Bear Market

Fannie Mae to make qualifying for interest-only loans tougher

April 30, 2010 by · Leave a Comment 

“Fannie Mae, the government-backed mortgage giant, announced Friday that it will tighten lending requirements for the interest-only loans and adjustable rate mortgages (ARMs) it backs.”

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U.S. Role in Mortgage Market Grows Even Larger

April 30, 2010 by · Leave a Comment 

“By providing a steady source of liquidity to the mortgage market, the government has helped housing markets to stabilize. However, “Fannie and Freddie have to get smaller and less relevant in order to revamp them, and instead, every day they’re getting bigger and bigger and bigger,” said Paul Bossidy, chief executive of Clayton Holdings LLC, a mortgage analytics firm.”

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Treasury Redeems A Gargantuan $643 Billion In Treasuries In April

April 30, 2010 by · Leave a Comment 

“A week ago we were practically speechless when we showed that the Treasury had redeemed nearly $494 billion in Bills in April. A truly stunning number and an indication of just how much cash the Treasury needs to have access to to keep rolling its ridiculously short average maturity debt load. Today we stand even more speechless: ”

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Viewing Goldman Sachs from a Mortgage Banker’s Perspective

April 30, 2010 by · Leave a Comment 

“I don’t have an opinion about the charges levied against Goldman by the SEC, but some of the bantering between the seven Goldman employees (past employees) and the Senate Subcommittee caught my eye. ”

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Two Charts: the Dow and Dow/Oil

April 30, 2010 by · Leave a Comment 

By Charles Hugh Smith, OFTWOMINDS
by Charles Hugh Smith

Two charts reveal much about the current Wall Street rally in equities.

Frequent contributor Harun I. provided two self-explanatory charts which shed light on the current rallies in the stock market and oil.

The first is a long-term snapshot of the Dow Jones Industrial Average, showing its 11-fold increase from the start of the Great Bull Market in 1982 to the present “nascent recovery.” As Harun notes in his comments, credit default swaps have risen 10-fold since the dot-com bubble burst; CDS can be viewed as a rough measure of leverage and risk-gaming.

One dollar in 2000 is $1.26 in 2010 dollars, hence Dow 11,000 in 2000 is equal to Dow 13,860. Thus even as the Dow has returned to 11,000 nominally, the value of those shares has declined 26% in the past decade.

Harun illustrates purchasing power with this Dow/Oil ratio chart. In essence, even as the Dow has risen some 70% from 6,550 to 11,200 (a 4,650 point rise), the amount of oil a share of the DJIA can buy has remained more or less the same as when the Dow was still 8,000 in 2009.

Thank you, Harun, for these enlightening charts which remind us that nominal prices are not the final arbiter of value or purchasing power.

I would like to make an important clarification about my entry yesterday, Debt, Democracy, Autonomy and Revolution: Understanding 2010-2021 (April 29, 2010). By using the word “revolution” I meant a revolution of understanding as noted in this paragraph:

Debt servitude and the fact that they now own virtually nothing will predispose citizens to finally grasp the failure of the Savior State/Plutocracy status quo; that revolution of understanding will lead to an embrace of radical reforms which were hitherto “impossible.”

I should have emphasized by radical reform I mean peaceful, legal reform of the kind which has often been advocated in U.S. history: by Progressives in the first decades of the 20th century and by reformers in the post-Watergate era, to name but two examples.

I do not believe in violent revolution as a “solution” any more than I believe that scapegoating other nations or groups solves political/financial problems. We as nation and we as a species are entering dangerous times, and my core spiritual and political views as expressed in this site are grounded on the belief that positive transformation is not only possible but it is the only real solution to our interconnected problems. I believe that political, financial and cultural transformation is a legitimate and realistic alternative to violent chaos or a Police State.

The “Third World” (those parts with functioning government and relatively low levels of inequality) offer numerous examples of how life goes on quite happily if financial assets fall as financial fraud collapses. As I have noted many times here, the vast majority of Americans don’t actually own any assets of substance anyway, so the collapse of assets will also mean the disappearance of all debt: credit, debt and assets are connected.

The top 1% will suffer the loss of assets; the bottom 80% will lose their debt-serfdom. It’s something to consider: a collapse of the status quo Wall Street Fraud would only be a calamity to the small circle who own 93% of the nation’s financial assets. For the rest of us, it means a Debt Jubilee as uncollectible debts are written off en masse.

I see no need for revolution; what is needed is individual responsibility and autonomy, an engaged citizenry, the reduction of concentrations of power and a transformation to a sustainable way of living.

I also want to make it clear that in asking whether the corporate Mainstream Media has an agenda in their largely negative coverage of the Tea Party movement, I am in no way condoning racially offensive depictions of President Obama which appear at various Tea Party demonstrations. I find these inexcusable, and remind readers that President Obama and I are both alumni of the same prep school, Punahou School. While Punahou is a bastion of privilege (Obama’s grandmother paid his tuition, while I attended tuition-free because my stepfather was a teacher there), it is a multi-ethnic bastion of privilege.

I would also remind readers (or inform new readers) that I am married to an Asian-American, my stepmother is Hispanic, my niece is African-American and I am Scots-Irish/English and French (Wallace/Robinson, Smith, Mankin and Basset). All the members of my family are native-born Americans. In other words, ours is a typical American family. (In the extended family, there are gay Americans as well.) To show how open-minded we are, my brother married a French citizen (now that’s open-minded!)

