The Daily Reckoning

China says it is continuing to buy US bonds “every day.” It doesn’t have much choice. It earns money by selling things abroad. In fact, exports in February were up more than 40% over February ‘09. This leaves it with a lot of foreign money – most of it in dollars. What can it do with so much money?

China has quietly bought stakes in America’s leading companies…and in various businesses all over the world. But the only way large amounts of US dollar cash can be readily and safely deployed is in US bonds.

That said, China could also cause one helluva problem for the US if it ever chose to do anything else.

No worries on that score, said the Chinese official in charge of its $2.4 trillion worth of foreign reserves. He says China’s holdings of US debt are normal and that there is no intention of reducing them or playing politics with them.

He surely means it. And when the dollar goes down…and when the market turns, and China feels compelled to get rid of its US bonds, he’ll be totally sincere when he explains that to the international financial press too.

Markets make opinions, as they say on Wall Street. The market in bonds and the dollar has been very good for a very long time – since 1983, to be exact. As a result nearly everyone – including the Chinese – are of the opinion that US bonds are a safe place to be. When the market changes, so will opinions.

So far, no problem. But there’s no telling how long the foreigners will continue to support the dollar. Then what? Well…it leaves quantitative easing…in which the US central bank lends the money itself. Where does it get the money? It just invents it.

Which is why you can’t trust paper money. You have a dollar. You have it. You hold it. And you expect to keep it ’til death do you part. But then, along comes another dollar that looks just like it…fresh…young…full of vim and vigor. So why not? Everybody does it.

Pretty soon, there are a lot more dollars running around. And they change hands fast. In economists’ lingo, the velocity of money goes up…and the value of the dollar – like a faithless lover – goes down.

Bill Bonner
for The Daily Reckoning Australia

Similar Posts:

• The Chinese and the Fed Both Buying U.S. Treasury Bonds
• China Reduces Holdings of Treasury Securities
• Fannie and Freddie in a Free Market Economy
• China is a Key Driving Force in the Gold Market
• China Stepping Up Purchases of U.S. Treasury Debt

More articles from The Daily Reckoning….

Zero Hedge

It’s Déjà Voodoo Economics… All Over Again

By: Eric Sprott & David Franklin

If you’re of a certain age, chances are you remember exactly where you
were when JFK was  assassinated. Similarly, if you’re from Canada or
the United States and have an even remote interest  in hockey, it’s
highly likely that you remember exactly where you were when ‘Sid the
Kid’ scored the  winning overtime goal in the Olympic gold medal game.
These were both “significant events”, albeit  for different reasons. We
wonder, however, if any of you recall where you were on September
18th,  2008? Do you remember that day? We can’t seem to recall it
either, which is strange, because it was  one of the most important
days of the decade. October 7, 2008 is another day that should stick
out  in our memories, but we’re sure you don’t remember that day either
– and we’re in the same boat.  How is it, then, that we can’t recall
where we were or what we were doing on the two days the entire 
financial system almost collapsed?!? It boggles our mind. These dates
should have been emphasized  in every “review of the decade” written at
the end of 2009, but we’ve been hard pressed to find them  mentioned in
any mainstream publication. This is troubling to us, and makes us
wonder if people are  even aware of the incredible events that took
place on those fateful days only eighteen months ago.

The financial industry often prides itself on the hindsight principle.
We may not predict the future  with great accuracy, but when things
fall apart we’re very quick to explain why and how it happened  with
authoritative aplomb. “Hindsight is 20/20″, as they say. But is it
really? Despite our seemingly  thorough analysis of past failures, the
financial industry seems to have an uncanny ability to make  the same
mistakes over and over again. Perhaps this is due to the fact that we
don’t properly review  events passed. Our obsession with predicting
future results impels them away into oblivion. The fact  remains that a
cursory look back on the last decade reveals an apparent cycle of asset
bubbles that  all grew and burst before our eyes, with little effort
made to actually address the underlying causes  that made them
possible. We have written at length about the next asset bubble now
forming in  government debt and currency. Looking back on the last
decade from 2000 to 2009, are there any  lessons that can provide some
guidance for the next decade? And are there any lessons that can  be
gleaned from September 18th and October 7th, 2008, when we almost lost
the entire financial  system? We certainly hope there are.

The seeds of the financial mess we are currently experiencing began in
the mid-to-late nineties.  As we approached year 2000, the widespread
belief developed that new technology would rewrite  economic rules. The
euphoric years between 1995 and 2000 blew the first asset bubble of the
21st  century in the technology-heavy NASDAQ Index. Alan Greenspan
first uttered his now famous  “irrational exuberance” warning in
December 1996 when describing stock valuations at the time.¹
It  wasn’t until mid-1999, however, that the U.S. Federal Reserve
actually increased interest rates in an  attempt to quell the
overheated stock market. The Fed actually raised rates six times
between June  1999 and January 2000 in an attempt to cool an already
overheated economy. The dot-com euphoria  burst on March 10, 2000, when
the NASDAQ peaked at 5,132, representing more than double its  value
from only a year before. We were watching the bubble closely at the
time, and wrote on March  9th 2000, “In the next few months, if not
weeks, we anticipate that the Nasdaq will capitulate to market 
liquidity. Valuations are screaming at us! Excessive speculation is
running rampant! DON’T BE A  PART OF IT!!!” It was a timely
recommendation.

