Reserve Bank of New York, has ever worked for Goldman Sachs. Stephen Friedman, the former chairman of the New York Fed, was a director and shareholder of Goldman Sachs. Mr. Friedman has since stepped down amid a controversy over those dual roles. In response to questions from Digg users about whether government officials who rescued Wall Street were corrupt, Mr. Geithner said that while he understands the public anger toward the bailouts, policy makers acted honorably in their efforts to save the financial system. He said the government needs policy makers who understand financial markets and are able to help craft efforts that protect taxpayers.

"These are deeply honorable men, great public statesmen willing to come serve their country in very challenging times and they did exceptionally good things for the country," Mr. Geithner said. Separately, Mr. Geithner reiterated the administration's position that it is too soon to tell whether additional measures might be needed to help stimulate the economy but that the administration would "do what it takes to get this economy going again."

Flight Risk in Credit Markets
New investors have poured into corporate bonds this year, lured by cheap valuations and the promise of less volatility than in equities. This has supported both record amounts of issuance and an enormous rally. But does it also contain the seeds of the market's downfall? Across the market, some 15% to 25% of demand for corporate debt in Europe since March has come from nontraditional buyers such as institutional investors usually focused on equities and retail investors, J.P. Morgan estimates. The fear is that they may prove as quick to depart as they were to arrive if fresh trouble hits the market, risking a fresh bout of illiquidity as paper floods the market.

The concerns are biggest in subordinated bank debt: J.P. Morgan suggests that what it labels "off-piste skiers" have been responsible for 20% of demand in euros and 30% in sterling for this part of the market. In March, some of these subordinated bonds were trading at just 10% to 20% of face value, after fears mounted that cash-strapped banks would defer interest payments or fail to redeem them as expected. That meant traditional equity investors, for instance, could buy them as options on the fate of the financial system. The strategy has paid off handsomely: Prices have quadrupled or even quintupled for some issues.

But the fundamental concerns that caused the sell-off remain. U.K. bank Northern Rock this week suspended interest payments on some subordinated bonds, and other banks that have received state aid may be required to do so. Some believe European banks haven't done enough to build capital in the face of mounting loan losses. And liquidity for these bonds remains low. All these risks may no longer be reflected in pricing. Add in a flighty group of investors unfamiliar with the market, and the potential for volatility is clear.

Stiglitz Sees Risk to Dollar, Need for Reserve System
The dollar’s role as a good store of value is "questionable" and the currency has a high degree of risk, said Nobel Prize-winning economist Joseph Stiglitz. "There is a need for a global reserve system," Stiglitz, a Columbia University economics professor, said at a conference in Bangkok today. Support from countries like China should ensure orderly discussions on a new reserve system, he added. The dollar has lost 12 percent since March 5 against an index comprising the euro, yen and four other major currencies.

China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves. "The current reserve system is in the process of fraying," Stiglitz said. "The dollar is not a good store of value. Right now, the dollar is yielding almost no return and yet anybody looking at the dollar has to say there’s a high degree of risk." The dollar will weaken as the U.S. pumps "massive" amounts of money into the economy, according to Curtis A. Mewbourne, a portfolio manager at Pacific Investment Management Co., the world’s biggest manager of bond funds.

Still, pessimism over the dollar’s prospects may be excessive, with its status as the world’s reserve currency still intact, said David Woo, global head of foreign exchange strategy at Barclays Capital in London. "The reserve currency issue was a big issue three months ago," Woo said in a Bloomberg Television interview yesterday. "But guess what? The dollar hasn’t gone anywhere over the last three months for the most part and if anything, we’ve seen a slowdown in dollar-selling by central banks."

Policy makers in the U.S. and Europe have flooded the global economy with liquidity, which could lead to speculative bubbles due to limited opportunities for investment, Stiglitz said. The Nobel Prize winner said he was not confident of the Fed’s claim that it would withdraw liquidity when needed. Under Chairman Ben S. Bernanke’s stewardship, the Fed cut the benchmark lending rate to as low as zero and expanded credit to the economy by $1.1 trillion over the past year. In the euro region, the European Central Bank has reduced interest rates to a record low of 1 percent. "As the balance sheet of the Fed has blown up, as the deficit of the U.S. and the debt has increased, people have asked the obvious question: will there be inflation in the future?" Stiglitz told the conference. "Right now we’re facing deflation, but some time in the future, there will be consequences."

The liquidity pumped into the U.S. economy may also end up elsewhere, including in Asian property and stocks, Stiglitz said later in Bankgok. "The liquidity is going to be spent, but not necessarily in America," he said. Asian economies may have to "protect against an American-led asset bubbles." The global financial crisis also signals the failure of American-style capitalism, Stiglitz told the conference. The worldwide financial system only worked because of repeated government bailouts and markets have been saved from their failures to allocate risk, he said. Stiglitz said more collective action was needed on a global level to address the crisis and that the Group of 20 has been slow in addressing fundamental problems such as weak aggregate demand.

Finance ministers and central bankers from the G20 are due to meet in London on Sept. 4-5. The global financial crisis, which began with the collapse of the U.S. subprime-lending market in 2007, has led to almost $1.6 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg. Treasury Secretary Timothy Geithner said yesterday the U.S. recovery is still in its early stages, propelled by an improving job market and a housing industry that’s beginning to stabilize. "We have a long way to go, but we are starting to see signs of stability, and these signs mark the first steps to recovery," Geithner said in prepared remarks in Berea, Ohio.

Stiglitz has a more pessimistic view on the U.S. economy, saying that while the worst of the recession may have passed, the likelihood of unemployment in the next one to three years being higher than it had been was "very great." The economist shared the Nobel Prize in 2001 for work on problems that may arise in markets when parties don’t have equal access to information. He was formerly chairman of the White House Council of Economic Advisers under Bill Clinton. Stiglitz was also the chief economist at the World Bank between 1997 and 2000, during which he clashed with the White House over economic policies it supported at the International Monetary Fund.

Two Reasons to Be Skeptical About Japan's 3.7% Growth
by William Pesek

Champagne corks are probably popping at Liberal Democratic Party headquarters in Tokyo. The reason for the celebration: Japan’s economy grew 3.7 percent last quarter. It’s the equivalent of answered prayers for Prime Minister Taro Aso, who is expected to lose an Aug. 30 election. Aso will no doubt argue his LDP deserves more time in power to continue its recovery efforts. Aso and his cronies should keep the bubbly on ice. Investors, too. The growth surge reeks of aberration and those who get all excited about it may live to regret it.

Yes, Japan, like France and Germany, is benefiting from the $2.2 trillion of stimulus spending by governments worldwide. Aso’s administration alone spent $264 billion. Exports, consumer spending and a big increase in government investment returned the second-biggest economy to growth. There are two bigger considerations to keep in mind, though. One, the forces restraining Japan’s growth are stronger than those supporting it. Two, the complacency that longtime Japan investors know all too well may be returning. Richard Jerram, chief economist of Macquarie Securities Ltd. in Tokyo, has a point when he says you don’t want to be a "spoilsport" about Japan’s impressive gross-domestic-product figure. At the same time, he says, "you can’t really ignore that prices are falling."

The deflation that took hold in the late 1990s had a devastating effect on household and business sentiment. And it never really ended. It took record price increases for food and energy over the past two years to produce a little inflation. Once they reversed, prices fell anew. Consumer prices plunged a record 1.7 percent in June. This week’s GDP report showed wages fell a record 4.7 percent from a year earlier. Good luck getting savings-rich consumers to spend more in this environment. It’s quite simple, say economists such as Seiji Shiraishi of HSBC Securities Japan Ltd: Domestic demand is about 70 percent of the economy and it’s "very, very weak." Once government spending runs its course, weak income trends will take over.

If the opposition Democratic Party of Japan wins this month’s election, as pollsters predict, its options are severely limited. Public debt is almost double the size of the economy, and interest rates are near zero. It will need to think fast about cost-effective ways to restore economic confidence. It’s easy to lose perspective on where Japan is right now. While not quite as impressive as China’s 7.9 percent growth, the figures are nothing to sniff at. Still, even after the second- quarter snapback, Japanese GDP is only at 2004 levels. A sobering thought, isn’t it?

Japan is hardly destitute. Yet the global crisis has set back the nation in underappreciated ways. It has widened the gap between rich and poor. It has also led to huge companies such as NEC Corp., Panasonic Corp. and Sony Corp. announcing America- like mass layoffs, which Japan always proudly avoided. Lifetime employment is being phased out for entire generations. While that may sound good to overseas investors looking for change at Japanese companies, the transition to part-time work contracts is spooking the nation of 126 million. It is also hurting the female workforce disproportionately.

And then there are the most extreme side effects. Homelessness is on the rise in cities such as Tokyo and Osaka, albeit from a low base. The suicide rate increased 4.2 percent in the first half of this year during hard economic times. And hovering above all of this is a fast-aging population that threatens to overwhelm government coffers a decade from now. Amid mounting gloom, the government’s focus is on raising the consumption tax. Such an argument is as ill-timed as it is damaging to already deteriorating household and business sentiment. It’s amazing that there isn’t more serious focus on lowering taxes to stimulate demand.

The theories of John Maynard Keynes are alive and well in Japan. Officials in Tokyo are tossing money at the economy. The spotlight must also be on cutting taxes for small to midsized companies to encourage job growth. It’s not supply-side economics that Japan needs, but a sharper focus on empowering entrepreneurs to do their thing. The time seems ripe, given that the loyalty Japanese once had to household-name companies is breaking down. Many 20- somethings now feel comfortable eschewing offers from supposedly safe employers such as Toyota Motor Corp. in favor of startups.

The bad news is complacency. Japanese politicians have a track record of declaring victory and stepping back to do other things when growth returns. The collective sigh of relief coursing down the streets of Tokyo is a dangerous thing. Can we say with 100 percent certainty that Japan’s economy will deteriorate? No, and growth of 3.7 percent does count for something. Just be 96.3 percent sure Japan isn’t out of the economic woods yet. The more the government believes it is, the more we should worry.

'Clunkers' to Close August 24 After Fueling Sales, Dealer Anger
The U.S. "cash for clunkers" trade-in program will stop accepting applications on Aug. 24, bringing to a close an effort that helped revive auto sales and drew the ire of dealers for slow repayments. The clunkers plan, which offers auto buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles, has recorded more than 457,000 dealer transactions worth $1.9 billion in rebates, the Transportation Department said in a statement yesterday.

The deadline will give car dealers and buyers time to complete purchases and apply for rebates from the remainder of the $3 billion provided by Congress, the department said. Dealers have complained of difficulty running their businesses while awaiting program payments, and the agency said it’s adding workers to help process claims faster. "Obviously there was a lot more latent demand than many thought," said Michael Robinet, an analyst at CSM Worldwide Inc. in Northville, Michigan. "That bodes well for the market. But we are past the honeymoon now and we have to see what the market looks like in the post-clunker environment."

Applications for rebates won’t be accepted after 8 p.m. New York time on Aug. 24, the agency said. The Transportation Department said it has handled 167,000, or 37 percent, of the 457,476 dealer requests submitted. The agency didn’t say how many of the processed transactions have been paid out and how many were rejected or sent back for further information. Some $145 million, or less than 8 percent, has been paid out so far to dealers, a senior administration official said on a call with reporters yesterday.