We are in this together, folks, and as the fraud and debt-based economy crumbles around us, we must be wary of the temptation to scapegoat or demonize various nationalities and groups, both within the U.S. and in the world at large. I remind readers thatpropaganda works by reinforcing the biases we already have. That goes for all political persuasions.

For myself, I turn to these lines for guidance: He that is without sin among you, let him first cast a stone at her. And again he stooped down, and wrote on the ground. And they which heard it, being convicted by their own conscience, went out one by one, beginning at the eldest, even unto the last: and Jesus was left alone, and the woman standing in the midst. (John 8:7-9)

Though this is from the Bible, undoubtedly every major faith has a similar passage or lesson.

Thank you, Alonzo J. ($20), for your most welcome generous contribution to the site. I am greatly honored by your support and readership. Thank you, Roger H. ($20), for your multiple (and very) generous donations to the site. I am greatly honored by your support and readership.

Go to my main site at
for the full posts and archives.

More articles from Charles Hugh Smith….

Sell Treasuries … Again

April 30, 2010 by · Leave a Comment 

The Daily Reckoning

“Shorting US Treasuries is a slam-dunk trade if ever there was one,” our friend Paul Van Eeden wrote not long ago. I agree.

Treasury yields have been going down along the entire yield curve since 1983. This trend reached a crescendo during the crisis of 2008, when 10-year Treasury yields plunged to 2% and 90-day T-bills paid negative yields.

For a few moments in the heat of the credit crisis, some investors were so scared of losing money in any other asset; they took a guaranteed loss just to keep their money “safe.” Better to lose 0.1% on a short- term bond, the theory went, than risk losing 50% on GE, Citigroup, GM or Bank of America.

The US government recognized this insatiable thirst for the “security” of American bonds. And it abused this opportunity to the fullest extent – setting record budget deficits in 2008, 2009, 2010 and likely beyond. Mainstream economists like Paul Krugman, James Galbraith and Dean Baker applaud these deficits as a necessary remedy for economic malaise. They maintain that when consumers can no longer consume and corporations are locked out of the credit markets, the government is the only actor in the economy that can save us all from financial Armageddon.

Further, they argue that inflation is the devil we know whereas deflation is the devil we don’t want to know. They argue the government is not spending enough money right now, and that those who encourage fiscal restraint and austerity during an economic downturn are only asking for more trouble, more pain.

Further, they say, it is the government’s responsibility to coax inflation back into the system, which would in turn spur growth in GDP. Then when the economy gets “back on track,” we can deal with the deficits and begin addressing the national debt.

Trouble is, since the 1980s, we’ve never, but for a few short years in the late 1990s, gotten to the second half of that Keynesian equation. As one reader insightfully observed:

“Keynesian economics really does (or did) have a legitimate function in a capitalist economy wracked by business cycles. Any honest, solvent government can use Keynesian strategies to good ends when a cycle tanks.

“The problem, which you guys so rightly observe is that our government is far from solvent; it uses what are called ‘Keynesian’ strategies to mask what Marx would have called ‘internal contradictions’ – and it’s not being honest with itself or its citizens, either. What we see now is not Keynesian – it’s simply consequences of overreach by an empire in decline. It’s not Keynesian at all, just chronic overspending.”

Following what we feel is a deeply flawed economic strategy, the Obama administration issued over $2 trillion in government bonds – a record, by a long shot.

Mostly with the help of Asian governments, the Treasury managed to sell them all. But many thanks go to the Federal Reserve itself. Through its program of quantitative easing, the Fed bought billions upon billions of Treasury paper to suppress American mortgage rates and ease the pain of the housing bust.

This, to put it bluntly, cannot last. The Fed ended quantitative easing on March 30. Mortgage rates have already reached an eight-month high since then.

But the real threat to the plan to keep rates low may come from outside the Fed’s purview. On January 25, 2010, the Obama administration announced a $6.4 billion arms deal with Taiwan. Two weeks later, the Treasury auctioned $16 billion in 30-year Treasury bonds. The Chinese failed to show up in customary fashion. Yields ticked up from 4.68% to 4.72% by the end of the auction.

The fear that the Chinese would simply slow their consumption of US debt was all that was needed to drive up rates in the US.

The worst inflations in history took place when savers and investors lost confidence in the integrity of the currency, while governments handed out purchasing power to entities that did not earn this purchasing power through past production.

By promising to suppress dollar-based interest rates well into the future, the Fed is giving investors little reason for faith in the dollar. Except for the inherent weakness of the euro, the dollar would already have “exited stage left.”

The American government cannot continue financing bailouts and future growth with borrowed money. The national debt stands at 90% of annual GDP, the highest since World War II. In the face of looming entitlement disasters like Medicare and Social Security, our debts might grow even larger… but our creditors will assuredly not grow any kinder.

“We are very concerned about the lack of stability in the US dollar,” Chinese Premier Wen Jaibao said last month. He oversees the biggest cache of US government debt in the world – roughly $889 billion in US Treasuries. As China’s worries grow – along with the rest of the world’s – creditors will demand higher rates of return. Bond yields will go up, prices will go down.

