Thursday, August 25, 2011

August 25 2011: Sex, Lies and Banking Stocks

Detroit Publishing Co. Walk after the quake April 18, 1906
"Market Street toward ferry", San Francisco after the earthquake and fire

Ilargi: OK, I'll admit it off the bat: there's no sex in this article. That title was just for effect. But then again, to make up for it, there's plenty of lies.

Yves Smith says, talking about Bank of America's fateful fits of late, that It's the extend and pretend endgame.

I'm not too sure about that, other than perhaps it's the very early stages of the end. But that may be all it is, and we might just as well pick at random any moment in time in the past decade for that honor. Soon as it started, we knew it had to end. You can't fake it forever.

Much as I'd like to see the end of the extend and pretend game, I’m sort of pretty convinced that it's the only thing left standing between the world as we knew it and the demise of the financial and political system that went along with it. And there's a whole bunch of skin in the game that ain't preparing to give up all that easily.

Yves carries a great quote from an April 3 2010 Steve Waldman piece that puts into words what we all (well, all?!) know but have perhaps never said as eloquently:
Capital can’t be measured
Bank capital cannot be measured. Think about that until you really get it. "Large complex financial institutions" report leverage ratios and "tier one" capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15x, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish "well capitalized" from insolvent banks, even in good times, and regardless of their formal statements.

Ilargi: When you read that and let it sip in, isn't that just the strangest thing? There's no way to tell what a major financial institution is worth.

In the Bank of America discussion, both Mike 'Mish' Shedlock and Barry Ritholtz refer back to what's been ailing the US financial system for years now: the insistence of both banks and regulators, in close cahoots, that assets should never not be marked to market; until, that is, it is favorable to the banks to do so.

FASB 157, the piece of paper that officially allows for American mark-to-Alzheimer valuation, doesn't appear to provide for any rules in case that favorable situation simply never comes along. And that's a predictable problem right there, isn't it? You can't lie forever. So what do you think happens? Yup, the FASB 157 rules receive one extension after the other.

And it's not hard to understand why. Force Bank of America, or any other major bank in the world (all the attention for BofA is a bit weird, since they're all zombie goners), to tell the outside world what paper they truly hold, and what all that paper is truly worth, and you might as well sign their death warrant.

Matt Taibbi delicately suggests that the $20 billion deal the government(s) are trying to reach with Wall Street on mortgage irregularities (see under fraud) may have something to do with the 2012 presidential elections.
Obama Goes All Out For Dirty Banker Deal
by Matt Taibbi - Rolling Stone

In a remarkable quote given to the Times, Kathryn Wylde, the Fed board member who ostensibly represents the public, said the following about Schneiderman:
It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.

This, again, is coming not from a Bank of America attorney, but from the person on the Fed board who is supposedly representing the public!

This quote leads one to wonder just what Wylde would consider “indefensible,” given that stealing is pretty much the worst thing that a bank can do — and these banks just finished the longest and most orgiastic campaign of stealing in the history of money. Is Wylde waiting for Goldman and Citi to blow up a skyscraper? Dump dioxin into an orphanage? It’s really an incredible quote. [..]

Why? My theory is that the Obama administration is trying to secure its 2012 campaign war chest with this settlement deal. If Barry can make this foreclosure thing go away for the banks, you can bet he’ll win the contributions battle against the Republicans next summer. Which is good for him, I guess. But it seems to me that it might be time to wonder if is this the most disappointing president we’ve ever had.

Ilargi: Now, I don't know whether Obama would be the most disappointing president ever, since that would be contingent on your expectations, which in turn should perhaps have been pretty much set when Larry Summers, Robert Rubin and Tim Geithner joined the team avant la lettre. It's more like the deal once again confirms the Washington/Wall Street MO, and if that anno August 2011 surprises anyone, they should probably be reading up on their history.

Still, Taibbi's piece ties in nicely with the whole Bank of America tragic tale: given what we may reasonably and minimally presume to be the bank's involvement in mortgage mayhem of all sorts and kinds, not in the least, but also certainly not exclusively, because of its purchase of Countrywide, $20 billion should be Bank of America's lawyers' tally, not its penalty for breaking about every law in the book, and by all means not the combined fine for the major lenders put together.

It’s nice to read about the negotiations on the deal and see the banks demanding some sort of absolute immunity to all further legal action, or else they won't sign. Who on earth are they to have any demands at all? They're being accused of what Taibbi calls "pretty much the worst thing that a bank can do", and then they threaten to not comply with a deal that lets them off far too easily?

All the lying and scheming isn't limited to Washington either, or the US for that matter. Europe has its own version of FASB 157 mark-to-Alzheimer regulation, suggested to it by no less than the International Accounting Standards Board, IASB. It's called IFRS9, and here's a telling little tale from Accountancy Age:
Can IFRS 9 prevent Greek tragedy?
CFA senior policy analyst Vincent Papa said investors want to see losses when they occur, and the proposed mixed model of impairment accounting "gives preparers too much freedom to present accounts as they see fit - a pure fair value model will take away this freedom".

Papa warned current proposals would present a "false plateau" and undermine investor confidence in the numbers, concluding: "The only way to solve this crisis is to tell it as it is."

Unsurprisingly, the IASB does not agree. Where IAS 39 used fair value measurement, IFRS 9 is based on expected cash flows, meaning if the holder of an asset is confident it will continue to bring in cash over its lifetime, it might not have to be written down to the extreme lows dictated by market prices.

Ilargi: It's like going up to a murder suspect and ask: "Did you kill the victim?", and when he replies, with blood all over his shirt, hands and teeth: "I don't reckon I did", vacate the premises while uttering abundant apologies. Not exactly Sherlock Holmes methods, and little to do with truth finding.

And then today Europe did itself one better in this lying league, as Zero Hedge reports:
Price Discovery Era Coming To An End As Spain, France, Belgium, Greece Extend Short Selling Ban "Due To Market Conditions"
Kiss the free market goodbye. Spain's and France's regulator have both just announced that the short selling ban, which was supposed to expire tomorrow, has now been extended until the end of September 30, and November 11, respectively. Add to this Belgium and Greece whose regulators announced they will lift its own short selling ban "when conditions allow", or some time in October, in and we can pretty much be confident that the European market rout seen earlier is due to someone leaking the news that price discovery in Europe is now officially over.

Ilargi: Now, let's get this straight. Is banning short selling equivalent to telling outright lies? No it's not. But it IS equivalent to not telling the truth. And that is, whatever you may think about this, a strange thing to be confirmed in official policy when it comes to what publicly traded companies are worth.

Remember free markets, how they are supposed to be efficient and rational and all, based on full information for all participants? Well, all of these things, FASB 157, IFRS9, and any and all short-selling bans, they serve one purpose and one only: to obscure the facts from the public, so they can never make any decisions based on full disclosure.

Financial institutions are not only permitted to withhold information from their shareholders, they're actively assisted -and one might add encouraged- in doing so.

And that's not going to change. The bordering-on-criminal-negligence deal on mortgage fraud the US government is preparing for its banks is only the last example we need to bring that home. Just another detail that confirms the overall pattern.

The big flipside of it all, as I said before, is that you can't fake it forever. And once you realize that you will never get full information on the value of bank assets, you're going to sell their stocks and never go back. Unless, and here we are in our Wile E. Coyote moment, you're the sort of investor that bets on governments forking over ever more taxpayer funds in order to make you hold on to those stocks.

We can all try and determine what Bank of America's financial situation is really like, and Henry Blodget does a reasonable job of it in The Truth About Bank of America. The point is, though, that it's all just a guessing game for even the most in the know experts, since the government has freed all banks from their legal commitments concerning both fair value and the truthful disclosure of information related to it. Yes, it may be somewhat interesting to know whether Bank of America has $50 billion or $200 billion in undisclosed liabilities. But the political system has guaranteed that you'll never find out the real number. Until, perhaps, the bank goes poof.

Which means that's it's not about Bank of America. It may be the worst of the bad apples, but so what? The entire basket full of them is rotten to the core. It's about political systems that break their own laws in order to facilitate the continued provision of misinformation concerning publicly traded institutions.

And as much as you may or may not trust or mistrust the financial markets, they are the only option left for finding the truth about these institutions.

Greece forced to tap emergency fund
by Louise Armitstead - Telegraph

Greece has been forced to activate an obscure emergency fund for its banks because they are running short of collateral that is acceptable to the European Central Bank (ECB).

In a move described as the "last stand for Greek banks", the embattled country's central bank activated Emergency Liquidity Assistance (ELA) for the first time on Wednesday night. Raoul Ruparel of Open Europe told The Telegraph: "The activation of the so-called ELA looks to be the last stand for Greek banks and suggests they are running alarmingly short of quality collateral usually used to obtain funding."

He added: "This kicks off another huge round of nearly worthless assets being shifted from the books of private banks onto books backed by taxpayers. Combined with the purchases of Spanish and Italian bonds, the already questionable balance sheet of the euro system is looking increasingly risky."

Although it was done discreetly, news that Athens had opened the fund filtered out and was one of the factors that rattled markets across Europe. At one point Germany's Dax was down 4pc before it recovered. In London, bank stocks - which have been punished by traders nervous about the European debt crisis - fell again.

In a bid to curb the falls regulators in Italy, France, Spain and Belgium extended their short-selling bans. Although it was designed to support European banks, experts in London reacted angrily to the move, claiming that regulators were wrongly targeting hedge funds.

Andrew Baker, chief executive of the Alternative Investment Management Association, the hedge fund lobby group, said: "Short-selling was not the reason bank share prices were under pressure and banning it has not relieved that pressure."

Richard Payne, a finance academic at the Cass Business School in London, said the restrictions could do more harm than good by increasing volatility and bumping up trading costs. He argued that the moves were an attempt to deflect attention away from the failures of European politicians to come up with convincing solutions to the financial crisis.

Traders argued that the worsening crisis in Greece was the real driver of market concerns. There are particular concerns that the political will to solve the crisis is waning, particularly in Germany.

Athens' activation of the ELA will raise concerns that Greece will simply shift debt to Brussels. The ELA was designed under European rules to allow national central banks to provide liquidity for their own lenders when they run out of collateral of a quality that can be used to trade with the ECB. It is an obscure tool that is supposed to be temporary and one of the last resorts for indebted banks. So far it has only be used in Ireland.

By accepting a lower level of collateral the debt in the ELA is, in theory, supposed to be the responsibility of Greece. However, since the Greek state is surviving on eurozone bailouts and Greek banks are reliant on ECB funding, in practice the loans are backed by the eurozone. The terms of lending and other details are not disclosed publicly.

Mr Ruparel said: "Though the ELA is meant to be a temporary emergency solution, we know from Ireland, where the programme has been running for almost a year, that once banks get hooked on ELA they rarely get off it."

Market Chaos 'Potentially Dangerous for Humanity'
by Christoph Pauly - Spiegel

Financial markets are inefficient and growing to the point of overwhelming the economy, according to Paul Woolley, an expert on market dysfunctionality. In an interview with SPIEGEL he explains why it's up to investors to stop dangerous trends and hold financial institutions accountable.

SPIEGEL: Mr. Woolley, you were fund manager for many years, but went on to found a research institute at the London School of Economics to study why financial markets repeatedly go haywire. Now speculators are once again betting against the euro, and share prices for big companies are falling by 20 percent in a day only to shoot back up again. What is going on?
Woolley: The developments in recent weeks have made it quite clear that the markets don't function properly. Things are spinning out of control and are potentially dangerous for society. Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn't reaching equilibrium -- it's falling into chaos.

SPIEGEL: You've compared the finance markets to a cancer. What do you mean by that?
Woolley: The finance sector can -- and is -- growing until it overwhelms the economy. In good years the US finance industry cashes in on more than 40 percent of all corporate profits. In bad years they are saved by the taxpayers. The agents are doing a devilishly good job of developing innovative, complicated new products that people can't understand. It gives them the opportunity to earn excess returns and attract the best talent. While they are acting rationally, the result is a catastrophe.

SPIEGEL: For someone who took part in this activity himself, that is a harsh judgement.
Woolley: I suppose as an investment manager for a large fund manager I was quite successful. But I also spent much of my career taking advantage of investors' herd instinct. Most fund managers follow only the newest trends and strengthen them by doing so. In the short term that leads to success, but in the long term it leads to a crash. This connection occurred to me when we pulled out of technology stocks in the late 1990s and investors with us withdrew money. After the new economy bubble broke in 2000 they came back to us because we were better than the rest of the market.

SPIEGEL: Why did you leave the finance industry in 2006, then?
Woolley: I wanted to do something socially useful. We want to revolutionize the finance industry with our institute. You have to build into the models and the self interests of the banks and fund managers to which the most investors have delegated their investment decisions. The finance industry is characterized by many innovations. Because the customers hardly understand their innovative products, banks make amazing returns. But simultaneously there is a moral hazard: When something goes wrong the bankers just move on to the next employer. The banks bear the losses. Or, in the case of bankruptcy, the state takes on the costs.

SPIEGEL: Governments are trying to curb the financial industry. What are their chances?
Woolley: I'm skeptical about this. There are many incentives for banks to get around the rules. Sanctions won't help in the long run.

SPIEGEL: You rely on the insight of the investors, then?
Woolley: Right. The big investors are in a position to force their service providers, the banks, fund managers and bankers into better behaviour. I have developed 10 simple rules that big investors should introduce for their own interests. After all, average returns on pension funds worldwide, for example, have decreased repeatedly after the market crashes in recent years.

SPIEGEL: What should investors take to heart from these 10 rules?
Woolley: They should stop chasing short-term price changes, and instead take a long-range approach to investing. That's why they should cap annual turnover of portfolios at 30 percent per annum. They should stop paying performance fees to managers who increase the worth of funds because it encourages gambling. It is nearly impossible to assess whether above average returns come from a manager's skill, luck or market moves.

SPIEGEL: What can insurers and other large investors do additionally to contain the excesses of the financial markets?
Woolley: They shouldn't invest in hedge funds or private equity companies. Managers at these companies are particularly good at hiding high costs to enrich themselves. To generate returns they must take on significantly higher risks. Big investors should also insist that trading take place on a public market. Bank profits would sink almost automatically if they were no longer allowed to sell opaque products.

Market crash 'could hit within weeks', warn bankers
by Harry Wilson and Philip Aldrick - Telegraph

A more severe crash than the one triggered by the collapse of Lehman Brothers could be on the way, according to alarm signals in the credit markets.

Insurance on the debt of several major European banks has now hit historic levels, higher even than those recorded during financial crisis caused by the US financial group's implosion nearly three years ago.

Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure £10m of the state-backed lender's bonds against default is now £343,540.

The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.

"The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008," said one senior London-based bank executive. "I think we are heading for a market shock in September or October that will match anything we have ever seen before," said a senior credit banker at a major European bank.

Despite this, bank shares rebounded on Wednesday, showing the growing disconnect between equity and credit investors. RBS closed up 9pc at 21.87p, while Barclays put on 3pc to 149.6p despite credit default swaps on the bank hitting a 12-month high. This mirrored the US trend, with Bank of America shares up 10pc in late Wall Street trade after a hitting a 12-month low on Tuesday over fears that it might have to raise as much as $200bn (£121bn). As with the European banks, the rebound in the share price was not reflected in the credit markets, where its CDS reached a 12-month high of 384.42 basis points.

European stock markets joined in the rally. The FTSE closed up 1.5pc at 5,206 on hopes the chance of a global recession had diminished. European shares hit a one-week high, with Germany's DAX closing up 2.7pc and France's CAC 1.8pc higher. The Dow Jones index edged higher on strong durable goods orders data as markets began to accept that the US Federal Reserve is unlikely to signal fresh stimulus at Jackson Hole this Friday.

Even Moody's decision to downgrade Japan's sovereign credit rating by one notch to Aa3 did little to damage global sentiment, although Tokyo's Nikkei closed down just over 1pc. As stock market nerves settled, gold - which has recorded steady gains recently as investors seek a safe haven - fell 5.3pc to $1,777 in London.

The Truth About Bank of America: Here's Another Thing Some Investors Are Freaking Out About...
by Henry Blodget - Business Insider

Today, Bank of America management finally acknowledged what the market has long suspectedthe company needs money.

This morning, Bank of America sold 50,000 shares of preferred stock and 700 million options to Warren Buffett for $5 billion.

This was very expensive money. Six months ago, Bank of America could have raised this capital at a vastly lower cost to its shareholders. But that's the penalty for failing to be conservative and waiting to raise money until you absolutely have to.

Relieved that management is finally facing reality, Bank of America shareholders have bid the stock back up to $8 a share. This is still less than half of the company's book value, though, which suggests the market thinks there's still plenty of reality that management has yet to face up to.

As you may recall, I wrote an article earlier this week about why Bank of America's stock has tanked ~40% in a month.

The article explained that the market does not believe that Bank of America's assets are worth what Bank of America says they are worth.

The market thinks that Bank of America will eventually be forced to acknowledge that its assets are not worth what it says they are worth and write down their value. And this action, the market thinks, will demolish Bank of America's book value and force it to raise even more additional capital. (Or, if the losses are spread out over many years, just become a colossal, lumbering zombie).

As you may also recall, my article made Bank of America so apoplectic that it threw a mud-pie at me. This, in turn, prompted a lot of opining on TV and elsewhere about the condition of Bank of America. It also prompted one person to call me a "d-bag"direct quoteand suggest that writing posts about why Bank of America's stock is collapsing is "irresponsible."

Well, to be honest, the last thing I want to do with the last few days of summer is waste our collective time thinking about Bank of America, especially when there are so many more important things to focus on. But given the attention my article received, as well as the fact that Bank of America is one of the biggest banks in the country and its stock price suggests it still has serious problems, I also wanted to delve in a bit deeper.

I asked readers to help by sending me analyses of Bank of America, and they sent in a lot of great stuff (thank you!). I also had some exchanges with a couple of bank analysts who know far more about banks and Bank of America than I ever will. These were also extremely helpful.


The savior.

Thankfully for Bank of America shareholders (like me), Bank of America management has begun to face up to reality. This reduces the risk that Bank of America will enter a death-spiral and go down the tubes. Today's Warren Buffett investment, however, was a classically brilliant Warren Buffett investment in that it takes care of Warren Buffett first: Buffett will collect a 6% dividend and own a preferred security that will be partially protected from future Bank of America losses. And he will also get an option to buy a staggering 7% of the company. 

Regular old Bank of America shareholders like me get neither of those things. If Bank of America is forced to raise additional capital, the dilution will come right out of our hides. So assessing how much capital, if any, Bank of America will need will continue to be important.

One could spend months peering into the depths of Bank of America and never know anything for certain. But here, in bullet form, is what I have concluded so far:

  • No one knows what Bank of America's assets are worthincluding Warren Buffett and including the experts opining all day on TV. The market's collective assessmentthat Bank of America's assets are worth much less than Bank of America says they are worthis probably the most meaningful estimate out there. Bank of America itself may have a better idea of what its assets are worth than the market does, but Bank of America is keeping critical information secret.
  • Assessing the value of Bank of America's assets is extraordinarily complicated, and Bank of America has not disclosed enough information for even super-sophisticated bank analysts (or Warren Buffett) to reliably do it. Bank of America has published a mind-boggling amount of detail about its assets and business, but according to several professional bank analysts, this is not nearly enough detail for any outsider to really know what's going on.
  • Bank of America's balance sheet is so huge$2.2 trillionthat even a 5%–10% "haircut" to the value of its assets would result in write-offs of $100-$200 billion. This would zero out Bank of America's tangible equity and wallop its book value.
  • Bank of America's stock is behaving exactly the way the stocks of AIG, Lehman Brothers, Bear Stearns, Wachovia, and other doomed financial institutions behaved in the early stages of the financial crisis. Which is to say, the stock keeps dropping, with intermittent rallies, while management keeps insisting that everything is okay.
  • Bank of America's management is behaving exactly the way the managements of AIG, Lehman, Bear, Wachovia, and other doomed financial institutions behaved in the early stages of the financial crisis. Which is to say, they are indignantly insisting that everything is okay and blaming their stock price declines on "shortsellers" (and me). Thankfully, now, with the Warren Buffett deal, they are finally facing reality.
  • Bank of America has several categories of assets that might well be worth less than Bank of America says they are worth. Taken together, these add up to big numbers.  The categories include (but are probably not limited to):

    • $17 billion of European exposure, including $1.7 billion of sovereign debt of PIIGS countries
    • $67 billion of net "derivatives" assets(~$1.9 trillion before netting). Derivatives are what Warren Buffett once referred to as "financial weapons of mass destruction." No one outside Bank of America knows what's in them, what they're worth, or what might cause them to explode. Derivatives played a role in killing Lehman and AIGand no one on the outside of these companies had any idea what was about to hit them.
    • $78 billion of "goodwill," which is the residual carrying value of acquisitions Bank of America made long ago. This goodwill may or may not be worth anything.
    • $47 billion of commercial real-estate loans, per two analysts
    • $408 billion of residential mortgage loans (as of Q1), comprised of $274 billion of first mortgages and $134 billion of Home Equity Lines Of Credit, per one bank analyst (more on these below).
    • Some of the above assets roll up into...
    • $73 billion of "level 3" assets, which are carried at extremely subjective valuations (These assets don't have freely traded market comparables. It was this category of assets, in part, that killed Lehman Brothers)
    • ~$500 billion of "level 2" assets, whose values are determined with models (which, in turn, are driven by assumptions that may or may not be conservative).
  • All of these assets are balanced against about $230 billion of shareholder's equity ("book value") at June 30, including Buffett's investment.  $230 billion of shareholder's equity may sound like a lot, but it's not when measured against the size of the balance sheet ($2.2 trillion). Again, a 5%–10% haircut in the value of the assets would blow a huge hole in the balance sheet (or, if the hit is spread out, depress earnings for many years).
  • It is not just Bank of America's reported assets and liabilities that could clobber the company––it's the unreported ones.  Think back to why Lehman, AIG, and other financial firms imploded with little warning: A big contributing factor was the "collateral" the companies suddenly had to come up with to satisfy derivative contracts no one knew existed. No one knows who the counterparties for Bank of America's $1.9 trillion of derivatives are. No one knows what the terms of these contracts are. Hopefully, we'll never know––but if things get bad enough, we might suddenly find out.
  • It is now the consensus of Wall Street analysts that Bank of America needs to raise more capital––the only question is how much. A couple of months ago, most analysts were saying that Bank of America had plenty of capital. Now, even Bank of America bulls are arguing that its capital needs are "manageable."  This, too, is reminiscent of the fall of 2008, when analysts moved from insisting that financial firms had plenty of capital to saying that they needed capital to watching them go bust. Most analysts think Bank of America needs a lot more capital than the $5 billion Warren Buffett just injected into it.  I wonder what the Bank of America consensus will be in a few months.
  • It's certainly possible that the market is wrong about Bank of America and that, as management insists, everything's fine.  Sometimes the market is wrong. Sometimes the market just gets nervous for a while and then gets comfortable again. Perhaps that's what's happening this time.
  • But Bank of America's management is not behaving as if everything is fine. I've been observing management teams for two decades now.  Generally, the more management teams make their communications about "shooting the messenger" (often a shortseller or skeptical analyst), the more likely it is that the messenger has hit close to the mark. The mud-pie that Bank of America threw at me earlier this week, in my opinion, was a classic example of shooting the messenger.