In many ways, the NASDAQ bubble was somewhat conventional in that it
was born out of over- enthusiasm for the prospects of new technology.
The fact that the Federal Reserve actually tried to  cool the bubble
down, however feebly, in the years before its peak, is really what
differentiates it from  the bubbles that followed. The NASDAQ collapse
is well understood now, ‘in hindsight’. This collapse  compelled Alan
Greenspan and the Federal Reserve to embark on the largest rate cuts in
US history  in an effort to soften its impact. The inability to face
the economic pain of the market crash ultimately  set the stage for the
second bubble of the decade, this time in housing. The key point to
emphasize  here is that the Federal Reserve lowered interest rates thirteen
times between January 3, 2001 and  June 25, 2003 in order to cushion
the economy. These rate cuts allowed for increasingly easy access  to
credit on a worldwide scale. It didn’t take long for the second bubble
to develop, and it wasn’t hard  to see the warning signs. Even The
Economist magazine noticed, stating on June 16, 2005, that “the 
worldwide rise in house prices is the biggest bubble in history.”²
Home prices rose at an annualized  rate of more than 11% from 2000 to
the peak on July 31, 2006 -more than doubling in that time  period.³
The financial sector became the US economy’s central economic driver,
generating up to  41% of all corporate profits and making it the
fastest growing sector of the economy.⁴ In July 2005, 
Greenspan described certain real estate markets as “frothy” and
recommended that the Federal  Reserve rein in lending standards.⁵
We wrote in response at the time that “(Alan Greenspan) should  be
careful what he wishes for… it may come true. It’s like throwing stones
in glass houses. It may  all end with the Federal Reserve having to
bail out the financial system, as it did with the savings  and loan
crisis a decade ago.” We now know what transpired in the years to
follow – we’ve all lived  through it, and it ended with the biggest
bailout in financial history.

So what’s the point, you ask? In hindsight, it’s very safe to argue that the Fed probably shouldn’t 
have lowered rates thirteen times between January 3, 2001 and June 25,
2003. It proved to be an  extremely damaging policy. Artificially low
rates created a lending mania of enormous proportions  which dragged
consumers along for a debt-fueled buying orgy. In our January 2008
commentary,  aptly entitled “Welcome to the 2008 Meltdown”, we opined
that “There are meltdowns occurring  everywhere: commercial real
estate… car loans…credit cards. It was all a massive Ponzi scheme 
sustained by overleverage. Because this has been one of the most
egregious bubbles ever, its impact  is likely to linger longer than
anyone expects. This is more than just a market failure. It’s a
systemic  meltdown.” And it was. But the meltdown happened so fast that
it never seemed to burn into our  collective memory. Everyone remembers
that we went into a severe recession in late 2008, but do  they know
the details of what actually transpired? A quick review is needed to
appreciate how close  we really came to a full shutdown.

It was the Lehman Brothers bankruptcy on Sept. 15th that set everything
in motion. Most market  participants will remember that date – Bank of
America bought Merrill Lynch the very same day, so  it was certainly
memorable. What many people fail to appreciate, however, is the mayhem
that took  place during the following days in the US money markets. The
day after Lehman’s collapse, the  Reserve Fund, one of the oldest and
most high profile US money market funds, began to hemorrhage  money as
investors redeemed in panic. Large institutional investors soon began
pulling money out  of other major US money market funds fearing heavy
losses from Lehman Brothers debt. Almost  $173 billion was pulled from
such funds over the next two days, threatening to collapse the entire 
US financial system.⁶
Two weeks later, on Sept. 29th, investors sent the Dow Jones plummeting
778  points, representing the largest single-day loss in the history of
the index. In hindsight, it was somewhat  of a delayed response,
because the real damage had by then been averted by the Treasury’s
blanket  guarantees on all money market funds.

The fact remains that on Thursday, September 18th, the US financial
system almost completely  collapsed. The details of that day remain
frustratingly murky. The imminence of complete disorder  seemed to
scare Congress into action, but we can only piece the story together
through random  anecdotes that have been partially revealed through
subsequent interviews. In what has been dubbed  ‘the Kanjorski meme’,
Congressman Paul Kanjorski recounts a meeting that was held between
Ben  Bernanke, Henry Paulson and certain members of Congress where the
conception of the “Troubled  Asset Relief Program” (TARP) supposedly
took place. To stem the flow of money out of US-based  money market
funds, Paulson had to provide an almost instant guarantee on all money
market funds  held within the US. Kanjorski recounts, “If they had not
done that, their estimation was that by 2pm that  afternoon (September
18th), $5.5 trillion would have been drawn out of the money market
system of  the United States, [which] would have collapsed the entire
economy of the United States, and within  24 hours the world economy
would have collapsed. We talked at that time about what would happen 
if that happened. It would have been the end of our economic system and
our political system as  we know it.”⁷
Further details of these meetings have been provided by Senator James
Inhofe, who  recounted that Paulson had warned of martial law and civil
unrest if the TARP bill failed.⁸ It is interesting  to note
that while Henry Paulson mentions several meetings that took place on
September 19th in his  book, the discussion of ‘imminent financial
collapse’ and ‘martial law’ was noticeably absent.

The official record of the events of September 18th, 2008 comes from a
research report issued by  the Joint Economic Committee. The reports
states, “On Thursday September 18, 2008, institutional  money managers
sought to redeem another $500 billion, but Secretary Paulson intervened
directly  with these managers to dissuade them from demanding
redemptions. Nevertheless, investors still  redeemed another $105
billion. If the federal government were not to act decisively to check
this  incipient panic, the results for the entire U.S. economy would be
disastrous.”⁹
Between the official  record and the statements by members of congress
and the senate, we can piece together an almost  system-wide collapse
that was potentially hours away.