What’s more, China and many other foreign creditors have historically bought Treasuries in order to suppress the value of their currencies. Now that so many emerging markets have “emerged,” currency suppression isn’t providing the boost that it used to. If inflation becomes a problem in emerging markets, currency suppression will cease to become an objective. This would also remove a major source of demand for Treasuries.

When will it happen? How bad will it get? We don’t know. But our money says it’ll happen in the next 10 years. Holders of US debt will wish they were holding something – anything – else. Anything but the promise of a fixed stream of steadily debased US dollars. Investors will wish they sold US bonds short when they had the chance.

So how do you short US bonds without going to the trouble of borrowing them? Fortunately, there’s an exchange-traded fund (ETF) that lets you do just that.

The ProShares Short 20+ Year Treasury ETF (NYSE:TBF) returns the daily inverse of TLT, the Barclays 20+ Year US Treasury Index. The focus is on long-dated bonds – the securities that Treasury will have the most trouble floating if global confidence in US debt wanes.

In the last half of March, Treasury had a series of lousy auctions. TBF responded just as you’d want it to – rising 2% in just a couple of weeks. This is just the beginning.

All of that probably makes intuitive sense to you. After all, we’re betting against an investment class that’s gone nowhere but up over the last generation. So don’t be surprised if this asset goes nowhere but down during this generation.

Addison Wiggin
for The Daily Reckoning Australia

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It’s Tough Being Fab

April 30, 2010 by · Leave a Comment 

The Daily Reckoning

Poor Fabulous Fab.

The young Frenchman went to all the right schools in Paris. He must have been good at math, because he got into Stanford. And then, it was onward and upward… He landed a job at Goldman. He was making millions. His girlfriend wrote to say how she’d like to curl up in his arms.

And then, at the tender age of 31, powee! Right in the kisser.

His beautiful derivatives lost 85% of its value in just 5 months, his clients get sore and now he’s got a whole posse of senators on his tail.

The senate torturers didn’t have any idea what Fabulous Fab was up to. They wouldn’t know a derivative contract from a household fusebox. But they knew something had gone wrong. They knew the public was out for blood. And they knew the lights were on and cameras were rolling.

This was the time to impress the rubes back home. Get some Wall Street hotshot in the dock and grill him hard. And a Frenchman to boot! What luck.

I-N-D-I-G-N-A-T-I-O-N! The senators were positively shocked…shocked!…to discover that Fab…and Goldman…were out to make money. Maybe they thought the Goldman was a public utility – like Amtrak or the Post Office. Government services don’t work very well, they may have told themselves, but at least they don’t make any money!

Yes, senators can feign indignation when it is called for. But what are they so indignant about? Well, that’s another matter. Who knows and who cares! The point is, the voters want to see them nail this little Frenchman…and they’re going to make a good show of it.

The media reports suggest that everyone played along on Tuesday. The senators were indignant. The Goldman fellow denied any wrongdoing…but regretted that had sent the emails out. While the senators pretended indignation, the Frenchman’s regret was certainly sincere. So was his denial. For, in fact, it’s hard to know what he did wrong. Yes, he played his clients for suckers, but so what? That’s what Fab Finance is all about – make money…and then dump the risk onto someone too dumb to know what he’s doing. And then, when he blows up…and the whole system blows up…in come the senators to bail everyone out.

From Fab’s perspective – and ours – if you can find bankers and hedge funds dim enough to take your derivative contracts – without wondering what is in them – you are performing a public service by separating them from their money. Better for the cash to be in the hands of someone who knows what to do with it – like Fabulous Fab himself.

But let us imagine that Fabulous Fab gets his hands on some real dough. And let’s imagine that he is not in the mood to gamble on his own jackass derivatives…or to find some chump to sell them to.

What would he do with the money?

Ah…here, he would have to close his newspaper and turn off his television and think deeply about what is actually going on in the world. Forget the circus surrounding Goldman. Forget the news flow. Forget even the ‘information’ coming from the markets.

Now, it’s time to think. This is real money we’re talking about…not just casino chips.

Fab is no dope. He’d probably look at what is happening with Greek debt…and he’d be suspicious of all government bonds. After all, Greece’s finances are not so different from a half-dozen other countries – including the US of A. True, Greece’s debt problems have investors running to the relative safety of the US…which lowers borrowing costs for the US and makes it easier for the feds to finance their debt.

But the problem of too much public debt can’t be solved by low interest rates and more debt. Eventually, the US runs into the same problem the Greeks face now. Only the US problem is even bigger…and there is no bigger, richer nation to bail it out.

Fab figures all of that out… He figures US lending rates may go down in the short run, but in the long run, the feds face the same predicament – they need to borrow more and more money just to keep the show on the road. And eventually, lenders will want higher interest rates. And it won’t be too long before Moody’s and Standard and Poor’s take a hard look at America’s balance sheet too.

The news yesterday was that the rating agencies may downgrade Spain, Portugal, and Ireland even further. And Reuters reported that the Greek debt alone would cost bondholders $265 million – if Greece has to reschedule (that is, if Greece defaults on its loans).

Greece now. Then Spain. Then Ireland. Then Britain. Then America.

And more thoughts:

Our “Crash Alert” flag is still flying. It’s been up there for so long it’s gotten a bit faded and tattered. But we leave it up; we never know when we will need it.