So that's what I've concluded about Bank of America so far. Again, this does not mean Bank of America is hosed––and as a Bank of America shareholder and American taxpayer, I certainly hope it isn't. It just leaves me concerned that the market is right about Bank of America and Bank of America management is wrong.

Detroit house

Possibly a Bank of America "asset."

Image: crashtestaddict via flickr


Before I leave this topic, I want to shine some additional light on one category of Bank of America's assets that gives one analyst I spoke to serious pause.

That category is real-estate.

Bank of America has approximately $450 billion of real-estate loans on its books, ~$400 billion of which are residential. 

The analyst I spoke with thinks that Bank of America may well end up booking $80-$100 billion of losses on this asset category alone.

What follows is this one analyst's assessment of Bank of America's real-estate loans, and the potential losses embedded within them. I am sure many other bank analysts disagree vehemently and think this analyst is an idiot. Dick Bove of Rochdale, for example, seems to think that Bank of America is in pristine shape. John Hempton of Bronte Capital, who is the farthest thing from an idiot, thinks that the market's overreacting and Bank of America is fine.

To understand why the analyst I talked to is so bearish about Bank of America's real-estate loan portfolio--and why his analysis likely merits some consideration--you need some backstory.

angelo mozilo

The gift that keeps on giving.

Bank of America, you will recall, bought Countrywide, which was one of the worst mortgage-underwriting-and-securitizing offenders during the housing bubble. It also bought Merrill Lynch, which was another.

Merrill Lynch and Countrywide blew up during the financial crisis, almost taking Bank of America down with them. Bank of America wrote off much of the Merrill-Countrywide damage, strengthening its balance sheet in the process. But the wreckage of these two companies' mortgage "assets," however, has not been completely rinsed away. And the analyst I spoke with thinks that what remains may be giving Bank of America big trouble.

The reason that Merrill Lynch and Countrywide blew up so fast, in part, is that most of their loans were "securitized"--which means that they were rolled up into mortgage-backed securities and resold by Wall Street. Mortgage-backed securities are generally "marked to market" on bank balance sheets, which means that their values are adjusted depending on the prevailing market values. When the housing bubble burst, the market values of mortgage-backed securities plummeted, and, as they fell, companies like Merrill had to take huge write-offs. These losses demolished the companies' capital, forcing them to raise additional capital to survive (which many didn't).

Since the peak of the housing bubble, my analyst tells me, the value of "securitized" residential mortgage assets across the industry has been written down by a a staggering ~$700 billion, from ~$1.9 billion at the peak of the bubble to about ~$1.2 billion today.

And that's actually good news.


Because, thanks to those write-offs, the current carrying values of mortgage-backed securities are much lower than they were at the peak of the bubble. This means that there is much less potential downside to the values of these assets than there was a few years ago.

But now for the bad news...

Another huge class of residential mortgage assets--whole loans that were NOT securitized by Wall Street--does not have to be "marked to market" on bank balance sheets.  Instead, as long as a bank intends to hold a loan as an investment, the loan can be carried at the price at which it was acquired.

Collectively, says my analyst, US banks own about $2.7 trillion of residential mortgage loans, of which about $700 billion are home equity lines of credit (HELOCs).  These loans are subject to the same real-estate market pressures that destroyed the value of securitized mortgages, but banks have hardly written down their values at all.

(My analyst did not have an industry-wide figure for the dollar value of these loans that have been written off since the peak of the bubble, but he believes it's small. If any readers have such a figure, please send it along.)

On a percentage basis, my analyst says, the value of securitized mortgages has been written down by about 35% since the peak of the bubble, from $1.9 trillion to $1.2 trillion. The value of whole loans, meanwhile--$2.7 trillion, according to my analyst--has hardly been touched.

Instead of writing down the value of whole loans, my analyst says, banks are simply reserving against them in their provisions for loan losses. But in the analyst's opinion, they aren't reserving anywhere near enough.


Brian Moynihan, who may well be a great guy. But here's betting he also doesn't know what Bank of America's assets are worth.

Image: AP


At the end of the first quarter, my analyst says, Bank of America was carrying $408 billion of residential mortgages held for investment (ie, not marked to market). Against this, my analyst says, the bank had only reserved $20 billion in loan-loss provisions.

$20 billion of losses on $408 billion of loans is about a 5% loss rate. This compares to the ~35% loss rate the industry has experienced on securitized mortgages thus far.

If Bank of America were to eventually experience the same 35% value reduction on its whole loans as the industry has seen on securitized mortgages, the company would end up writing off about $140 billion of value, not $20 billion.

So that gives my analyst pause.

The other thing that gives my analyst pause is his belief that most of the loans that Bank of America is carrying as whole loans are among the worst mortgage loans of all the mortgage loans made during the housing bubble.


Because, according to the analyst, only a relatively small percentage of these loans have been originated since the housing bubble burst (i.e., on saner, more sustainable housing values). Most of the loans that were originated in the early years of the housing bubble, meanwhile--which were also issued on saner, more sustainable house values--were securitized by the Wall Street securitization machine.

So my analyst is betting that the loans that banks like Bank of America are carrying as whole loans are mostly loans that were originated near the peak of the housing bubble, when the securitization machine began to break down and when house prices were at their highest.  On average, therefore, my analyst thinks, those whole loans may have a worse loss rate than the ones that were securitized.


Knowing Tim, he's already working on a bailout plan.

Image: AP

So, Why Aren't These Crappy Loans Showing Up In Bank Of America's Financial Statements?

So if Bank of America's residential loan portfolio is so bad, why isn't this visible in the company's non-performing loan statistics? And why haven't banks like Bank of America started being more aggressive about foreclosing on these bad loans and writing them off?

On the first question--why haven't the loans been showing up in the banks' Non-Performing-Loan totals--my analyst thinks that banks like Bank of America are gaming the accounting rules to avoid taking write-offs.

For example, my analyst thinks banks are allowing delinquent homeowners to skip a few months of payments and then make one payment just before the loan would have to be classified as non-performing. This technique, the analyst says, would "reset the clock" and thus allow banks to make it appear that loans are performing when they aren't.

As to why banks like Bank of America won't just foreclose on deadbeat borrowers, or permanently modify their mortgages by writing down the principal balances, my analyst is convinced that banks just don't want to take the capital hits. Doing either of these things--foreclosing or permanently modifying a loan with a principal write-down--would force the bank to take a big write-off. And the banks, my analyst thinks, are doing everything they can to avoid taking those losses.


So, in short, my analyst thinks that banks like Bank of America have huge "embedded" losses in their mortgage portfolios--losses that have yet to be taken as write-offs and, therefore, have yet to hit the banks' capital.  These losses, my analyst believes, will eventually inflict themselves on the banks one way or another.

Now, importantly, my analyst does not KNOW any of this. The banks are not required to disclose the information necessary for the analyst to precisely determine the actual condition of the banks' whole loans, so it is impossible for the analyst to verify his suspicions. But based on anecdotal information, he is confident that he is right.

This analyst, by the way, is not a "shortseller."  He's just a well-connected industry analyst who wants to remain anonymous so banks and bank investors don't get mad at him and call him a "d-bag."

So, is this analyst right? Do Bank of America and other huge US banks have hundreds of billions of dollars of embedded loan losses that they have yet to recognize?

No one knows--except, perhaps, the banks.

But to this non-bank analyst, at least (me), the bearish analyst's concerns sound valid.

And that leaves me even more concerned that the market is right about Bank of America and Bank of America management is wrong--and that the bank needs a lot more capital.

Bundesbank questions legality of EU bail-outs
by Ambrose Evans-Pritchard - Telegraph

Germany's Bundesbank has issued a blistering critique of EU bail-out policies, warning that the eurozone is drifting towards a debt union without "democratic legitimacy" or treaty backing.

"The latest agreements mean that far-reaching extra risks will be shifted to those countries providing help and to their taxpayers, and entail a large step towards a pooling of risks from particular EMU states with unsound public finances," said the bank's August report. It said an EU summit deal in late July threatens the principle that elected parliaments should control budgets. The Bundesbank said the scheme leaves creditor states with escalating "risks and burdens" yet no means of enforcing fiscal discipline to make this workable.

There are no plans as yet for EU treaty changes to correct these distortions. "Unless there is a fundamental change of regime involving a far-reaching surrender of national fiscal sovereignty, it is imperative that the 'no bail-out' rule – still enshrined in the treaties – should be strengthened by market discipline, rather than fatally weakened," the report said.

The wording is uncannily close to language used by plaintiffs challenging the legality of EU rescues at the country's constitutional court. The judges are expected to rule in September or early October. Any finding that the bail-out fund (EFSF) breaches Germany's Grundgesetz could have shattering effects on creditor confidence in monetary union. The broadside came as two Chinese officials called on Europe's leaders to "show a responsible attitude", warning that failure to create a workable rescue machinery had become a threat to global stability.

"The euro debt crisis has now been going for nearly two years since the end of 2009, and has spread like the Black Death of the 14th century across the eurozone countries," wrote the two officials, including the former chief of global affairs at the central bank.

China has been a crucial prop for the eurozone, accumulating some €700bn of EMU bonds over the past decade as it seeks to lower dependency on the the US dollar. Beijing has pledged support for Italy and Spain over recent months but there are signs that the Politiburo is losing patience with Europe's leaders.

For now the European Central Bank is shoring up the Spanish and Italian bond market. It bought a further €14.3bn (£12.5bn) of eurozone bonds last week, less than the week before. Its total holding has risen to €110bn. The ECB is capping yields of Italian and Spanish bonds at just under 5pc with carefully-calibrated purchases. The policy has succeeded so far but is likely to be tested as trading returns to normal next month and the ECB nears its implicit limit. Italy must issue or roll over €68bn by late September.

German President Questions Legality of ECB Bond Purchases
by Spiegel

German President Christian Wulff blasted the European Central Bank's policy of buying up bonds from indebted euro-zone countries on Wednesday, saying it runs counter to European Union laws. His comments highlight just how controversial efforts at propping up the common currency have become.

German President Christian Wulff on Wednesday publicly questioned the legality of the European Central Bank's program of buying bonds of debt-ridden EU countries as a way of propping up their economies. Speaking at a conference of economists in the Bavarian town of Lindau, Wulff said: "I regard the massive acquisition of the bonds of individual states via the European Central Bank as legally questionable."

He referred to an article in the EU's fundamental treaty which bars the ECB from buying bonds directly from governments. Because of the article, the ECB has been purchasing bonds on the secondary market. The ban, Wulff said, "only makes sense if those responsible don't circumvent it with comprehensive purchases on the secondary market."

Growing Opposition
Wulff holds a largely ceremonial post as president, but as a member of German Chancellor Angela Merkel's Christian Democratic Union (CDU) his comments show how controversial the issue of supporting the debt-ridden EU countries has become in Germany and in Merkel's own party. Wulff must also sign off on German legislation, including laws aimed at propping up the euro.

To date, the ECB has bought about €110 billion ($159 billion) in bonds from Greece, Ireland, Portugal, Spain and Italy. The bond-buying program began in May 2010, and it has been heavily criticized in Germany, above all by the German federal bank, or Bundesbank. The ECB recently started buying the bonds again after a 19-week pause. The move was opposed by two Germans on its Governing Council, Jens Weidmann and Jürgen Stark. Axel Weber, the former head of the Bundesbank, opposed the bond-buying program from its outset.

The Bundesbank again criticized the bond-buying program on Monday, saying that it curtailed incentives for "appropriate fiscal policy."

Kohl and Greenspan Weigh In
In his Wednesday speech, Wulff also indirectly positioned himself against proposals to introduce euro-bonds as a way of helping indebted countries borrow money on international financial markets. "Who would you personally take out a loan with?" he said. "Whose loan would you personally guarantee?" For one's own children this might work, but with other relatives it would be more difficult, he said.

Former German Chancellor Helmut Kohl, also of the Christian Democrats and an early supporter of the common currency, warned in an interview this week about the possibility of a breakup of the European Union. The EU must help its members, such as Greece, face their debt crises, he told the magazine Internationale Politik in Berlin. "We have no choice, if we do not want to let Europe break apart," he said.

Meanwhile, the German business daily Handelsblatt reported Wednesday that the former head of the US Federal Reserve, Alan Greenspan, expects an end to the European common currency. "The euro is collapsing," Greenspan was quoted as saying at a Washington, D.C. symposium. Such an event would cause grave problems for European banks, whose security is already partially "questionable," he said.

Germany fires cannon shot across Europe's bows
by Ambrose Evans-Pritchard - Telegraph

German President Christian Wulff has accused the European Central Bank of violating its treaty mandate with the mass purchase of southern European bonds. In a cannon shot across Europe’s bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem.

“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said. “This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said, speaking at a forum of half the world’s Nobel economists on Lake Constance to review the errors of the profession over recent years.

Mr Wulff said the ECB had gone “way beyond the bounds of their mandate” by purchasing €110bn (£96.6bn) of bonds, echoing widespread concerns in Germany that ECB intervention in the Italian and Spanish bond markets this month mark a dangerous escalation. He did not explain what else the ECB could have done once the bond spreads of these two big economies began to spiral out of control in early August, posing an imminent threat to monetary union and Europe’s financial system.

The blistering attack follows equally harsh words by the Bundesbank in its monthly report. The bank slammed the ECB’s bond purchases and also warned that the EU’s broader bail-out machinery violates EU treaties and lacks “democratic legitimacy”.

The combined attacks come just two weeks before the German constitutional court rules on the legality of the various bailout policies. The verdict is expected on September 7. The tone of language from two of Germany’s most respected institutions suggests that both markets and Europe’s political establishment have been complacent in assuming that the court would rubberstamp the EU summit deals in Brussels.

Nobel laureate Joe Stiglitz told the forum that the euro is likely to fall apart unless Germany accepts some form of fiscal union. “More austerity for Greece and Spain is not the answer. Medieval blood-letting will kill the patient, and democracies won’t put up with this kind of medicine.”

Mr Stiglitz said Argentina’s 8pc annual growth rate after breaking its dollar peg in 2001 showed that “there is life after default, and life after breaking out of an exchange rate system”. He warned that Germany is “going to lose a lot of money one way of another” since the exit of southern states will inflict large banking losses. The country might as well opt to shore up EMU and prevent its great dream of European unity “going down the drain”.

Chancellor Angela Merkel has struggled all this week to placate angry critics of her bailout policies within the Christian Democrat (CDU) party. Labour minister Ursula von der Leyen said countries that need rescues should be forced to put up their “gold reserves and industrial assets” as collateral, a sign that rising figures within the CDU are staking out eurosceptic positions as popular fury mounts.

Mrs Merkel insisted that this was “not the way to get things done” in the eurozone. She appears to have enough votes to back the EU summit deal in late July, which gives the bailout fund (EFSF) broader powers to shore up bond markets.

However, the simmering mutiny kills off any chance that Germany will agree to a major boost to the EFSF in coming months, let alone quadruple its firepower from €440bn to €2 trillion or more, the sort of figure deemed necessary by RBS, Citigroup and others to prevent the crisis engulfing Italy and Spain.

Marc Ostwald from Monument Securities said Germany is drifting towards a major constitutional crisis. “This has all the makings of the revolt that unseated Helmut Schmidt [in 1982], and indeed has political echoes of the inefficacy of the Weimar regime,” he said.

Mr Wulff said Germany’s public debt has reached 83pc of GDP and asked who will “rescue the rescuers?” as the dominoes keep falling. “We Germans mustn’t allow an inflated sense of the strength of the rescuers to take hold,” he said.

“Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts. With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult,” he said.

The carefully-scripted comments are the clearest warning to date that Germany has reached the limits of self-sacrifice for Europe. The assumption that it will always - after much complaining - sign a cheque to keep the project of the road, no longer holds.

Fear that Germany’s torrid recovery from the Great Recession is already sputtering out is likely to harden feelings in Berlin.The IFO institute’s index of German business confidence saw the biggest one-month drop in August since the Lehman crisis in October 2008. This follows a sharp fall in the ZEW financial index to -37.6, levels that have typically preceded recession in the past. German growth wilted to 0.1pc in the second quarter on falling export demand, though the figures may have been distorted by the stoppage of eight nuclear plants.

Mr Wulff rebuked Chancelor Merkel, saying political leaders should not break their holidays every time there is trouble in the markets. “They have to stop reacting frantically to every fall on the stock markets. They mustn’t allow themselves to be led around the nose by banks, rating agencies or the erratic media,” he said. “This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies.”

Eurozone industry shows signs of slowdown
by Graeme Wearden - Guardian

The eurozone economy slipped closer to stagnation this month as the region's manufacturing sector contracted for the first time since September 2009. Data released on Tuesday showed that Germany's private sector grew at its slowest pace in over two years in August, while France's manufacturing output shrank, dragging the overall eurozone manufacturing sector into reverse. Economists warned that the European economy has slowed sharply in the last few months and may struggle to expand at all this quarter.

"The eurozone economy grew only marginally again in August, suggesting that recent months have seen the weakest expansion for two years," said Chris Williamson of Markit, which compiles the research. "The data raises the prospect that economic growth in the third quarter could be even slower than the disappointing 0.2% rise seen in the three months to June," he predicted. UK factories fared better during August, though, with the CBI reporting growth in order books and an increase in the number of manufacturers predicting increased output later this year.

Confidence suffers
Markit's monthly healthcheck of the eurozone found that the total activity across the region was flat month-on-month at 51.1, above the 50-point mark that separates expansion from contraction. But French manufacturing output dropped to 49.3, its first contraction since July 2009. The overall eurozone manufacturing sector came in at 49.7. Germany's manufacturing sector, the powerhouse of Europe, increased its output to 52, but this was marred by a drop in service activity to just 50.4.

Williamson said that the eurozone economy had suffered from a drop in global demand, which dampened demand for exports. The ongoing euro debt crisis has also hit business confidence.

Seperate data from Germany underlined how the financial crisis has hit sentiment. The ZEW index, which tracks invester confidence, fell sharply this month. Economists said the size of the drop was surprising, and matched the plunge seen after the collapse of Lehman Brothers.

The ZEW economic expectations index dropped to -37.6 from a reading of -15.1 in July. "The skepticism with regard to future economic growth shown by a growing number of financial market experts during the previous months has increased dramatically," said Wolfgang Franz, president of the Mannheim-based Center for European Economic Research, or ZEW.

Subdued picture
Martin van Vliet of ING said that the Markit data was not as bad as feared, but indicated that there was little sign of economic expansion in Europe. "Despite the lack of change from last month, the August flash PMI survey still paints a very subdued picture. With little prospect of a near-term pick-up in external demand and the impact of the recent financial market turbulence yet to fully feed through into activity we cannot be too complacent about the risk of a new eurozone recession," van Vliet warned.