Officials from the National Automobile Dealers Association trade group met two days ago with the Transportation Department to discuss concerns that payment delays add to the burden on retailers of trying to recover from a sales slump. The association also urged the agency to outline a plan to wind down the effort so retailers know when to stop accepting trade-ins. Representative Joe Sestak, a Pennsylvania Democrat, said last week the effort had paid retailers for only 2 percent of their claims. The program is formally known as the Car Allowance Rebate System, or CARS.

Senate Majority Leader Harry Reid, a Nevada Democrat, asked Transportation Secretary Ray LaHood in a letter yesterday to speed up payments, saying "dealers have been forced to effectively finance the CARS vouchers for buyers until the dealers are reimbursed by the federal government, placing a strain on dealers’ balance sheets that, if prolonged, could eventually offset some of the benefits of the program."

More than 1,000 people are processing the applications, LaHood said two days ago. That compares with fewer than 200 when the program began. The agency is training more of its staff and is using Citigroup Inc. contractors to handle the paperwork. being delayed because the offer has been so popular. "It has been successful beyond anybody’s imagination," President Barack Obama said during an interview with Philadelphia radio talk-show host Michael Smerconish yesterday. "We’re now slightly victims of success."

General Motors Co. and Chrysler Group LLC said they plan to provide cash advances to dealers awaiting government rebates as the initiative spurs auto demand. The advances will be made for qualifying new-vehicles sales already exchanged under clunkers through the life of the program, GM said. The government’s initiative may give GM its best sales this year in August. The industry’s new-vehicle retail sales in the U.S. will top 1 million in August for the first time in the past 12 months, J.D. Power & Associates forecast.

Ford Motor Co. is increasing the availability of credit for dealers’ used-vehicle financing to provide cash flow relief to dealers awaiting ‘clunker’ payments from the government, said Meredith Libbey, a spokeswoman for the automaker’s loan unit. "Given that the funding could run out at any time, the government is erring on the side of caution so neither consumers nor dealers are left holding the bag," said Jeremy Anwyl, chief executive officer of research firm in Santa Monica, California. "We expect there will be a flurry of activity over the weekend as the program comes to a close."

Common Sense 2009
by Larry Flynt

The American government -- which we once called our government -- has been taken over by Wall Street, the mega-corporations and the super-rich. They are the ones who decide our fate. It is this group of powerful elites, the people President Franklin D. Roosevelt called "economic royalists," who choose our elected officials -- indeed, our very form of government. Both Democrats and Republicans dance to the tune of their corporate masters. In America, corporations do not control the government. In America, corporations are the government.

This was never more obvious than with the Wall Street bailout, whereby the very corporations that caused the collapse of our economy were rewarded with taxpayer dollars. So arrogant, so smug were they that, without a moment's hesitation, they took our money -- yours and mine -- to pay their executives multimillion-dollar bonuses, something they continue doing to this very day. They have no shame. They don't care what you and I think about them. Henry Kissinger refers to us as "useless eaters."

But, you say, we have elected a candidate of change. To which I respond: Do these words of President Obama sound like change? "A culture of irresponsibility took root, from Wall Street to Washington to Main Street." There it is. Right there. We are Main Street. We must, according to our president, share the blame. He went on to say: "And a regulatory regime basically crafted in the wake of a 20th-century economic crisis -- the Great Depression -- was overwhelmed by the speed, scope and sophistication of a 21st-century global economy." This is nonsense.

The reason Wall Street was able to game the system the way it did -- knowing that they would become rich at the expense of the American people (oh, yes, they most certainly knew that) -- was because the financial elite had bribed our legislators to roll back the protections enacted after the Stock Market Crash of 1929. Congress gutted the Glass-Steagall Act, which separated commercial lending banks from investment banks, and passed the Commodity Futures Modernization Act, which allowed for self-regulation with no oversight. The Securities and Exchange Commission subsequently revised its rules to allow for even less oversight -- and we've all seen how well that worked out. To date, no serious legislation has been offered by the Obama administration to correct these problems.

Instead, Obama wants to increase the oversight power of the Federal Reserve. Never mind that it already had significant oversight power before our most recent economic meltdown, yet failed to take action. Never mind that the Fed is not a government agency but a cartel of private bankers that cannot be held accountable by Washington. Whatever the Fed does with these supposed new oversight powers will be behind closed doors. Obama's failure to act sends one message loud and clear: He cannot stand up to the powerful Wall Street interests that supplied the bulk of his campaign money for the 2008 election. Nor, for that matter, can Congress, for much the same reason. Consider what multibillionaire banker David Rockefeller wrote in his 2002 memoirs:
"Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure -- one world, if you will. If that's the charge, I stand guilty, and I am proud of it."

Read Rockefeller's words again. He actually admits to working against the "best interests of the United States." Need more? Here's what Rockefeller said in 1994 at a U.N. dinner: "We are on the verge of a global transformation. All we need is the right major crisis, and the nations will accept the New World Order." They're gaming us. Our country has been stolen from us.

Journalist Matt Taibbi, writing in Rolling Stone, notes that esteemed economist John Kenneth Galbraith laid the 1929 crash at the feet of banking giant Goldman Sachs. Taibbi goes on to say that Goldman Sachs has been behind every other economic downturn as well, including the most recent one. As if that wasn't enough, Goldman Sachs even had a hand in pushing gas prices up to $4 a gallon. The problem with bankers is longstanding. Here's what one of our Founding Fathers, Thomas Jefferson, had to say about them:
"If the American people ever allow private banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and the corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their father's conquered."

We all know that the first American Revolution officially began in 1776, with the Declaration of Independence. Less well known is that the single strongest motivating factor for revolution was the colonists' attempt to free themselves from the Bank of England. But how many of you know about the second revolution, referred to by historians as Shays' Rebellion? It took place in 1786-87, and once again the banks were the cause. This time they were putting the screws to America's farmers.

Daniel Shays was a farmer in western Massachusetts. Like many other farmers of the day, he was being driven into bankruptcy by the banks' predatory lending practices. (Sound familiar?) Rallying other farmers to his side, Shays led his rebels in an attack on the courts and the local armory. The rebellion itself failed, but a message had been sent: The bankers (and the politicians who supported them) ultimately backed off. As Thomas Jefferson famously quipped in regard to the insurrection: "A little rebellion now and then is a good thing. The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants." Perhaps it's time to consider that option once again.

I'm calling for a national strike, one designed to close the country down for a day. The intent? Real campaign-finance reform and strong restrictions on lobbying. Because nothing will change until we take corporate money out of politics. Nothing will improve until our politicians are once again answerable to their constituents, not the rich and powerful. Let's set a date. No one goes to work. No one buys anything. And if that isn't effective -- if the politicians ignore us -- we do it again. And again. And again. The real war is not between the left and the right. It is between the average American and the ruling class. If we come together on this single issue, everything else will resolve itself. It's time we took back our government from those who would make us their slaves.

UBS Tax Fraud Case Whistleblower Gets 40-Month Prison Sentence
Ex-UBS AG banker Bradley Birkenfeld, who assisted U.S. investigators probing about $20 billion in taxpayer assets hidden overseas, was sentenced to more than three years in prison for conspiring to help wealthy Americans evade taxes. Birkenfeld played a key role in showing investigators how UBS helped Americans hide assets, the government said in court papers seeking leniency. Birkenfeld sought a sentence of only probation. A U.S. judge today rejected both motions, sentencing the banker to 40 months, 10 more than prosecutors sought.

"I’d like to express my regret for my actions," Birkenfeld told U.S. District Judge William Zloch today in Fort Lauderdale, Florida. Zloch, who didn’t explain his reasoning, could have given Birkenfeld a maximum five-year term. Prosecutors had noted that Birkenfeld didn’t initially reveal his role in the scheme when he first came forward as a whistleblower. The sentence, which includes a $30,000 fine, comes two days after Zurich-based UBS agreed to hand over information on 4,450 accounts to the U.S. Internal Revenue Service. In February, the bank said it would pay $780 million to avoid prosecution by the federal government.

Birkenfeld, 44, and Liechtenstein investment adviser Mario Staggl were charged in April 2008 with helping California billionaire Igor Olenicoff and others evade taxes. The son of a neurosurgeon, Birkenfeld was arrested the next month after he flew into Boston’s Logan International Airport for a high school reunion. He pleaded guilty last year. Staggl is a fugitive. UBS’s settlement and prosecutors’ efforts to wrest the names of secret Swiss account holders from the bank wouldn’t have occurred without Birkenfeld’s cooperation, the banker said in his Aug. 18 request for leniency.

Dean Zerbe of the National Whistleblowers Center criticized the judge’s sentence as a deterrent to future whistleblowers. "It stuns me that the reward for a whistleblower who shined the light on extensive tax fraud and corruption is being sent to jail," Zerbe said today in a statement. The sentence "sends a terrible message to other potential whistleblowers." Kevin Downing, a senior trial attorney with the Justice Department’s tax division, asked Zloch to delay Birkenfeld’s prison term for 90 days so he can continue to assist the investigation. The government may then request a reduction in Birkenfeld’s sentence, Downing said. The judge gave Birkenfeld until Jan. 8 to report to prison. "Birkenfeld intends to continue fully cooperating with the government in its ongoing and expanding investigation," defense attorney David Meier said after the hearing.

Since the bank’s February settlement, four UBS clients have agreed to plead guilty for failing to report offshore accounts. Former UBS banker Raoul Weil was indicted and declared a fugitive, and an ex-UBS manager and a Swiss lawyer were indicted yesterday on charges related to the investigation. Birkenfeld began working at UBS in Geneva in 2001. Four years later, he noticed that his employer wasn’t in compliance with U.S. tax laws, according to court papers. The banker said he discovered an internal document that was at odds with UBS’s practices and alerted his superiors. Birkenfeld said he was then fired. After a bonus payment was withheld, he sued the bank under Swiss laws protecting whistleblowers, according to court filings.

Beginning in 2007, Birkenfeld voluntarily provided U.S. prosecutors and the IRS with information about the bank’s efforts to help Americans evade taxes, including an overview of UBS’s banking practices, accounting reports, training guidelines, details on employee travel to the U.S., and internal e-mails and memos, he said. Lured Clients UBS bankers lured U.S. clients with sponsorships of art fairs and tennis tournaments, Birkenfeld said in court papers. The bank trained employees to avoid detection in the U.S. when visiting clients, he said, adding that he once smuggled diamonds for a client in a toothpaste tube.

Birkenfeld wasn’t forthcoming about his own complicity in the tax evasion scheme when he first spoke to government investigators, U.S. prosecutor Downing said at the hearing today. "He only put half a leg in the door," Downing said. Birkenfeld’s leniency request included letters of support from U.S. Senator Carl Levin of Michigan, representatives of the Securities and Exchange Commission and IRS, and Rosie Casals, a former professional tennis player. "He has continued to provide as much information as he possibly, humanly can," Birkenfeld’s attorney Meier said at the hearing today.

Eliminate financial double-think
by Gillian Tett

A decade ago, it was fashionable for western consultants, bankers and business people to decry Japan’s domestic service industry. For Japanese business sectors, ranging from milk production to financial broking, have long been plagued by complex distribution chains and numerous middlemen. So, Anglo-Saxon consultants – such as McKinsey – would regularly urge the Japanese to reform their distribution chains, and flourish data showing how much more "efficient" the US was than Japan in sectors such as retailing.