The Dow bounced yesterday – up 53 points after taking a big fall on Tuesday. Gold rose $9…and seems, once again, to be readying for a move on the $1,200 level.

Which brings us back to Fabulous Fab. What would he do if he had some really big money? Would he buy stocks? If he’s smart he’d stay away from them. This market could crack at any time. Stocks are cheap. And there are too many threats coming from too many different directions compared to the limited upside potential.

Would he buy bonds? Nope…bonds could surprise us all as de-leveraging resumes in earnest. They could be the only thing that resists a general turn-down in asset prices.

But who’s going to bet on a depression? Not Fabulous Fab. If he had big money, he’d just want to park some money safely…not gamble on the outside chance of a deeper slump. So what does he do?

He buys gold. That is why gold continues to creep up. The big money wants to protect itself. And it’s getting wary of government debt.

*** What’s going on in Arizona? The state legislature has passed a law that allows the police to stop anyone on the street and ask him for his papers. If his papers are not in order, the fellow is in trouble.

The idea is to discourage illegal immigrants.

Here at The Daily Reckoning our views on immigration are about as unpopular as our views on everything else. We listen to CNN en Espagnol in the morning. From what we can tell, immigrants from across the border are doing the country a big service. And illegal immigrants are the best kind. They work cheap. They stay out of trouble. They use few public services. And they don’t vote. What’s more, they know how to dance.

If we were all illegal immigrants, the country would have a much healthier economy. Labor rates would fall to levels where we could compete with other exporters. Social costs – food stamps, unemployment compensation, social security, medicare/aid – would drop. And non- voters couldn’t demand more bread and circuses from the legislature (currently, 47% of voters pay no taxes…)

Meanwhile, our old friend Jim Davidson thinks he’s spotted a new trend. For the first time ever, he says, immigration – legal or illegal – is not a problem:

“Note that according to the Center for Immigration Studies, a think tank that agitates for tighter border controls, the number of illegal immigrants living in the United States declined to 11 million in 2008 from 12.5 million in 2007. For the first time since the depths of the Great Depression in the early 1930s, more persons appear to have left the US than moved in.”

This is typical of a nation in decline, says Jim. It’s what happened to Great Britain after it lost its empire.

And now, there’s a new phenomenon: the illegal EMIGRANT.

First this news item from The New York Times:

WASHINGTON – Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.

The Federal Register, the government publication that records such decisions, shows that 502 expatriates gave up their US citizenship or permanent residency status in the last quarter of 2009. That is a tiny portion of the 5.2 million Americans estimated by the State Department to be living abroad.

Still, 502 was the largest quarterly figure in years, more than twice the total for all of 2008, and it looms larger, given how agonizing the decision can be. There were 235 renunciations in 2008 and 743 last year. Waiting periods to meet with consular officers to formalize renunciations have grown.

It is not easy to renounce your citizenship. If you are wealthy, the costs can be very high, as the feds try to punish you for leaving. Davidson comments:

Just as there are “illegal immigrants” to the United States, so there are also now growing numbers of “illegal emigrants” from the United States. While statistics are necessarily sketchy, evidence suggests that there has been a dramatic upsurge in the number of US persons living abroad. According to the Association of Americans Resident Overseas, (AARO) apart from the military and other US government employees, 5.26 million US citizens reside abroad, a 67 percent increase since 2008. “Among the benefits the study cites of a life abroad are statistics that show expats earn more, pay less tax, have a better work/life balance, have an improved quality of life, enjoy broader cultural opportunities, and enjoy better job prospects.”

In the opinion of the US State Department the AARO estimate is 25% too low. The State Department suggests that about 1.34 million Americans have become “illegal emigrants,” which is to say that they have gone abroad and “fallen off the radar.” As one report stated, “If an American living abroad stops paying their taxes, stops visiting the US, stops using embassy or consulate services they will not be OFFICIALLY counted anymore.”


Bill Bonner
for The Daily Reckoning Australia

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Rent Seeking in Canberra

April 30, 2010 by · Leave a Comment 

The Daily Reckoning

A world built on debt does not have a solid foundation. A world built on sound money, secure private property, and a predictable rule of law DOES have a solid foundation (as our new friend Ron Kitching pointed out earlier this week). We do not live a world with solid financial foundations. That’s what makes investing so dangerous today.

Later in today’s Daily Reckoning we’re going to reject the heinous and misguided accusation of doom-mongering levied against us via a profanity laced e-mail tirade. But first, to the markets and the local scene. And there’s some catching up to do on one of those shaky, debt-based pillars of Australian financial life, the housing market.

First up is the news that mortgage lending is falling while house prices continue to rise. “Total mortgage applications fell 15 per cent in March quarter compared with the corresponding period a year earlier, the quarterly consumer credit demand index by consumer credit check company Veda Advantage showed,” according to today’ Age.

Cris Cration of Veda said, “One consequence of a withdrawal in government incentives is a relatively sharp drop off in housing credit demand in 2010.” Those “incentives” are the first home buyer’s grants. Mortgage data provider Australian Finance Group says first home buyers have declined as a percentage of the new mortgage market from 28% last year to 10% this year.

Once you bring forward all that demand…what then? You get now. Let us call it the “demand gap!” People who would have otherwise patiently built up a deposit and bought a home at a time that suited their finances are “brought forward” like reinforcements into the battle line. So who is going to get shot?

