The Full Feed from HuffingtonPost.com Wed 2009-11-25 12:11 EST

Geithner Singled Out In TARP Watchdog Neil Barofsky's Scathing Report On AIG Bailout

The Huffington Post News Editors

In its bailout last fall of the insurance giant AIG, a team led by current Treasury Secretary Timothy Geithner failed nearly every step of the way, according to a scathing report released Monday by a government watchdog. Instead of bargaining with AIG's numerous counterparties to resolve its billions of dollars in souring derivatives contracts, Geithner's team ended up funneling payments for those toxic derivatives to AIG's counterparties at "an amount far above their market value at the time," the report notes.

AIG Bailout; com; full Feeds; Geithner singled; HuffingtonPost; TARP watchdog Neil Barofsky's scathing report.

Mish's Global Economic Trend Analysis Wed 2009-11-25 12:05 EST

What Is Inflation and How Does One Measure It?

Michael Shedlock

...Inflation is a net expansion of money supply and credit, where credit is marked to market. Deflation is the opposite: a net contraction of money supply and credit, where credit is marked to market...Credit (and credit problems) dwarf monetary concerns at the present...I still expect the US to slip in and out of deflation and recession for years to come just as happened in Japan...banks aren't lending, consumer credit is contracting, credit writeoffs are likely to exceed monetary printing, and symptoms like treasury yields are in generally in agreement...To bail out the banks' poor bets on Dot-Com companies and Latin America in 2001-2002, Greenspan purposely ignited a credit bubble that led to the mother of all housing crashes. In response to the housing bust, the Fed refused to let failed banks go out of business and is attempting to force another credit bubble...However, this is the end of the line. Housing was the bubble of last resort, nothing can come close to the number of jobs created by the global housing bubble. Further attempts to reflate will do nothing but create a currency crisis, crash the economy, and add to future liabilities that cannot be paid back.

Inflation; measured; Mish's Global Economic Trend Analysis.

Wed 2009-11-25 09:59 EST

Hussman Funds - Weekly Market Comment: "Should Come as No Shock to Anyone" - November 16, 2009

John P. Hussman

The big picture is this. There is most probably a second wave of mortgage defaults in the immediate future as a result of Alt-A and Option-ARM resets. Yet our capacity to deal with these losses has already been strained by the first round that largely ended in March. The Federal Reserve has taken a massive amount of mortgage-backed securities onto a balance sheet that used to be restricted to Treasury securities. The purchase of these securities is reflected by a surge in cash reserves held by banks. Not only are the banks not lending these funds, they are contracting their loan portfolios rapidly. Ultimately, in order to unwind the Fed's position in these securities, it will have to sell them back to the public and absorb those excess reserves, so to some extent, the banking system can count on losing the deposits created by the Fed's actions, and can't make long-term loans with these funds anyway. Increasingly, the Fed has decided to forgo the idea of repurchase agreements (which require the seller to repurchase the security at a later date), and is instead making outright purchases of the debt of government sponsored enterprises (GSEs such as Fannie Mae and Freddie Mac). Again, the Fed used to purchase only Treasuries outright, but it is purchasing agency securities with the excuse that these securities are implicitly backed by the U.S. government. This strikes me as a huge mistake, because it effectively impairs the Fed's ability to get rid of the securities at the price it paid for them, should Congress change its approach toward the GSEs. It simultaneously complicates Congress' ability to address the problem because Bernanke has tied the integrity of our monetary base to these assets. The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner's actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.

2009; comes; Hussman Funds; November 16; shocks; weekly market comments.

naked capitalism Thu 2009-11-19 10:39 EST

Saudis drop WTI oil contract

Edward Harrison of Credit Writedowns

va the FT: Saudi Arabia on Wednesday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange...The point of this move is not to undermine the dollar but to get away from the WTI contract where prices have been artificially inflated due to storage shortages at Cushing.

naked capitalism; Saudis drop WTI oil contract.

Thu 2009-11-19 10:26 EST

Goldman left foreign investors holding the subprime bag | McClatchy

Greg Gordon

Goldman sold more than $57 billion in risky mortgage-backed securities during a 14-month period in 2006 and 2007, including nearly $39 billion issued from mortgages it purchased. Meanwhile, the firm peddled billions of dollars in complex deals, many of them tied to subprime mortgages, in the Caymans and other offshore locations...Goldman's traders also made huge bets that those securities would lose value by buying insurance-like contracts, called credit-default swaps, with private parties. Beginning early in 2007, they bought swaps on a London-based exchange.