Back then, I was working in Tokyo as a reporter. So I dutifully reported those studies-cum-sermons on the evils of middlemen. However, amid all that debate about American efficiency, one point that western commentators almost never discussed was the proliferation of middlemen in America’s financial world. If you were to sketch a map of how credit has been sliced and diced in 21st century banking, for example, there would be so many stages – and commission-hungry middlemen – in that process, the Japanese dairy industry might seem positively rational. Yet, for many years the apparent contradiction went almost entirely unnoticed, by western politicians, bankers, and consultants alike. Middlemen were regarded as bad in Japan; but they were somehow overlooked in America’s financial world.

Why? The obvious answer is that the banking sector has been very powerful. Three decades ago, Pierre Bourdieu, a French sociologist, observed that elites in a society typically maintain their power not simply by controlling the means of production (ie money), but by dominating the cultural discourse too (ie a society’s intellectual map). And what is most important in relation to that cognitive map is not what is overtly stated and discussed – but what is left unstated, or ignored. Or as he wrote: "The most successful ideological effects are those which have no need of words, and ask no more than a complicitous silence."

The western financial system is a powerful case in point. For the first seven years of this decade, most politicians, voters (and journalists) effectively ignored the extraordinary revolution brewing in the debt and derivatives world, because these areas of finance were widely (and wrongly) believed to be very boring, or so complex they could only be understood by a tiny technocratic elite. That essentially left bankers free to operate with minimal external scrutiny. It also meant there was little discussion about the inconsistencies that plagued the free-market rhetoric – or intellectual map – that ruled the day. And these paradoxes were numerous.

One of the founding principles of free market theory, for example, is the idea that markets work best when there is a free flow of information. Yet, some of those bankers who have been promoting free market rhetoric in recent years have also been preventing the widespread dissemination of detailed data on, say, credit derivatives prices. Similarly, while bankers have taken the idea of creative destruction as an article of faith, in terms of how markets are supposed to work, they have been operating on the assumption that their own industry would never suffer too violent a wave of creative destruction.

And securitisation has produced a particularly curious – or absurd – paradox. A few years ago, it was widely assumed that the process of slicing and dicing credit would create a more "complete", free-market financial system. But by 2005, credit products had become so complex and bespoke, that most never traded at all. Thus they had to be valued according to models, since they could not even be priced in a market – in a supposed free-market system.

These days such paradoxes look so extraordinary that it is hard to believe they went unnoticed for so long. But the really interesting question about all this "complicitous silence", as Bourdieu says, is not simply why it arose in the past – but what it implies about the future. After all, one reason why this double-think persisted for so long is that bankers and policy makers alike have all been trained in recent years to take economic theories at their face value, shorn from social context, or power structures.

But if regulators and politicians are to have any hope of building a more effective financial system in future, it is crucial that they start thinking more about power structures, vested interests and social silence. That might sound like an irritatingly abstract or pious plea. However, it has some very practical implications about how policy is formulated. I will seek to flesh out some of those in next week’s column, in relation to some striking ideas being quietly developed by a few financial officials, such as Adair Turner, Britain’s chief regulator (and, by a happy chance, a former McKinsey consultant too).

Growing deficits in British company pension funds are a ‘beast that cannot be tamed’
Ballooning pension fund deficits in many British companies were likened to "the beast that cannot be tamed" and many midcap stocks appeared even more vulnerable than blue chips, according to a new study. DS Smith, the packaging group and a member of the FTSE 250, was revealed as the most vulnerable to adverse pension movements, by one measure — the size of its pension deficit as a percentage of its total market value. Interserve, the construction services group, WS Atkins, the project consultants, and Go-Ahead Group, the transport operator, also appeared exposed on this measure. All four had larger proportionate deficits than either BT or British Airways, two FTSE 100 companies regarded as particularly vulnerable because of their past pension promises.

Barclays Capital, which produced the study, warned that pension funding levels were often far worse than published numbers and that sponsoring employers would have to make higher contributions for years. One unfortunate side effect of quantitative easing, the Bank of England’s attempt to loosen monetary policy further, was that it was pushing down bond yields — which had the effect of boosting pension fund liabilities. Yields spiked higher in December, enabling companies with December year ends to report relatively healthy pension positions, BarCap said. "However, since then, and particularly as a result of quantitative easing, this situation has reversed sharply. Companies are now reporting, and we believe will continue to report, worsening pension deficits while QE continues to keep bond yields low."

According to other pension consultants, companies with a March year-end have been hit by plunging bond yields and the nadir of global equity markets. Those with a March strike date for their triennial funding reviews could be especially hard hit, as future funding requirements will be based on the health of their schemes at that time. Scores of companies are now planning to close their schemes for existing members, having already closed them to new recruits. A recent Watson Wyatt poll of large private-sector employers suggested that a million people currently accruing benefits will be disadvantaged over the next three years. But even this may not really help sponsoring employers, BarCap said. The high cost of closure, governance complexity and long-term nature of pensions meant that the short-term benefit would be minimal.

DS Smith had no immediate comment on the research. In June, it revealed that its pension deficit had risen by £83.5 million to £138 million. The fund was closed to new members in April 2005. It halved the dividend and injected £15.6 million into the scheme last year. BarCap also conducted the same analysis on large European companies: Bank of Ireland, Swiss Life, Allied Irish Banks and Lufthansa, the German airline, were revealed as having the largest deficits relative to their market values.

BarCap emphasised that its analyses were no more than a static indicator of whether pension deficits could be material, adding that pension risk could not be judged solely on the reported deficit. A study by KPMG last week found that FTSE 100 companies were set to spend as much plugging pension deficits this year as they set aside to meet future benefits for current staff. The research said that a tipping point would come during the coming 12 months in which the cost of trying to close the funding shortfalls of the companies’ defined benefit schemes would be equal to the money they set aside to cover new pension benefits earned by workers.

Russia’s Foreign Direct Investment Falls Record 45%
Russia’s foreign direct investment plummeted an annual 45 percent, the most on record, to $6.1 billion in the first six months of the year as the economy of the world’s biggest energy producer contracted at a record pace. Overall foreign investment, including credits and flows into securities, fell 30.9 percent from a year earlier to $32.2 billion, the Moscow-based Federal Statistics Service said today. The office began collecting the data in 1999.

"Given the pressures on the credit market and uncertainties in the financial sector both in Russia and globally, it would have been surprising to see a pickup in FDI volumes in this period," said Vladimir Tikhomirov, chief economist at UralSib Financial Corp. "I wouldn’t be surprised to see it lower in the third quarter too." Gross domestic product shrank a record 10.9 percent in the second quarter following a slump in the price of oil, its key export earner. This year’s decline ended a decade of expansion averaging almost 7 percent. President Dmitry Medvedev has made developing an "innovative economy" a priority in an attempt to wean Russia off dependence on oil, gas and metals exports.

Foreign investment in stocks and bonds dropped 25 percent to $862 million compared with the same period last year, the statement said. Portfolio investments jumped more than sevenfold on a quarterly basis, as recovering oil prices helped Russia’s benchmark Micex Index rally about 23 percent in the period. Other foreign investments, including loans from foreign banks and Russian companies’ foreign divisions, were down 26.5 percent in the first half at $25.2 billion, the data showed. Still, the second quarter saw almost double the $8.7 billion of the first three months, Tikhomirov said.

"The market started to unfreeze somewhat for Russian companies," as they sought to restructure their loans with foreign banks, Tikhomirov said. "It shows it was easier for some to attract loans in the second quarter than in the first." Investment in the retail industry, which received the most funds in the first six months of 2008, dropped almost 41 percent to $8 billion. Ikea, the world’s biggest home-furnishings retailer, had the opening of its outlet in Samara delayed almost two years after a disagreement with local officials. The retailer has faced at least four disputes with authorities since entering the Russian market in March 2000.

The country risks losing competitiveness as foreign investment dries up and the global economic crisis prompts the government to raise its stakes in corporate stocks. State ownership of corporate stocks reached 45 percent at the end of 2008, the Moscow-based Institute of Contemporary Development said in a February report. More than half of the stock market is controlled by the state, a setup that investors should approach with caution, according to Troika Dialog, Russia’s oldest investment bank. The decline in Russian FDI compares with a 35.7 percent slump in China’s inflows in July, the Commerce Ministry said on Aug. 17, as companies stalled expansion plans. Russia’s manufacturing industry received the largest amount of investment in the first six months, according to the Statistics Service. Foreign investors brought $9.2 billion into the industry, including stock and bond purchases.

The Netherlands was the largest foreign investor in Russia in the first six months, followed by Cyprus and Luxembourg. The U.S. was the eighth biggest. PepsiCo Inc., the world’s second-largest soft-drink maker, and Pepsi Bottling Group Inc. said on July 6 that they plan to invest $1 billion in Russia over three years in anticipation of a resurgence of consumer demand. So far the central bank’s five interest-rate cuts since April 24 have failed to spur lending as banks hold back on concern borrowers can’t repay loans. Retail sales declined 8.2 percent in July, the most in almost 10 years, as households cut back spending after incomes dropped and consumer borrowing declined. "Though assets are cheaper, the fact that FDI is falling sharply means that companies aren’t rushing to use this drop in price," Natalia Orlova, chief economist at Alfa Bank in Moscow, said by phone.


rapier said...

Terrible post on questions surrounding the FDIC.

There is an extreme amount of fluidity in the status of the FDIC.

Fact one. Their funds from collection of fees from member banks is now virtually gone. (They stopped collecting the fees from many banks sometime in the mid to late 90's. Another of the bizarre side stories in this mess. Not the least of which is who decided the unlucky ones that still had to pay?)

The rest are facts as I know them. Somewhat randomly.

A couple of months ago congress gave the FDIC a $500 billion 'line of credit'. It was stated in the press I saw as for the purpose of funding PPIP, the trashy asset purchase program which is moribund.

What the legislation actually spells out as to the use of these funds I have no clue.

Then is this story.
F.D.I.C. Seeks to Attract More Buyers of Banks

One oddity is that the story says ". That could require the F.D.I.C. to tap a multibillion-dollar lifeline from taxpayers, through an emergency borrowing program run by the Treasury Department, to finance loan sales and other short-term obligations."

Which I assume is the 500 billion that we were told was the FDIC's two months ago. You can see where this is going. Into the weeds. Nobody seems to know. One supposes a few congress people and their starffs know but that makes no difference. All that matters is what Geithner says.

The idea that this money is going to subsidize Private Equity groups is beyond a nightmare.

The fly in this ointment is that the Treasury has to go out and borrow this money. With the large auctions next week and for the next 5 till the end of the fiscal year, heavy borrowing could be a problem. Then too just two days ago the White House declared a better than expected fiscal 09 deficit of only 1.58t instead of 1.84T. The better than expected part is probably due to the slow disburement from the stimulus package and also the delay in borrowing for Tim's slush funds. Whose needs have been mitigated by the return of TARP money, which also feeds into the lower final deficit number.

Poorly written, Sorry.

Ilargi said...


Rolfe Winkler's take on the FDIC (see top) is good. My feeling is their personnel shortage is more urgent than the money one. There must be at least 100 banks that should have been closed already, and urgently. I think, as well, that the FDIC is part of a political game.

Also, the White House today announced the 10-year deficit will be almost $2 trillion higher than stated before, at $9 trillion.

Anonymous said...


Are you on Twitter? If not, it's really cool, you guys should join!

Ed_Gorey said...

Re: Banks chipping away at investor access to Inverse ETFs

We are now clearly on the path toward blocking retail investor access to all forms of shorting. Add Wells Fargo to the growing list of firms that are either discouraging, blocking, or planning to block investor access to inverse ETFs. Other firms include UBS and Fidelity as well as other I can't remember right now.