Well, let’s say you got yourself a mortgage six months ago when the RBA lowered the cash rate to 3%. The standard variable rate from any of the Big Four banks would have been higher than that. But let’s say you want to refinance today (because you believe rates are rising) into a 15-year fixed rate mortgage. According to the rates at one major bank site we checked, the rate on a 15-year fixed mortgage is about 8.54%.

So, if you’re a first home buyer worried about an interest rate shock from rising rates and you want to lock in some stability, we reckon you’re likely to pay nearly double the rate you got into your mortgage. And that would probably be pretty stressful. Of course if you think interest rates are not going up, then you wouldn’t refinance and lock yourself into a fixed rate.

All of which shows you how Australia’s preference for variable rate loans coupled with central bankers rigging the price of money can turn a whole economy into a giant exercise in speculation. You make the biggest financial decision of your life based on factors that are influenced by unpredictable changes in the cost of money and the rate of inflation. Sounds like how you’d design a system to put people into debt to the bank and keep them there for decades.

But only if rates move up, which they very well may be next week when the Reserve Bank of Australia meets to set the price of money. Based on the consumer price inflation data released yesterday (up 0.9% in the March quarter) annual Aussie inflation is running at the upper end of the RBA’s tolerance/target of 3%. The IMF says in its Asia Pacific Regional Economic Outlook yesterday that the RBA will have to put up rates this year as Aussie GDP rebounds.

Incidentally, we had a quick scan of the report, which you can find here. A couple of charts caught the eye. First, you can see from the IMF chart below that housing credit as a percentage of GDP is higher in Australia and New Zealand than anywhere else on the chart (and probably in the world). And the total amount of credit is dominated by housing in the Anglosphere countries, reflecting… something about their fascination with the idea of getting rich from houses, although to be fair, the banks (the ones that survived the credit crunch) HAVE gotten rich.

The second chart, below, shows that while Aussie banks (mostly the Big Four) have gone on a lending binge, the provision of credit to the corporate sector fell off a cliff. Big listed firms managed to raise equity last year (although not always in ways that boosted shareholder value, given the cost and return on capital). But smaller firms have been cut off by Aussie banks, according to the chart below.

Robert Gottliebsen made this point quite clearly today at Business Spectator when he wrote, “The Australian banking industry, as it is presently structured, is unable to fund the needs of small and medium-sized businesses.” He the quotes from a UBS report we haven’t seen about Australia’s reliance in imported foreign capital (when you’re a debt junkie, any hit will do).

“As UBS research shows,” Gottliebsen writes, ” Australian growth in loans to both the housing and business market have been funded by overseas lenders. According to UBS, Australian banks are getting close to the upper limit of loans that overseas institutions are likely to provide to Australia. And worse still – as ANZ points out – the European crisis could contract the amount of loan money available to Australia and lift its cost.”

Ah yes. Greece and loan losses. ANZ’s Mike Smith got on the front with the issue in the press today, including his own handy new term to describe Greece: “a rogue sovereign.” The ABC reports that Smith said, “Europe is a mess and the sovereign issues have not been addressed with clarity…The uncertainty has continued and that’s probably going to get worse. The contagion issue is now very real.”

The end result, he added, is a higher price for money for Australians. “That’s where it will impact us. In terms of the funding that the Australian banks have, in terms of their wholesale funding, obviously credit spreads are going to be more volatile.” Hmmn.

Pop quiz! How do you kill Australia’s most vital industry, its mining sector? You plunder it, that’s how!

The plunder begins on Sunday when the Rudd government finally unveils the Henry Review of Taxation, which, by all accounts, is likely to include a new federal resource “rent” tax to go alongside the royalties miners must already pay the States. The government could not have chosen a more apt word than rent. The government is the ultimate rent seeker.

Investopedia defines “rent seeking” as, “When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.” Frederic Bastiat calls this kind of rent seeking a form of legalised plunder, and rightly so. His description distinguishes how the government raises revenue from how entrepreneurs raise revenue, by making a profit.

Profit-seeking behaviour creates a lot of things: surplus, jobs, incomes, goods, and services. And for a company to produce a profit it must serve its ultimate master: the customer. Profit-seeking serves customers. Rent-seeking is the legally-backed coercive cudgel of Canberra.

But one of our friends out in Perth – a man who works in the mining industry – put the case against resource rents far better than we could in a letter to the editor that we believe was published by the Australian Financial Review. He wrote:

Our WA Premier has said:

“BHPB and Rio fully understand … it is part of their corporate and social responsibility to pay their way.”

“The mining royalty, the $40m that will be collected from this project, is not a tax – it is the price at which the people of Western Australia sell the gold.”

This tired clichés of socialism are also blatant double talk from our Premier.

There is no such thing as an Iron, Gold or any other mine until entrepreneurs explore for it then plan and build a mining operation which separates the mineral or element from the rock. All of this human action organised profitably by the private sector.

Royalties are an additional impediment. They are legalised plunder.

Bastiat wrote in his book The Law: “See whether the [said] Law takes from some persons that which belongs to them, to give to others what does not belong to them” and his further determination was to “abolish this [said] Law”.