Earlier, HSBC's preliminary purchasing managers' index showed that China's manufacturing sector had contracted for the second month running in August. However there was optimism that the index rose to 49.8 from 49.3, showing that the decline had slowed. HSBC chief economist Qu Hongbin said this showed there was little risk of China's economy suffering a "hard landing', after years of strong growth.

Rich EU Members Lose Patience with the 'Olive Zone'
by Manfred Ertel, Julia Amalia Heyer, Volkmar Kabisch And Walter Mayr - Spiegel

The rich countries of the northern euro zone are bearing the brunt of bailing out their debt-stricken fellow members. Resentment is growing among their populations, helping euroskeptic right-wing populists to win support. But there is little awareness of how much the European Union has done for their own countries

Officially, of course, the one-euro coin is worth the same everywhere. But given the current state of the euro zone, you could be forgiven for thinking that the coin with the Greek owl or Spanish king on its reverse is worth less than one bearing, say, a German eagle or the silhouette of the Netherlands' Queen Beatrix.

An invisible crack now divides the euro zone. With their triple-A rating from the American credit rating agencies, six of the euro zone's 17 member states are considered sound borrowers. And the more government finances in Greece, Portugal, Italy, Spain and Ireland are thrown out of kilter, the more the countries with the best credit ratings are expected to vouch for the euro. They include, in addition to Germany and France, Finland, Luxembourg, the Netherlands and Austria.

From the Austrians eating at sausage stands in Vienna to the regulars at fish stalls in The Hague, to Luxembourg bankers and Finnish businesspeople, many in the euro zone's model countries seem conflicted nowadays. They are torn between the strong suspicion that some of their hard work is going down the drain with the hundreds of billions that are currently disappearing into aid packages and bailout funds for threatened EU countries, and the hope that their political leaders, in their efforts to appease citizens, might be right after all.

This euro crisis is not only about rescuing a common currency. It's about fundamental questions of political union. It's about the suspicions of many Europeans that people in the southern part of the EU, derisively referred to as the "olive zone," lived well at the expense of others, and that those who were more careful with their money are now expected to swallow the poison that is making its way northward.

On the other hand, it is not clear whether the EU will be able to continue in its current form if some countries are effectively under receivership while the strong economies are in a position to call the shots in future. Is there a threat that Germany, the economic giant among the triple-A countries, could unintentionally become the leading power in Europe through its fiscal authority?

'We Wouldn't Stand a Chance Without the Euro'
Such issues are not at the top of Heikki Vauhkonen's mind. A cheerful businessman with thinning hair, he heads a publicly traded family company in Helsinki that makes sauna heaters and soapstone stoves. "Finland is a small country with big neighbors," says Vauhkonen. "No one in industry here would think of breaking up the euro zone or withdrawing from it. We live from exports -- we wouldn't stand a chance without the euro."

Anne-Catherine Berner, also from Helsinki, shares his views almost to the letter. With a degree in business administration, Berner represents the third generation to run the textile company established by her family. At the same time, she heads an association of family-run companies that employ a total of 170,000 people and generate €30 billion ($43 billion) in annual revenues. Berner, also a strong advocate of Europe, says: "Searching for individual solutions doesn't help Finland."

Finnish Prime Minister Jyrki Katainen seems to disagree, which might explain why his finance minister announced an agreement last week on "collateral" for Finnish bailout loans to Greece. Under the agreement, the Greeks are expected to deposit about €500 million into an escrow account with the Finnish state in return for the roughly €1.4 billion Helsinki is required to contribute to the €109 billion European aid package for Greece. Finland will hold on to the money, which will be invested in triple-A securities, until the debt is repaid or the collateral plus accumulated interest equals the Finnish contribution.

Critics across Europe see this solo effort as a foolish attempt by the Finns to limit their own risks at the expense of others. If only one of the donor countries, which may now be tempted to conclude similar agreements, were to reject Finland's special provision, the entire bailout package for Greece will fall apart. The Finnish premier is not impressed by such prospects. He sees the aid for Greece from the perspective of a businessman. "The other euro countries know that Finland will not participate in this package if we are not provided with any collateral," says Katainen.

'Economic Gangrene'
Katainen, who has been in office since June, is clearly under pressure. Finland, next to Luxembourg and Estonia, is one of only three countries in the euro zone that are in compliance with the debt limits imposed by the Stability and Growth Pact. With its population of roughly 5 million, it is one of the biggest net contributors to the EU in relative terms. In 2010, Helsinki's payments to the EU exceeded the subsidies it received by 0.32 percent of its gross domestic product (as compared with 0.26 percent for Germany).

But since the established parties suffered a serious setback in the 2011 parliamentary election, in which the right-wing populist True Finns, under Timo Soini, captured 19.1 percent of votes, something of a sea change has begun in this northern European model country. The established parties are now trying to curry favor with the protest voters.

But they are not conveying their message as effectively as Soini does. He says that Europe suffers from "economic gangrene" caused by individual countries. "As long as we don't amputate what can no longer be saved, we risk poisoning the rest of the body." Polls indicate that some 23 percent of voters now agree with the diagnosis of the euroskeptic True Finns.

Finnish Minister for European Affairs and Foreign Trade Alexander Stubb openly admits that "the True Finns have backed us into a difficult corner," and that in the future the government will have to proceed "much more resolutely than before." Nevertheless, he promises: "We want to be part of the solution and not part of the problem."

Austria's Rising Right
Austrian Finance Minister Maria Fekter, who is doing her utmost to explain to voters why booming Austria should have to bleed for the starving olive zone, is fuming over the Finns these days. At the end of last week, Fekter sent her Finnish counterpart a venomous letter addressing their unilateral actions.

Fekter, nicknamed "Gravel Mitzi" because of her parents' gravel business (the name Mitzi is a form of Maria), is looking a little stern as she participates in an Internet chat with the online edition of the Austrian magazine NEWS. She has hardly had a chance to sit down before she is peppered with mean-spirited questions. "How can you justify giving away Austrian taxpayer funds to foreign countries?" one person asks. "How much longer will this euro dictatorship last?" asks another.

The minister puts up a good fight. She has seen the unflattering morning headlines in the popular newspapers about Belgium's Herman Van Rompuy, a center-right Christian democrat like Fekter who is now expected to lead a European economic government. She has read the criticism of the billions being sunk into the EU. Fekter is also familiar with the opinion polls showing that the right-wing populist Freedom Party of Austria (FPÖ) is now the strongest party in Austria, a country that has benefited more than most from the EU. The FPÖ's chairman, Heinz-Christian Strache, has called the euro bailout fund "a mass expropriation for the Austrians."

Fekter collects herself and straightens her body. Then she valiantly sends her message to the online readership: "The euro is a success story. It is one of the world's strongest currencies."
Only after her Internet flirtation with voters has ended, and she is already on her way out, does Fekter add that countries like Austria are paying close attention to the German-French approach to dealing with the euro crisis through bilateral meetings. "We small countries have a problem with two large countries getting together and then wanting to impose something on us." She insists that Austria is most of the time in agreement with the German approach, but adds: "I respect Angela Merkel, but I prefer to personally fight for the interests of my own country."

The Benefits of Europe
Less than 1,000 kilometers (625 miles) to the west, in the Kirchberg district of Luxembourg City, is the office of a man who plays an important role when it comes to the euro, the German economist Klaus Regling. He helped develop the Stability Pact and later, on behalf of the European Commission, reprimanded the administration of former German Chancellor Gerhard Schröder for not sticking to the deficit rules. Now he is the CEO of the European Financial Stability Facility, the rescue fund which the euro-zone members decided to set up in May 2010. Regling is now the man charged with preventing the collapse of the common currency with the help of the EFSF.

Judging by the mood among the people surrounding Regling's office on Avenue John F. Kennedy, everything will turn out all right. Here, where Luxembourg's bankers, EU officials and other well-off employees are constantly coming and going, where clever financial service providers manage and invest €2 trillion in assets. Here, it is hard to imagine a world without a united Europe.

The small grand duchy, one of the co-founders of the European Economic Community in 1957, later helped in the development of the EU and the euro. It has always been one of the model pupils in the euro zone. "We have always earned our money," says Benoît Tesch, a consultant with PricewaterhouseCoopers, who is standing with a half-full glass of beer in the "Urban" bar in Kirchberg. According to Tesch, open borders are Luxembourg's capital, adding that if Europe goes downhill, it's logical to conclude that his country will go down with it. "But if Europe is doing well, we do even better," he says.

According to a study by the Swiss bank UBS, employees in Luxembourg have the third-highest purchasing power worldwide. Even Paul Helminger, the city's mayor for the last 12 years, would not consider it unseemly if his electorate were called upon to contribute generously to the European bailout fund. There is a price to be paid for the benefits Luxembourgers derive from Europe, says Helminger. Without Europe, their slice of the pie would be "not as tasty and not as big."

Dealing with the 'Garlic Countries'
In the Dutch city of The Hague, there is little evidence of the affluent ease of established Luxembourgers. With his platinum-blonde hair, hand-stitched shoes and navy-blue suit, Geert Wilders, head of the right-wing populist Party for Freedom (PVV), looks like the devil incarnate as he sits in the front row of the Dutch parliament.

Wilders is a political curiosity, both a silent partner and a thorn in the side of the conservative administration of Prime Minister Mark Rutte. He will only comment on the efforts to save Greece through his spokesman, who delivers the following statement: "Long live the euro, and the Greeks will drink another glass of ouzo to that." His spokesman, speaking for Wilders, also explains the reason for this plenary session of the Dutch parliament in the middle of the summer recess. It is, he says, to address the debts of the "garlic countries." The phrase sounds notably less sympathetic than the term "olive zone."

This extraordinary session was called to address Greece and the bailout package, the issues of rich and poor in Europe and the eternal question of the transfer union. The Dutch, like the Germans, are net contributors. Even the growth rates of the two economies were almost identical in the last quarter: a paltry 0.1 percent.

But most of all, the session on these two days in the stone Binnenhof complex, the seat of the parliament, revolves around the man who is sitting in the first row, on the far right side, looking as if he is not even involved. In the WikiLeaks cables, US diplomats once referred to him as the "golden-pompadoured, maverick parliamentarian Geert Wilders." The otherwise vocal rebel, currently the key figure in Dutch politics, leans back in his blue leather armchair, says nothing and watches the proceedings. There is no need for Wilders to say anything, because others are speaking for him -- including Prime Minister Rutte, who interrupted his vacation to attend the session.

Facing Angry Voters
Wilders tolerates Rutte's minority government, a coalition of the conservative-liberal People's Party for Freedom and Democracy (VVD) and the center-right Christian Democratic Appeal (CDA). It is a unique political construct. There are agreements between the government and Wilders in which his wishes are specified as the government's objectives. And Wilders, in addition to being an avowed critic of Islam, is also, as he readily admits, an "anti-European."

This odd arrangement places Rutte in a delicate position. The strictest of control mechanisms for the debtor nations are necessary, he says, but adds, in a concession to Wilders, that this absolutely cannot translate into more power for Brussels.

Wilders can indeed lean back and relish his position. He is not held responsible for the aid payments to Greece, which are, after all, part of the government's policy. At the same time, he is not a powerless member of the opposition. He pulls the strings behind the scenes, while others -- "his vassals," as Wilders' opponents now refer to members of the government -- are left to face the fury of angry voters.

The desolate state of a few southern EU countries is one of Prime Minister Rutte's problems, but by no means the only one. In fact, his real problem is his dependency on Wilders, with whom he meets every Monday morning before delivering his weekly report to Queen Beatrix, the head of state.

Skepticism in a Small Country
"Wilders is always first," Alexander Pechtold, the parliamentary floor leader of the social-liberal party D66, says sarcastically. Pechtold, 45, is sitting in a café on the Plein, the square in front of the parliament building. After six hours of debate, he seems more annoyed than exhausted. Pechtold's constant attacks on Wilders and the coalition government have made him something of an opposition leader. His party holds less than half as many seats as Wilders' PVV. Its slogan in last year's election was: "Europe: Yes."

"We have a problem," says Pechtold, "and it's the populists." According to Pechtold, they have managed to manipulate public opinion in such a way that skepticism about Europe is totally out of proportion to the benefits the EU offers the Dutch. "We Dutch are a trading nation, a small country," he says. "Our prosperity has always depended on cooperating with others."

The Finns, Austrians, Luxembourgers and the Dutch will probably all have to pay for the sins of others, at least until the next elections. But then the anti-European forces in Helsinki, Vienna and The Hague could very well win even more votes.

Silvio Berlusconi ally says Italy 'condemned to death'
by Nick Squires - Telegraph

Silvio Berlusconi has been forced to dismiss dire warnings from his main political ally that Italy is doomed and the country is destined to split in two. Umberto Bossi, the mercurial leader of the Northern League, said that with Italy mired in a deep economic crisis, its political system no longer functions and the country is heading towards disaster.

He told his supporters to prepare for the creation of 'Padania' – an independent state in the wealthy north that would stretch from the Alps to the River Po and incorporate Lombardy, Piedmont, the Veneto and other regions.

The gloomy prediction of a break-up could hardly come at a worse time – Italy is supposed to be celebrating the 150th anniversary of its unification and foundation as a modern nation state. The Northern League has dreamed of an independent Padania for 20 years but Mr Bossi has ramped up his devolutionist rhetoric in recent days, as part of an apparent sabre-rattling campaign against Mr Berlusconi.

The Northern League is staunchly opposed to plans by Mr Berlusconi's PDL party to cut pensions and raise the retirement age for women as part of a 45 billion euro austerity package announced this month, on top of a 48 billion euro package of savings announced in July.

During appearances at political rallies in the north of the country, Mr Bossi said "the Italian system is condemned to death" and said the only solution was an independent Padania. He appeared at the rallies flanked by League supporters dressed in medieval knights' chain mail and helmets – the party takes its inspiration from a confederation of Celtic tribes who united to fight an invasion force led by Frederick Barbarossa 800 years ago.

The prime minister took the unusual step of issuing a public rebuke to his erstwhile ally. "I am sorry, but this time I cannot agree with my friend Umberto Bossi. I am deeply convinced that Italy will always exist," he said in a statement. He said that Italy's north and south shared a "common history and a common destiny".

The charismatic and outspoken Mr Bossi has sparked controversy in the past with his incendiary comments about immigrants and the corruption and underdevelopment of the Italian south. Last week he lashed out at a cabinet colleague, Renato Brunetta, calling him "a Venetian dwarf" – a jibe against the minister's diminutive stature.

Bank of America's share nosedive fuels fears of a second credit crunch
by Tom Bawden - Guardian

The rapidly declining housing market is heightening concern that the bank will need to make huge write-offs

Bank of America continued its tailspin on Tuesday as shares in the largest US bank tumbled by another 6.4% to their lowest level since March 2009, fuelling fears of a second banking crisis. As concerns mounted that BoA will need to take huge additional write-offs on bad mortgages, the cost of insuring the group's debt jumped to record levels and investors became increasingly concerned that the financial system could be facing a fresh credit crunch.

BoA's share-price fall followed a 7.9% drop on Monday, which took the stock to less than half its value at the start of the year – a decline that wiped about $65bn from its market capitalisation. "It does sap investor confidence to see a bank of this stature struggling so mightily," said David Dietze, chief investment strategist at Point View Financial Services in New Jersey. "It casts a shadow over the entire financial sector and puts a negative spin on the growth picture," added Nick Kalivas, of MF Global Research in Chicago.

Dennis Dick, of Bright Trading in Detroit, said: "Every day it's the same story. BoA keeps leading the charge down on financials and every trader is probably using that as an indicator to trade the rest of the financials too."

Investors continued to offload BoA's shares on fears that its huge exposure to the rapidly declining US housing market and European sovereign debt mean it will need to make much bigger provisions for bad debts. This would force the bank to raise billions of dollars in additional cash to restore its capital ratios, a move that could push the bank's shares considerably lower.

Mark Coffelt, founder of Money Manager Empiric Advisors in Austin, Texas, said: "The stock's a dog. It's on a self-fulfilling downward spiral. I don't know what's going to make it go up. It either has to prove unequivocally that it has enough capital in a worst-case scenario, or it has to raise capital, which will be very dilutive to existing shareholders."

Investor hopes that BoA may raise further capital without issuing new equity were depressed on Monday after Chinese officials said the US bank would keep at least half of its remaining 10% stake in China Construction Bank. Shareholders had expected the bank to sell the whole stake for up to $20bn.

The bank's prospects took a further hit on Tuesday with the release of new data showing that sales of new US homes declined more than expected in July to the lowest level in five years.
Purchases fell by 0.7% to an annual rate of 298,000, indicating that the housing market is struggling to stabilise, according to the Commerce Department. A glut of cheap, second-hand properties arising from the high levels of foreclosure are depressing demand for new homes, making it harder for the housing cycle to turn around.

Foreclosures are likely to remain high for some time as the US economic outlook deteriorates and BoA is particularly susceptible after buying sub-prime mortgage firm Countrywide Financial in 2007, months before these kind of high-risk loans resulted in financial crisis.

Graham Turner, of GFC Economics, said it was "small wonder that stocks such as BoA's are under such pressure," adding that banks are holding on to many of the properties they have repossessed for fear of precipitating further price declines. "The recent uptick in the unemployment rate increases the risks that early arrears will climb further in Q3. The Lehman Brothers crisis succeeded in pushing 30-day arrears up by 39 basis points over two quarters. A similar increase over the coming six months would push early arrears up to new highs," Turner said.

BoA's shares tumbled as low as $6.28 in morning New York trading, before regaining some ground. Meanwhile, the cost of insuring the bank's debts – through so-called credit default swaps – jumped by 64 basis points to a record 435 basis points, or 4.35%, according to Markit. This means it would cost $435,000 a year for five years to insure $10bn of the bank's bonds.

BoA, which last week announced a further 3,500 redundancies, was forced to hold a conference call to appease more than 6,000 analysts and investors this month, in the wake of the group's tumbling share price.

Bank of America: Could it Need $200 Billion in Capital?
by Mark Gongloff - Wall Street Journal

Bank of America shares are bouncing back this morning from a ghastly fall yesterday, but worries about the bank haven’t gone away. Shira Ovide over at Deal Journal points out there’s at least one relative optimist out there, who thinks the market is too worried about the bank’s need to raise capital. This is in contrast with Jefferies analysts, who said yesterday that the bank needed $40 to $50 billion in fresh capital.

And this view really, really clashes with that of Henry Blodget, who this morning writes that the bank might need $100 to $200 billion in fresh capital. Building on groundwork laid by Zero Hedge and Yves Smith, Mr. Blodget runs through all of the chunks that should be bitten out of BofA’s $222 billion book value and concludes:
So, taking some back of the envelope numbers, it looks as though we could easily come up with, say, $100-$200 billion in write-offs and exposures to “clean up” Bank of America’s balance sheet.
A $100-$200 billion hit to Bank of America’s $222 billion of equity capital, needless to say, would do some serious damage. Specifically, it would force the company to raise about the same amount to restore its capital ratios.

That’s why Bank of America’s stock is tanking. The owners of that stock will be the first folks to get hit if Bank of America has to raise more capital. And the lower Bank of America’s stock is when it raises more capital, the more they’ll get hit. The hits include mortgage-litigation reserves, second-mortgage write-downs, commercial real-estate loans, ephemeral “goodwill” that seems likely to dissipate, and exposure to Europe.

Does these numbers make sense? Alas, I have no idea. They certainly seem, how do you say, ah yes, high. But as Shira observes, these estimates are so all over the map, it makes it really hard to see why anybody would want to own this stock.

Bank of America – not Citi and not being bought by JPM
by John McDermott - FT

Turns out that some banks don’t need sovereigns to create their own funding loop problems.

Not for the first time, Bank of America is in a league of its own.

It’s a quick point made by Marc Ostwald of Monument Securities on Tuesday, who encouraged us to take a look at a revealing chart of senior unsecured BofA floating rate notes, which were issued a mere six weeks ago:

BofA shares were up nearly 9 per cent at pixel time, making it the biggest riser by far on the S&P 500, as… well, you tell us. (The S&P 500 was up 0.7 per cent with financials generally doing well.)

Perhaps it’s the Blodget Bounce.

Or perhaps equity and credit views of the bank are diverging.

Who knows, frankly. But what we do know (again), thanks to a short primer from Nomura bank anaylst Glen Schorr and team, is that BofA’s recent precipitous decline is a lot more justified than that of Citigroup. It’s a bit rough and ready but it’s a decent reminder of the reasons why BofA is a special case.

Here’s a quick summary of the reasons, occasionally combined with the devastating power of a bar chart, which you can click to enlarge:

1. BofA has a lower Basel III tier one capital estimate, especially if it is unable to complete a full sale of the firm’s CCB stake.

2. BofA’s legacy mortgage issues are much worse than Citi’s. “Citi’s mortgage servicing portfolio was $431 billion at 2Q11 compared to $1.6 trillion at BAC. Similarly, at 2Q11, outstanding representation and warranty repurchase claims were $1 billion at Citi vs. $11.6 billion at BAC,” write the analysts. (This is using the banks’ own accounting assumptions.)

3. BofA is more exposed to forthcoming regulatory changes and, of course, legal settlements. The analysts reckon “pending foreclosure-related settlement impact would be ~7x greater at BAC than Citi.”