Something is brewing.

"Wells Fargo Advisors is no longer permitting its advisers to sell leveraged and inverse exchange-traded funds through advisory accounts."

Wells Fargo Shuns Some ETFs

Anonymous said...

"Banks chipping away at investor access to Inverse ETFs"

The dam is cracking.

This is a sign of that. The financial mafioso class want to be the only ones cashing in on a market they rigged to implode from the get go. Anyone who not a 'made' man is out of this play.

They have to get a short block in place before the trap door on the financial gallows is sprung.

Again, this is done in broad daylight. It's very hard to have any sympathy for the Sheeple. They have bought the Pigmen's lies and now they will be ritually disemboweled on the Alter of Crony Capitalism at the corner of Broad and Wall.

Democracy symbolically dies where it began. How fitting.

(In 1789, Federal Hall and Wall Street was the scene of the United States' first presidential inauguration. George Washington took the oath of office on the balcony of Federal Hall overlooking Wall Street on April 30, 1789. This was also the location of the passing of the Bill Of Rights.)

Anonymous said...

JACKSON HOLE, Wyo., Aug 21 (Reuters) - The U.S. budget deficit poses more of a potential risk to the financial system than the collapse in commercial real estate prices, an influential economist said on Friday.

"We have a huge deficit. ... The stimulus package is generating a lot more debt, and there are systemic issues there," Stanford University economics professor John Taylor told Reuters Television on the sidelines of the Federal Reserve's annual Jackson Hole conference.

"If that gets out of control, if interest rates start to rise because people are reluctant to buy all that debt then that can slow the economy down. So, that's the more systemic concern I have," Taylor said.

Ya Think??

Ed_Gorey said...

If interest rates rise, then it's game over. It's that simple.

The housing market will vaporize, and the federal budget will be consumed by interest payments.

That's why I'm betting equities will soon find themselves on the chopping block. The FED needs a "rush to safety."

Anonymous said...

The FED needs a "rush to safety."

Sounds good.

Like making a loud noise and then watching all the chickens run into the corner of the coop and smother each other.

The good news is:

It doesn't matter anymore if you run with scissors, the Sky is Falling!

snuffy said...

That insuring shorts are cut off at the knees is the scaryist thing i have heard in a long time.

The Axe fell today for the second time.I was invited to join the ranks of the semi-employed.... again...shooting any chance at benefit package they had been holding out like a carrot...

I knew in my heart of hearts this was coming...but this time I am not sad...just pissed-off.I am making my best arrangements to try and pry my 401k monies out...but it will be a squeaker if I do. My guess the bomb goes off late Sept early Oct...

It will be interesting what is left after it all collapses.I see the USA going to the same path the soviets did...and we will have foreigners coming in and buying for pennies what many worked their lives for...

And the rest of the world will say "Serves the assholes right for their actions overseas since the second world war..

My god,the payback we have coming will be biblical....



Anonymous said...

Ilargi keeps on placing that asterisk at the end of the ‘recovery.” Ordinarily this would make sense to most Americans, especially if the artificial enhancing asterisk is placed behind the name of Barry Bonds, Mark McGuire or Jose Canseco. But there is still a small fragment of rules and guidelines concerning artificial enhancers in the athletic world. The economic and political world, however, is a whole new game. Only those with a gifted nose to the economic and political ground--Sir Lord Baltimore, the persistent tracking nemesis of Butch and Sundance comes to mind--are able to make heads or tails of the Byzantine labyrinth otherwise known as the American financial/political system.
It’s a room full of mirrors, and when a detractor of the status quo lashes out at a false mirage, the lap dogs are quick to point out the folly of it all. In other words, quit looking in the mirror, its easier that way.

Speaking of Butch and Sundance, one of these days--and I have a feeling it will be sooner rather than later--people are going to really start asking:

“ Who are those guys? “


Anonymous said...

My god,the payback we have coming will be biblical....




Like you really had any thing to do with any thing. Payback for the likes of Kissinger, Rumsfeld and Rove. But I am dreaming, they are always untouched.

ParkerMama said...

Could someone explain, in layman's terms, what this means:

"Re: Banks chipping away at investor access to Inverse ETFs

We are now clearly on the path toward blocking retail investor access to all forms of shorting. Add Wells Fargo to the growing list of firms that are either discouraging, blocking, or planning to block investor access to inverse ETFs."

I can look up what a retail investor is. But shorting?

I'm trying to understand what is going on.

I often leave this blog with the feeling that I'm not that bright.

I'd like to cut down on those experiences if you kwim.

Anonymous said...

Bank Failure Friday. Just call me BFF. :)

March 2009 Troubled asset ratios for some of the banks mentioned today:

eBank: 392.8,
First Coweta: 291
CapitalSouth: 120
Guaranty Bank (Dallas, not Austin?): 52.4
Bank of the West, SF. TAR = 23.3
New Frontier Bank, CO. TAR = 187.4
BankUnited 3749.8 (that is not a typo)
- - -TAR March 2008: 50.3
County Bank in Merced, Calif. TAR = 133.4
Silverton TAR = 184.2
Florida Community Bank: 282.0

New Banks:
Rabobank, National Association: No Call Reports before 6/30/09.

Banks not found, but with Call Reports available for the curious:
Integrity Bank in Georgia
National City, Cleveland, OH
First Defiance Financial Corp. ohio
Temecula Valley Bank, in Riverside County, Calif.
Security Bank of Bibb County, Ga

Synovus, Columbus, GA. This is Synovus Trust Company, National Association.
--- There is a Synovus Financial Corp, which owns lots of banks, and received $967,870,000 of TARP funding on Dec. 19, 2008.

No wonder they are selling off houses.

Banks without any call reports at all(!):
Riverview Bancorp, of Vancouver, Wash.

Foriegn Banks: What - Foriegn banks don't have to report, or something?
Toronto-Dominion Bank (TD), TD Bank
BNP Paribas (BNPQY)
BankUnited FSB, Coral Gables, Fla
Banco Bilbao Vizcaya Argentaria SA (BBV).
North Sea Partners LLC,

Anonymous said...

Typo: Synovus got $967 Million, not Billion.

BankUnited isn't foriegn, just not listed.


Anonymous said...


It means that the big boys expect the market to go down, and they don't want small fry to make money off of it. Just them.


Johanna Knox said...

@ ParkerMama

I know, I often feel like that here too! (Although I think I&S do an uncommonly good job of explaining this stuff to laypeople!) Wikipedia helps ...

snuffy said...

anoni-mouse @ 1:27

I am a citizen of the country that spawned those asshats you mentioned.
While I have not decided to do anything to do actions that would result in long prison sentences...I always have to ask myself why,as a person who truly loves my country,and what it supposedly stood for ,would allow these types of things to occur.
People know the system has been corrupted past recognition.As this sickening charade of health care "reform"continues,it is being driven home to EVERY citizen who is paying attention....and most are.

There exists the most efficient,seductive,powerful propaganda machine in the world aimed at the American so many forms ,from childhood on..the minds are drugged[1 in 5 persons take psychoactive medication],and programmed ,public perception is "tuned"...and perception IS reality.
Some escape.
[kill you television]

This collapse will end that.Starving folks dont want anything but food....but I have a bad feeling that there are those who have insured a rather drastic thinning of the herd will occur when the system breaks...

What I dont think they count on is the widespread dispersal of information of exactly who is responsible for this mess....and I don't think the lords of propaganda will have the ability to sway the public as they have so effectively in the past.The elite in this country have become arrogant,and forgotten some very ugly chapters of the past.

That we,as a people will pay a blood-price for the sins of our leaders is a given.How bad it will get most likely will depend a lot on where you are,and what resources you have.

That and dumb luck

Its often said[fervently by some]they would rather be lucky than skilled.I think you will need to be both very soon...



Anonymous said...

Re: snuffy's post and many similar

Do you guys still pay taxes to the US government? If so, why?

Holding the opinion you are being duped (with which I and many others agree) while sending Uncle Sam his cut of your earnings seems to make you a colluder in your own exploitation.

Anonymous said...

ARTIST: Paul Simon
TITLE: The Boy in the Bubble
Lyrics and Chords

It was a slow day and the sun was beating
On the soldiers by the side of the road
There was a bright light, a shattering of shop windows
The bomb in the baby carriage was wired to the radio

/ A - C D / :

These are the days of miracle and wonder
This is the long distance call
The way the camera follows us in slo-mo
The way we look to us all
The way we look to a distant constellation
That's dying in a corner of the sky
These are the days of miracle and wonder
And don't cry baby, don't cry, don't cry

/ G - C D / :

It was a dry wind and it swept across the desert
And it curled into the circle of birth
And the dead sand falling on the children
The mothers and the fathers and the automatic earth


It's a turn-around jump shot, it's everybody jump start
It's every generation throws a hero up the pop charts
Medicine is magical and magical is art
Think of the boy in the bubble and the baby with the baboon heart

And I believe, these are the days of lasers in the jungle
Lasers in the jungle somewhere
Staccato signals of constant information
A loose affiliation of millionaires and billionaires, and baby


el gallinazo said...

Ed Gorey

Would you post the whole WSJ article about ETF's? Only the first sentence is in front of a subscriber wall.

bluebird said...

Just watched the Michael Moore movie trailer. My family's Indiana Congressman, Baron Hill, is in it. It will be interesting to see if October 2, when it is shown in the theaters, is when the bubble bursts.

el gallinazo said...

Michael Hudson hour interview this week on Guns and Butter. A little repetitive but a must listen. The people of Iceland have told the IMF and the bankers of England and Holland to fcuk off. The banksters demand that they return the country to 15th century feudalism. May set a precedent for eastern Europe.

John Hemingway said...

@ Snuffy
I don't think that the USA will be getting a "payback" for what it has done imperially since the end of the Second World War. No, the powerful are always exempt from paybacks. It's only when they lose their power that others fill in the slack. As Giulio Andreotti (the puppet master for various Italian governments in the post-war period) once said "il potere logora chi non c'è la", or Power wears down whoever doesn't have it.

There is no morality in this, no "payback" based on moral principles. How can there be when the new powers will behave exactly as the USA did when it was strong?

Ilargi said...


Go through Google News, all WSJ is freely available that way. Just search for ETF, It's the top piece.

PKP said...

VA workers given millions in bonuses as vets await checks

el gallinazo said...


Went to Google>news
Pumped "inverse etf banks" into the search. The requested article appeared at the top of the list. Same subscriber wall.

rapier said...

Assuming the Treasury can continue to borrow $2 trillion a year at low rates I maintain the view that the economy and really the entire culture can muddle along. Certainly for another week and then perhaps months and then for a year or two or three. I am not saying it will just that such is a reasonable probability.

One lynch pin of this argument is the cynical theory that the new poor among the foreclosed don't make any difference. A few tenths of a percent in the GDP.

The other has to do with their now defaulted mortgages. Let's not forget the Fed is in the process of purchasing $1.2 trillion of mortgage paper and more could always be on the way. The banks have been slowly writing them down and will continue to do so. The cost of the guarantees of the GSE paper is incremental. At this point maybe 25 billion a quarter. An amount that seems small as long as the Treasury can borrow it.

I cannot deny the accumulated damage the continued slow melt down in price Illargi expects won't eventually overwhelm all of the above but even if the prices do keep dropping it's an incremental phenomenon.