The second fateful date to remember was October 7, 2008, when the UK
almost collapsed. Bank  of England Governor, Mervyn King, describes the
situation: “Two of our major banks which had had  difficulty in
obtaining funding could raise money only for one week then only for one
day, and then on  that Monday and Tuesday it was not possible even for
those two banks really to be confident they could  get to the end of
the day.”¹⁰
This was the justification given for the Bank of England to provide
secret loans of £61.6 billion to The Royal Bank of Scotland and HBOS to
maintain solvency.¹¹ Amazingly,  news of these loans was
never revealed until November 24, 2009, more than one year later.
Recalling  that fateful day, David Soanes, Managing Director of UBS
Bank, and part of the group assembled  to assist with the UK
government’s crisis response, stated, “We only really knew by probably
about  seven o’clock at night (October 7, 2008), that we, that everyone
was going to get through to the next  day.”¹² These
revelations raise new questions about the true scope of bailouts
undertaken by the  major governments at the time. Lord Myners, the UK
Financial Services Secretary, alluded to similar  covert banking
operations conducted by the European Central Bank and the US Federal
Reserve.13  We have no idea what he is referring to, but we would
certainly be interested to learn more.

This type of activity by the leaders of our financial system certainly
helps to explain why those two dates  are not more ingrained in our
collective memory – strong efforts were obviously made to hide their 
severity. The fact that these details were left out of Henry Paulson’s
memoirs strikes us as astounding.  It also seems incredible that the
best we can do to understand those fateful days is to cobble together 
comments made after the fact. It serves to be reminded that the events
of September and October  2008 had previously been considered
unthinkable, and we must never forget that the ‘unthinkable’ can 
happen again. A complete banking collapse would not be pleasant – and
it’s certainly not an experience  we would ever wish upon ourselves,
but it must be remembered that WE ALMOST WENT THERE.

So where does this leave us for the decade ahead? In bad fiscal shape.
It seems as if we’re just  making the same mistakes over again, and on
a far larger scale. We have passed the debt obligations  of the
financial system onto the governments. We have liquefied the system
beyond any rational  explanation, more than doubling the monetary base
since the collapse of Lehman Brothers. Social  Security, which was in
balance in year 2000, is now underfunded by $15 trillion dollars. Total
unfunded  obligations of the US Government are now $104 trillion. If we
add the $6 trillion of outstanding Fannie  Mae and Freddie Mac debt and
the $12 trillion of outstanding national debt, we arrive at a total US 
government debt obligation of $122 trillion. It’s a truly preposterous
amount of money that will never  be paid off in today’s dollars. As we
wrote in our October 2009 article entitled “Dead Government  Walking”,
the US Government is on a trajectory to default on their obligations,
and the same can  realistically be said for the UK and Japan. The
answer put forward by the US, UK and Japanese  governments? Quantitative Easing and 0% interest rates. Have they learned nothing from the past  decade?!

As our readers know, the flagship funds at Sprott have been managed
with the view that we entered a  long-term secular bear market in year
2000. We have never detracted from this view, and it remains in  place
today. We will not be bears forever, because the cycle will eventually
reverse, but a new secular  bull market will not, and cannot, emerge
until the world solves its debt problems. Our overarching  macro view
is strongly influenced by the Kondratieff Cycles. The ‘winter season’
began in the year  2000 and continues to this day. We have watched this
cycle unfold, and have noted the Kondratieff  Theory’s eery ability to
predict the debt defaults and banking collapses that we witnessed over
the  past two years. Our analysis suggests that we are only half way
through this Kondratieff winter, with  another approximate ten years
remaining. They will undoubtedly be an interesting ten years, and it 
should come as no surprise to our readers that gold is considered the
ultimate asset class to own  during the ‘winter cycle’. It has
certainly served us well up to now.

A review of the last decade would not be complete without our
predictions for the next ten years.  Rather than bore you with
prognostications, we would like to leave you with some titles we are 
considering for future editions of Markets at a Glance:

1. The Federal Reserve Board. Remarks by
Chairman Alan Greenspan (December 5, 1996). The Challenge of Central
Banking in a Democratic Society. Retrieved on March 10, 2009 from:
http://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm
2. The Economist. (July 16, 2005) In Come the Waves. Retrieved from:
http://www.economist.com/opinion/displaystory.cfm?story_id=4079027.
3. Bloomberg, S&P/Case –Shiller Composite – 20 Home Price Index Not Seasonally Adjusted
4. Johnson, Simon (May 2009) The Quiet Coup. The Atlantic. Retrieved on
March 10, 2010 from:

http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/

5. Andrews, Edmund (May 21, 2005) Greenspan is Concerned About
‘Froth’ in Housing. The New York Times. Retrieved on March 10, 2010
from:

http://www.nytimes.com/2005/05/21/business/21fed.html?_r=2&oref=slogin

6. Henriques, Diana (September 19, 2008) Treasury to Guarantee
Money Market Funds. The New York Times. Retrieved on March 10, 2010
from: http://www.nytimes.com/2008/09/20/business/20moneys.html?em
7. Kanjorski, Paul (January 28, 2009) Kanjorski: We came so close to
complete financial collapse. Pocono Record. Retrieved on March 10, 2010
from:

http://www.poconorecord.com/apps/pbcs.dll/article?AID=/20090128/NEWS04/901280302

8. CNN iReport (November 20, 2008). Paulson Was Behind Bailout
Martial Law Threat. Retrieved on March 10, 2010 from:
http://www.ireport.com/docs/DOC-150837
9. United States Congress, Joint Economic Committee Research Report
#110-25 (September 2008) Financial Meltdown and Policy Response.
Retrieved on March 10,
2010 from: http://www.house.gov/jec/Research%20Reports/2008/rr110-25.pdf
10. BBC (September 24, 2009) Mervyn King and other key players reveal
true extent of financial crisis one year on . Retrieved on March 10,
2010 from:

http://www.bbc.co.uk/pressoffice/pressreleases/stories/2009/09_september/24/money.shtml