4. BofA has less exposure to Tilt markets while having about the same exposure — though it’s not directly comparable — to Greece, Ireland, Italy, Spain and Portugal.

Nothing startling here but the main implication — that BofA may have gotten off lightly during the recent decline of financials — is worth noting.

Then again, what do we know, we’re a mere financial blog. BofA’s new where-there-is-smoke-we’ll-start-a-fire communications strategy (one part flattering to two parts bizarre) appeared again on Wednesday morning.

According to Bloomberg, an internal BofA memo was released Wednesday morning quashing those takeover rumours:

“Some blogs are speculating about rumors of merger talks with J.P. Morgan Chase, which are baseless and don’t even make practical sense,” [BAC]’s communications department said in a memo to employees yesterday “We have a clear path to meet the new regulatory requirements under Basel III and we intend to meet these standards without having to issue additional common stock,” according to the memo.

Doth protest too much?

Derivatives 'data gap' could pose systemic risk
by Philip Stafford - FT

International regulators and central banks have warned that moves to safeguard against the systemic risk posed by the vast $600bn over-the-counter derivatives market could be undermined by potential “data gaps” in the information warehouses that store details on trades.

A report published on Wednesday by the Bank of International Settlements proposed a global minimum set of data to be reported by banks on their derivatives trades. However the report cautioned further information on off-exchange trades “would be helpful in assessing systemic risk and financial stability”.

The drive for more transparency by regulators is part of the package of financial markets reforms agreed by G20 nations in Pittsburgh in 2009 in the wake of the failure of Lehman Brothers. Global leaders agreed all standardised over-the-counter derivatives should be traded on exchanges or other electronic trading platforms; that they be processed through clearing houses; and that trades be reported to data warehouses known as trade repositories. Such a move would provide regulators with a full electronic audit trail for all trades.

The report was compiled by BIS’s Committee on Payment and Settlement Systems and the technical committee of International Organisation of Securities Commissions, which includes national regulators such as the UK’s Financial Services Authority and the US Securities and Exchange Commission.

Among the “data gaps” it identified included information on bilateral portfolios of OTC derivatives transactions, which would include details on exposures, collateral, netting arrangements, market values of open transactions, and reference data on affected parties in the event of a counterparty’s default.

“Public dissemination of data ... promotes the understanding of OTC derivatives markets by all stakeholders, underpins investor protection, and facilitates the exercise of market discipline,” it said.

CPSS-Iosco also said it may need to propose using other sources of information if the data could not be sent to trade repositories. They suggested requiring information from clearing houses or direct reporting from banks to regulators.

Cracks have also emerged in the global consensus over how to implement the reforms, which are due to be concluded by the end of 2012. The US has backed a single, central repository for each asset class, with information shared with all relevant regulators globally to avoid fragmentation of data. Europeans have called for their own data warehouse. CPSS-Iosco backed moves for data to be collected centrally to prevent traders from picking an authority with the loosest oversight.

Regulators are also aware of significant legal and technical issues to overcome. At present there is no global standard way to identify parties in financial contracts, with the standard practice to assign a unique “ID” to each OTC trade that is reported to a repository. The Financial Stability Board, which works under the Bank for International Settlements to co-ordinate the work of national regulators at a global level, wants to establish a universal Legal Entity Identifier through international consensus.

CPSS-Iosco called for trade repositories to “actively participate” in the development of LEIs, which it called “a global public good”.

New York Attorney General Kicked Off Government Group Leading Foreclosure Probe
by Shahien Nasiripour - Huffington Post

New York Attorney General Eric Schneiderman on Tuesday was kicked off the committee leading the 50-state task force charged with probing foreclosure abuses and negotiating a possible settlement agreement with the nation's five largest mortgage firms, according to an email reviewed by The Huffington Post.

Schneiderman was one of roughly a dozen state attorneys general leading the talks with the five companies, alongside representatives of the U.S. Department of Justice, the Department of Housing and Urban Development and other federal agencies. The government launched the negotiations in the spring after widespread reports of foreclosure irregularities, such as so-called "robo-signing" and illegal home seizures, emerged.

But state prosecutors and federal officials are pressing to complete a proposed settlement with the five companies even though they've initiated only a limited investigation that hasn't examined the full extent of the alleged wrongdoing, The Huffington Post reported last month. Elizabeth Warren, who until recently was a senior adviser to President Barack Obama and Treasury Secretary Timothy Geithner, told a congressional panel last month that government agencies may not have sufficiently investigated claims that borrowers' homes were illegally seized.

Schneiderman, a Democrat who's in his first term as New York's top law enforcer, has been among a group of state legal officers who has also questioned the desire for a speedy resolution. He's leading his own investigation into mortgage improprieties, subpoenaing documents from the nation's largest financial institutions and reviewing court records for possible illegal home repossessions.

The Obama administration officials -- in particular, Treasury Secretary Timothy Geithner and HUD Secretary Shaun Donovan -- have publicly stated on numerous occasions that they want a quick resolution to the 50-state mortgage probe. Sources said attorneys general like Schneiderman, along with the top legal officers from Massachusetts, Delaware and Nevada, among others, were complicating that goal by questioning the plan to scuttle the state and federal investigations in exchange for a settlement.

These attorneys general have said they're reluctant to sign on to an agreement that effectively kills their ongoing investigations or prevents new ones from being launched. Beau Biden, Delaware's top law enforcer, remains on the states' executive committee.

In a statement of support for Schneiderman, Biden said that the "events leading up to the mortgage crisis must be fully investigated, including origination and securitization practices, before any broad immunity is granted." "The American people deserve an investigation," he added.

Top Obama administration officials recently reached out to Schneiderman and his allies, effectively requesting he get in line, people familiar with the discussions said. The New York Times editorial board on Tuesday declared that Schneiderman "should stand his ground in not supporting the deal." "The administration says that a settlement would quickly deliver much needed relief to hard-pressed borrowers, but it’s doubtful it would provide redress on a par with the banks’ wrongdoing or borrowers’ needs," the board wrote.

The email announcing Schneiderman's dismissal from the states' executive committee was sent just after noon to more than 50 people by Patrick Madigan, a top lawyer in the Iowa Attorney General's Office. It read: "Effective immediately, the New York Attorney General’s Office has been removed from the Executive Committee of the Robosigning multistate."

This month, Schneiderman accused Bank of New York Mellon, the 11th-largest U.S. bank by assets, of "repeated fraud and illegality" when it came to its actions as a trustee for various mortgage securities, and he accused Bank of America of fabricating missing documents when foreclosing on some homeowners who defaulted on their mortgages. Bank of America's stock price is down more than 55 percent over the past six months. Investors haven't seen a closing price as low as Tuesday's -- $6.30 per share -- since March 2009.

The state and federal discussions with the targeted banks -- JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Ally Financial -- center on the banks providing distressed homeowners with reduced monthly payments, lower mortgage principal amounts or other relief in exchange for a release from liability for past illegal actions. An agreement could yield up to $30 billion to be used to allow troubled borrowers to remain in their homes or to help others move into rentals, according to people involved in the talks and documents reviewed by HuffPost. The bigger the effective grant of immunity from potential government civil lawsuits, the more cash the companies are willing to pay to settle the accusations, these people have said.

The Obama administration, along with the top legal officers from other states leading the talks, including officials from Iowa and Illinois, has said the deteriorating state of the housing market should be a priority. By their reckoning, a resolution to these outstanding issues needs to be quickly achieved in order to save potentially hundreds of thousands of homeowners from foreclosure and to allow proper home repossessions to fully resume. Many companies halted home seizures last autumn after news reports of widespread robo-signing.

Foreclosures have since crawled to a halt, even though the number of homeowners delinquent on their mortgages remains sky-high, according to data compiled by Lender Processing Services and RealtyTrac. New delinquencies have ticked up, according to the Mortgage Bankers Association. Home prices continue to drop and are not expected to resume climbing until 2013, experts forecast.

Schneiderman is "committed to a comprehensive resolution," his spokesman, Danny Kanner, said in an emailed statement. "While we will continue to work with Delaware, Nevada, Massachusetts, and our other federal and state counterparts to achieve those goals, ongoing investigations by attorneys general cannot be shut down by efforts to settle quickly and those responsible must be held accountable." Kanner said Schneiderman was removed at Iowa Attorney General Tom Miller's "prerogative."

Miller, through a spokesman, said that Schneiderman was "intimately involved in every aspect of this investigation and possible settlement" from the launch of the probe last October to this past June. Schneiderman was "on every internal [executive committee] conference call and participated in all conference calls and meetings with the top five mortgage servicers. As such, New York had a large influence on the actions and decisions of the multistate."

But in June, after The Huffington Post reported on a confidential conference call between state and federal officials, the executive committee was reduced to a smaller group of states that would directly negotiate with the five banks. Schneiderman was invited to join this smaller group, but declined, Miller said.

"Since that time, New York has actively worked to undermine the very same multistate group that it had spent the previous nine months working very closely with," Miller continued. "While we certainly respect the right of any state to choose to no longer participate in a multistate and to pursue another path, working to actively undermine a multistate while still a member of the Executive Committee simply doesn’t make sense, is unprecedented and is unacceptable. Accordingly, today I informed New York that it is no longer a member of the Executive Committee."

Schneiderman's removal will likely make it easier for state and federal officials to reach an accord with the five banks. However, the potential amount of money they'll be able to extract will likely decrease.
Schneiderman, armed with New York state's Martin Act, can bring suit against alleged fraudsters without having to prove that they intended to commit fraud, a much more lenient standard than available to federal securities regulators. New York's top legal officer is investigating whether banks followed the state's laws when bundling mortgages into securities. That probe could prove explosive.

"If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever," Adam J. Levitin, a bankruptcy expert and professor at Georgetown University Law Center, told a congressional panel last November. Levitin said the problem could "cloud title to nearly every property in the United States" and could lead to trillions of dollars in losses.

The banks targeted by state prosecutors and federal officials would rather settle claims that they improperly bundled home loans into securities than allow those probes to continue. In exchange, they'd shell out more cash to help homeowners and help the Obama administration avert foreclosures. With a settlement into those investigations seemingly off the table, the banks would likely be willing to pay less in penalties.

Obama Goes All Out For Dirty Banker Deal
by Matt Taibbi - Rolling Stone

A power play is underway in the foreclosure arena, according to the New York Times.

On the one side is Eric Schneiderman, the New York Attorney General, who is conducting his own investigation into the era of securitizations – the practice of chopping up assets like mortgages and converting them into saleable securities – that led up to the financial crisis of 2007-2008. On the other side is the Obama administration, the banks, and all the other state attorneys general.

This second camp has cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes.

The idea behind this federally-guided “settlement” is to concentrate and centralize all the legal exposure accrued by this generation of grotesque banker corruption in one place, put one single price tag on it that everyone can live with, and then stuff the details into a titanium canister before shooting it into deep space.

This is all about protecting the banks from future enforcement actions on both the civil and criminal sides. The plan is to provide year-after-year, repeat-offending banks like Bank of America with cost certainty, so that they know exactly how much they’ll have to pay in fines (trust me, it will end up being a tiny fraction of what they made off the fraudulent practices) and will also get to know for sure that there are no more criminal investigations in the pipeline.  

This deal will also submarine efforts by both defrauded investors in MBS and unfairly foreclosed-upon homeowners and borrowers to obtain any kind of relief in the civil court system. The AGs initially talked about $20 billion as a settlement number, money that would “toward loan modifications and possibly counseling for homeowners,” as Gretchen Morgenson reported the other day.

The banks, however, apparently “balked” at paying that sum, and no doubt it will end up being a lesser amount when the deal is finally done.

To give you an indication of how absurdly small a number even $20 billion is relative to the sums of money the banks made unloading worthless crap subprime assets on foreigners, pension funds and other unsuspecting suckers around the world, consider this: in 2008 alone, the state pension fund of Florida, all by itself, lost more than three times that amount ($62 billion) thanks in significant part to investments in these deadly MBS. 

So this deal being cooked up is the ultimate Papal indulgence. By the time that $20 billion (if it even ends up being that high) gets divvied up between all the major players, the broadest and most destructive fraud scheme in American history, one that makes the S&L crisis look like a cheap liquor store holdup, will be safely reduced to a single painful but eminently survivable one-time line item for all the major perpetrators.

But Schneiderman, who earlier this year launched an investigation into the securitization practices of Goldman, Morgan Stanley, Bank of America and other companies, is screwing up this whole arrangement. Until he lies down, the banks don’t have a deal. They need the certainty of having all 50 states and the federal government on board, or else it’s not worth paying anybody off. To quote the immortal Tony Montana, “How do I know you’re the last cop I’m gonna have to grease?” They need all the dirty cops on board, or else the whole enterprise is FUBAR. 

In addition to the global settlement, Schneiderman is also blocking an individual $8.5 billion settlement for Countrywide investors. He has sued to stop that deal, claiming it could “compromise investors’ claims in exchange for a payment representing a fraction of the losses.”

If Schneiderman thinks $8.5 billion is an insufficient, fractional payoff just for defrauded Countrywide investors, then you can imagine how bad a $20 billion settlement for the entire industry would be for the victims.

In that particular Countrywide settlement deal, it looks like Bank of New York Mellon, the New York Fed, Pimco and other players negotiated on behalf of defrauded investors. They told the Times they were happy with the deal, but investors outside the talks told Gretchen they weren’t happy with the settlement.  

Schneiderman apparently listened to those voices instead of the Mellon-Fed-BofA crowd, which infuriated the insiders who struck the actual deal. In a remarkable quote given to the Times, Kathryn Wylde, the Fed board member who ostensibly represents the public, said the following about Schneiderman:
It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.

This, again, is coming not from a Bank of America attorney, but from the person on the Fed board who is supposedly representing the public!

This quote leads one to wonder just what Wylde would consider “indefensible,” given that stealing is pretty much the worst thing that a bank can do — and these banks just finished the longest and most orgiastic campaign of stealing in the history of money. Is Wylde waiting for Goldman and Citi to blow up a skyscraper? Dump dioxin into an orphanage? It’s really an incredible quote.

The banks are going to claim that all they’re guilty of is bad paperwork. But while the banks are indeed being investigated for "paperwork" offenses like mass tax evasion (by failing to pay fees associated with mortgage registrations and deed transfers) and mass perjury (a la the “robo-signing” practices), their real crime, the one Schneiderman is interested in, is even more serious.

The issue goes beyond fraudulent paperwork to an intentional, far-reaching theft scheme designed to take junk subprime loans and disguise them as AAA-rated investments. The banks lent money to corrupt companies like Countrywide, who made masses of bad loans and immediately sold them back to the banks.

The banks in turn hid the crappiness of these loans via certain poorly-understood nuances in the securitization process – this is almost certainly where Scheniderman’s investigators are doing their digging – before hawking the resultant securities as AAA-rated gold to fools in places like the Florida state pension fund.

They did this for years, systematically, working hand in hand in a wink-nudge arrangement with clearly criminal enterprises like Countrywide and New Century. The victims were millions of investors worldwide (like the pensioners who saw their funds drop in value) and hundreds of thousands of individual homeowners, who were often sold trick loans and hustled into foreclosure when unexpected rate hikes kicked in.

In a larger sense, even the (often irresponsible) people who simply bought more house than they could afford were victims of this scam. That's because in many of these cases, credit simply would not have been available to those people had the banks not first discovered a way to raise vast sums of money dumping crap loans on an unsuspecting market.

In other words: if Bank of America hadn’t found a way to sell worthless subprime loans as AAA paper to the Chinese and the Scandavians in May, you can be sure that it wouldn’t be going back to Countrywide in June to lend out more money for more subprime loans. And Countrywide, in turn, wouldn’t then have been sending masses of reps out into the ghettoes to offer juicy home loans to undocumented immigrants and refis to confused old ladies on social security.

This is as bad as white-collar crime gets. But to Wylde, it doesn’t rise to the level of being “indefensible.” Until they do something worse than this, we apparently should support the banks, and make sure they don’t have to pay more than a fraction of what they made off of this kind of crime.

What is most amazing about Wylde’s quote is the clear implication that even a law enforcement official like Schneiderman should view it as his job to “do everything we can to support” Wall Street. That would be astonishing interpretation of what a prosecutor's duties are, were it not for the fact that 49 other Attorneys General apparently agree with her.

In Schneiderman we have at least one honest investigator who doesn’t agree, which is to his great credit. But everyone else is on Wylde’s side now. The Times story claims that HUD Secretary Shaun Donovan and various Justice Department officials have been leaning on the New York AG to cave, which tells you that reining in this last rogue cop is now an urgent priority for Barack Obama.

Why? My theory is that the Obama administration is trying to secure its 2012 campaign war chest with this settlement deal. If Barry can make this foreclosure thing go away for the banks, you can bet he’ll win the contributions battle against the Republicans next summer. Which is good for him, I guess. But it seems to me that it might be time to wonder if is this the most disappointing president we’ve ever had.

China Manufacturing Activity Declines
by Eliot Gao, Esther Fung and Owen Fletcher - Wall Street Journal

A survey of China purchasing managers signaled a second straight monthly decline in manufacturing activity in the world's No. 2 economy, and the country's Commerce Ministry warned that its export sector is facing new difficulties. The reading of 49.8 in the preliminary HSBC China Manufacturing Purchasing Managers Index, issued early Tuesday in Beijing, came in higher than some analysts expected, and above the index's final reading of 49.3 for July.

While the number was above the July reading and higher than some analysts had expected, it was still below the key level of 50, which separates growth in the industry from contraction. "The data reflected the basic situation, that the manufacturing activity of small- and medium-sized companies has improved moderately," said Standard Chartered economist Li Wei. He added that he expects industrial production to stabilize in the near term.

Analysts said the slight improvement in the survey results points to a limited risk of a hard landing for the economy despite a year-and-a-half of monetary tightening measures by the central bank to fight inflation. The manufacturing output sub-index, meanwhile, rose to a two-month high of 49.4, from a 28-month low of 47.2 in July, HSBC said. "All these data suggest that the hard landing risk is still remote. This provides leeway for the People's Bank of China to keep the current tightening measures in place," HSBC Chief Economist for China Hongbin Qu said in a statement.

Bank of America-Merrill Lynch economist Lu Ting said he expects the official National Bureau of Statistics PMI, which will be released Sept. 1, to remain above 50.0. Mr. Lu said in a research note that he is maintaining an economic growth forecast of 9.0% to 9.1% for the second half of the year, down from the first half's 9.6% year-to-year expansion.

Also Tuesday, Vice Commerce Minister Jiang Yaoping said in a statement that China's foreign trade is facing slow external demand and pressure from surging costs, while the debt crisis in developed countries also poses greater challenges for emerging economies including China. "We will closely follow changes in the external market and keep the continuity and consistency of foreign trade policies, while making them more relevant and flexible," Mr. Jiang said.

At a later press conference, Mr. Jiang said the weaker outlook for exports combined with rising import growth because of stronger domestic demand and high global commodity prices is likely to lead to a narrower trade surplus for China, after the gap grew sharply last month. China's trade surplus widened to $31.5 billion in July, its highest monthly level since January 2009, with exports rising a surprisingly strong 20.4% from a year earlier, and imports rising a weaker-than-expected 22.9%.

Analysts also said the central bank may see no need to loosen monetary policy in the months ahead, and may keep its policies on hold as inflation remains stubbornly high. China's consumer price index in July rose 6.5% from a year earlier, its highest level in three years. "The PBOC is likely to adopt a wait-and-see approach, perhaps waiting for other indicators like August's CPI before there are any signs of a change in its policy stance," said ANZ economist Zhou Hao.

The preliminary PMI figure, called the HSBC Flash China PMI, is based on 85% to 90% of total responses to HSBC's PMI survey each month and is issued about one week before the final PMI reading for the month. The final PMI reading for August is due Sept. 1.

China’s Looming Debt Disaster
by Gordon C. Chang - Daily Beast

The United States has made painstaking efforts to reassure China about the American economy. Yet it’s China that should be doing the reassuring.

In the aftermath of Washington’s debt-ceiling debacle, Vice President Joe Biden was in Beijing on Friday, desperately trying to reassure the Chinese government that the American economy is not in a downward spiral. “And very sincerely, I want to make clear that you have nothing to worry about,” the vice president said.

Whether or not he succeeded in soothing his hosts’ anxiety remains to be seen. Yet in trying to placate Beijing, the vice president was making a major miscalculation. China may own $1.2 trillion in U.S. Treasury obligations, but from the get-go, Biden should have eschewed playing defense and gone on the offensive. He should have asked the Chinese to reassure him about their debt problems and, more urgently, their impending economic slide.

Despite all the apocalyptic pronouncements about America’s budget problems, the reality is that the U.S. has a higher credit rating than China and, unlike Beijing, has never repudiated its sovereign debt. More important, the People’s Republic has been understating its debt for years to avoid global attention and criticism.

Indeed, China claims its debt-to-GDP ratio—the standard measure of sustainability—was a healthy 17 percent at the end of last year. Yet Beijing-based Dragonomics, a well-respected consultancy, put China’s ratio at 89 percent—about the same as America’s. Worse still, a growing number of analysts think the Chinese ratio was really 160 percent. At that astronomical level, China looks worse than Greece.