Let's not forget that home prices are not isolated from the dollar issues. There can be little doubt that the bull run in stocks, many other financial assets and some commodities is closely correlated with a falling dollar. It's a little difficult to make the case that residential real estate would succumb to this dynamic which seems to be buy something, don't hold cash but it's worth considering such a thing could happen. The bull run in stocks has become a positive feedback loop now, a bubble, and a shift to an inflationary outlook for real estate is theoretically possible. (admittedly hard to envision because of the lack of credit to fuel it)

I work from the ideas that the future is not determined and that prediction is impossible.

If I may presume, it is I&S's belief and job to spread it that a long term historic cycle is ending. That the results of that will be quick and devastating down to the individual level for all people. In general I subscribe to this view but my main focus is on the speed. 2 years or 5 or 10 or 20 would all look and feel quite different.The final denouement might evidence itself in environmental disaster, or natural disaster or nuclear war disaster, or bloody civil war. I'll discount Jesus descending somewhere in Texas to wreck millennial vengence.

None if which is to deny the views of I&S but only to counterpoint them with other possibilities/probabilities.

bluebird said...
This comment has been removed by the author.
Ilargi said...

El G,

Odd. It's all there for me. Below the Wells Fargo piece. More interesting on the topic, I think, is this one, also WSJ: Small Investors Face Big Hit in ETF Push. See if that works for you in either way. I'll post it later today for sure.

"U.S. regulators have begun targeting the big-time speculators suspected of artificially inflating prices for oil, natural gas and gold. Turns out some of the big guys happen to be small fry.

Exchange-traded funds, which have become popular as one of the few avenues for small investors to gain direct exposure to commodity futures, are a top target in the Commodity Futures Trading Commission's drive to rein in speculation in oil markets. The CFTC's moves reverse a trend in market innovation that allowed almost anyone to bet on the direction of energy prices along with the likes of Goldman Sachs Group Inc."


Wells Fargo Shuns Some ETFs

NEW YORK -- Wells Fargo Advisors is no longer permitting its advisers to sell leveraged and inverse exchange-traded funds through advisory accounts.

The policy has been in place for several weeks, according to a Wells Fargo adviser in the bank brokerage channel. "As a matter of firm policy, we can't solicit those products," the adviser said, adding that the change affects a small number of brokers. Clients still may buy leveraged or inverse ETFs unsolicited through a nonfee-based account if the profile on the account includes "trading and speculation," the adviser said.

A Wells Fargo Advisors representative had no comment on its sales policies regarding leveraged and inverse ETFs. In an email last month, the representative said the company was reviewing its policy regarding nontraditional ETFs.

el gallinazo said...


Barring Jesus' descent into Texas (didn't he visit Hell once before?), the question is how long the international bond market can and will permit the US Treasury and Fed to borrow and/or print dollars. I find two years very unlikely.

As one who was coerced into studying chemical quantum mechanics in a previous life, it is non-deterministic, but the probability of various outcomes is fixed with great accuracy. Thus Einstein's famous quote about God and dice. While economic outcome probabilities cannot be fixed with great accuracy, the probabilities still have significance. Thus one can have a non-deterministic model with significant predictive value.

bluebird said...

el gallinazo @ 9:17 - I must have typed my earlier comment at same time as Ilargi, posting the WSJ article.
Anyway, It worked for me in both IE and Firefox. But sometimes I have that problem with articles with Financial Times. Try adding the author's name, DAISY MAXEY , or the full title of the article.

Anonymous said...

Hello Ilargi,
Very intesting hypothetical you have posed. Is it possible to only freeze one segment of the financial complex?(housing,office,construction)
My unerstanding of this, complex Mortgage instruments were used for leverage in a variety of ways and purchased by a variety of investment entities. Is this rather simple description correct?
Does the hydra grow another head?
Finacial/Military/Industrial/Med/Pharm/Governmental complex.
Hello snuffy,
Perhaps, we can take some solace in that a large percent of the people of what was once the United States are good.
you know I did a google exercise you may or may not find interesting I googled:
America helps= 76.5 million
USA helps= 64.7 million.

USA hurts= 3.8 million
America hurts=6.18 million

However, I can only speak for myself, come what may, this American will help.

Anonymous said...

Andy Xie: New Bubble Threatens a V-Shaped Rebound

Many policymakers actually don't think along the line of Keynes versus Schumpeter. They think in terms of creating another bubble to fight the recessionary impact of a bubble burst. This type of thinking is especially popular in China and on Wall Street. Central banks around the world, although they haven't done so deliberately, have created another liquidity bubble. It manifested itself first in surging commodity prices, next in stock markets, and lately in some property markets. Will this strategy succeed? I don't think so.

The old equilibrium cannot be restored, and many structural barriers stand in the way of a new equilibrium. The current recovery is based on a temporary and unstable equilibrium in which the United States slows the rise of its national savings rate by increasing the fiscal deficit, and China lowers its savings surplus by boosting government spending and inflating an assets bubble.

China's stock market is cooling because the Chinese government is jawboning it down, based on fears of a big bubble downside. And the economy is beginning to slow. Markets outside China will likely do well for the next two months; diverging trends reflect that China's market recovered four months before others, and adjusts before others as well.

Conventional wisdom says inflation will not occur in a weak economy: The capacity utilization rate is low in a weak economy and, hence, businesses cannot raise prices. This one-dimensional thinking does not apply when there are structural imbalances. Bottlenecks could first appear in a few areas. Excess liquidity tends to flow toward shortages, and prices in those target areas could surge, raising inflation expectations and triggering general inflation. Another possibility is that expectations alone would be sufficient to bring about general inflation.

Oil is the most likely commodity to lead an inflationary trend. Its price has doubled from a March low, despite declining demand. The driving force behind higher oil prices is liquidity. Financial markets are so developed now that retail investors can respond to inflation fears by buying exchange traded funds individually or in baskets of commodities.

If central banks continue refusing to raise interest rates during these weak economic times, oil prices may double from their current levels. So I think central banks, especially the Fed, will begin raising interest rates early next year or even late this year. I don't think it would raise rates willingly but wants to cool inflation expectations by showing an interest in inflation. Hence, the Fed will raise interest rates slowly, deliberately behind the curve. As a consequence, inflation could rise faster than interest rates, which is what the indebted U.S. household sector needs.

This fool-the-market strategy may work temporarily. Its effectiveness must be reflected in oil prices; the Fed needs to target oil prices in its interest rate policy. If oil prices run from current levels, it means the market doesn't believe the Fed. That would force the Fed to raise interest rates quickly which, unfortunately, would trigger another deep recession.

A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down -- and keep them down for a long time.

Anonymous said...

I'm amazed but not totally surprised that TPTB have held it together this long.

Being Reptiles, their processing power is impressive for cold blooded creatures.

That said, I'm gradually beginning to see that not all avenues of subterfuge have not closed to them.

Everyone is scratching their head wondering how the Treasury keeps puking more debt into the bond market and it keeps being slurped up by the running lackey lap dogs at the FED and pension funds and endowments, and gullible foreign investors, etc.

The controlled demolition of the stock market this Fall, needs to be timed and finessed with the 'rush to safety' into U.S Puke Bond debt.

If done right, U.S debt can be financed for, oh, another good six months with the panicked asshat survivors of the equities 'suicide bomber' crash.

If the U.S debt can continue to be serviced this way, through 'rush to safety' stampede tactics from the burnt out hulk of the former equities racket, the FDIC and FHA and other Potemkin federal 'agencies' can also be funded for at least several more quarters.

This is not to say that mobs won't burn the Capital to the ground to cleanse that cesspool of crony corruption, but unless something very Big throws the Banking Mafia a curve, I think they can still keep the Blowup Doll Economy inflated enough for a few more screw jobs.

Don't kid yourself.

bluebird said...

Dmitry Orlov discusses hunger insurance, as one might discuss health insurance. Kinda humorous :)

VK said...

@ El G

Just clear your cookies, usually when the NYT and FT block me, I just clear that up and I'm ready to go again!

Anonymous said...

I enjoy reading the diverging ( not quite dissonance) opinions of Rapier and others. After all, intellectual engagement, and not consensus, is what spurs folks to get off the dime and have a look from a different vantage point.

Having wrote that, I find it interesting as more and more seem to be of the opinion that the greater whole--think GDP/ Wall Street market--is somehow divorced from the elements--’the inconsequential new poor’ which compromise the well from which they ultimately draw their lifeblood. ( Or at least the well from which the borrowed money will ultimately be removed from.) The “new poor,” the underemployed and unemployed, the lack of a vibrant industrial/manufacturing base replaced with a service sector industry whose workers find themselves ever increasingly moving closer to minimum wage... none of this matters as long 2 trillion a year can be borrowed and the GDP can manipulated into a convoluted piece of paper sculpture.

Perhaps Rapier is correct; but what type of economic river will this look like when the tributaries are nothing but dried-up stream beds with barely a trickle of water. Certainly not a mighty raging river. It will look like stagnation, or worse. Much worse in fact.

Despite the possibility that the economy and GDP might be able to continue in a holding pattern, which is what you and others seem to be asserting, we should look to nature and ask ourselves what a stagnant body of water looks like in the most fundamental holding pattern of all: Thirty-Two Degrees Fahrenheit.

The pipes are freezing and even when a degree or two of hopeful trickling does occur, that water will be coming from the melting snow pack of Mount Borrowed. Indeed, before there is any hope for a future raging river, a lot of down, down, down needs to occur.

Unless, of course, you believe water can flow uphill.


el gallinazo said...

Since I "invested" in S&P500 inverse shorts this week, I am pleased to see many former bearish people starting to proclaim that this crap can go on forever despite the fundamentals. According to the Gospel of Stoneleigh, that means the end times are near :-)

Greenpa said...

El Gal: "I am pleased to see many former bearish people starting to proclaim that this crap can go on forever despite the fundamentals. According to the Gospel of Stoneleigh, that means the end times are near :-)"

My own sense of the mood is that the "recession is over!!" people, the great majority of them, are really whistling as they walk past the graveyard; hoping that will actually keep the ghosts in their graves.

They half-believe still that saying so will make it so. But it's only half.

And I think that does help set the stage for panic selling. One good push, and the whistlers will start to run for their lives.

DIYer said...

So I talked to my broker on Wednesday, and he indicated that his management is discouraging (forbidding?) him from allowing clients to invest in SDS. Further, he was touting some technology company -- their stock went up 7% on Thursday but lost most of that gain on Friday -- I'm not sure I ever liked the guy anyway.

I need to find another broker PDQ ... Schwab? Etrade? ...

The other thing I think I'm going to do is start a TD account. Thanks for mentioning them, El G. And finish paying off the house mortgage, since not paying 5% interest is like getting 5% tax free. A little creative destruction of money, eh.

DIYer said...

Oh BTW, just listened to the Guns n' Butter clip with Michael Hudson. Good stuff -- Iceland as the new Cuba, heh heh. It's refreshing to hear about someone giving banksters the center digit.

el gallinazo said...


Signing up with TD takes about 3 weeks because you have to get your matrix Ovaltine decoder ring by snailmail. Uh, that's in St. John. May take a few days elsewhere :-)

I have been using TD Ameritrade for the last 18 months and am quite pleased with them. They seem to be in OK financial shape. $10 a trade of ETF or stock, regardless of the monetary amount. I am also very happy with their interface except their help explanations about different types of trades leaves a bit to be desired for a beginner.