11. Conway, Edmund and Monaghan, Angela (November 24, 2009) Bank of
England tells of secret £62bn loan to save RBS and HBOS. Telegraph.
Retrieved on March 10, 2010 from:

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6646923/Bank-of-England-tells-of-secret62bn-loan-to-save-RBS-and-HBOS.html

12. BBC (September 24, 2009) Mervyn King and other key players
reveal true extent of financial crisis one year on. Retrieved on March
10, 2010 from:

http://www.bbc.co.uk/pressoffice/pressreleases/stories/2009/09_september/24/money.shtml

13. BBC (November 25, 2009) Alistair Darling defends secret loans
to RBS and HBOS. Retrieved on March 10, 2010 from:
http://news.bbc.co.uk/2/hi/business/8378087.stm

More articles from Zero Hedge….

Zero Hedge

Treasuries –>  As expected, the household sector is increasing its exposure to treasuries which make up less than 5% of the household balance sheet.
 All that “dry powder” that everyone is talking about, is not making
its way back to equities folks.  Households have endured to massive
bubbles in a span of roughly 10 yrs and cannot be messing around with
their retirement.  

 

US Dollar –> The
DXY has been strengthening (particularly against the Euro and the
Pound).  Continued sovereign debt problems will only ensure that this
trend continues, no matter how much it doesn’t make sense considering
our high debt levels.  But it is still considered the currency of
choice in times of risk aversion, that is for sure.  

 

Equities
(Technicals/Financials/Transports) –> Stocks continue to rise lead
by the most unusual leader, the financials.  the streaks are amazing
and makes it perhaps the most impressive part of this whole rally.

 

The Consumer:  Consumer Credit increased, as did retail sales.  Is the Consumer coming back?

Bearish News

China bad noises are starting to be more frequent.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aadD4Awj4OA8  

 

Leading indicators are either weakening or pointing down (ECRI, Conference Board)

http://blogs.barrons.com/stockstowatchtoday/2010/03/12/ecri-weekly-leading-indicators-weak/

 

High debt levels continue and the deleveraging process is not complete as per the Fund of Flows report.  

Jobless claims remain frustratingly elevated.  By this metric, we are still seeing job losses.

 

While
Transports are making new highs, we are seeing cautious commentary on
the recovery by FedEx.  I think that’s pretty important.

http://www.ft.com/cms/s/0/2b9f10da-2d78-11df-a262-00144feabdc0.html

 

General Thoughts

Green Shoots for the Republican Party? (h/t Mich’s Global Economic Trend Analysis)

 

It’s official,
Angela Merkel’s political life is now on the line.  The idea of savers
and financially prudent citizens of Germany bailing out a profligate
sovereign entity (NO the EU is not a political union) seems ludicrous
even to an outsider.  The German electorate must be furious.  Moral
hazard continues and investors feel almost assured that this will be
the solution for every other country that’s next inline (UK, Spain,
Portugal, Austria, Eastern Europe), until it isn’t.   

Tying in
with the Bearish news above, the news coming out of China is very
concerning in my view.   Inflation seems to be heating up and may force
officials to raise rates. If they choose not to, inflation will
accelarate, affecting food and energy prices which are important to the
rural population.  However, raising them will bring about additional
headwinds for the export sector as well as increase the possibility of
popping a potential bubble (shades of US.  Which will officials choose?

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHRvk50Oc8Xk 

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5jLvbZ3a_8M&pos=4

 

Technical Observations (All charts courtesy of Freestockcharts.com — Fantastic site)

Internals
of the rally are mixed, but with a bullish tilt.  The transports and
the financials (BKX only, not XLF) broke through their highs as did
numerous other indicies like the NASDAQ and the Russell 3000.  We would
only need the dow to break through to confirm that the rally is alive
and well under the Dow Theory (is that a bearish pennant I see?).
 However, the recent rally has been marked by low volume and high
complacency and signals red flags.  

(Dow; Daily)

(Transports; Daily)

 

On
the global recovery front, AUD/USD, a measure of risk taking (and
strength in China) in my view, is at the top end of its trading range
which it hasn’t been able to break out of.  EWA is looking toppish. 

(AUD/USD Daily)

(EWA Daily)

Credit not confirming recent highs.  
(Investment Grade LQD Daily)

(High Yield HYG Daily)

 

Although
it’s not very clear from the chart.  It does serve to signify that
performance in gold has been closely correlated with TIPS, expectations
of inflation.  Is deflation starting to win out now that the stimulus
is being withdrawn?  

Have a great weekend

Disclosure: Short Emerging Markets

More articles from Zero Hedge….

Much press has been dedicated these past few days to Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC) and ex-Goldman Sachs partner. A New York Times article regales us over his apparent transformation from a hard-line acolyte of then Treasury Secretary and former Goldman Chairman Robert Rubin, long an advocate for a ‘hands off government’ over derivatives trading that was to grow to a $300 trillion (I repeat, trillion) runaway market and become an unsupervised, unregulated financial WMD.

That, supposedly, was then and this is Gensler now: “Wall Streets interest is not always the same as the public’s interest.” Or, “Wall Street thrives and makes money in inefficient markets, and I am creating efficiencies in the market.” Really?