All WA people are free to invest and purchase equity in a privately run Mining company if they so desire, before and or after a discovery and thus participate in the wealth creation.

In many cases the legal plunder or “Royalties” render the operation non-viable, and so destroy jobs, production and profits.

This issue of royalty increases makes one ashamed to be an Australian; fancy living off of others hard work.


Couldn’t have said it better. This brings us to the final part of today’s Daily Reckoning on who the real heroes of the free market (not the capitalists, not the bankers, and not the regulators). But we’ll preface it with a letter we received yesterday. Apologies in advance for the blue language:

You &^%#ing doom and gloom merchants. I am sick to death of your negative projections whereby daily you drum up bearish sentiment with glee as though your ego would be happy to see a complete financial collapse so then you could say to everyone – see I was right, see look how clever I am. You are *&%#ing stupid that is all you are. You have been waiting for an excuse, any excuse to say see I told you the sky was going to fall in.

What sort of impact does it have when you and other scammers with your $#!&ty little gold positions bang on and on that things are &#@%ed? That’s right the prophecy becomes self fulfilling when a critical mass is reached.

Well done I hope you are proud of the destructive role, as opposed to creative, you have chosen to fill in this great endeavour we call humanity.

Take me off your list, don’t mail me &#it all day every day and get a life you losers.

With all due respect, we think the reader misunderstands our intentions with the Daily Reckoning. It’s just a reckoning. Lately, that means reckoning up all the badly allocated capital, human fraud, misguided public policy, and good old fashioned greed. When you reckon all that up, the sensible investment position is to be really, really, really cautions and highly (eternally) sceptical.

But that is not a hereditary disposition. It’s just the position we think makes sense. Hereditarily – or really by choice – we are joyful optimists! Economic and political liberty combined have the power to unleash an astonishing variety of human potential, from the Mona Lisa to the Sham Wow!

That’s why the great heroes of the Austrian School of Economics are the entrepreneurs. They are the creators who bring new things into the world with their energy and skill and dedication. They might do it with other’s capital (the bankers, capitalists, and investors). But it’s the entrepreneurs who are always on the frontier of economic experience, looking for a new way to use resources better, more efficiently, or chase whatever their particular passion or vision is.

But those entrepreneurs have many obstacles to overcome these days, from competition to regulation to the equity markets being hijacked by financial capitalists who pursue financial gain alone rather than the funding of enterprise. We don’t live in a world with free enterprise at all, and perhaps never will.

But we shouldn’t forget that the great achievement of the free enterprise system is that without any centralised direction or organisation – it manages to harness noble and ignoble human passions to produce choice and prosperity for millions of people. And with a fair and stable legal framework, that’s a kind of real justice that the plundering central planners out for social justice can never even come close to delivering.

So no, we’re not trying to be clever and revel in the demise of the financial system. But we do think if you want survive the collapse of this system – a system based on debt, unsustainable finances, and a rotten moral premise of theft – you had better be willing to face facts and then make a plan and then make a life. If you don’t, you’re going to be the real loser.

Dan Denning
for The Daily Reckoning Australia

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Treasury gets $320 million for PNC Financial warrants

April 30, 2010 by · Leave a Comment 

By Chris Carey, Bailout Sleuth

The Treasury Department announced today it sold its warrants for common shares of PNC Financial Services Group Inc. for nearly
$320.3 million, on the low end of what the department was expected to earn.

Treasury’s 16,885,192 warrants sold for $19.20 each at an auction conducted Thursday.

The warrants allow investors to purchase stock in the company for $67.33 per share. The
company’s stock was trading at $67.27 per share at noon Friday. Treasury said
the warrant sales are expected to close May 5.

Linus Wilson, a professor at University of Louisiana-Lafayette who tracks
TARP warrants, had estimated that PNC’s would sell for $22.87 apiece,
which would have net the Treasury $386.2 million.

The sale is the third largest bank warrant auction for Treasury, behind Bank of America Corp. and JPMorgan Chase & Co., which netted
Treasury $1.5 billion and $936 million, respectively.

The department got the warrants as part of its $7.6 billion investment in PNC through the Troubled
Asset Relief Program. PNC, which has headquarters in Pittsburgh, repaid the
$7.6 billion in February.

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Did Paulson Have A $2 Billion Bear Stearns CDS Short In Late 2006? Novel Observations On Abacusgate

April 30, 2010 by · Leave a Comment 

Zero Hedge

Reading a 901 page Goldman document production (cover to cover) at 36,000 feet has proven to be both relaxing and quite productive. Among the plethora of emails, documents and memoranda, we may have stumbled upon something that could prove to be an even “bigger short” for John Paulson than RMBS: a $2 billion postion in Bear CDS initiated prior to January 2007, as well as all other financial firms. Additionally, we discover that arguably the world’s richest hedge fund manager (for a reason) was prophetically putting on bank counterparty hedges as early late 2006, up to and including Goldman Sachs itself. Most relevantly, in what could be damaging disclosure by Fabrice Tourre, the Frenchman notes that as a result of Paulson’s mistrust of Goldman’s counterparty risk, the Abacus AC1 deal was structured in a novel way in which “they would be acting as protection buyer, facing the ABACUS SPV (as opposed to a structure where Goldman is protection buyer as is usually the case).” This little legalistic variation could make a world of difference in an Attorney General’s hands. It may be time to very carefully read the indenture of AC1 and compare it with those of 2006 and earlier “Abaci.”