One thing to be aware, and this is a SEC rule, if you buy a stock or ETF, that money is tied up for 3-4 days, even if you turn around and sell the stock five minutes later.

Mad Max has Alex Jones on this week's On the Edge. A must for all you Mad (tin foil) Hatters.

Re last weeks Guns & Butter:

Just as George W. was a great Decider, Hudson is a great 'Splainer. And Gordon Brown has a lot of 'splaining to do. Iceland as a terraist nation. Give me a break.

cowpoke said...

Regarding counter trend signals. I've found myself questioning my instincts and belief system the last couple of weeks.

I even had a dream the other night that I've set myself up for 30 years of misery while all of Canada whoops it up around me.

I would classify myself as long term natural bear/doomer.

It seems to me now that it will happen fast when(if {wink}) it really pops. It might just happen exactly as SL has said it would. I'll pick October 2nd like I read elsewhere, the day reality TV comes to the bigscreen with Micheal Moore opening that night.

That would be something.

el gallinazo said...

Heads up for ex-pats or ex-pats to be in countries where books in English are rarer than bankers' remorse:

If you have an iPhone or iTouch, Amazon has released a free converter program that allows you to buy a Kindle download and read it on such Apple device. However, they do not have a decoder that will allow you to read it on your Mac.

My son has an iPhone. His comment to me reads:

"I have the Kindle app, which I've only used to read the one book I've bought in Kindle format—a pop music history book that's out of print and very expensive used, but only $10 as an ebook. I'd like to read it on my Mac as well, but so far no dice.

All my other iPhone reading is done on Stanza—I use Calibre to convert pdfs to epub format, which Stanza seems to prefer in terms of keeping the paragraph breaks and other formatting-type issues."

el gallinazo said...


I think that Bernanke's beard, when viewed face on, is predicting a "V" shaped recovery. People tend to scoff at such things but I think it more substantial than the BLS numbers.

jal said...

Put on you tinfoil hats. :-)

Micheal Moore is working with the PR team to lay the groundwork so that the “lawmakers” will have the prep work done so that they can pass a bill with teeth.

1. The big banks will become “crow corporations”.

2. The employees will get paid as per the federal pay schedule.

3. The hand outs will become void and/or paid back.

4. The federal will be able to withdraw its quantitative easing.

5. Old inmate at federal prisons will be let go to make room for the banksters.

6. The economy will stabilize at new lower level until a new “peak” resets it to a lower stable condition.

7. Mind altering drugs will be available without a prescription.

MMN said...

On "Eliminate financial double-think
by Gillian Tett "

Three decades ago, Pierre Bourdieu, a French sociologist, observed that elites in a society typically maintain their power not simply by controlling the means of production (ie money), but by dominating the cultural discourse too (ie a society’s intellectual map). And what is most important in relation to that cognitive map is not what is overtly stated and discussed – but what is left unstated, or ignored. Or as he wrote: "The most successful ideological effects are those which have no need of words, and ask no more than a complicitous silence."

This is Orwellian Newspeak and Doublethink driven through a consensual Politically Correct template to produce Singapore-like OB markers. Google any of the italicised terms to see how they relate.

Its essentially a branding exercise - the terms of the conversation have been hijacked and it is no longer possible to debate the forest for the trees.

The idea is not new - witness older childrens fables about Emperor's new clothes and modern fables like the Wizard of Oz hiding behind his curtain.

We all know and understand the nature of this shell game, and yet, and yet... many fall for the 'tell a big lie' lie, hook line and sinker.

Maybe half the anonymous posters here are not trolling, motivated by some hidden agenda - they are genuinely shocked and outraged by the subversive ideas and opinions of the bloggers and the posters chorus.

They are lost, somewhere on the five stages of the denial continuum. Just like my colleagues, my wife, or the rest of my family, including my Mother who calls me "Cassandro".


gregfb said...


" The camera follows us in slo-mo" is now on "Implode o meter".

Bigelow said...


Try Scottrade.

@El G

Oh what ever! Not forever, try till Feb '10 instead.

Free advice: Watch your stops. Don't let SDS "temporarily" get away from you. Reenter later (if us peons still can that is).

ca said...

I guess they are going to be in for a big surprise!!

Anonymous said...

"One lynch pin of this argument is the cynical theory that the new poor among the foreclosed don't make any difference. A few tenths of a percent in the GDP."

Perhaps that's true now. Previously they made up a bigger share.

The middle-class consumer accounts for about 70% of the GDP. Yet they are losing jobs at a great rate, and what jobs they have a beset by global wage arbitration.

You'll have to look at a different blog to find this coverage. Karl's is superb, and he has one on todays front page:

Why "Recovery" Calls Are Doomed: The Bezzle

Anonymous said...

President Barack Obama will make his first official visit to China in November, seeking to foster collaboration on the environment, renewable energy and regional security, the new U.S. ambassador to China said.

He had better take his knee pads when he starts begging them for more money.

el gallinazo said...


I am half in SH and half in SDS. I don't have any stops. I am letting it ride on Bernanke's nose. Other than a major change in government enforced regulations prior to my "normal" decision to sell, I don't plan to change that. When I day trade I lose money. When I go in for the longer horizon, I make money. I am looking at it as a state function in the physical chemistry business. It's just the end points of the system that count, the pathway is irrelevant.

And my normal decision to sell would be when I see the roof rafters of the NYSE on fire but before they start falling to the mezzanine.

Bigelow said...

@El G

Good luck then. Keep your vulture eyes on Feb.

Bigelow said...

“America is just a few days away from a possible day of reckoning. I again call attention to this day, August 25, when the Federal Deposit Insurance Corporation issues its 2nd Quarter report for 2009 on the state of health of American banks.”
Days Away From Economic Chaos?

“Sources tell us…”
White House Reveals Obama is BiPolar

Anonymous said...

“3,610 Bank Branches Failed - And Counting
If you're feeling slapped around by 'cognitive dissonance' - loosely defined as the difference between what you're being told about the economy and what you actually see going on in the world would around you, relax! The world really has bifurcated - an economic concept meaning (again loosely) split into to separate pseudo-realities that you see on TV.”

Anonymous said...

All the Federal alphabet soup entities are broke and are being 'funded' with deficit spending based on future tax receipts AND selling Treasury paper.

The tax receipts are collapsing and will truly start tanking in 2010.

However, even though a bond market implosion is in the cards, there are still assets to be forced into bond buying and will be by TPTB.

The last of the pension/endowment/trust funds to escape the massacre of the coming intentional stock market crash, will either run for the safety of the T-Bill of their own panicked shitless volition OR a law will be passed forcing All this funds into the Treasury bond purchase corral.

More forced bond purchases by the remaining semi-solvent U.S. trust/endowment/401k entities will keep the federal alphabet faux agencies afloat for just a little bit longer.

Kicking the can down the street is the only game left in town. It doesn't have to make any long term sense.

Here in Ahmerica, we only live for the Moment.

It's just to squeeze one last shot glass of blood from the Formerly Middleclass. It won't stop the Ultimate Deflationary Depression, just give it one last delaying kick.

Continued sale of Treasury 'Tools' >>> Allows continued Deficit 'Alls Well' Coverup Spending >>> which will Maintain the Illusion of Recovery for awhile longer.

One last note on gold. My hunch is that TPTB will rubber stamp a law making it illegal to have physical possession of gold, BUT, if you allow the Treasury to 'safe guard' your gold by buying Treasuries with it and accepting an Offical U.S. Government Pawnshop Claim Check receipt in the form of a T-bill, you won't be prosecuted for posession of 'illegal' PMs

Possession of PM, 'with intend to survive', will enter the lexicon as the new offense jargon to replace the old drug expression of 'with intent to sell'.

Welcome to the Future.

ric said...

Just like my colleagues, my wife, or the rest of my family, including my Mother who calls me "Cassandro".

Thanks, Marcus, for your post. You reminded me of one of the last things my mother coherently said to me before she finally succumbed to being unable to speak beyond a babble because of dementia/alzheimers. She had tolerantly listened to me for many years, even sometimes following my suggestions. About this time last year she could no longer read nor follow TV news, nor understand much of anything going on about her. She was lying in bed, her voice no more than a whisper. "Is what you said would happen, happening?" she whispered. I was surprised and stupidly said, "What?"

"You know.... What you said about things...collapsing."

"You're safe," I told her. "It's all okay."

timekeepr said...

DIYer said...
So I talked to my broker on Wednesday, and he indicated that his management is discouraging (forbidding?) him from allowing clients to invest in SDS. Further, he was touting some technology company -- their stock went up 7% on Thursday but lost most of that gain on Friday -- I'm not sure I ever liked the guy anyway.

I need to find another broker PDQ ... Schwab? Etrade? ..

Brokers charge too much (commissions).
I use Vanguard, I get 12 free trades per year, $12 after that. Their mutual funds have the lowest ERs.

Most investment firms are either publicly traded or privately owned. Vanguard is totally different—it's owned by the mutual funds, which in turn are owned by our clients.

Dr J said...

Re Michael Hudson on Guns n' Butter

If this move by Iceland is the gamechanger he says it is, I suspect he will be seen as having been a supportive influence and he'll be in need of some witness protection.

Greyzone said...

Regarding the "surge" in existing home sales.

1. Over one third of these sales are foreclosure sales.

2. There is that government program running that gives first time homebuyers a nice incentive to drag themselves down into debt slavery.

3. There are always people who believe "the bottom is in". Eventually they will be right but not yet, in my opinion.

4. Almost 14% of existing mortgages are either delinquent or in foreclosure in the entire United States right now.

So you can take 14% of these really lousy sales numbers and kiss them goodbye immediately, at the very least. And that assumes zero increase in unemployment, which we know is a pipedream.

People who demand that I&S put an exact date on collapse are either delusional and believe that economics is a real science (it's bullshit voodoo, people) or are trolls trying to pin I&S to the wall for being "wrong" about an exact date.

Keynes himself noted that the markets can stay insane longer than you can stay solvent. (I paraphrase but that's the gist of it.)

The system continues to melt down with no end in sight.

P.S. Karl Denninger asked a really good question the other day - if this is the new mother of all bull markets the way tout media proclaims, then why would the largest banks in the world park tens of billions of dollars in US T-Bills at 0.14% interest for the next 90 days? What do those banks know that you do not know that makes them put money there instead of this "new bull" market? (Believe me, this market is full of bull but not in the sense that most financial players mean. ;) )

bluebird said...

timekeeper said "Vanguard is totally different—it's owned by the mutual funds, which in turn are owned by our clients."

What if the mutual funds go broke? Wouldn't Vanguard be broke too?

el gallinazo said...


" if this is the new mother of all bull markets the way tout media proclaims, then why would the largest banks in the world park tens of billions of dollars in US T-Bills at 0.14% interest for the next 90 days?"

Thanks, Greyzone. I was wondering what that foul smell was every time I had to turn my 90 day T-Bills over. And that is why the yield curve is so steep coming out of 90 days. It's all that nasty company.

Anonymous said...

Alex Jones on Max Keiser.

Tinfoil hat on the one and (where does he get those?) tight white shirts on the other.

Good fun but not for internal consumption.

hey there Greyzone and right you are , I too have been predicting the collapse and for about 30 years now. One day I will show all those ageing trolls I was right.

ilargi says:
All we need is one month of vacation for everyone linked to both the government as well as the housing industry. If we do it tomorrow, your children can have an affordable home before New Year's Day.