Back in May 2009 Gensler took over the CFTC, an agency that in July 2008 organized an “Interagency Task Force on Commodity Markets” report and, with oil prices scaling $147/bbl, concluded that it “does not support the proposition that speculative activity has systematically driven changes in oil prices.” A conclusion I leave to the reader to determine whose interests were being taken into account.

Apost concurrent to Gensler’s confirmation raised the issue that oil prices had increased dramatically from February 2009 lows of $32.70/bbl to $60/bbl in May 2009, causing the likes of the Financial Times to comment that the fundamentals are “weaker, much weaker than current prices imply.” The implications of speculation and/or manipulation were clear, and Gensler at the CFTC would now be in the hot seat.

What has happened since? The price of oil has extended its rise from $60/bbl to over $80/bbl, and that with imports of oil down significantly, given that oil storage terminals are full, and having a surprisingly positive impact on our foreign trade balance. Yet irrespective of more than ample supply in the upside down world of oil prices: the more oil there is on the market, the more we pay per barrel.

But then Gensler’s CFTC gave us a bright shining moment of an oil industry influenced government’s reversal in form and candor on issues oil. On July 27, 2009 the Wall Street Journal blazoned their headline, “Traders Blamed For Oil Spike,” advising that the CFTC was to issue a report ‘next’ month “suggesting that speculators played a significant role in driving wild price swings in oil prices — a reversal of an earlier CFTC position.” As well that month, the CFTC had announced that it was considering volume limits on energy futures by financial/proprietary traders and tougher information requirements. Almost immediately the good folks on Wall Street energized their K Street lobbying clan to stop the CFTC and their old work mate Gensler in their tracks. We are still waiting for that report!

The outrageous dysfunction of the commodity markets and the tepid CFTC oversight continued blithely along. Late in the week of November 9th, 2009 the Energy Information Service announced that oil stocks had surged by 1.762 million barrels, much more than expected, and that the U.S. refineries processing rate sank to 79.7%, the lowest in more than two decades. Against all reason, instead of collapsing prices, the price of oil jumped by $2.50 on the very day of the announcement, eliciting a post, “The CFTC and Department of Energy Snore Away While the Oil Patch Makes Hay” 11.18.09.

And so it continues. While Mr. Gensler and his CFTC Vaudeville act continue to fiddle away, the distortion in oil prices is burning a billion dollar hole a day in American consumers pockets (please see “The Billion Dollar Day Extortion: A Somnolent Administration and Dysfunctional Congress’ Gift to the American People” 02.22.10).

As for Mr. Gensler, he is now, after all these months calling for some form of federally mandated limits on speculative trading on oil, gas and other energy futures. But don’t hold your breath. It will all be subject to a 90 day comment period. When all is said and done it will be a year or more since Mr. Gensler’s ascension that anything will have been accomplished, if at all, to rein in the distortions being promulgated on the commodity exchanges. In the meantime, billions are being transferred to oil interests from the pockets of American consumers and putting at risk the feeble economic recovery now underway!

An apocryphal comment in the NYTimes article refers to Gensler’s time at the Treasury when asked to investigate derivatives held by South Korean Banks and being “amazed at how little information the banks could provide”

“Knowing what we know now, we should have banged the table more forcefully” he now says.

Well Mr. Gensler, as oil trading has become the litmus test of all commodity exchange based pricing, we are waiting to hear the loud bangs, especially when it comes to oil!

Read more….

Michael Lewis, author of one of the defining books about Wall Street excess, “Liar’s Poker,” told 60 Minutes that bonuses at banks bailed out by the government are akin to “a very elegant form of theft.”

[The big banks] have access to a zero percent loan in virtually unlimited quantities from the Federal Reserve. You can take that money and reinvest it in Treasury bonds or government agency securities and you will get the spread and you could do it over and over. You’re essentially borrowing from the government … and taking a cut.

Really what’s going on is the people on the top of the firm want to make a lot of money and if they’re going to make a lot of money, they have got to pay the people under them a lot of money,

WATCH:

Read more….

Zero Hedge

• Built on a lie – the fundamental flaw of Europe’s common currency (Der Spiegel)
• It has been a while since we had a Greece rumor: EMU States near €20-25 billion Greece aid accord (Market News. Banking News)
• Germanry and France have decided that Greece needs €55 billion until the end of the year to prevent insolvency (Euro Intelligence, h/t Paul)
• No snow in February – Retail sales in US rose in February (Bloomberg), so did credit card chargeoffs
• IPO window still weak despite melt up: AVEO raises 23% less than sought in first biotech IPO of 2010  (Bloomberg)
• Not so lonesome doves: Janet Yellen to be next Fed vice chair (Reuters)
• Goldman’s biggest hedgie departs (Barron’s)
• Another market top signal: KKR to move stock listing to NY from Amsterdam (Bloomberg)
• “Invisible Power” of London money exposed as mayor fights back (Bloomberg)
• Is America’s foreign-owned debt a threat to the national economy (Forbes)
• A new chapter in bankruptcy (NYT)
• Why Wall Street hates Elizabeth Warren (Newsweek)

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

The Lehman Report on which I wrote last night regarding deeply troubling issues surrounding the Lehman Bankruptcy, has laid bare some very ugly facts relating to our financial system, corporate governance, and our government’s active complicity not only in the Lehman collapse, but in ongoing balance sheet shenanigans and the current investment picture.

The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.

They compel me to advise that, in my opinion, the market is now trading both technically and on a fundamental basis, exactly as the Nasdaq was in 1999.