An email thread from January 6, 2007, which features all the usual suspects (Tourre, Sparks, Swenson, Lehman, Rosenblum and Ostrem), located on page 755 of 901, has proven to be a cornucopia of information into the Goldman, and Paulson, thought process.

Starting at the bottom:

From: Tourre, Fabrice
To: Sparks, Daniel; Swenson, Michael; Lehman, David A; Rosenblum, David J; Ostrem,Peter L
Cc: ficc-mtqcorr-desk
Sent: Sat Jan 06 19 : 06 :41 2007
Subject: Post on Paulson

David Gerst, Cactus Razzi and I had a meeting with John Paulson and his team last Friday. The meeting was attended by [redacted] and [redacted] at [redacted]. The purpose of the meeting was for the Paulson team to meet [redacted] and understand whether [redacted] could be a good candidate for acting as portfolio selection agent for an ABACUS COO trade where all the risk would be provided by Paulson.

At the end of the meeting, the Paulson team told us that they were happy to have met [redacted] and assuming that (1) [redacted] could get comfortable with a sufficient number of obligations that Paulson is looking to buy protection on in ABACUS format , (2) [redacted] could get comfortable being in the market as early as end of January with a transaction under which [redacted] is disclosed as Portfolio Selection Agent (without any credit risk removal rights), and (3) Paulson, Goldman and [redacted] agrees on [redacted]’s required compensation for a transaction like this, then Paulson will want to proceed with [redacted] as soon as possible and be in the market as soon as possible .

We now know that the redacted firm is GSC, and that before ACA, Paulson would have been perfectly happy to go with GSC as portfolio agent: in fact he didn’t care who the agent was as long as one existed, (and was not Goldman). The man just wanted to put on his big short (not to be confused with his bigger short, discussed shortly), and have somebody willing on the other side. In an email from January 29 (p. 480 of discovery), Fabrice writes:

As you know, a couple of weeks ago we had approached GSC to ask them to act as portfolio selection agent for that Paulson-sponsored trade, and GSC had declined given their negative views on most of the credits that Paulson had selected.

Sure enough, Tourre scrambled and promptly discovered Laura from ACA, who proved that 22 years of industry expertise is never a hindrance to blowing up your firm in record time, and ended up being a willing receptacle for Goldman’s and Paulson’s toxic detritus. We will leave the specifics of whether or not she was flimflammed by Tourre: after all that is at the heart of the civil, and now criminal case against Goldman. Although if Tourre’s court testimony is as full of contradictions as his Senatorial one, we hope the Goldman whiz kid is a better buyer of Bail Bond insurance.

Going back to Tourre’s long ago email. He concludes it with this rather stunning paragraph, which shoul be an eye opener to all who are following the Goldman case:

One issue remains w.r.t. this Paulson-sponsored transaction: it is related to the fact that Paulson is concerned about Goldman’s counterparty risk in this illiquid CDO transaction, even with the existing CSA [ISDA Credit Support Annex] that is binding Goldman and Paulson. For this reason they are asking us to structure a trade under which they would be acting as protection buyer, facing the ABACUS SPV (as opposed to a structure where Goldman is the protection buyer as is usually the case). As an FYI, for single name CDS trades that Paulson is executing with dealers such as Goldman, [redacted] and [redacted] they are buying large amounts of corporate CDS protection (on the broker dealer reference entities) to hedge their counterparty credit risk!!!

Where to begin. Already in 2006 JP was distrustful not only of the crappy banks, but of all banks, top trading partner Goldman included. It is amusing that when faced with a question of how he approaches Goldman from a trading standpoint, Jim Chanos said he “never shorts his business partners.” Ironically, a much more ruthless (and cynics could add richer) Paulson had no such qualms, and was openly insuring against a Goldman default. Yet as we pointed out above, the main observation here is that Goldman essentially changed the legal framework of Abacus when juxtaposed with previous Abacus-type transactions, and by implication all Goldman structured CDO deals: “they are asking us to structure a trade under which they would be
acting as protection buyer, facing the ABACUS SPV (as opposed to a
structure where Goldman is the protection buyer as is usually the case)

Now this is interesting, because either Paulson changed his mind on this critical matter, or the transaction was misrepresented. As can be seen from the schematic for both AC1 (the 2007 Abacus), and the Abacus 11 from mid-2006 (we pulled the chart from the Credit Committee Memo on page 565 of the presentation), the protection buyer in both cases is in fact GSCM. This makes sense for the 2006 deal. It refutes completely how Paulson was envisioning structure of the AC1 deal.

Here is the 2006 Abacus schematic:

And here is the identical boilerplate for the 2007 Abacus deal:

We doubt that Paulson agreed to let the fine print stay on such a critical issue for him. If indeed he was buying up protection as a hedge for all corporate deals, he would certainly with to disintermediate Goldman from the process. Either way, this could be a rather substantial variation in the Reg-S/144A language of the prospectus, which would ostensibly go straight to a 10(b)-5 violation issue. Ultimately, if there was in fact predetermined legalistic commingling and/or misrepresentation of the initial protection buyer, that could make the legal defense case much more problematic.