What that says to me is that ilargi has been lightly blind sided by circumstances out of his purview, (i.e. as in the degree of stimulus applied). Doesn't change a lot about where I imagine we are going but does change the timing. No big deal that, as it would be stupid to expect otherwise. Events do not unfold in a vacuum, shit happens. Expect it! So listen and watch and don't (blindly) follow leaders and to all trolls... watch those parking meters:)

-the shadow-

Greyzone said...

"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone." - John Maynard Keynes

"The market can stay irrational longer than you can stay solvent. " - John Maynard Keynes

"I work for a Government I despise for ends I think criminal." - John Maynard Keynes

And this is the man whose "great thinking" now guides us to the precipice of disaster.

scandia said...

@ el G...Just listened to the Michael Hudson interview. Loved it as I felt a surge of hope in my long hopeless heart. Ha! Oh the power of one!
Just think of the possibilities! Other nations writhing under the boot of the financial new world order may take courage from Iceland's most reasonable position.
The ability to pay is a fine principle.

Max said...

“RAND corporation, a Pentagon-linked powerhouse think tank, connected to the Blderberg Group, Trilateral Commission and Council on Foreign Relations, came up with a solution to the financial crisis in October of 2008: for the United States to start a major war. Chinese media reported that RAND “presented a shocking proposal to the Pentagon in which it lobbied for a war to be started with a major foreign power in an attempt to stimulate the American economy and prevent a recession.” Further, “the target country would have to be a major influential power,” and Chinese media “speculated that the target of the new war would probably be China or Russia, but that it could also be Iran or another middle eastern country.”[8]”
Transnational Totalitarianism

Anonymous said...

As long as we are channeling Paul Simon, I'm hearing:

...And I don't know a soul who's not been battered
I don't have a friend who feels at ease
I don't know a dream that's not been shattered
or driven to its knees
but it's all right, it's all right
for we lived so well so long
Still, when I think of the
road we're traveling on
I wonder what's gone wrong
I can't help it, I wonder what's gone wrong

And I dreamed I was dying
I dreamed that my soul rose unexpectedly
And looking back down at me
Smiled reassuringly
And I dreamed I was flying
And high up above my eyes could clearly see
The Statue of Liberty
Sailing away to sea
And I dreamed I was crying

We come on the ship they call the Mayflower
We come on the ship that sailed the moon
We come in the age's most uncertain hours
and sing an American tune
Oh, and it's alright, it's all right, it's all right
You can't be forever blessed...

Anonymous said...

"...why would the largest banks in the world park tens of billions of dollars in US T-Bills at 0.14% interest for the next 90 days?.."

Because they are the parties engineering the collapse of the stock market, in broad daylight I might add.

They will also Short it left, right, forward, backwards, up and down until it bleeds from it's ears.

Imagine the tens of millions of retired people depending on the interest and earnings from their 401k and other financial vehicles who will just stop getting a check in the mail. Tens of millions.

Will the under and unemployed children and grandchildren of these retirees take them in when they become destitute? Should be Grist for the Mill.

Anonymous said...

ric said... ""You're safe," I told her. "It's all okay.""

Comforting words at The End of any journey.


NZSanctuary said...

Thanks for the Guns n' Butter link, El G.

el gallinazo said...
This comment has been removed by the author.
el gallinazo said...

A 5:45

"They will also Short it left, right, forward, backwards, up and down until it bleeds from it's ears."

And the shorts will be so naked that they will make porno tsars blush. But hey, they bought the police department long ago.

Starcade, now from Leviathan said...

Why doesn't anyone just admit that ALL of the banks are going to fail -- that the entire system is coming down?

el gallinazo said...


I think Ilargi mentioned that many moons ago.

Anonymous said...

Regarding fabricated wars. If a fighter steps into the ring enough times, they eventually get knocked out. Guaranteed. And once a fighter is knocked out, they are never the same--just ask Mike Tyson or Roberto Duran.

Not that all wars aren’t tragic, but one of these diabolical and evil military excursions for profit and power is going to end up being a horrendous catastrophe, both for the innocent victims and the satanic corporate puppet masters whose pockets are lined via murder and mayhem.

So far no lucky punches have landed, but soon enough a skilled and lucky opponent will land the knockout punch... and that will be that.


Anonymous said...

"I'm calling for a national strike, one designed to close the country down for a day." Let's set a date. No one goes to work. No one buys anything."

This would be a dream come true but unfortunately the sheeple of this country will never come together to do this.

VK said...

@ Greyzone

The man saw the future, Keynes once again!

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Starcade, now from Leviathan said...

Ilargi: 100? And that's if 3 of them are BoA, C, and Wells-Fargo.

Ed Gorey: People know that any real "mark" on most every (if not every) company in the world right now is zero. They're going to make shorting a stock illegal entirely as another means to force "value" into stocks...

Anon 2338: More and more, we are getting real impressions, across the spectrum, that we are not making it out of 2009 "alive" as a nation, economy, or culture. This is just another on that list.

My friend and I are getting more and more peeved at the deterioration of everything we once thought was "good", and I think I came to a reason why everything is "letting go":

We are about to hit dystopia.

We are about to hit the point where you see in a lot of those movies and books where people just stop caring about anything human and humane.

snuffy: That's what everyone seems to be saying now -- we don't make it through the year, that it basically collapses within a month or two. I've heard one rumor that some police are calling for a "Crimson Christmas", as in the retailers are in the red, and blood is in the streets.

Starcade, now from Leviathan said...

Anon 1745: You assume there will be such children and grandchildren -- perhaps something needed reconsidered. Maybe the point of all this is for TPTB to wash the undesireables from the face of the planet.

VK said...

@ Starcade


Leave man! Go to a safer place.

Greenpa said...

Marcus (and others) "Just like my colleagues, my wife, or the rest of my family, including my Mother who calls me "Cassandro".

It's almost certainly wasted effort, but next time your Mother makes that crack, you might point out to her what the story of Cassandra actually IS.

The entire point to her story: She was RIGHT about everything- and no one, no one, would listen. So they all died the horrible deaths she tried to get them to avoid- which they could have; if they'd listened.

The fact, which you can rub in, is that people who use such references without any understanding of them- are highly likely to be taking a lot of other stuff they're told for granted, too- without ever finding out what's really going on.

They probably won't listen- but it might disturb their sleep a little.

timekeepr said...

Anonymous said...

"I'm calling for a national strike, one designed to close the country down for a day." Let's set a date. No one goes to work. No one buys anything."

This would be a dream come true but unfortunately the sheeple of this country will never come together to do this.

I thought this was already happening everyday..

Ed_Gorey said...

Re: Don't fight the system. Use it to your advantage.

What is the biggest financial question we should all be thinking about?

When will the FED raise interest rates in anticipation of economic recovery?

Wrong question, despite the fact that the media repeats it a lot these days.

The most important question is:
When will short-term interest rates go negative?

That's correct, we are headed for a negative short-term interest rate world. Not immediately, but it's just inescapable at some time in the next year or so. Yes that will mean the end of cash. Impossible to accomplish? Necessity is the mother of invention. Don't fret, its coming whether we like it or not.

With all of the changes that are about to come crashing down on our heads, I'd argue that it's largely pointless to howl at the moon about them. Yes, from time to time, it helps one's sanity to blow off some steam, but after releasing that steam, you're still standing in the same place. Nothing about you situation has changed by getting angry or sad about it.

Instead of anger and/or frustration, I've decided to use my understanding of our predicament to my own advantage.

Stocks and commodities are going down. The FEDs are hoping for a controlled demolition of those markets and a controlled shift of money into sovereign debt. The key, in all of their analysis, is a focus on CONTROL. They want money out of stocks and commodities and into sovereign debt, but they don't want this to happen in a disorderly manner. That is the basis for the coming restrictions on inverse ETFs and commodity ETFs. Stocks can easily fall even if nobody, apart from the very well-connected big boys, is allowed to short them. As stocks fall, they FEDs don't want millions of peons funneling their money in into undesired directions (i.e. asset classes). Sovereign debt is where the money must go, so doors to other means of speculation must be closed. It's that simple. Don't fight it. Use this knowledge to your own advantage. Since money must flow into sovereign debt in the near future, position yourself there ahead of time, before the herd is given its marching orders.

Anonymous said...

Real good stuff from JC.

"Why The Austrian, Keynesian, Marxist, Monetarist, and Noe-Liberal Economists Are All Wrong":

Stoneleigh said...

Ed Gorey,

That's correct, we are headed for a negative short-term interest rate world. Not immediately, but it's just inescapable at some time in the next year or so. Yes that will mean the end of cash. Impossible to accomplish? Necessity is the mother of invention. Don't fret, its coming whether we like it or not.

I agree that we are likely headed for a negative short-term interest rate scenario, but I disagree that this will be the end of cash. Negative interest rates are an attempt to force savers to bear a share of the losses rather than being able to benefit fully from their prudence, however they would still benefit, albeit less so. Interest rates would be negative in nominal terms, but not in real terms (the nominal rate minus negative inflation) thanks to on-going credit collapse.

This is why the Fed will still be pushing on a string. Zero will not be low enough, and neither will marginally negative rates. For the real rate to be low, the nominal rate would have to be a very large negative number, and IMO that is something we are not going to see.

I think real rates will be high enough that people will still be rewarded for hanging on to cash (and I do mean hanging on to it, so that it doesn't evaporate inconveniently in a bank run sometime within the next year). If nominal rates are negative, but real rates remain high, that would be an incentive to withdraw money from the system, but if people responded to that incentive, they would rapidly crash the banking system.

Anonymous said...

@ Stoneleigh

Do you think governments will try to force almost all investors into government bonds, through one technique or another?

As long as the governments can run humongous budget deficits (which fund programs and services) by selling more government bond debt, the game of peek-a-boo account can continue.

A bond dislocation can still be postponed for quite some time by a series of squeeze plays on investors to buy sovereign debt or else...

Any thoughts?

Surfing the Hurricane

VK said...

@ Stoneleigh

Negative interest rates are a very dangerous game to play.

Total Deposits in US banking system that are insured: 6,400 Bn

Total Physical USD in the world: 800 Bn

Vault Cash in US banks: 53 Bn

If negative rates were imposed only 0.8% of deposits would have to be withdrawn to effectively deplete all the cash in the banking system. Negative interest rates are very dangerous IMO.

The Taylor Rule is showing (depending on the person calculating) that interest rates should actually be -6.8% in the US economy.

So those in Cash in short term T-bills are earning a nice 7% yield.

Anonymous said...

It's unfortunate all comments get rolled into into one glob.
This comment refers to your first post this aug21st (about housing).

First off, I'm 54 and have never owned one. Having grown up in coastal California, it was apparent that striving for home ownership has been a Faustian bargain since the '70s. Even 35 years ago it had servitude written all over it.

So, TAE... DON'T go placing a one size fits all template on ALL Americans. Not everyone jumped in.

Yes, it scheme is way screwed up and desperately needs some sort of reset. What's happening now could very well be it.

No doubt life will go on after the decades of real estate greed. This is far overdue to my way of thinking, but nevertheless, welcome even if late.

Now, if only the government doesn't screw it up by sticking it's nose into this much needed correction.

Stoneleigh said...

Surfing the Hurricane,

Do you think governments will try to force almost all investors into government bonds, through one technique or another?

As long as the governments can run humongous budget deficits (which fund programs and services) by selling more government bond debt, the game of peek-a-boo account can continue.

A bond dislocation can still be postponed for quite some time by a series of squeeze plays on investors to buy sovereign debt or else...