I recognize this is a serious charge and has implications that are most unpleasant, in that it implies a probable detonation ahead at some time in the next year – one that will not only destroy all of the gains made since March of last year but go beyond that – indeed, perhaps as far as the banner on The Market Ticker has for the major indices.

The technicals of the last month leave no doubt what’s going on – the market is moving in a parabolic upward fashion, exactly as was the case for the Nasdaq in ‘99, and indeed, we are approaching the sort of gains in the broad market that Nasdaq saw in 1999.

For those who need a refresher, here it is:

Now let’s look at the S&P 500 since the March lows:

And if you need a refresher on what happened to the Nasdaq after it topped in early 2000, here’s that unfortunate reality:

Not only did the entire ramp in 1999 disappear, more than another 50% was lost beyond that.

The seriousness of this cannot be overstated.  Anyone who bought into the start of the decline in 2000 was wiped out by doubling into a decline that took a literal 85% off the NDX from the peak.  Worse, today, nearly a decade later, we remain more than 50% below the peak valuation that the NDX reached.

The Nasdaq is not alone in this behavior.  The Nikkei 225 reached 38.957 in 1989.  Today it trades around 10,000 – a nearly 75% loss from it’s all-time highs, and despite 20 years it has not healed.

An analytical look at history says that when markets rise on fraudulent accounting and false claims - that is, the booking of asset values that is fictional, the claim of profits that were never really made, the hiding of losses off-balance sheet – the losses, when they come, are not recovered for a generation or more.

When this happens to individual companies, they go bankrupt.

When it happens on a broad basis in a market index, the result is utter destruction.

Such happened in the 1930s as well.  The DOW’s high of 1929 was not recovered until more than 20 years later, and due to FDR’s devaluation of the currency it was another decade before, on a purchasing-power basis, your original values were seen again.

So the seminal question for this alleged recovery has been whether or not the recovery is real – that is, whether the asset class at the core of the original problem, the banking system, now has clean balance sheets and it can be reasonably assumed that what is reported in terms of assets, liabilities and earnings is in fact real.

If you cannot be reasonably certain of this then you simply cannot, as an investor, be in this market.  The reason for this is clear on its face – we will, at some point in the not-distant future, have a point where the insolvency of these institutions rises to public consciousness.

When (not if) that happens the market will collapse. 

This is not conjecture.

It has occurred in each case through history where markets have been pumped through fraudulent balance sheets and similar game-playing, and when it happens the typical losses are in the 75-80% range.  Those losses are maintained even a decade or more later.

Now let’s examine the evidence on whether the core of the reason for the collapse – bogus accounting that led to the failure of Bear Stearns and Lehman Brothers – is in fact resolved and no longer present.

Tim Geithner and the Obama Administration understand this risk.  That much was made clear last year when they ran their so-called “Stress Tests.”  The market understood this too, in that the promulgation of those “results” was a large part of the underpinning for the rally in the markets that has followed.

Is that reliance reasonable?

The evidence says it is not.

As was made clear in the article I wrote last night, Lehman failed multiple stress tests internally, and yet they were repeated with ever-looser standards until an internally-conducted test passed – at which point Tim Geithner’s NY Fed proclaimed them healthy:

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

Unfortunately the precise same practice took place with all of the other major institutions when Geithner ran the famous “stress tests” that were hung out in front of investors to “bring them confidence.” 

It was physically impossible for The Federal Reserve to actually perform the testing on its own – so instead, they provided metrics to the firms and asked them to run them.

This is the precise same process that was used to produce a “passing” grade by Lehman after the Bear Stearns failure and that process was administered by the same person who was responsible for the false Lehman outcome.

Now add to this that Diane Olick of CNBC has confirmed what I’ve been saying since the crisis began: If the banks really accounted for all the losses in the home loan market, they’d all be insolvent.

Wait a second.  If the “stress tests” were valid, then the capital raises that were done were sufficient and none of the banks are insolvent. 

Indeed, Diane Olick called this exactly as I have:

That’s why the Obama Administration has created this kind of shell game in the first place.

Shell game?

Further, the fact that these loans have no economic value isn’t just mine.  It’s also Barney Frank’s, who is the lead guy in Congress on the House Financial Services Committee.  He said:

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: “Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans.”

Accounting rules that Congress caused FASB to modify by literally pointing a gun at them.

I’m sorry folks, but the weight of the evidence is overwhelming on this point.

Whatever gains you think you’re chasing in the stock market at this point in time, you’re doing so against a risk of an 85% loss.  The idea that Government can prevent this sort of collapse if it initiates is fanciful – remember that in the summer of 2008 the common belief was that we’d never see a crash right in front of an election, as “they” would not allow it to happen.  If you bought into that belief, you lost half your money.

The risk here is even more severe.  If, in point of fact, those “Stress Tests” provided false confidence (and I believe the evidence is strong that they have) then it is simply a matter of when the market comes to realize that these losses in the large banks are still present but being hidden.

If we apply the FDIC’s own metrics to the expected losses from such a revelation that would “immediately appear” we get a number between $2 and $3.5 trillion that would have to be paid to depositors of the failed institutions - equal to somewhere around one full year’s Federal Budget and dramatically exceeding what the FDIC and Treasury could cover – by more than 10 times.

The consequence of such an event would be literally catastrophic. Having squandered over $3 trillion in the last two years in new borrowing by The Federal Government to prop up the economy (instead of clearing this bad debt through resolving the bankrupt financial institutions) it is highly unlikely that The Government would be able to, on short notice, raise another $3 trillion.