The wide discrepancy in estimates is due to the so-called hidden debts. The largest of these off-the-books obligations have been incurred by local governments and state banks. Yet there are other components, including central-government debt incurred for municipal and local projects, Ministry of Finance guarantees related to partial bank recapitalizations, and miscellaneous obligations such as grain-subsidy payments. No one actually thinks Beijing will default on its outstanding external debt, but these hidden obligations matter; to work down the crushing debt load, the country’s technocrats are adopting strategies that will cripple growth for a decade, maybe longer.

It didn’t have to happen this way. When the global downturn hit in 2008, China decided to spend its way out of the crisis. The country adopted a stimulus program that in 2009 pumped, according to my calculations, about $1.1 trillion into its then–$4.3 trillion economy. Beijing created robust growth—9.1 percent in 2009 and 10.3 percent last year—but in the process, the country’s hidden debts ballooned, as the country’s leaders forced state banks to lend to unviable projects.

These include ghost cities such as Ordos in Inner Mongolia, where the government has built sundry new homes and office buildings, which remain empty. Last year, the state grid reported there were 64.5 million flats—enough housing for 200 million people—that used no electricity for six consecutive months. Despite the obvious oversupply, the government—in conjunction with private developers—is constructing 40 million to 50 million more units. And the Chinese government recently announced it will be building 20 new cities a year over the next two decades.

All this building is technically creating gross domestic product, but it is extraordinarily wasteful. In a free-market economy, this grossly imbalanced situation would lead to both a property crisis and a banking crisis. Weak developers and financial institutions would go bankrupt, their assets would end up in the hands of more productive market participants, and the economy would recover quickly.

But Chinese leaders are not allowing this creative destruction to occur. To rescue financial institutions, for instance, central authorities are forcing down interest rates paid to depositors so that banks can earn their way out of difficulties. Yet in doing so, they are condemning their economy to years of stagnation.

By keeping deposit rates artificially low, the government depresses the income of households. Consumption accounts for just 34 percent of the economy in China—the lowest rate in the world—compared with about 70 percent in America. For the country’s economy to achieve sustainability, its consumers will have to spend more.

That’s unlikely to happen, however, as Beijing is essentially adopting the same fundamentally flawed tactic that Tokyo employed in the early 1990s to work its way out of its infamous housing bubble. Japan’s economy has never fully regained its dynamism, and China’s won’t either, unless Beijing radically changes course.

Politically, that doesn’t seem feasible. The Communist Party has begun its historic transition from fourth- to fifth-generation leaders, and the result has been paralysis. At the moment, current officials seem to be just buying time until they leave office—and then hand intractable problems to someone else. No one in Beijing is willing to take the steps necessary to put the economy on a sound basis.

Washington, of course, is no stranger to gridlock and head-in-the-sand economics. Yet until now, just about everyone seemed to be looking to the Chinese to become the new engine of world economic growth. We will surely be disappointed. China has just begun another long descent. Biden should have spoken up.

China squeeze drives boom in 'black' banks
by Olivia Chung - Asia Times

China's smaller private companies, starved of loans as the country tightens credit to fight inflation, are driving an underground banking boom by turning to unofficial sources for funds to stay in business. Some are even becoming lenders, given the prize of high returns.

About 3 trillion yuan (US$470 billion) of bank loans have been channeled into underground lending in the eastern coastal provinces, China Banking Regulatory Commission chairman Liu Mingkang told a recent closed-door conference with lenders.

Large, usually state-owned enterprises, can get bank loans at a 7.2% interest rate, compared with the one-year benchmark interest rate of 6.56%. Through third-party companies such as financing firms, they can then lend the money on at higher rates to small and medium-sized companies, Liu said, according to a copy of his speech obtained by Securities Times last week.

The funds are then lent to small-and medium-sized enterprises (SMEs) at annualized interest rates of between 36% and 60%, the paper said.

Beijing tightened monetary policies this year to combat inflation that has risen after 4 trillion yuan was pumped into the economy following the global financial crisis near the end of 2008.

Year-on-year consumer price inflation in July reached 6.5%, the fastest pace in 37 months and well above the 4% government target for the year. The central bank has raised interest rates three times this year, taking the one-year benchmark deposit rate to 3.5% and the one-year loan rate to 6.56%. In addition, it has increased the reserve requirement ratio for commercial lenders six times to a record 21.5%.

The bank's measures appear to be having their effect on borrowing, new yuan loans falling 25.2 billion yuan in July from a year earlier to 492.6 billion yuan.

The credit tightening is hurting China's 7.5 million or so non-state SMEs, whose predicament now is "even worse than in 2008" when the global financial crisis began, said the All China Federation of Industry and Commerce, the official chamber of commerce for non-state companies, after conducting a three-month survey of private businesses in 17 regions.

Privately owned companies account for 70% of total employment on the mainland and 60% of gross domestic product.

"Small and medium-size firms, already burdened with the rapid rise in labor costs and the soaring price of raw materials, are facing financing problems. Most of them are finding it difficult to survive," a federation spokesman told Asia Times Online.

About 80% of the SMEs in Zhejiang province are using underground banking loans to fund their businesses, even though the black market interest rates in the province have surged as high as 10% monthly, Cai Hua, a spokesman of the Zheshang Research Association, which represents entrepreneurs in the province, said. Zhejiang and other eastern provinces accounted for 53% of the country's GDP last year, according to the National Bureau of Statistics.

More than 7,300 companies in Zhejiang were forced to close from January to April this year due to Beijing's monetary tightening measures, according to People's Daily newspaper.

Zhejiang has about 2.4 million non-state companies with an output valued at more than 1.5 million yuan, and abounds with underground banks for cash-strapped small businesses. About 600 billion yuan flows through the province's underground banking system a year, state media report.

Dodgy lenders are particularly active in Wenzhou, a Zhejiang town that has boomed over the past three decades by producing a wide range of consumer goods - from shoes, cigarette lighters to spectacles - whose low cost has helped to make China the world's workshop.

Of the Wenzhou's 360,000 SMEs, 30% have cut back operations or closed their doors so far this year, said Cai. State media have carried reports of some SMEs borrowing from underground lenders at annualized rates of up to 120%.

"Thanks to the global economic slowdown at the end of 2008, we could hardly receive any orders," said Li Jun, an owner of a lighter factory in Wenzhou. "Now a few orders come back [but] we dare not accept them due to insufficient support from banks.

"Some lighter factories just closed their companies and started a kind of lending business, which are sure to have higher net profit rates. We are tempted to do so," he said.

Wenzhou's underground banks last month processed 110 billion yuan, about 40% more than the 80 billion yuan processed in the same month a year earlier and worth about one third of the town's entire 2010 GDP of 292.56 billion yuan, according to statistics given by the Wenzhou branch of the People's Bank of China.

Companies are not alone in engaging in such lending businesses; individuals are welcome to join. Liu Chumei, a housewife in Liantan town in Yunfu city, in southern Guangdong province, close to Hong Kong, said credit companies had promised her family a 7.5% interest rate per month on deposits of 10,000 yuan.

"Seeing the inflation rate is higher than the [official] deposit rate, we actually loose money putting our cash in the bank ... I would put my money in such credit companies if I had any, so I called some of my relatives in Hong Kong to see if they were interested," she said. "They refused on security reasons."

The high interest charged by unofficial lenders reflects more than just greed. High risks are also involved at both local and country level.

In the case of debtors having inadequate cash flows, substantial amounts of loans to local credit companies may become bad debts, said Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences. That in turn poses a potential threat to the country's stability, he said.

An underground lending market involving 300 million yuan in Xinbian and Shiji villages in Sihong County, eastern Jiangsu province, collapsed in June, barely three months after it was set up in March. More than 100 credit groups or companies put their money into a common fund, which was ultimately lent to a real estate developer surnamed Shi. The market collapsed when Shi ran into financial troubles, prompting villagers to ask for their money back.

Unofficial banking carries the additional attraction of being useful for laundering money - and the risk of crackdowns. An underground bank that had allegedly laundered 56 billion yuan, in the metropolis of Chongqing, was broken by police, China National Radio reported last week.

The criminal ring that ran the bank, comprising about 30 members in southwestern Chongqing and Shenzhen, adjoining Hong Kong, allegedly set up several shell companies with hundreds of employees and corporate accounts to extend credit and launder money.


Anonymous said...

It seems to me like I heard something a while back about some way to set my Amazon account so that book purchases will automatically cause some small amount of money to be donated to the TAE. Am I imagining this? If not, how do I set my Amazon account to perform this important function?

scrofulous said...

ilargi your link ... extend and pretend endgame. ... seems to have a slime-up advert attached to it, when one clicks on the link up it slimes. I would hope that is not one of the site's 'New Features' you promised.

scandia said...

Okay, I have a dumb 2 part question. If there is no way to know whether a bank is solvent or not on what do rating agencies base their rating and on what do banks calculate dividends?

Draft said...

From what I can tell, the Greece bailout just officially hit the rocks, and yet there's no news about it. It's almost like it's no big thing. Am I confused? I thought it'd be a very big deal if Greece defaults? Doesn't that mean we'll see a spread to other PIIGS?

NZSanctuary said...

scandia said...
Okay, I have a dumb 2 part question. If there is no way to know whether a bank is solvent or not on what do rating agencies base their rating and on what do banks calculate dividends?

Whatever their accounting firms dictate?

One thing I learnt as part of the management team for a small-ish company, was that projections of sales, income, expenditure, asset worth, etc., were highly biased guesses. Although the basic functions of accounting are firmly set, the assumptions on which many calculations are based – particularly those to do with assets and future income/expenditure – can be very malleable.

Ilargi said...

" progressivepopulist said...
It seems to me like I heard something a while back about some way to set my Amazon account so that book purchases will automatically cause some small amount of money to be donated to the TAE. Am I imagining this? If not, how do I set my Amazon account to perform this important function?

For some dark and undefined reason, Amazon won't let me set up a clear version -which they do advertise and allegedly provide- of their consoles. But if you click anywhere in our present Stoneleigh Likes list of books, right beneath the blogroll, left hand column, it'll all work out, provided you're stubborn enough.


p01 said...

Could have used last post's pic for today's sex-less. :-)
I concur in asking what the hell is happening to Greece and the PIIGS? It should be game over by now. Maybe tomorrow? Not that I'm in that much of a hurry, but still...

John Day said...

OK, I just saw this very amusing presentation, and went to AE, and there was the admission of "No sex" right in the first sentence, so this is definitely on-topic, and well worth a laugh. I suspect that it is all true, but do not have direct experience with most of it. Seems plausible, anyway.

scandia said...

Re Greece...Perhaps the Feds are making more loans under the table to prevent default?

YesMaybe said...

And as much as you may or may not trust or mistrust the financial markets, they are the only option left for finding the truth about these institutions.

Isn't that a bit like saying "Potato chips are the only option left for solving our energy problems?" Since when do financial markets find the truth about anything? And how is that even supposed to work? As far as I can tell, it's a case of garbage in, garbage out, with the occasional leaks (to which the market respond, but you can't say the markets find the leaks).

rapier said...

It's difficult to set aside ones old habits of thought about politics. Well probably about everything but in the matters of which we speak here politics is always entwined. Reading recently about the almost certain demise of any extended UE benefits come the new year, the possible cut of transportation spending by 1/3 if they don't kill the 18 cent Federal gas tax totally then who knows how low it may go, and Cantor's insistence that disaster relief will only come from other cuts my reaction is as you would expect from anyone who isn't a 'Conservative'.

Then I have to catch myself and break out of that loop of thought and emotion. It matters not if some take pleasure in the new austerity and others believe it is nuts. What matters isn't motive or feelings what matters is its inevitability. Getting lost in political emotions is a total waste of energy and actually quite destructive. I have to remind myself constantly to stop it.

Greenpa said...

scandia said...
"Okay, I have a dumb 2 part question. If there is no way to know whether a bank is solvent or not on what do rating agencies base their rating and on what do banks calculate dividends?"

The true answers: ratings are based on whatever they feel like at the moment, and whether the bank in question is related to the ratings agency; and, dividends are calculated on : what they can get away with.

and, yeah, it's always been that way; with lots of windowdressing.

Nassim said...

A rather appropriate picture this week. I mean, the Bank of Italy (USA) really made its name during the San Francisco earthquake. Their boss set up shop on the waterfront and was taking care of depositors and making new loans from there - when everything else was rubble.

Of course, this bank is now known as the Bank of America - it has been run by Gerald Celente's white shoes boys for quite a while. I can't pretend to be sorry for them. When I worked for them in London, Amazon asked them to handle their billing and they refused. I really could not understand why at that time since it would only have taken me a few months to program it. Now I realise that they had much bigger fish to fry - and to choke on.

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D. Benton Smith said...

On Human Bondage
part Almost The Grand Finale

We believe the “Big Lie” because we feel that NO ONE WOULD DARE assert a falsehood so enormous, so out in the open, so wrong, and so likely to be found out! Unfortunately for society, sociopaths are not impeded by such moral encumbrance, ESPECIALLY when being caught hardly matters.

Here are what I see as some impressively BIG LIES about sovereign debt. My views on this are admittedly unconventional.

a) The purpose of purchasing Sovereign Bonds is to preserve capital, a so-called flight from risk.

b) Sovereign Bonds make money, or at least preserve it.

c) The reason that Highly Rated (read: Low Yield ) bonds like US Treasuries sell for more in the secondary market than their High Yield ( read: Low Rated ) cousins from Greece or Spain, is that they reflect sovereign policies less likely to result in default, and are thus less “risky”.

d) There is some logical rationale for designating bond yield rates to FIVE decimal places.

e) The ultra rich buy sovereign debt because it is a safe way to accumulate reserves or to park huge sums while awaiting better market conditions.

All lies, and big too.
Which poses a 'big' question, “ So Why Buy Sovereign Bonds ? ”

To which the big clue is “ Where Is The BIG Money? ”

And the big surprise is : the answer is in basic “ Economics 101 ” as summarized in the next three paragraphs. ( by the way, be sure to drop the class before it causes any lasting harm )

The two main instruments of governmental control of an Economy are Fiscal Policy and Monetary Policy. Each consist of two parts.

Fiscal policy is the use of 1) government expenditure and 2) taxation ( revenue collection , ) to influence economic activity.

Monetary policy consists of 1) controlling the money supply, and 2) setting interest rates ( both typically executed through a central bank, and coordinated with fiscal policy. )

( continued in my next post )

D. Benton Smith said...

On Human Bondage

part Really Close To The Grand Finale

Now, with those four data in mind (Fiscal and Monetary Policy,) let's have a second look at the above list of Big Lies:

a) The “flight from risk” aspect applies only to small fry, who can't afford to lose and so should not gamble in the first place. In any “restructuring” after a default these people, sadly, are the first to be elbowed away from the trough. They lose all so that others lose less. If there IS NO default, on the other hand, the small fry's money would have been just as safe and drawn better interest in an FDIC insured bank.

For the truly big players, the purpose is completely different, and well worth the pocket change they might ( but seldom ) lose in restructuring.

b) You won't make or preserve much when there's a hole in the bucket. Reliable inflation & Cost of Living stats are hard to find ( so many agendas! So many liars ! )

Nevertheless, real purchasing power of 'good' currencies has declined steadily somewhere around 8% per year for decades. Any investment returning less than sufficient to offset that is a loser.

Reminds me of the joke about the guy who buys widgets at a dollar apiece and sells them for half a buck, reckoning he can make up for it in volume.

Jokes aside, the historical net yield of sovereign bonds has been an eye-popping one fourth of one percent over the past 200 years. That's using government stats, not real ones, so reckon a net loss of , oh, 5% or so... not counting overhead expenses. Looks like a lousy deal, BUT, what if the thing they're ACTUALLY buying isn't the bonds, but the power the bonds provide?

c) The high price of “Low Yield” ( and the low price of “High Yield” ) cannot be related to the risk of default, because the risk is in reality either ZERO or One Hundred Percent, depending on time frame.

Daily volume in sovereign bond markets is US$ 822 Billion PER DAY. In comparison, “haircut” losses over that 200 years is statistically insignificant. Data compilation is tough ( I'm not Harvard University ) but the figure is way under one ten thousandth of one percent of just the last decade of bond trading. You're more likely to be hit by a meteorite... but that is not what makes the risk zero. THAT item is covered farther down the page.

d) What use are interest rate figures precise to thousandths of a percent , when face value deteriorates at a rate that is anyone's guess? Inflation and cost of living are measured in whole numbers that no one believe anyway , so it's just SILLY to measure bond yields in fractions so small that in the time it takes a “basis point” to earn you the price of a decent suit... the decrease in purchasing power is costing you enough to buy Armani, Inc.

e) The OPERATIVE reason that rich people buy sovereign debt is to attain managerial control of the issuer's fiscal and monetary policy, so as to direct enormous flows of tax supported profit into the bond holders' businesses, while simultaneously externalizing expenses to the peasants. And that's not all. They can also dictate the placement of their own people into the positions that make such decisions.... making the task that much easier.

In other words , when one can tell a country how much to spend, what to spend it on, who and what to tax, and how much money to lend into existence ( at what rate, and to whom )... then one has god-like control of that country's wealth and power . Long live the new Boss.

( continued in my next, and final, post )

D. Benton Smith said...

On Human Bondage

The Actual Grand Finale, I Swear It

Which brings me to the closing statement ( you have to be glad about that small virtue, at least. I certainly am ) about sovereign bonds in general, and the people who own tons of them in particular.

A Black Swan alighted a while back, quite some time ago in fact, and ( to borrow a metaphor from Ashvin ) disguised in plumage of the purest white. Some people recognized its more sinister aspects, but the vast majority heralded this killer swan as an unparalleled blessing.

COMPUTERS made impossibly large and complex calculations ( previously impossible, that is ) now as easy as pie, even automatic. They also endowed business and government with the capacity to simultaneously execute billions of individual transaction across global distances at the speed of light ( or to catalog the identity, history, communications , and more, of any individual citizen they chose to.)

One thing this technological miracle made possible is that virtually ALL debt is now inextricably entangled with all other debt, which in turn is endlessly recycled as capital or collateral to issue or purchase even more. Now if one domino falls, they ALL fall... at speeds that only a computer geek would know how to pronounce, much less comprehend. Undoubtedly, computers will document the event accurate to lots of decimal places.

Because of this byzantine entanglement no major nation's debt can be allowed to default, NO MATTER WHAT.

Victim nations can still usually be bullied into accepting usurious loans and the 'austerity' measures that are the true motivation behind them. But when that fails ( as it did in Iceland ) other nations will simply pretend to pay the bills for them, rather than start the chain reaction that takes everyone down.

In that scenario ( the existing one ) the risk of default is ZERO because default has been declared unacceptable under any circumstances, by the people who get to declare things. That makes ratings a farce, of course, so let's just hand out Triple A+++ at the door and make everyone happy.

On the other hand, the scene is quickly devolving into absurdity. If that absurdity is ever officially acknowledged then ALL sovereign bonds shall default in an unimaginable serial conflagration and become uniformly worthless.

The risk of “classic” style default may be forced to zero by imperial decree... but how about the “natural” risk of catastrophic systemic collapse? That risk of that, as we all know, seems to be fast approaching 100%.

Unfortunately there is an alternative possibility envisaged by those who care for us.

Current bond holders, having successfully captured all of the “Too Big To Fail” Financial, Regulatory, Corporate, Governmental, Political , Intelligence, Military, Academic and Religious institutions … can simply exercise their unchallenged authority.

With very little fanfare they need only drop the ruse and declare themselves 'In Charge' until further notice. We're practically there already.

I would rate the chances somewhere around Quadruple A ++++.

Skip Breakfast said...

I've been thinking lately about how different this economic crisis must be from every one in the past--despite so many unavoidable similarities. And that difference is obviously the Internet. Because I realized that if it were not for the Internet--if this crisis were happening in 1991 instead of 2011--I would be in the dark. I'd be relying on the newspaper, fuly of lies and propaganda, to assess the state of things. Imagine how oblivious most folks were during the Great Depression. It must have been reallyd ifficult to figure out what was really happening and access and contrarian opinion. The rules of the game have changed entirely, today. Because the historical means of controlling information and public opinion have vanished. I think the governments are trying old-world tactics of information control that would have worked as recently as 20 years ago, but no longer. It must be bewildering to the leaders of Europe, the U.S., even China, when ideas and "truths" can be disseminated so much more quickly than ever before. I honestly believe I would have had no clue about any of it. I read the leading national newspaper here and get almost none of the insights I find on TAE or zerohedge or Mish Shedlock's blog. So where would I be? Probably I'd be exactly where TPTB wanted me to be.

You know even 18 months ago, I was thinking of buying another home. Thank god I found blogs like this one. They woke me up to an entirely hidden economic and political reality. I think it will be very interesting to look back after we have more clarity on the collapse (it will take a few years of hindsight to know what form the collapse has taken).

Erin Winthrope said...

Capital preservation?

What's this blog about, anyway.

Is it about helping the little people keep some of their hard-earned dough?