That's why I don't think a bond dislocation is imminent. I think rates will head to record lows (likely negative) first on a flight to safety. I don't think the government will need to force people into sovereign debt under those circumstances, but they may well try anyway.

I agree that the really lucrative opportunities will be closed to the little guy (who never gets a break). Those who anticipate trends can benefit from them if they move before the hard, but not without risk. It can be all too easy to end up stuck in something when everyone rushes for the exits at once.

Starcade, now from Leviathan said...


Several responses to that:

1) My friend dies when I leave. Period - end. Now, not to say that she probably doesn't want to leave this Earth, but would rather have some more control over that situation than it appears she will.

2) I don't think there's going to be any safe places for people like me -- rich or poor. As I've said time and again, one's survivability, especially if they are trying to "prepare", is probably going to require the willingness and ability to shoot and kill. I'm not allowed to own a gun -- if I did, I'd leave bodies already.

And where do you go to?? THE ENTIRE FREAKING SYSTEM IS COMING DOWN. NOTHING will remain.

3) The time, now, is growing VERY short. Many people are now looking at the end (whether it's a full-out dislocation, the swine flu, false-flag Israel-Iran-Russian, etc.) at about the end/start of the fiscal year for America, October 1.

Stoneleigh said...


If negative rates were imposed only 0.8% of deposits would have to be withdrawn to effectively deplete all the cash in the banking system. Negative interest rates are very dangerous IMO.

Agreed. We are living in a world where dangerous games are rapidly becoming the only games in town.

The Taylor Rule is showing (depending on the person calculating) that interest rates should actually be -6.8% in the US economy.

So those in Cash in short term T-bills are earning a nice 7% yield.

Exactly. And that return doesn't depend on holding money in the system.

Comrade said...


New to your site. What do you see as the difference between the effects of default and a loss of confidence in the US monetary-political system? Is there a distinction in your opinion? Can we default without a loss of confidence?

VK said...

The data for the Vault Cash can be found here.

Comrade said...

VK - Are you the same poster on Nate's site? If so, look through the comments on his latest posts and comment on my comments. 'ppreciated.

Stoneleigh said...


What do you see as the difference between the effects of default and a loss of confidence in the US monetary-political system? Is there a distinction in your opinion? Can we default without a loss of confidence?

I think a default will be preceded by spiking interest rates, which will indicate a loss of confidence (hence the demand for a much higher risk premium). This would mark a bond market dislocation. However, rates should hit record lows on a flight to safety first.

MMN said...

[...]"You're safe," I told her. "It's all okay."

Kind words. You are lucky that you were able to comfort your Mother before her mind slipped beyond reach. She is lucky to have your protection.


Comrade said...


Do you think we can have a default without a loss of confidence in the "system" (monetary and political). As I noted elsewhere, Argentina had many regime changes in a short space of time after defaulting on their obligations. I theorized that confidence in America's monetary system (and be extension its political system) is predicated, in large part, on its abilities to make good on its obligations. This would be why America has been able to exchange paper for cheap labor and goods.

Stoneleigh said...


It wouldn't surprise me at all if America (and other countries) went through the same kind of political instability as Argentina did. A event of this magnitude eats politicians for breakfast. Incumbents inevitably take the blame and can ousted unceremoniously (impeached or worse). Their successors fare no better, as there are no actual solutions, hence a string of leaders is entirely possible.

Unfortunately, I think the US (and others) will end up with extremist leadership - leaders who proclaim that the predicament can be blamed on some third party and promise to deliver savage revenge. That is the nightmare scenario.

VK said...

Do you think we can have a default without a loss of confidence in the "system"

IMO only through one possible scenario - let the insolvent banks fail, let Fannie and Freddie fail etc. The bad debt must be cleared from the system. This is the right approach.

This is hugely deflationary though but ultimately it MAY save the US in the long run. The US Government also during this process were it to happen should NOT default on it's debt obligations.

Also the criminals in the banking system must be prosecuted and top management arrested or sent packing.

What this shows is that,

1) The rule of law is respected
2) No one is too big to fail, capitalism prevails rather then fascism.
3) The US Govt honours it's obligations and to justice.

Alien concepts the one's above. Feels strange just writing about it.

ps - yes, it is me who posts on Nate's blog sometimes.

Greenpa said...

Further evidence (for me) that we are entering a "Fall of Rome" type event.

Bedbugs are now so prevalent in NYC that home buyers fear them- and will refuse to buy into a building with a history.

To me this is societal decadence. It's not that hard to control bedbugs (though higher human densities do make it harder) - but it requires good will efforts from all concerned; officials, landlords, tenants, exterminators, etc.

Now most of those work hard to cover up infestations- and I'd be very very surprised if a lot of exterminators didn't intentionally leave just a little corner untreated- so they can get the repeat business.

All related to the "broken window effect" - now well demonstrated.

In this case- our entire culture is rapidly developing broken windows.

Comrade said...

Vk - Can we avoid a government level default? We already pay debt and interest with more debt and the tax base is declining and will decline under deflation.

Ed_Gorey said...

@ Stoneleigh,

If nominal short-term rates are negative, then cash, with a 0% interest rate, would represent a better real rate of return than money in the bank or short-term T-Bills.

Thus, people would have an incentive to pull their money out of the system and to sit cash (it would represent a better rate of return).

In addition, I don't think the government or the media would have much success explaining to the public the difference between nominal vs. real interest rates. J6P would simply focus on the fact that the bank or the T-Bill is offering negative nominal interest. Negative = bad. He would then react by pulling his money out of the system, even though a slightly negative nominal rate of return is actually hugely positive in real terms.

As VK pointed-out, cash could be sucked out of the system with tremendous speed if the herd is spooked by negative nominal interest rates. Thus, the need for a cashless society emerges.

Not long ago, I read that the Japanese government, which has been unsuccessfully fighting deflation for 20 years, is actively studying a switch from cash to plastic. Government issued debit cards would allow the abolition of cash. In addition, it would better enable the government to collect taxes on all monetary transactions occurring within the economy. The underground hush-hush cash-only economy where transactions aren't reported to the IRS would be impossible to sustain in a world where the only game in town is govt. issued plastic debit cards. Thus, abolition of cash serves two goals: (1) Enforcement of negative nominal interest rates (2) Greater taxation efficiency.

For the sake of clarification, I'm not rooting for negative nominal interest rates or a cashless society. I'm merely pointing out the rationale for why I think it's inevitable.

Stoneleigh said...

Ed Gorey,

If nominal short-term rates are negative, then cash, with a 0% interest rate, would represent a better real rate of return than money in the bank or short-term T-Bills.

Thus, people would have an incentive to pull their money out of the system and to sit cash (it would represent a better rate of return).

In addition, I don't think the government or the media would have much success explaining to the public the difference between nominal vs. real interest rates. J6P would simply focus on the fact that the bank or the T-Bill is offering negative nominal interest. Negative = bad. He would then react by pulling his money out of the system, even though a slightly negative nominal rate of return is actually hugely positive in real terms.

As VK pointed-out, cash could be sucked out of the system with tremendous speed if the herd is spooked by negative nominal interest rates. Thus, the need for a cashless society emerges.

Agreed. It is a huge risk to take. The reaction could indeed be very rapid, probably much more rapid than the government would be anticipating. My guess is that such a policy would 'bring the house down' too quickly for an alternative to cash to be developed and implemented. Nevertheless I think they would take the risk of dropping the interest rate first while imagining they could contain the consequences.

I think cash will hold value for some time to come, though certainly not over the long term. Eventually a way may be found to force people to shift to an alternative (this is effectively what Russia did when it reissued the rouble following its collapse). This is one reason I don't generally suggest that people hold everything in cash, especially if that would be a lot of money. Everything is risky at this point, but there are greater and lesser risks. IMO cash is among the lesser risks at this point.

Not long ago, I read that the Japanese government, which has been unsuccessfully fighting deflation for 20 years, is actively studying a switch from cash to plastic. Government issued debit cards would allow the abolition of cash. In addition, it would better enable the government to collect taxes on all monetary transactions occurring within the economy. The underground hush-hush cash-only economy where transactions aren't reported to the IRS would be impossible to sustain in a world where the only game in town is govt. issued plastic debit cards. Thus, abolition of cash serves two goals: (1) Enforcement of negative nominal interest rates (2) Greater taxation efficiency.

I agree that it would serve a purpose and recognize that it is a risk. I don't think implementing it would be simple under chaotic circumstances though, so I don't think cash is threatened in the short term.

IMO the underground economy will still exist because people will find alternative methods of payment such as local currencies or barter. It would take a very significant increase in repression to put much of a dent in it, which is a distinct possibility. (I expect chaos followed by repression.)

Anonymous said...

The bedbug infestation is alarming, although I am not the least bit surprised. I typically see at least a dozen people a day casually toss trash anywhere they see fit without a second thought. And many of these liter pigs look to be fairly well off. It’s an attitude of disdain and disrespect not unlike the type of pomposity displayed by the “elites’ of society. Somebody else will deal with the trash.

As a kid my granddad would make me walk around and pick up the liter of other campers and fishermen. Fortunately, back in those days the Miracle Mile of central Wyoming was a very isolated place and there wasn’t much to pick up. He was trying to instill some sort of lesson in me, but I think he just loved the river too much----the fishing was simply incredible, especially in the fall-- and couldn’t bear the sight of old beer cans and food wrappers.

We need more Mr Miyagi’s teaching Daniel -san’s to beautify their surroundings. No money is needed, just some elbow grease and the sweat of their brow. In fact, I would not at all be surprised if one remerging movement in the coming deflationary spiral is a rebirth of the Wabi-Sabi aesthetic--or at least for those who must still produce beauty in order to survive.


Ilargi said...

New post up.

MMN said...


[...]It's almost certainly wasted effort, but next time your Mother makes that crack, you might point out to her what the story of Cassandra actually IS.{...]

Oh, my Mother is coming round, the Cassandro crack is actually gentle irony on her part and she's definitely not sleeping so easily these days.

One issue I wrestle with is unpredictability - not that my doomer pessimism might be misplaced, rather that there is a cone of uncertainty regarding when and where the economic hurricane will make landfall and how high the storm surge will be.

I&S write about trends and probabilities and I am completely comfortable with the uncertainty surrounding timing and consequences. No one can forecast to the day exactly when the music will stop - they can only decide for themselves when to stop dancing and sit down.

It's really quite simple for me to take personal responsibility and make the call to flee or fortify on my own account, but what advice do I give my Mother who is a retired UK civil servant on an indexed pension who owns her own home and has some modest savings (invested in British banks)?

I know, I know; sell the stock, sell the house and prepare for the day when the pension won't cover the cost of a bus ticket. Easy for me to say (and I have), but if I'm wrong (which I am, more often than not), I risk breaking the "first, do no harm" imperative.


Anonymous said...

"I don't think the government or the media would have much success explaining to the public the difference between nominal vs. real interest rates.""


The government or the MSM/MoP wouldn't have much success explaining to the U.S Sheeple the difference between their ass and their elbow.

We as a culture are beyond dumb and dumber.

Something as dramatic as springing a 'cashless society' on the Proles would cause their pointed little heads to burst into flames from spontaneous combustion.

We are beyond rationally explaining Anything to the Public at this point. TPTB want it that way.

That's why I agree with Stoneleigh on the real possibility of 'strong men' yammering on about scape goats.

There are no solutions at this point to this mess.

What can't be cured will be endured.