I’m out of all long positional trades as of this morning and will not be back in them until this issue is resolved.  Even if there is a potential 10 or 20% advance that I will miss by doing so, the downside risk of 85% is so extreme and the facts that we now have available strongly suggest that not only are all the large banks insolvent but that the government has been and is complicit in covering it up – not just temporarily, but as an ongoing practice, just as occurred with Lehman.

I’m sure many will call me crazy for this analysis. 

We will see if you still think so in a year or two.

More articles from the Market Ticker….

The MSM keeps spreading the message that in spite of the fact that billions have been provided to banks, they are not making loans. Here's one of the reasons why: [Hat tip Economic Populist!]

Read more….

Key pieces of this puzzle are presently coming thick and fast from US government sources, the MSM and various parts of the blogosphere.  The fuzzy outlines of a picture are even beginning to emerge, but these appear at first glance to be much weirder than anything our conspiracy-soaked imaginations had previously envisioned, so it may take a while to get used to it.

Just in the last couple of days it's become possible to think about the Second District as a self-governing sovereign entity.  The approximate model would be a high Renaissance  Italian mercantile city state like Florence.  Indeed it's even possible that if, as Susan Bies proposed around 2005, the US Congress were to put the Fed Board in charge of the great Wall Street banks, it would profoundly alter the state of the financial (and real) world.

NY Fed Implicated in the Accounting Fraud at Lehman

by Jesse

Quite a bombshell from Yves Smith of Naked Capitalism tonight. [this was posted late Thursday evening - JM]

I wonder if the US mainstream media will ignore and dismiss it as they did the exclusion of the Wall Street banks from European debt sales in response to their fraudulent CDO sales. Is there a 'reverse gear' on the Voice of America?

In response, let's see if Chris Dodd puts the Consumer Protection section of the financial reform legislation under the control of a private organization,the Fed, which is owned by the institutions it is supposed to be regulating, and which is now implicated in the failure and fraud that helped to trigger the recent financial crisis.

The senior Republicans on the committee have insisted that it be. Originally Senator Dodd seemed to be going along with that in the spirit of bipartisan support for the monied interests and the financial lobbyists. That would be the perfect Orwellian twist to an increasingly surreal decline in the observance of the Constitution and the rule of law.

And then of course there is Turbo Tim, knee deep again in messy conflicts of interest and crony capitalism. The "CEO defense" claiming attention deficit disorder and blissful aloofness is in fashion among highly paid US executives. Considering Mr. Geithner's record, even in the execution of his own tax returns, the incompetence defense might be plausible. But it then calls into question the judgement of the person who subsequently appointed Tim to be the head of the most powerful financial organization on earth, the US Treasury.

Call the New Yorker. Time for another media PR blitz, but this one is for the Chief.

Naked Capitalism
NY Fed Under Geithner Implicated in Lehman Accounting Fraud

Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were such that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.

Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counter parties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately…

Read the rest of the story here.

Posted by Jesse at 11:05 PM

Category: accounting fraud, blame for financial crisis, financial corruption, financial reform, New York Federal Reserve

Read more….

Zero Hedge

Presenting a detailed look at “Repo 105″ – the next soundbite sure to fill the airwaves over the next weeks and months, as more and more banks are uncovered to be using this borderline criminal accounting gimmick to make their leverage ratios look better. This is the first time we have heard this loophole abuse by a bank, be it defunct (Lehman) or existing (everyone else). There should be an immediate investigation into how many other banks are currently taking advantage of this artificial scheme to manipulate and misrepresent their cap ratio, and just why the New York Fed can claim it had no idea of this very critical component of the Shadow Economy.

From the report:

Lehman employed off-balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008. Repo 105 transactions were nearly identical to standard repurchase and resale (“repo”) transactions that Lehman (and other investment banks) used to secure short-term financing, with a critical difference: Lehman accounted for Repo 105 transactions as “sales” as opposed to financing transactions based upon the overcollateralization or higher than normal haircut in a Repo 105 transaction. By recharacterizing the Repo 105 transaction as a “sale,” Lehman removed the inventory from its balance sheet.

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet. Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt. Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios. Thus, Lehman’s Repo 105 practice consisted of a two-step process: (1) undertaking Repo 105 transactions followed by (2) the use of Repo 105 cash borrowings to pay down liabilities, thereby reducing leverage. A few days after the new quarter began, Lehman would borrow the necessary funds to repay the cash borrowing plus interest, repurchase the securities, and restore the assets to its balance sheet.

Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these  transactions had on the firm’s publicly reported net leverage ratio. According to former Global Financial Controller Martin Kelly, a careful review of Lehman’s Forms 10?K and 10?Q would not reveal Lehman’s use of Repo 105 transactions. Lehman failed to disclose its Repo 105 practice even though Kelly believed “that the only purpose or motive for the transactions was reduction in balance sheet;” felt that “there was no substance to the transactions;” and expressed concerns with Lehman’s Repo 105 program to two consecutive Lehman Chief Financial Officers – Erin Callan and Ian Lowitt – advising them that the lack of economic substance to Repo 105 transactions meant “reputational risk” to Lehman if the firm’s use of the transactions became known to the public. In addition to its material omissions, Lehman affirmatively misrepresented in its financial statements that the firm treated all repo transactions as financing transactions – i.e., not sales – for financial reporting purposes.

And here is the Fed punchline, as it once again implicates Tim Geithner:

From 2003 to 2009, Treasury Secretary Timothy Geithner served as President of the Federal Reserve Bank of New York (“FRBNY”). The Examiner described to Secretary Geithner how Lehman used Repo 105 transactions to remove  approximately $50 billion of liquid assets from the balance sheet at quarter-end in 2008 and explained that this practice reduced Lehman’s net leverage. Secretary Geithner “did not recall being aware of” Lehman’s Repo 105 program, but stated: “If this had been a bank we were supervising, that [i.e., Lehman’s Repo 105 program] would have been a huge issue for the New York Fed.”