One tangential question we have in this regard is how has Goldman’s Abacus outside counsel McKee Nelson not gotten an iota of press coverage so far. As the Mortgage Capital Committee memo from March 12, 2007 discloses (p. 505), “The transaction disclosure notes the various capacities in which Goldman entities act as counterparty to the transactions and the risk factors section notes the potential for conflicts of interest. As with prior ABACUS transactions, we receive advice of outside counsel (McKee Nelson) regarding disclosure in ABACUS securities offerings and all such disclosure will be reviewed and approved by Tim Saunders in Legal.

Another tangent: in his email from February 8, 2007, David Rosenblum proves he is unbelievably prophetic. A day earlier, with regards to the Abacus process, Fab Tourre wonders (p. 482):

Gerstie and I are finishing up engagement letters with ACA and Paulson for the large RMBS CDO ABACUS trade that will help Paulson short senior tranches off a reference portfolio of Baa2 subprime RMBS risk selected by ACA. We intend to go out in the market and distribute ABACUS notes off this trade starting on February 23. At the time we distribute, we will cross the tranches into Paulson — therefore no commitment for us to take down any risk. Happy to sit down tomorrow to walk you through the economics. Do you need us to go to Mortgage Capital Committee for this trade? Let us know, thanks.

To which Rosenblum responds:

Still reputational risk, so I suggest yes to MCC.

Good call David.

Anyway, all these are issues for the disclosure lawyers, and scandal media to debate. Even though we are merely the former, and in our free time we allegedly ghost write for MTV miniseries, we will leave this topic to bigger experts in the field.

What we will focus on however, is Michael Swenson’s response to Fab in early January 2007:

I can not believe it!!! Absolutely amazing.

Believe it Swennie. Less than two years later the government will have to come and bail you out, once again vindicating Paulson for being the most prophetic person on Wall Street in the 2005-2008 period.

And it continues. Fab next describes the GSC meeting in detail. And here is where you should pay very close attention.

The meeting itself was surreal. Am hearing that Paulson bought $2bn of [redacted] CDS protection, sucking all the liquidity on that name in the corporate CDS market. Also, on the side [redacted] mentioned to me that he had heard from many different sources that one reason why the ABX market was trading down so much in December was related to [redacted] building a sizable short and buying large amounts of ABX protection from the market.

The first bolded [redacted] is the 64k question as this would set off a chain of events of everyone copycatting Paulson into shorting whatever he was shorting. His Oracular star was ont he rise. And the anwer is provded by Michael Swenson’s response following 4 minutes after the Fab email.

I wonder who gave bear the liquidity

In other words, who sold the protection… on Bear Stearns. Was Paulson massively short Bear as early as 2006? If so, the amount of money he made shorting RMBS may pale in comparison with how much he likely made on the short synthetic side in financials.

As the chart below demonstrates, Bear CDS in late 2006 was trading around 18 bps. Days before it was handed off to JPM for pennies it hit a record 751 bps.

As $2 billion notional has a DV01 of about $800,000, assuming that paulson sold at or near the top he made nearly $600 million by shorting Bear via purchasing its CDS. Surely, as Fab disclosed earlier, he did not stop there, and was long protection each and every bank he was trading with. That financial short trade alone likely netted about $3-4 billion in total.

What is funny, is that an ever ready to piggyback on any good idea Goldman Sachs, decided to do precisely what Paulson was doing. As disclosed on p. 765, by March 27 Goldman was accumulating a massive short in Bear share, to the tune of an $18.6 profit in Jump To Default, i.e., should the firm fail.

By July 27, this number had nearly doubled to $33. Yet observe which firm had the highest JTD value at this date: none other than rating agency Moody’s, in which Goldman had accumulated a whopping short position.

So much for nobody having heard of Paulson as CNBC claims: Goldman’s entire prop trading strategy in late 2006 and early 2007 was determined exclusively by JP’s actions – after all, unlike all other obsequious Goldman clients, Paulson would not bat an eyelid before shorting Goldman. And however Goldman is positioned on prop, so the entire market soon follows. We wonder at what point Goldman decided to start accumulating AIG CDS, and whether that trade was also predicated by following the “Paulson” example. To be sure, there are 1,999,099 discovery pages still held by the Senate and the SEC. We urge them to release these pages immediately so that every action of Goldman Sachs can be deconstructed by the objective public.

And in parting, we wanted to leave you with this eail from Peter Kraus to Lloyd Blankein, in which Krais implicitly acknowledges that the firm is a monopolist, and that clients really have no choice than to stay with his firm (p.655):

From: Kraus, Peter
Sent: Wednesday, September 26,2007 10:15 PM
To: Blankfein, Lloyd
Subject: Re: Fortune: How Goldman Sachs defies gravity

I met with 10+ individual prospects and clients (and 5 institutional
clients) since earnings were announced. The institutions don’t and I
wouldn’t expect them to, make any comments like ur good at making money
for urself but not us. The individuals do sometimes, but while it
requires the utmost humility from us in response I feel very strongly
it binds clients even closer to the firm, because the alternative of
take ur money to a firm who is an under performer and not the best,
just isn’t reasonable.
Client’s ultimately believe association with the
best is good for them in the long run.

Thank you Peter, we completely agree: it is very “unreasonable” for anybody to think about leaving the monopolist. After all (and by implication) – just where the hell could will they go?

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