Why won't Ilargi and/or Stoneleigh offer some guidance on the relative safety of Treasury C of I vs. 3-month treasuries.

Stoneleigh has recommended Treasury C of I in the past, and yet now, at the most pressing time of all, she's silent on this issue. Ilargi too.

It's a simple question that people running a big-picture finance blog would theoretically have some insight into? No?

If not? Can't you find out? You guys are, after all, the brains behind this operation.

Stoneleigh/Ilargi: Are treasury C of I safe? Is it safe.

I already get the fact that Europe and its banks are gradually imploding. I don't think anybody really needs any more news articles about that. We do, however, need some practical, get your hands dirty, advice.

Erin Winthrope said...

What is Prechter's opinion on the safety of Treasury C of I?

Is anybody on record about these things?

Wikipedia calls them government securities.

Other people call them a fancy holding pen with an implied lack of government backing. I call them Tuna on Rye hold the mustard.

Do C of I carry the same level of backing as 3-month Treasuries? That's the question - the only one that matters.

snuffy said...

It shows how far down the slippery slope this administration has drifted, that they put their campaign war-chest funding ahead of providing even a small fig leaf ...they are corrupt as the bastards they are shielding.

I can think of some very nasty political ads out of this one.

Honestly,the more I look at the actions of this president,the more
I honestly think he is going to walk out with a pocket full of cash,and spend the rest of his very comfortable life chuckling how he chumped the american public.

He knows that this is endgame,so he cares not one iota about what happens to "his base"or anyone else. Except him.

No second term,'specially since it looks like the whole world financial system is going to auger into the concrete at 300 miles an hr.[Very,Very Soon}


The man has made it very plain he is not a leader.He is not the leader we need now,and will not be the leader we need when half the country is on real short rations.Who knows though,they{the ones who own him}might decide that he's the one to cut food-stamps,before he show that we are real serious about addressing the deficit..

He'll have enough wealthy friends to hop from stronghold to stronghold,maybe...or.what will most likely happen is that as soon as hes not the pres...all his wallstreet buddies will suddenly forget how "helpful" he was and he will find himself unwelcome...["you cant have the help forget their place"....]

Hes now as unwelcome as GW was to my eyes now.I turn of the media when I hear his voice,or see his face,and just want him to be gone...dustbin of history.I am very damn sure that he will get a surprise when all the shielding is gone and he finds out how many people loath him now...and were paying attention when he got in bed with the trash.And then HURT the folks who worked tirelessly to help him.Not for kicks...just because they did not matter to him.At all.

Typical low-life Chicago politician,you see the same shit in a mayors race.

Ick..Total distaste

As has been said many times before...No matter how cynical I get,I just cant keep up...

Bee good,or
Bee careful


Erin Winthrope said...

El G,

What are your plans. Are you going to link another bank account to What banks are still available south of the border?

Do you plan to move back to USA in the future? What if gov no longer allows SS payments to banks outside US? Limiting foreign transactions seems like an obvious eventual form of capital control.

Isn't Mexico dissolving as the drug cartels wield control independent of the central government? Don't you expect it to get worse as oil prices fall? Without oil revenue, Mexico will get very very uncomfortable. They can hedge future declines with derivatives as they've done in the past, but it'll get more and more expensive to do that. Also, with Cantarell collapsing they'll have falling production and falling prices. What will they do? What will you do?

Would you consider a return to St. John? What about farming in New York State with Jim Kunstler?

Stoneleigh said...

Goodnight Sweetheart,

Personally I would stick with 3 month treasuries, but you only need to buy them once if you use Treasury Direct. After that you can leave the funds in the account, then you're using the US treasury as your bank. I wouldn't be at all concerned about a supposedly low (or zero) rate of return. That just means the asset is considered safe by the big players. A high rate of return is an indicator of risk.

In a deflation, nominal interest on the safest assets only looks low. It's the real rate that matters, and that will be high and positive as the purchasing power you preserve starts to grow with the fall of consumer and asset prices as a result of deflation. We haven't seen it to any great extent yet, but it's coming.

Safety is only relative though. In a world of high and rapidly increasing risk, there are no truly safe options, only options that are safer than others, and often only for a limited period of time. Liquidity (cash and cash equivalents) is a means to ride out the period of deleveraging. Following that, you will need to be thinking in terms of hard goods. When you make the transition depends on how much money you have. The less money, the longer you would need to wait to buy without debt, and the harder the choices you end up having to make. Life is not fair unfortunately.

Erin Winthrope said...

@ Stoneleigh:

Stoneleigh said:
"Personally I would stick with 3 month treasuries, but you only need to buy them once if you use Treasury Direct. After that you can leave the funds in the account, then you're using the US treasury as your bank."

This is the issue: When you buy 3-month Treasuries once and let them mature, then you are given the option of leaving the principal at the Treasury. In this case, if ou choose to keep the money at the Treasury as opposed to sending it back to your bank, then the redeemed funds are automatically invested in Treasury C of I securities (0% interest and no fixed maturity). So the question is (and I don't think you answered it, perhaps because it wasn't clear): Are these Treasury C of I securities safe? You can't just keep cash at the Treasury -- that's not an option. The closest thing is the Treasury C of I. Apart from that, the only way to hold your money at the Treasury is to constantly roll-over your 3-month Treasury investments by immediately reinvesting them upon maturity. This is not necessarily bad, BUT, yields could go negative (in which case 0% yield on C of I is better) and you are forced to hold 3-month treasuries for at least 45 days before you can transfer them to a broker to try and sell them on the secondary market. So, in effect, you've locked your money up for at least 45 days at potentially negative interest.

Thus, under these circumstances, the "cash at the Treasury option" = Treasury C of I is superior. But only if Treasury C of I is truly backed by full faith and credit etc. etc. etc....

Any thoughts Stoneleigh....I think the question still remains unanswered.

lautturi said...

Hello folks, I'm back inside the Machine from my wanderings in the Finnish wilderness (not that anybody missed me (^_^)

It was nice going, lots of beautiful, peaceful views from the lake district and all that. As a comic, me and my fellow travellers joked how Finland appears to have lots of nice islands - they will be very useful as guarantees to the eventually incoming IMF loans. I understand the sentiment of ordinary Greeks about selling/pledging their assets way better now (>_<)

It seems to me the world changed in the three weeks I was without any electric contacts (it took me additional 2 weeks to face the so-called-reality and adjust to it). I highly recommend longish disconnection from the system to give wider perspective to the matrix and our role in keeping it running.

Anyway, the hillside has indeed steepened and the marbles are rolling faster. I'm sorry to say Finnish government is lost in the laa-laa land. Then again none of the other governments seem to understand the issues any better. Observing that and thinking about my 3 weeks/ 200km rowing with true muscle boat things feel weird indeed...

Here's a book I highly recommend if you are interested to understand how banking system has gone astray - well, past 50 years? Treasure Islands: Tax Havens. It's about how BOE started off-shore thinking in the 1950s and what followed. The story explains a lot.

I see we got increased communication activities. That's nice - keep up the good work!

lautturi said...

Stoneleigh, do you have timetables/dates about your visits/lectures to Sweden? Or some email addies I could contact about arrangements?

I remember you were interested in coming to Finland, too - but that might be a bit difficult for me to organize personally as I'm located 400km away from Helsinki. However, I might get some people interested in arranging talking session (in Helsinki or in Turku, both very convenient to reach by overnight cruise from Stockholm) if we start working this. Let me know,

scandia said...

@Lautturi, welcome back! Sounds like some time unplugged was refreshing.
I missed you particularly when the ESF we were so bothered about ended up dead in the water:)

Nassim said...


I am glad you had a good break. I bought the book you recommended a few months ago and have almost finished it. I put some extracts up here for peoples' consideration. Of course, it was not all new to me but it was good to see it written down.

There are 2 ways of looking at this book: firstly, as a litany of the unfairness of things and of how many wealthy people are using the exact same methods as gangsters to hide their wealth and to avoid paying taxes, and secondly, as a handbook for someone who wants to know how so many fairly useless people seem to have unlimited funds at their disposal and who would like to be able to do the same.

Initially, I read it the first way but I am now gravitating towards the "if you can't beat them join them" point-of-view. I think that if many more people did the same things, it would all fall apart much more quickly and the system would have to change.

In some ways it is remarkable that so many wealthy people actually do pay their taxes - given the plethora of ways of reducing it below 10% of earnings.

The communist system failed when everyone started exploiting its inherent weaknesses and forgot about their principles. Perhaps the current crony-capitalism will fail in the same way.

Nassim said...

Samassa Veneessä seems to mean "in the same boat"

How appropriate. :)

lautturi said...


Thanks for the welcome. I thought you many a time on my trip...

Don't write ESF/ESM/whatever off just yet. These zombie solutions have a tendency of surfacing again and again. Only the names keep on changing LOL


The book indeed has many faces. And the tricks keep on being played all over the place (>_<)

Yes, "samassa veneessä" does mean "in the same boat". I picked the name for my site trying to say we all are in the same boat. The phrase got a whole new meaning when I was rowing in thunderstorm, waves black as death splashed all over, lighting stroke in the distance and loud booms gave me inspiration to row faster (^_^) No better performance booster than Mother Nature, one heck of a cheerleader!

Ashvin said...


"Don't write ESF/ESM/whatever off just yet. These zombie solutions have a tendency of surfacing again and again. Only the names keep on changing LOL"

The problem for them is that your country has just made any form of a fiscal contribution bailout mechanism a moot point. By insisting on cash collateral (and not gold as Germany suggested), it is basically saying NO to any bail out, including the one that was supposedly already a done deal. Now Greece is left to bail out itself through its own central bank (not the ECB), which obviously won't last long. Greek 2 year bonds are worth zero, and the DAX is getting crushed right now. The first hour in the US markets should be quite interesting to say the least.

ocmsrzr said...

@Goodnight Sweetheart
re:"So the question is (and I don't think you answered it, perhaps because it wasn't clear): Are these Treasury C of I securities safe?"

Asked and answered. Look back at el g's posts.

The general consensus around here is that debt spirals can quickly accelerate through fear trading, so you are right to worry. However, it's important that you don't allow fear overcome you at this point. Get onto the td website and read...there is plenty of info out there for you to do your own research.

That said, a default scenario would likely have such a dislocative risk that some US gov't debt may be treated differently than other US gov't debt regardless of any guarantees made today. However, i don't know if it's possible to know which way these risks would cut at this point.

lautturi said...

Ah, forgot to add this latest text from Golem XIV - why bank stocks got butchered. Excellent, simple straightforward analysis and thinking how mark-to-fantasy is pummeled into a brickwall. Things are unraveling fast now.

ocmsrzr said...

re: supporting TAE

It would be nice if I could buy a book through amazon (not on Stonleigh's list) and drive some cash to the site. I'm thinking about buying a book lautturi suggested above...which i would not have known about without the site. It seems fair to me, but i'm not sure how it would work. Affiliate program?

lautturi said...


Our political satyricons are just trying to wiggle with the election promises. Previous finance-now-prime Minister is very pushy about getting into supporting Greece and all the scapecoats. Now-finance minister is an ex-primary school teacher and clearly has no conseption of what's happening. Only recognizable words from her are about helping/maintaining economic growth and all the standard BS.

Our political system has detoriated in to a "fine" Puppet Show - sad to say.

Ashvin said...


Perhaps that's what they are doing, but financial markets, and most importantly currency markets, won't wait for elections to roll around. How will Finnish politicians fare when it is perceived that their political posturing was responsible for the demise of the EMU? On a similar note, its the height of delusion and insanity that analysts are focusing entirely on what the Fed has to say at Jackson Hole at 10am, given the fact that QE3, even if it does get announced (which it probably won't be), will do absolutely nothing for the dire European situation.

scandia said...

@Lautturi, rowing 200km in a " muscle " boat must have built up your muscles!
Experiencing that storm in a row boat must have been exhilarating, a reminder of our vulnerability.
You have touched my longing for the row boat of my youth, of all the shorelines I explored, free....

lautturi said...


Finnish elections were in April - the Government has "free" hands until 2015. Guarantee demands are after shocks of election promises - nothing more. Sock puppets will turn around into helping investor confidence (or whatever oxymoron the doctrine requires) when time comes. All they need is some blood on stock markets - which is apparently happening right now.

Our overlords have nothing to fear unless people get into streets - which is unlikely as autumn is getting in gear and modern Finns are notoriously sheepish "I can't do anything", "It's cold out there", "They know better" jada jada. Oh, how the mighty have fallen (>_<)

Then again, when Finns get into streets... (shudder)

All I'm saying that we will see some rather hilarious turnarounds on political front in trying to support confidence. Of course that all will fail and we are in the express lane to Disaster Capitalism, NWO or what have you.

Supergravity said...

Hostile downgrades
darkly seize our destinies,
history defaults.

lautturi said...


No muscle build-up, it was rather weird. Didn't have any aching muscles either, not even once. Maybe I was using some inner taichi powers (^_^) ...trained that for about a decade - among other things. Then again longest single day trip was only 18km or 4hrs, not that much. But the serenity, oh boy, the serenity of placid lakes under bright blue sky.

Wow, some excellent memories.

Ashvin said...


"All I'm saying that we will see some rather hilarious turnarounds on political front in trying to support confidence."

Believe me, I'm the last person to say that the corrupt politicians are ready to call it quits on the EMU wealth extraction game, but the Finnish political resistance is proving to be quite an overwhelming force, whether they realize it or not. What is the point of posturing for your political supporters when elections are measured in months/years and financial/currency moves are measured in minutes and hours. The only reason would be to avoid physical danger from the people, and as you point out, I doubt they would be worried about that. With Europe that much closer to implosion, absolutely no monetary support coming from the Fed, and Hurricane Irene making its way up the East Coast, it seems we literally have the "perfect storm" for extreme financial (and physical in the case of the hurricane) upheaval for extremely irresilient populations. Any politician still holding out to reverse their position at the last second is either bat shit crazy or part of some larger scheme that relies on such financial upheaval to occur.

Rototillerman said...

ocmsrzr: you don't have to buy an exact book from Stoneleigh's list, you only have to transit from this website to Amazon by clicking on Stoneleigh's list. Once that is done, anything that you buy from within Amazon for that session generates a commission for I&S.

Goodnight Sweetheart: your posts remind of religious discussions concerning how many angels can dance on the head of a pin. No one can know the answer any better than the ones given; a default scenario is uncharted territory. Deal with it.

Jack said...

Is there an indicator that show us how much money is still in the system.
For example how much money individuals have in the bank and corporations and investment companies and etc.
Maybe when we have this info than we will be able to have to predicting the bond collapse or the currency collapse

scandia said...

@Ash and Lautturi, I for one wanted Finland to say no to further bailouts. Asking for collateral may be a roundabout way of saying no?

scandia said...

I didn't hear Bernacke's speech but reports seem to indicate it is more " pretend and extend " until Sept. 20th. The Anonymous protest planned for Sept 17th on Wall St. may influence events.

Ashvin said...


Yeah except it's not so roundabout, since the deposited collateral plus interest will essentially be worth the entire size of its contribution to the bailout. It would be ridiculous for any other country to contribute without similar terms, which is why it prevents the entire bailout from occurring. The market action right now can only be fittingly described as the "calm before the storm".

Greenpa said...

As The Civilizations Crumble Dept: in case you needed something to bolster your depression: from the Minneapolis Star Tribune:

"Just cutting a check for a school doesn't cut it anymore for businesses.

"In a significant shift away from "checkbook philanthropy," corporations in Minnesota and nationwide are not merely writing checks but are helping to write curriculums for schools, design or teach classes and train principals.

"In St. Paul and Mahtomedi, 3M has already helped schools develop science curriculums and teach lessons. Cargill executives coach 11 Minneapolis charter school principals on management and business. And this school year St. Louis Park High School will ask corporations for help in designing electives.

"I'm seeing a move toward more advising and sharing business perspective than just cutting a check," said Kathy Christie of the Education Commission of the States, a Colorado-based nonprofit think tank. "Businesses would rather go that way. They see a value of working with the schools."

If you need more depression; read the comments.

If one wanted to imagine a plan by the Owners- it would not be difficult.

jal said...

Back to reality.
70% of people are living paycheck to paycheck.
Only 25% of baby boomers are debt free.

The majority of people do not have the inclination or motivation to worry about putting money away in a safe place like Goodnight Sweetheart and keep asking repetitive questions.

If you got that much money and don’t know what to do by now then you deserve to lose it. Why don’t you gamble in the stock market. Double or nothing.
If you lose you will be among the majority.

jal said...

Way back when this blog started I&S said that what was going to happen was going to be a political crisis.

I couldn’t see it.

Now, there is no doubt that I&S made the right call.

The prime minister of Japan has resigned.
Another bits the dust.


Jack said...

You know the well know saying
One scum going out and another scum going in.

Jack said...

Goodnight Sweetheart
I don't know what else from a free web site like this.

bluebird said...

@DBS - I've read your enlightening series on human bondage.

So the few people who have the tons of sovereign bonds are going to be our new owners. Then what?

Do they pull the plug on everything and we become their slaves? Then what?

We revolt and die? Just die from ____?

Did I miss anything?

bluebird said...

Skip Breakfast said "You know even 18 months ago, I was thinking of buying another home. Thank god I found blogs like this one."

While we don't need a different home, our current 25-year home needs remodeling ...updated cabinets, bathroom, kitchen, windows, etc. Relatives say it looks 'tired'.

But it's all paid for. Why use good money to look like 'House Beautiful', when that money could better be spent for upcoming needed tools, extra food and supplies.

I'm really appreciative of TAE also, :)

el gallinazo said...

Goodnight Sweetheart

El G

"What about farming in New York State with Jim Kunstler?"

I was never attracted to older bald men with moustaches.

"Why won't Ilargi and/or Stoneleigh offer some guidance on the relative safety of Treasury C of I vs. 3-month treasuries.

Stoneleigh has recommended Treasury C of I in the past, and yet now, at the most pressing time of all, she's silent on this issue. Ilargi too."

This is a total lie and fabrication. Stoneleigh knows next to nothing about the intracacies of, nor should she. She **never** recommended holding C of I. Additionally, ocmsrzr gave you excellent advice on two occasions dealing with the relatively safety of C of I and bills. He appears to have considerable expertise. He also pointed out that there is a huge amount of relative information on the site itself.

"Any thoughts Stoneleigh....I think the question still remains unanswered."

The question remains unanswered because the criminals-in-charge are making up the law as they go. One would have to know the status of Timmah's and Bennie's digestion as well as that of their shadow bosses to answer your question.

Also, one can instruct the computer to roll your bills over. So your cash would probably only be in C of I for less than a week before it went into a new bond. But you must have known that if you did any homework at all.

Back in the dark ages I earned a Boy Scout lifesaving merit badge. I remember two things. The first is that one's greatest personal danger is a victim in a panic. The second is that victims in panics have little rational control over their thought processes and actions and one should try to maintain a certain amount of empathy for them.

That said, I am finding your postings on the very edge of the abusive and would suggest that if any moderators happen to be awake, that they take a look at them.

"What's this blog about, anyway."

The blog is the big picture about the financial collapse we are going through. The founders are not financial advisors. 95% of the content of the site itself is about strictly financial issues. The fact that so much of the commentariat is about other things is vaguely irritating to Ilargi but he does not have the temperament to herd cats.

Greenpa said...

More depression fodder; and essentially missing from top MSM news; this can be found deep in the recesses of WAPO:

"By Associated Press, Updated: Friday, August 26, 10:01 AM

"TOKYO — The amount of radioactive cesium that has leaked from a tsunami-hit nuclear plant is about equal to 168 of the atomic bombs dropped on Hiroshima at the end of World War II, Japan’s nuclear agency said Friday.

"The Nuclear and Industrial Safety Agency supplied the estimate at a parliamentary panel’s request, but it noted a simple comparison between an instantaneous bomb blast and long-term accidental leak is impossible and the results could be “irrelevant.”

well of course it's irrelevant! Nobody wants to know!

And, a few blips down is the news the ban on selling radioactive beef has been lifted. Oh, I mean, beef from the radioactive region. They inspect it now, so it's all ok.

Jack said...

Before they built that nuclear plant they knew about the earthquake fault lines and that they should have done this and done that to get things right and somewhere along the line something happened like maybe somebody got paid for something under the table an they sacrificed on the quality for a few bucks.
The same danger is there in Armenia and these guys are not any better than your Japanese politicians

D. Benton Smith said...

@ bluebird

you asked, “So the few people who have the tons of sovereign bonds are going to be our new owners. Then what?
Do they pull the plug on everything and we become their slaves? Then what?
We revolt and die? Just die from ____?
Did I miss anything? “

I think there's strong evidence they've been our owners for quite awhile now, so at least we don't have to go through the hassle of getting used to new management.

And I sure don't recommend a slave uprising... not just yet, anyhow. Pitchforks and torches are for after you get hurt personally. Revenge is such a great motivator when you might otherwise just want to lay down and quit. It provides a compelling reason to get up in the morning, because each new day is another opportunity to get even.