And even though the Fed should have been fully aware of any shadow transaction be they “matched book” repos or the “105 variety, nobody had any clue. Just who the hell was regulating banks???

Jan Voigts, who was an Examining Officer in FRBNY’s Bank Supervision Department, had no knowledge of Lehman removing assets from its balance sheet at or near quarter-end via a repo trade treated as a true sale under a United Kingdom opinion letter.

Arthur Angulo, who was a Senior Vice President in FRBNY’s Bank Supervision department, likewise was unaware that Lehman engaged in repo transactions at quarter-end, under a United Kingdom true sale opinion letter, where the assets would be returned to Lehman’s balance sheet following the end of the reporting period. Angulo said that the described repo transactions appeared to go “beyond other types of [permissible] balance sheet management.” Angulo also said that he would have wanted to know about off-market transactions where Lehman accepted a higher haircutthan a repo seller normally would accept for a certain type of collateral.

Thomas Baxter, FRBNY General Counsel, had no knowledge of Repo 105 transactions, either by name or design. Baxter was generally aware of firms using quarter-end and month-end “balance sheet window-dressing,” but did not recall this being an issue linked to Lehman specifically.

Stunningly, nobody at the SEC was aware of Lehman’s Repo 105 program. And guess what: NEITHER DID DICK FULD. This is unbelievable – the criminality reaches to the very top, yet the very top denies all knowledge.

Richard Fuld, Lehman’s former Chief Executive Officer denied any recollection of Lehman’s use of Repo 105 transactions. Fuld said he had no knowledge that Lehman treated any kind of repo transaction as a true sale or that Lehman ever removed from its balance sheet assets transferred in a repo transaction. In addition, Fuld did not recall having seen any reports referencing the amount of the firm’s Repo 105 activity. Fuld further stated that he did not know that Lehman removed approximately $49 and $50 billion in inventory off its balance sheet at quarter-end
through the use of Repo 105 transactions in first quarter 2008 and second quarter 2008, respectively. Fuld said, however, that if he had learned that Lehman was temporarily cleansing its balance sheet of assets at quarter-end through Repo 105 transactions, it would have concerned him.

Evidence, however, suggests that Fuld is blatantly lying:

Fuld’s denial of recollection must be weighed by a trier of fact against other evidence. Fuld recalled having many conversations with his executives about reducing net leverage and emphasized to the Examiner how important it was for Lehman to reduce its net leverage. The night before the March 28, 2008 Executive Committee meeting, Fuld received materials for the meeting, including an agenda of topics including “Repo 105/108” and “Delever v Derisk” and a presentation that referenced Lehman’s quarter-end Repo 105 usage for first quarter 2008 – $49.1 billion.  The materials also were forwarded by Fuld’s assistant to other Lehman executives. It appears that Fuld did not attend the March 28 meeting, but Bart McDade recalled having specific discussions with Fuld about Lehman’s Repo 105 usage in June 2008. Sometime that month, McDade spoke to Fuld about reducing Lehman’s use of Repo 105 transactions. McDade walked Fuld through the Balance Sheet and Key Disclosures document (reproduced in part below) and discussed with Fuld Lehman’s quarter-end Repo 105 usage – $38.6 billion at year-end 2007; $49.1 billion at first quarter 2008; and $50.3 billion at second quarter 2008.

Based upon their conversation, McDade understood that “Fuld knew, at a basic level, that Repo 105 was used in the firm’s bond business” and that Fuld “was familiar with the term Repo 105.”3524 McDade recalled that when he advised Fuld in June 2008 that Lehman should reduce its Repo 105 usage to $25 billion, “Fuld understood that this would put pressure on traders.”3525 McDade also recalled that “Fuld knew about the accounting of Repo 105.”

Combing through the Appendix on what collateral was actually “sold” (only to be promptly bought back) in Repo 105s:

Most securities Lehman used in Repo 105 transactions were “governmental” in nature, implying a certain level of liquidity. While representing a relatively small percentage of Lehman’s total Repo 105 assets/securities, at times the nominal amount of non-”governmental” securities Lehman used in Repo 105 transactions was quite large. For example, as of February 29, 2008 (the end of Lehman’s first quarter 2008), Lehman utilized over $1 billion of highly structured securities, i.e., CLOs and CDOs, private RMBS, CMBS and asset-backed securities, in Repo 105 transactions. In the market environment that existed for Lehman in early 2008, these structured securities were likely relatively illiquid as indicated by declines in origination volumes, wider bid-offer spreads, and higher margin requirements.

In August 2008, just before it was over, the firm allowed $55 million, or seven securities, rated CCC to be included in a Repo 105 transaction.

The next chart makes it evident it that 105s were used simply to game the firm’s assets into quarter end (yellow highlights), by reducing overall asset for leverage ratio calculations.

That this scam was going unsupervised (just who the hell were the counterparties?) for many years, and that many banks are likely using it right now to fool investors, regulators, rating agencies, and the idiots at the FRBNY (who certainly also know about this), is beyond criminal. Yet that nobody will go to jail for this is as certain as the market going up another 10% tomorrow. A full investigation has to be conducted immediately into whether existing Wall Street firms, and in particular those who use Ernst & Young as auditors, are currently abusing public confidence via such transactions.

Full report

Repo 105

More articles from Zero Hedge….