Seriously, though, here is what I think should come next :

A hypothesis and theory have been proposed that there will be no outright defaults by any major nation, for the reasons outlined in my series of posts. So let's just watch Greece, Italy and Spain even more closely than before and see whether they do or do not.

Greece looks to be the first candidate, followed by Italy. If either of them goes, and big bondholder haircuts make the rounds and ripple through the world economy like a tsunami in a fish pond, then my analysis would clearly be wrong.

In that sense, defaults would be good news. It would mean nature is taking its course and we need only prepare for garden variety collapse of civilization which could take decades at least. Meanwhile life goes on in an anxious by fairly normal manner.

If they do NOT default, however, and especially if they avoid it by some new and absurd suspension of the rule of law... that would tend to support my hypothesis and the prognosis of our problems changes considerably.

Instead of preparing for a dirt poor, wood heat, subsistence farming sort of future, we should instead prepare for a jack-boot, police state, detention centers kind of scene. Considerable difference in game plan.

Basically, there are two schools of thought on the near and medium future. One school says extend and pretend can't go on for much longer, and the other school ( whose only pupil at the moment is me ) holds that with enough power and control, and the complete absence of human decency, that extend and pretend can continue indefinitely … until the last tyrant is the last man standing.

Let's watch Europe, for now, and see how it goes.

As much as I love to be right, it would be good news for everybody if I'm just plain wrong.

el gallinazo said...


"They inspect it now, so it's all ok."

I heard that they just put it in a dark room and see if they can read the newspaper.

A different Mexican drug war

The dog I am looking after appeared to have a bad case of giardia. Decided to put her on metronidizole (Flagyl). Went to the farmacia and they gave me a box containing 30 500mg tablets in aluminum blisterpak. The price I was asked was so outrageous I had to ask a second time. 15 pesos = $1.30.

Don't have the stomach to read Benny's speech put I heard that there was no whirring of his famous helicopter. The markets appear to be unperturbed by this. SPX up 1.6%. Go figure.

Rumor has it that the Octogenarian of Omaha is an agent for the Rothschilds as was JP Morgan, pretty much authenticated when he died and his will became public. So they already have the railroads at a song. And now he is saving BAC as he saved the vampire squid at double the interest received by the US taxpayer, preferred stock, also guaranteed by we pissants. What a kindly old man, and he would really like to pay more taxes.

Jack said...

When this Armenian nuclear plant explodes than all of Europe is along fried

Lynford1933 said...

Bluebird: Buy the tools and learn how to use them. When you feel ready, start on the cabinets. I did that 50 years ago and haven't regretted it a bit. Right now I am working on a nice cabinet for our house. Buy the best tools you can afford as they will last a lifetime.

I don't see anything unusual about companies working with the schools to create useful employees. In LaPorte Indiana where I grew up, it was not unusual at all for someone from the companies there to be in the shop classes instructing on how to weld, solder, woodwork, etc. I guess now that we don't do much of that, we should have ex-bankers in the schools teaching Scams 101.

BTW: With the attention on the Bernak and Irene no one noticed the unemployment last week was up from last week's corrected (up of course) figures.

Lynford1933 said...

I wonder if Manual has boarded up the house and prepared the garden for Irene?

el gallinazo said...


I am pretty much in your school, though I would have to considerate it a "conspiracy theory" :-) Only a paranoid would think that the Owners have long term plans though some of them have published them in their memoirs. The question is whether they can pull it off and for how long.

However, I guess I disagree with you about a sovereign default with a deflationary global collapse as proof that their plan has failed. This is the tradition that the banks have used for the last 300 years to buy up real assets for pennies. I think we are headed for Orwell's future.

Regarding the Steve Jobs retirement

I find it interesting that he is still alive with a disease that kills 99% within a year. Another hmmm.

el gallinazo said...

Looks like the markets first reaction to the Bernank's supposedly Richter 9 speech is more "printing." Stocks up sharply, dollar down. Strangely PM's steady.

D. Benton Smith said...

@ El G

Regarding 'Goodnight Sweetheart' , I think you've got this guy's number alright. Looks a lot like a Troll, but harder than average to make a positive ID.

The give-away is that he keeps trying to pull Stoneleigh into giving outright investment advice on a very specific topic.

He is smooth, though. Articulate, well spoken, and remarkably well informed about everything EXCEPT the one tiny little piece that he wants her ( and only her )to advise him on.

If I wasn't on my paranoia meds I might even think he was a pro, even a Fed, trying to set her up for censure. If so, that would be quite the sincere compliment.

Anyway, good on you for calling him on his bad behavior. If I had your technical knowedge I might be tempted to teach him some manners myself.

You know how I love to play with Trolls. They're no good for eating, though. All crunchy on the outside, but soft and putrid on the inside.

Ashvin said...


Your argument is spot on, IMO, except for one point - sovereign default and further expansion of totalitarian world government are not mutually exclusive events, especially if such default is contained to the "periphery" of our system for some time until the necessary wealth extraction and terror operations can mature even more. The dynamics of this system are non-linear, and the initial collapse of peripheral debt mechanisms are likely to actually strengthen the center in the short-term. In the most extreme scenario, even default in the US Treasury market could be used as a stepping stone towards a replacement mechanism that essentially serves the same function in a much more openly oppressive manner. In that sense, the people heralding "Freegold" or other such new world monetary orders may be getting a lot more than they bargained for. However, I don't view this scenario as being very likely and/or sustainable for many years, only a serious possibility to consider.

Ka said...


I'm going to hazard a guess that you are wrong, or at least that it is a tossup. Basically, I don't think TPTB are that monolithic. China, or Russia, or somebody, might decide to throw a spanner in the works, figuring that though they will suffer severe consequences, the rest will suffer worse. Or the Greeks might burn down their parliament and default. Or....

Well, who can say. Even if jackbootery prevails, its scope will gradually diminish, and so I think it still makes sense to prepare for a future of subsistence farming/scavenging.

snuffy said...

El G,

My understanding is that it is the slow form of pancreatic cancer that has got him...and he already had 1 liver transplant,..and CAN afford {whatever he wants}for medical care..

Thee and me would have checked out a long time ago if we had been diagnosed in 2005 with that form of the big C.

It does seem that Goodnight has a agenda...may be our perennial troll has morphed again,and now has orders to start to bring pain..


Nice to hear that you had such a wonderful time...[yes,I am jealous as hell.]I want to take the little pelican sailboat I am working on to lake Billy Chinook and do some serious fishing but I am running out of time...oh well
Its in the 90+ here in Oregon,and sucks to be working outside.
The bees are mellow..laidback though.Frequent breaks,and my own mix of soda water and pure lemon [w/no sugar]to hydrate.Where the spring goes into the pond the water is still way I have my ways to cool down

I am wondering if the reason we see so much of the "smash and grab" kind of behavior in the financial world,is that a lot of folks see the writing on the wall,and believe that the time left to "get the money and run"is very short.There is a lot of reliably mainstream sorts that look at the data now and are worried that some real bad,Bad,BAD Birds are coming home to roost
Europe appears to be on a seesaw..lurching from one crisis to the next as the bad data is assimilated by those paying attention...and frantic efforts by those "In Charge"to look as if their dealing masterfully with all the horrible news.
[My guess is they are loosing a lot of sleep.and shortening their lives from stress,or the fact it may be literally their head on a stick when it all really goes to hell]

I wonder if many here in the USA realize that the exposure the fed and other entities,here in the land of the free and home of the brave,make whats happening in the old countries of Europe to critical to our well being.Things go sour bad there will have consequence here..

I have 4 hives to work over..later folks

Bee good,or
Bee careful


Sandor said...

For those wondering why stocks and gold up big today? I think today’s action was largely predicated on the Swiss Central Bank charging depositors for Swiss Franc accounts. This had the consequence of pushing perception into gold, as the Swiss Franc is no longer viewed as a reliable safe haven. Anyhow, this is ‘risk-on’ in the markets until the next big Euro bank run. Expect the Euro to test 1.46 resistance shortly. Don't be surprised to see follow-through in the SP up to 1256.

I second what Stoneleigh says. Gold is an anchor, but not a cure. As I am fond of saying, awareness is the only safe haven. There is no ‘fix.’ Faith, hope, optimism/pessimism, basically prejudices of any kind are abandoned as coping mechanisms for spontaneous evolution. Meditation helps

Ashvin said...


"This had the consequence of pushing perception into gold, as the Swiss Franc is no longer viewed as a reliable safe haven."

Efforts such as these to disincentivize fearful capital flight and goose equity markets trading on currency pairs will not lost long, perhaps not even long enough to survive Monday's open. What UBS is proposing to do is fundamentally no different than what BONY already did, and it ultimately only serves to add conviction to the perception that safe haven currencies and bonds will continue to be in high demand.

jal said...

The carpet baggers are coming ...

NATO nations set to reap spoils of Libya war

As Reuters reports, "Western companies look well positioned as billions of dollars in oil exploration and construction contracts come up for grabs as part of the reconstruction effort."
Leaving aside the massive profits from the rebuilding that Libya is now going to need, there are vast oil spoils to distribute. The Libyan oil industry produced 1.6 million barrels a day prior to the war. The country is thought to have 46 billion barrels of reserves - the largest in Africa.

A liberal intervention for humanitarian ends may be the comfortable hook; but securing assets and resources, as usual, is the real goal. 

scrofulous said...


"I second what Stoneleigh says. Gold is an anchor, but not a cure. "

Exactly and hanging off the anchor in a storm is what one does, unless one has no fear of being driven onto the fearsomly deadly shoals of crumbling US Dollar fiat! Heh!

Stoneleigh, you say: "We haven't seen it [deflation] to any great extent yet, but it's coming."

So could the end of the USD as the reserve currency. All that would be necessary is for the US to loose control of oil, that would end it wouldn't it'?!

If I had a great big tank in my back yard I would hold oil, but since I can not do that, and as well since 'terrorists' could degrade it, then I think its proxy of gold will have to do. (read the writing on the wall or rather on the graphs)

Anonymous said...

I wonder if Wall Street window jumpers will be a leading indicator or a lagging indicator?

el gallinazo said...

The Financial Sense News Hours is an Internet based "station" hosted by Jim Paplava, While I personally find many of his opinions off based, such as his love affair with nuclear energy, I must admit he is one of the better interviewers in the financial world. Stoneleigh has had at least three interviews with him in the past 12 months, and he permitted her to give free reign to express her ideas and themes despite the major difference that Stoneleigh is a deflationista and Paplava is a hyperinflationista. One of Stoneleigh's interviews was so popular there that the listenership voted to repeat it during the New Year vacation break.

When Paplava takes a two week vacation at the end of August, they run by popular demand a series of pre-recorded "economic conspiracy" interviews, and it is only fitting that I should bring it to the attention of the board. The first two have been with very intelligent, thoughtful, with serious and articulate thinkers and I learned a lot from them. Actually, I find them closer to mainstream than conspiracy, but I set a higher bar. In any event, I recommend that anyone here who is partial to mp3 interviews, particularly those with failing eyes who get tired of reading on a computer display (such as me), to take a listen.

Carl Teichrib: One World–One Money
The quest for a single world currency
Jim Puplava is joined by Carl Teichrib, Chief Editor at Forcing Change, to discuss the quest for a single world currency


Patrick Wood & Martin Erdmann PhD on Technocracy’s Endgame: The Global Smart Grid
A roundtable discussion on “Technocracy” and its attempt to control the future

Patrick Wood and Dr. Martin Erdmann join Jim Puplava in a roundtable discussion about the ominous implications of the link between Technocracy and the energy Smart Grid.
RealPlayer WinAmp Windows Media

Ashvin said...

muchtooloose said,

"All that would be necessary is for the US to loose control of oil, that would end it wouldn't it'?!"

If by lose "control of oil" you mean there will be physical production shortages that can't meet US demand at any reasonable price, then yeah that will happen, but further down the road. If you mean oil exporters will stop sending us oil for relatively few paper dollars and reinvesting in Treasuries like they have been in the past and are right now, as I suspect you do, then I regret to inform you that there is a reason why we have troops, contractors, intelligence operatives, military hardware and bases all across that region, and it's not because we want the misguided Muslims and freedom-hating "terrorists" to enjoy the equality and comfort provided by the Western democratic model. Qadaffi and the Libyan people just found that out the hard way.

Jack said...

You are making a lot of sense and it does look like the price will stay high because of Demand

I know that not all scenarios turn out the way we write them here.

We have plenty of people who still have money and they don't even know that there is a crisis.

If you talk depression to some people they look at you in a strange way.
2 weeks ago someone was going to buy a home and I told him that prices will drop and he didnt buy it.

You see that this person didnt even know we are in a crisis because he has a job

As long as we have people like that the price could stay high.

Never forget the cartel because they are the ones who decide on the price and they have economists working full time doing their calculations

Skip Breakfast said...

I agree and disagree with what Stoneleigh says about gold being an anchor not a cure.

It dawned on me that the "flight to gold" supposedly driven by a "loss of faith in fiat currency" is actually a crock. A crock because there is truly no other indication that w have a loss of faith in fiat currency. I mean seriously. What would a true "loss of faith in fiat" look like? Would we be selling houses for a million fiat dollars? Going to work every day for our 50,000 fiat dollars a year? Filling up our gas tanks with fiat-priced gasoline. No, instead people are buying gold so they can make some more fiat money. They want "profit" priced in fiat, so they can buy all the things that are priced in fiat. A true loss of faith in fiat would entail house purchases where the vendor refuses to accept cash, and wants gold instead, or your in exchange for your train. I don't know anyone buying gold so they can keep in for the next thirty years and "spend" it in dribs and drabs to pay for their rent, or their kids' private school.

A true loss of faith in currency would look much, much more extreme than this. No one would even be enrolling their kids in school in such a true loss-of-faith scenario. Workers would refuse to be paid in fiat, and wouldn't show up for work.

It's arguable I suppose that this gold rally is a precursor to the true loss-of-faith scenario. But I just don't see the buyers bearing this out. Not yet. It's life as normal. Greed as normal. House buying (nearly) as normal. Because people all around me are still going to work and trying to make a buck and aprofit on thier stocks so they can buy a nicer house. They still aspire to material things all bought with fiat. They see fiat and their eyes go wide with desire. Gold is a means to get more fiat in their mind, not the other way around.

And so I think that gold is truly an anchor only for the big banks and countries. They're holding for decades with a view to backing up the system against possible collapse. But individual buyers are buying on speculation, hoping to get really really rich. Really really rich priced and spent in fiat, I might add.

scrofulous said...

Ash and Skip breakfast

Neither loss of control nor loss of faith need happen all in an instant.

Even Depends are not foolproof:)

seychelles said...

Skip Breakfast said

No, instead people are buying gold so they can make some more fiat money.

Yes. It's a dangerous game they are

D. Benton Smith said...

@Ash " sovereign default and further expansion of totalitarian world government are not mutually exclusive events, especially if such default is contained to the "periphery" of our system ... "

@ El G " I guess I disagree with you about a sovereign default with a deflationary global collapse as proof that their plan has failed. This is the tradition that the banks have used for the last 300 years to buy up real assets for pennies... "

So, if I were a deep strategic thinker at or near TPTB Control Central how do I go about extracting my unfair share of residual value from the periphery without setting off the hair-trigger chain reaction of sovereign debt... which is attached like a trip-wire to the core of my own debt laden power base?

The first things my mind turns to ( in my new role as a traditional Global Elitist “old money” kind of thinker ) is collateral and asset liquidation. This aligns with El G's observation about scooping up assets at pennies on the dollar as a proven favorite going back for centuries.

Fire Sale of national assets are already in motion in Greece and Italy, and Finland is rather blatantly attempting the collateral gambit with Greece even as we speak, so we don't need to assume anything about that. Both of those two ploys are definitely in play... but have they any chance of success ? Based on the sheer enormity of debt, my guess is no.

In the old days it would be a simple matter of rolling the trucks up to their border (with an army or two as Sheriff ) and hauling away their stuff. Debt paid. No contagion of default.

But now is not the old days. Those strategies won't get the job done because too much of their stuff is ALREADY our stuff.

The problem for me as a Rothschild clone in this modern age is this : How do I foreclose on THEM without foreclosing on ME ? My own intricate debt structure ( thanks ever so much to COMPUTERS ! ) is so inextricably intertwined with theirs in so many fabulously recursive ways, that their debt and my debt are like the entanglement of particles in Quantum Physics. Give one a cold and the other one sneezes.

THAT'S the one that has me stumped, and leads me to conclude that the Elite's solution will be similar to how Alexander “untied” the Gordian Knot. He rejected the premise of the game and simply cut the damned thing in half... or so the story goes.

An apparently intractable problem solved by a bold stroke.

So what I'm trying to articulate ( with limited success, because my brain is not big enough by half ) is that while all of the old solutions will be tried, they will fail almost before they start because they do not address the core problems. ( Accounting, Law, Precedence, Entanglement, Computer Based Automatic Responses to Computer Based Events, and sheer friggin' Magnitude )

I think the possibility of a Neo-Nationalist Populist uprising, ( to protect the Greek or Italian Homeland from rape ) is quite real and not to be discounted.

I think the possibility of Russia or China not really being on the same page with all the other Oligarchs ( as suggested by @ Ka ) is also possible.

Otherwise, I see suspension of existing financial law and outright dictatorship in the very near future... because if existing contractual law is enforced then all hell is out for breakfast within months if not weeks.

Without the sounding board of other thinkers here at TAE, in fact, I think I might think myself into a terrified tizzy... and wind up on a soap box ranting that the end is near. Which it is, of course, but I feel so much better about it with company to talk it over with.

Nassim said...


Gold is the preferred option but not the only one:

Diamond prices soar on Asian demand

The value of top-quality polished diamonds of 5 carats, or 1 gramme, has risen to about $150,000 a carat, up from about $100,000-$120,000 a year ago, according to PolishedPrices, which compiles data on the wholesale market. Other categories of polished and rough diamonds have also risen. ...
Diamond traders said that the price increase was having an unexpected knock-on effect for grooms in the US and Europe, who are opting for smaller, odd-shaped and cheaper gems for their brides.

Objectively speaking, it is ridiculous to "invest" in diamonds. You can buy a diamond after a lot of haggling and go back to the same dealer 5 minutes later and he will only give you 70% of what you just paid. The margins are out of this world compared to gold or silver.

The main advantage of diamonds, is that you can wear them or smuggle them across borders. I wonder if these Asians are on to something.

Anonymous said...


"Without the sounding board of other thinkers here at TAE, in fact, I think I might think myself into a terrified tizzy... and wind up on a soap box ranting that the end is near. Which it is, of course, but I feel so much better about it with company to talk it over with."

I concur, but then again I wouldn't discount the therapeutic benefits of finding yourself a soapbox either. I managed to finagle a weekly 1 hour spot on the local progressive talk radio show. I use the opportunity not to rant that the end is near (in so many words, though I agree that it is the end of the world as we know it), but to discuss issues surrounding the various irresistible forces that are bearing down upon the business as usual world we currently occupy.

My hope is to inspire questions and thought in those for whom awareness is beginning to dawn, reassure those who do have a clue, and perhaps make contact with others whose knowledge and skills will be needed to deal with the impending future. Maybe a few others will benefit from a slight inoculation effect. As has been pointed out numerous times, it's going to take far more than just my own lifeboat to get by in the days to come.

So, maybe there's some kind of soapbox that's right for you- these discussions around the end of growth, the coming changes/depression, resource constraints, supply chain disruptions, etc. need to be had. We have to begin normalizing and legitimizing these questions, these issues to whatever extent is possible in the remaining time we have left before TSHTF, or people will be running around like chickens with their heads cut off instead of getting down to the business of figuring out how to work together to survive (and thrive).

And once again, I too will express my thanks for this community of very bright folks talking about the very most important issues of the day. Being a Cassandra can get kind of lonely sometimes.

scrofulous said...

seychelles said...

"Skip Breakfast said

No, instead people are buying gold so they can make some more fiat money.

Yes. It's a dangerous game they are

If we are going to make blanket statements, then I will say that on this site most people are holding fiat USD so that they can buy the world cheap when deflation comes.

Talking of danger, I don't think currency collapse Black Swans are required to stop at the US border for a Homeland Security check.

John Day said...

Pertaining to diamonds as a store of value, as opposed to gold, I would point out that diamonds are more like residential real estate, much is held off the market to support prices. You must trust DeBeers.
Conversely, there is far more gold owned than actually exists, meaning that it is still possible to take some home at an artificially suppressed price, high as it may seem.
I enjoyed helping sponsor Stoneleigh here in Austin last year, and am in full agreement with the deflationary picture. We can see it in action, though mixed with commodity price rises from increased input costs (EROEI).
I do see gold as acting more and more like the actual money. I see more moves supporting that daily. (Of course we see what we know and recognize and expect and hope for)
In terms of turning the ultimate deflationary trick, I think that global banking will return to the gold standard, and play the Long Depression deflationary game of the late 1900s. It was a ruthless game. They took everything, by shrinking the US money supply by 2/3, in a time of massive real wealth creation. They foreclosed and foreclosed and foreclosed.

jal said...

Some week end reading.

"The First Recorded Word For ‘Freedom’ In Any Human Language Is The Sumerian Amargi, A Word For Debt-Freedom ... If Aristotle Were Around Today, He’d Probably Conclude That Most Americans Were, For All Intents And Purposes, Slaves"
my question ...

What were the effects of a "jubilee" on those societies and what would be the effects of a "jubillee" for the 0.01%.


scrofulous said...

I like your thoughts on diamonds, I think the return on them could depend to a degree where you buy them and where you sell them, also seems to me a way to avoid the taxman.

A wharf acquaintance, when I lived aboard, told me he made the price of his, very nice, boat by smuggling diamonds when working in the merchant marine. I doubt very much that he declared that buisness on his tax returns.

p01 said...

2 weeks ago someone was going to buy a home and I told him that prices will drop and he didnt buy it.

Jack, you're my hero. I never managed to convince anyone I talked to. I only managed the "you should get your meds, stat!" look.

p01 said...

I only managed to receive that look, I mean.

walker said...

Since fixed interest rate is very low these days in the U.S (3-4%),if with same amount of monthly payment, will you recommend us to pull as much as cash out by refinance our homes?
I bet most Americans won't make it for their mortgage payments in deflation. The outcome will be everyone live for free. The bank can't foreclosure 50%+ of entire real estate,right? Whoever has cash hanging longer who wins,cash flow is the key, am I correct?

Anonymous said...


>>I've been thinking lately about how different this economic crisis must be from every one in the past--despite so many unavoidable similarities. And that difference is obviously the Internet.<<

The big technical reason this crisis is different is because the private sector hit their maximum debt level.

This wasn't true before.

This charts says it all - and the only reasons we have a flat line is $2.5 trillion annual stimulus (Fed and government) and lies, lies and balance sheet lies...

This wasn't even close to true in 1987. Or the early 90s. Or even 2000/2001.

It is now.

Yes, the internet allows dissemination of the situation to us "little people" outside the filter of the criminal oligarchy.

But the structural difference is the debt limit has been reached in the private sector and we are ever so close in the public sector. I don't think anything is left after the government cries "no mas."

Josh said...

@ walker,

You're right. Why real estate and why now? The banks won't foreclose on all those properties. There's no political momentum in that. In fact, the government is preparing to write down mortgage principal. Not tomorrow, but soon. If you hang in there, help is on the way. Everyone in positions of authority agree that mortgage write-downs are coming. It's all a matter of timing. There are 75 million households with mortgages in this country and that's a lot of votes. A few more months of price declines and politicians will have voter momentum for mortgage reduction. It's good for what ails us. Now is the time to buy. After the mortgage write downs, consumers will spend again and we'll give this economy a real kick in the pants.

Josh said...

More than bricks and mortar.

Let me tell you about the why homeownership is still important -- even in these tough economic times. There has never been a better way for the middle class to save and keep its moral foundation. It's rigorous savings -- and it keeps you straight as an arrow. Focused on the things that matter. You work hard and you'd like to spend it all on hot wings, beer, and methamphetamine. But you can't, because you've got a hot ticket in the mail every month that demands your attention. So you sock it away -- you invest in something more than plywood, nails, and clay tiles. It's the idea of shelter and the love of family -- a stable bond to the hearth, the kitchen table, the living room sofa. It's the kids, mom and dad gathered around the big bright screen in the entertainment room with buttered popcorn, soda pop and Spielberg. It's turkey in the oven and mashed potatoes on the granite countertops. It's laughter and it's friendship. It's a home, and you should get out there and buy one soon. It's part of you, and you need to be complete.

D. Benton Smith said...


Well, you're right about one thing darlin', the banks won't foreclose all those homes... at least not quite yet. Because they can't. Because those dogs over at MERS ate their 'home' work ( oops! was that a pun? Apologies )

But hang in there, sweetums. Just a little more back room rubber hose work on unreasonable hold-outs like NY Attorney Genral Schneiderman and all of that nasty case precedent and statutes that've been cluttering up the place for the past couple of hundred years can get nullified in a jiffy.

Then you can have all the foreclosures your little ol' heart desires without anything like LAW getting in your way.

Josh said...

Dont be a freeloader. Pay your dues. Contribute to your community by building your nest.

You show me a community of renters and I'll show you moral deviance. Decadence. Graffiti and bad attitudes.

Ka said...

Re the internet spreading the word,

It seems to me the "word", albeit a somewhat different one, got spread more widely in the late sixties without the internet than is happening currently. In the US, anyway.

I've been renting all my life, in cheap places, and reached retirement debt-free, with savings, and without being surrounded by graffiti, decadence, and bad attitudes.

Anonymous said...


I hear a lot of people talk about "a loss of confidence in the dollar."

Since a dollar is a debt receipt, each dollar has a corresponding debt owed... with interest.

Therefore, it is equivalent to say that there would be a loss of confidence in the debt debtors owe.

Good luck with that.

The debt holders won't let you lose confidence in the dollar (the debt you owe them).

It is basic Economics 101, no?

Food for thought. Lyndsey Williams, a pastor with oil executive insider friends, predicted the Middle East uprisings months in advance and said that "the elites" (psychopath inbreds?) were going to install very radical Muslim groups across the Middle East as a means to generate an excuse to default on all the debt owed to the Middle East (can't pay T-bills to al Qaeda radicals!).

He also said that they want to cut off the oil from the ME, drive the price of gas up and then open up the reserves, which he says are enormous (bigger than the Middle East ever had), in North America.

Of course, they will sell that oil at a massive premium - well over double today's prices and they will have the excuse required to justify it in the minds of the peasantry (Middle East is shut down, you have to pay up!).

I'm not on board, but I do have a hairy eyeball watching events as they transpire - and he's been much more right than wrong so far.

seychelles said...

Carol said

There has never been a better way for the middle class to "save" and keep its moral foundation.

You know as much about morals as, to quote the late HT, a pig knows about Sunday school. Freedom does not equal free-bee. No offense, snuff.

Skip Breakfast said...

Banks are safe and the crisis is over! What a relief. I read the good news in New Zealand's most widely read newspaper, in which the staff financial-advice columnist answers a reader's concerns about bank safety. Keep in mind that New Zealand's biggest banks have opted OUT of the government deposit insurance guarantee schemes. Their reason? Because the Kiwi banks have AA ratings from Standard & Poors! Double-AA, for double amazing! This despite the fact that Canadian banks have triple-A ratings but are all equally covered by national deposit insurance schemes. This despite the fact that Standard & Poors has rated other financial institutions triple-A moments before the institution vanished bankruptcy. This despite the fact that I've never visited a country where there is more obsessive over-investment in real estate than New Zealand.

But on to the good news. Quote: "withdrawing your money from a New Zealand bank [just] because it's not covered by a government guarantee looks like paranoia to me. Even at the height of the global financial crisis, when the guarantee scheme started, experts told us our banks looked pretty safe. Now that the crisis is over, the chances of a bank failure seem extremely remote."

Did you get that, folks? The crisis is over. I'm greatly relieved.

Seriously, though, this kind of reporting is profoundly disturbing to me. When a major news source offers up such bizarrely sanguine advice, it paints the concerned citizen (like myself) as a crazy paranoiac. How dare she say the crisis is over? Will she he ired when she's proven wrong? Isn't she already proven wrong every day as the crisis continues and flares up in places every day?

Skip Breakfast said...

Here's the full article if interested:

Josh said...

I'm curious:

How many commenters here are taking anti-depressants? How many are on mood altering psychoactive drugs?

Many folks here display many clinical symptoms of querulous paranoia. I'm not making fun. It's a sad condition and it leads to lots of unhappiness and estrangement from family and friends.

You need to keep in mind feathering a nest can calm and soothe over-active nerve endings. 2400 square feet will do you wonders. There is nothing like the smell of fresh paint and carpeting to keep you focusing on the new days weeks and years ahead. Stay focused!

Glennjeff said...

Hey Carol,

I'm not taking anything whatsoever so you can have my share :)

Josh said...

Local banks are doing fine. The government funded mortgage principal reductions will top off the remaining asset-liability imbalance. We'll plug that gap, fill that hole, and caulk that seam.

Americans aren't cowards.

Josh said...

We're a nation of neighbors and neighborhoods. We shake hands and say good morning while watering the lawn, mowing the grass, and spraying the weeds. Real estate and home ownership have always been in our DNA. It doesn't just go away. It's here to stay. I just closed a deal on a corner strip mall.

You like the thwak thwak of the nail gun and so do I. It keeps us working. We cycle through paint, carpeting, and digital appliances -- Good, Better, Best -- Yes. I'll take one of each. Yard tools and riding lawn mowers, and leaf blowers, and the backyard swing set/monkey bars for the little-ones. It's a list that always grows and that never ends. It's the little engine that can at the heart of our economy.

Josh said...

This is an interesting blog with some novel ideas. A bit wacky at the edges but sometimes the feeding frenzy gets bloody. Everybody piles on with their pet hamster and conspiracy theory from the deep darkness under the bed. I think it's wise to shed some light on the goodness out there as well. There's good news around every corner even if the media doesn't cover it. I tell my friends to consider me the equivalent of 100 mg Sertraline.

sensato said...

Carol doesn't give a toss about her ecological footprint. Not only that, she encourages others to ignore it.

Skip Breakfast said...

Carol, I think you're exhibiting a whole other form of psychological dysfunction when you attempt to associate contrarian thinking with mental illness. Revolutionary insights, and even "truth" in a culture of systemic lies, has throughout history been labeled "insane." But time proved that the nutters were the only one seeing through the deception of group-think and propaganda.

Nature has provided society with a range of "brains" to increase the chances of societal survival. That guy who's "depressed" about the state of our oceans might be "unhappy" enough to do something about the problem. Whereas the majority continues to operate with sociopathic self-interested abandon. Which is healthier?

The fact that you would propose that acquiring more and more square-feet in your home is the solution to all our problems is downright scary.

While wallowing in doom is not a recipe for a happy life, it is also irresponsible not to try and shed light on the dangers inherent within the current system.

Jack said...

I have another opinion about the gold prices.

If a group was able to manipulate the price of homes they would do the same thing there.

Gold ,Diamond are all manipulated by one group.

This goes to show you that deflation is happening and prices are falling.

So far there is still people with to buy these speculative items.

Jack said...
This comment has been removed by the author.
Jack said...
This comment has been removed by the author.
Jack said...

Wages,Homes,everything that you can think of is falling except those items that are manupliated like oil,gold,diamonds

Food is not falling because you require oil for moving it around
and planting the seeds and so on

D. Benton Smith said...

" I just closed a deal on a corner strip mall. "

Quick ! Gimme the guy's name and phone number ! Does he have any money left ? I've got this killer dealer on a bridge.

D. Benton Smith said...

I can't make up my mind about @Carol.

One minute I think NOBODY capable of breathing could be that dumb, and the next minute I think oh, on the contrary... just look at America.

Is 'she' a simulacrum of some of the wags on this site, lobbing us slow balls so we can knock them out of the park, or is she/he/it/them/whatever just someone with a really twisted sense of humor?

I dunno. Which is it Carol? I can't help but LIKE you, but I just gotta know who you really are.

Please, please, please tell me you're just pulling our collective legs, and don't seriously believe any of that stuff you write.

If you are actually El G or VK ( or TAE Summary ! ) having a bit of fun then it's kinda cute, in a demented sort of way... but just too sad if you're real. Say it ain't so, Carol. Say it ain't so.

Jack said...

D. Benton Smith
I dont know about USA but here in Canada there are plenty of people who are buying real estate as if there is going to be an explosion in price and that they are going to hit a jack pot

Anonymous said...


From Carole:
You need to keep in mind feathering a nest can calm and soothe over-active nerve endings.

Board, you have to admit that "she" is excellent at what she does. In terms of calculated off-the-wall annoyance (but always just shy of provocation), it is very well done. First Manuel and the tomatoes, now nests and nerves.

Come on, take it for what it is, enjoy the goofiness, but for goodness sake, do not respond.


jal said...

I feel one of those , “I told you so “ moment.

AND you were told that there will be good days coming back in the USA.

Balanced budget ... ???

Businesses will create jobs ... ???

Where the cash will be going.

1. Libya, there will be a lot of bargains/deflated opportunities.

2. BoA is a deflated asset and will be a good buy.

3. Disasters ... buying and repairing broken glass at deflated prices.

Its all means more reduced standards of living.
Money is not going to go where it will be needed the most.

p01 said...

Nutter alert!!!; Carol is baaaaack!!!

ogardener said...

Blogger el gallinazo said...

I find it interesting that he (Jobs) is still alive with a disease that kills 99% within a year. Another hmmm

You know how it is in the States El G. If you're poor, you die. Jobs is *not poor.

bluebird said...

Carol sounds just like my family, friends, acquaintances, and most everyone else.

Jack said...

Take care of today and tomorrow will take care of itself.

I don't know who said that but I like it

Jack said...

I agree with you there.Its as if I belong in a cult or something like that

Anonymous said...

Wasn't just a few weeks ago that Carol was freaking out about losing here $300,000 house, going bankrupt, etc? Coming in here pleading for advice and talking about finding a sugar daddy. There seems to be a pattern to the frequency of troll posts- one after the other asking the same questions, making the same demands, challenging informed common freaking sense.

Don't feed the trolls, or they'll just stick around.

Greenpa said...

Many of youse guys here misunderstand, and misunderestimate, our Carol/Bob/Cheryl.

You respond, very humanly, to the purported logic of his words, even while knowing that this is not an actual person, and may in fact be just one paid employee of the Owners.

Paid astroturfers have two functions: one is to disrupt currents flowing in directions that do not suit the Owners, the other is to add energy to currents that do suit the owners. If they can do both; great.

The current set from "Carol"; who in my educated estimate is male, 58ish, paid for his work here, and is sophisticated in his approaches beyond the median (though just a little too transparent for this audience) is aimed primarily at the second function; and any results for #1 are gravy. He's already licking the gravy spoon here. :-)

The actual impact of those words: there are a huge number of readers here who never comment, and whose mental states we cannot entirely know. We do know they read this because they are searching for answers. Carol has recited all the dreams of the "almost" home-owner; it's a list possibly taken from that well known secret real estate agents' training pamphlet :"Best Closing Arguments Of All Time"; concepts and fantasies known to be effective in moving the wavering buyer off the fence.

It's QUITE possible that one, two, or several such folks have read the words, found a mirror for their own dreams there; and riding on the impression that the commentariat here is smarter than the average bear- gone out and bought the house they were dithering about. Done, today.

Considering that Carol/Bob's pay is minimal; there's an immediate pay off for the employer. As we know; one house purchase can easily be turned into "Housing Market Improves!" headlines for the next two months (nobody actually reading or comprehending the subheadline of "rate of decrease of housing purchases not increasing as fast as feared); enabling the Owners to continue their scamming/skimming operations that much longer.

And, of course, an ex-fence sitter becomes a convert; helping push on the desired currents, here in the soup of the Great Amoeba. And some of the currents set up by TAE, which the Owners do not like, will be slightly diverted, disrupted, slowed.

Logic is not on the list, nor is "truth". Just the flow.

el gallinazo said...


You still looking for Mr. Goodbar to solve your own mortgage problems? Care to list your assets? I'm collecting diamondbacks here in Mexico and rendering them down to oil, and I need an Arizona distributor.

Re the mortgage foreclosure debacle:

Last words uttered by Spartacus fighter number 11209, "posted" on the road to Rome, "They can't crucify us all."

scrofulous said...

Thursday, August 25, 2011
First Significant Hint of Wage Price Inflation Beyond Silicon Valley

and this comment from Bitcoin Forum

"According to keynesianism wages can not go up when there is high unemployment. And because of this, they argue, prices wont go up much, because any upward presure will meet people having stagnant wages. This is their explanation of why printing money in a depression is ok. But reality begs to differ.

The problem with the stated above is that they are looking at the economy through aggregates, which is a horrible way of looking at the economy and leads to big mistakes. What happens in reality is that not all workers are competition for the rest of the workers. For example, a guy with experience on the housing industry that is now unemployed is no competition for a engineer working at Google, therefore when the Google engineer negotiates his next increase it does not affect him much that there is a lot of construction workers unemployed or not. Thats why in the last year we have seen a lot of the more skilled workers getting better wages, even in the face of high unemployment.

Now the raise in wages is starting to move onto less skilled workers and its the first evidence for the wave of high inflation that we will see.

Jack said...

I dont know about them but in my circle there is no work.
People are practically begging.
Wages will plummet

D. Benton Smith said...


You're right.

Your points are all acuurate and well taken. I will reform my ways and TRY to stop playing with the Trolls ( Which up 'til now I have been doing for mostly self-indulgent entertainment. )

However, there are a few good reasons for not chasing them away altogether, and to tease them back.

It is to reverse engineer their input to suss out their specific goals, and maybe even determine who they're working for.

In a sense Greenpa, that analysis is what you just did. And it is a valid and useful analysis. And we would not have learneed from it had not 'Carol' come back around to annoy us again.

So one might ask (and benefit thereby ) why did Carol choose this moment ? Why was her "commentary" what it was ?

Can we use her comments to re-state and reinforce the messages we are sending that she is trying to prevent us from sending? See?

So, yeah, I agree with what both of you say about 'her' , but lets not arrest and imprison a spy just because we've discovered they are an agent for the other side. Let's do what the big boys do : USE them.

It's how the game is played because experience has shown that it works if you do it well.

( and Hey, if I have a little fun in the process why should I be denied that small pleasure, so long as I am "responsibly serving a valid counter-intell security purpose ? ")

Jack said...

Most business owners are sitting around waiting for work and when you say things are bad than they will get into endless conversation about how bad things are.
This guy has rent to pay and he is chatting with you about talk like this

A moderator said...


We agree with your analysis regarding Carol. As he has just been posting for the morning, although somewhat spamming the comment section, we let it slide for the moment. We regard it as potential inoculum against MSM stupidity when countered by some of the regulars here. Additionally, it does have a certain entertainment value, and this sort of parody type humor might be more effective than Zoloft or even a newly acquired 5,000 square foot McMansion carrying a 100% mortgage in calming the nerves of the doomers here. If some of the non-commenter readers here have been taken in by him, well let us just hope that they have not reproduced yet. In any event, we think we have seen enough and will cull his comments in the future as we spot them.

ogardener said...

For the 'Irene' fatigued.

Jimi Hendrix - Rainy Day, Dream Away

Ilargi said...

New post up.

Et tu, Commodities?


scrofulous said...

Hi Jack,

This is from Wikipedia

"The 1920s German inflation started when Germany had no goods with which to trade. The government printed money to deal with the crisis; this meant payments within Germany were made with worthless paper money, and helped formerly great industrialists to pay back their own loans. This also led to pay raises for workers and for businessmen who wanted to profit from it. Circulation of money rocketed, and soon banknotes were being overprinted to a thousand times their nominal value and every town produced its own promissory notes."

Jack I don't know the unemployment situation in Germany after the war but I imagine it would be rather bad with all the returning soldiers. Hyperinflation ran I think about from 1920 to 1923. While Stoneleigh and ilargi may be perfectly correct that deflation will occur, I am still hedging my bets by holding both cash as well as precious metals. I also have a garden :)

snuffy said...


You have not been paying much attention to the information provided here...
You have said..
1#The banks are fine
2#We[this board]is"wacky
3#construction"Stuff"is heart of
our economy and a home the
moral foundation of the middle

The banks overwhelmingly are zombies,kept "alive" by inertia, the Fed,blue smoke and mirrors.

The term wacky,is distasteful on its face,as well as being incorrect.The discussions here are based on the principal that energy supply constrictions will make the current form of our society impossible to continue,and will result in a shift to a lower energy state.We exchange commentary/information on the information provided by our hosts,as well as opinions and discourse.If this is wacky,I think your judgement is a bit off.

The construction industry was a carefully constructed bubble which has popped.There is 3 to 5 year supply of office space in just about every town and city in the USA,as well as a backlog of foreclosed homes that will depress the housing market for the foreseeable future...10years+

Carol,that picture you paint is a nice one,but the reality is 2 exhausted parents busting their ass to make the houspayment 2.8 kids with the t.v. for a babysitter...

I have wasted enough the information in the primer's,than maybe we can have a conversation..

Bee good,or
Bee careful


snuffy said...


Your right,I responded before I thunk it out...

Begone troll

Bee good,or
Bee careful


scrofulous said...


Don't want to get in between you and Carol on your 'disscusion', just cherry picking this out of your comment:

"The discussions here are based on the principal that energy supply constrictions will make the current form of our society impossible to continue"

If that is so then the principles must have changed their tune as of late because they have repeatedly made the point that finance and not energy were foremost on the agenda.

Personally I agree, with what I take to be your view, that it is energy, first, that is the deciding card. I played that card for the first time in 2005, structuring my mutual fund portfolio so that it was backloaded to 2008 allowing me to cash out with no fee's. My thinking at that time was that a financial crash would occur soon after that date and due to energy no longer growing there would be no recovery as we have known in the past. That is still my thinking but whether there is deflation, hyperinflation or if it is to be the heat-death of stagflation those things are pertinent only in accordance with ones time frame, in the end energy decides.

Nassim said...

New post up (reminder)