Goldman left foreign investors holding; McClatchy; subprime bag.

naked capitalism Tue 2009-10-27 12:45 EDT

More on Banks Engaging in Mortgage Fraud

Hoisted from comments: I am a lawyer who has been involved in corporate finance for over 25 years...the securitization industry 5-10 years ago made a collective choice to ignore the terms of contracts, state and local laws and legal convesntions developed over hundreds of years. Why? Because they could. Our legal system and conventions were built on the assumption that most businesses would choose to follow them. Instead, the securitization industry simply developed a cost/benefit approach to following the law and adhering to contracts. It worked quite well becaseu most individuals just aren't equipped to read and enforce their mortgage agreements or fully understand the law.

banking engage; mortgage fraud; naked capitalism.

The Big Picture Wed 2009-10-14 11:36 EDT

Andy Xie: Here We Go Again

Former Morgan Stanley Analyst Andy Xie explains why China is a potential bubble: [Consider] the US Savings and Loans crisis of the late 1980s and early 1990s. The US Federal Reserve kept monetary policy loose to help the banking system. The dollar went into a prolonged bear market. During the descent, Asian economies that pegged their currencies to the dollar could increase money supply and lending without worrying about devaluation, but the money couldn't leave home due to the dollar's poor outlook, so it went into asset markets. When the dollar began to rebound in 1996, Asian economies came under tightening pressure that burst their asset bubbles. The collapsing asset prices triggered capital outflows that reinforced asset deflation. Asset deflation destroyed their banking systems. In short, the US banking crisis created the environment for a credit boom in Asia. When US banks recovered, Asian banks collapsed. Is China heading down the same path? There are many anecdotes to support the comparison. Property prices in Southeast Asia became higher than those in the US, but ``experts'' and government officials had stories to explain it, even though their per capita income was one-tenth that of the US. Their banks also commanded huge market capitalizations, as financial markets extended their growth ad infinitum. The same thing is happening in China today. When something seems too good to be true, it is. World trade -- the engine of global growth -- has collapsed. Employment is still contracting throughout the world. There are no realistic scenarios for the global economy to regain high and sustainable growth. China is an export-driven economy. Bank lending can support the economy for a short time, however, stocks are as expensive as during the heydays of the last bubble. Like all previous bubbles, this one, too, will burst.

Andy Xie; Big Picture; Go.

Jesse's Café Américain Tue 2009-10-13 20:27 EDT

Consumer Credit Contracting at Record Levels

Jesse

...The challenge facing Bernanke and the Obama economic team is how to get the US consumer spending again, if they cannot be paid a living wage, and if they can no longer be encouraged to borrow beyoned their means, by using their homes as a cash machine with variable interest rates, as they were encouraged to do by Fed Chairman Greenspan...There can be no denying that the Fed is promoting money supply growth in ways never seen before in the US. Whether they can be successful is open to question. We think they will keep at it until they break something.

consumer credit contracting; Jesse's Café Américain; record levels.

Wed 2009-10-07 10:31 EDT

Beijing's derivative default stance rattles banks

Reuters

For banks that are hoping to sell more derivatives hedges in China, the world's fastest-expanding major economy and top commodities consumer, the danger goes beyond the immediate risk to existing contracts to the longer-term precedent that suggests Chinese companies can simply renege on deals when they like...Air China, China Eastern and shipping giant COSCO -- among the Chinese companies that have reported huge derivatives losses since last year -- had issued almost identical notices to banks.

Beijing's derivative default stance rattles banks.

The IRA Analyst Mon 2009-09-21 17:23 EDT

Exposure at Default: As Banks Shrink, So Does the Economy

...before Treasury Secretary Tim Geithner and the other G-20 finance ministers set about to raise capital levels, they need to understand that the earnings of the banking industry are going to be impaired for years as the cost of resolving failed banks is repaid. Restoring solvency is the first issue for many banks, then we can talk about increased capital and restrictions on risk taking equally. And as the banking industry shrinks defensively in order to conserve capital and fund liabilities impaired by realized losses, the credit available to the US economy also shrinks. You can't have economic growth without credit growth...Bottom line is that deflation is still the chief threat to the US economy, driven by a relentless contraction in bank and nonbank credit. Until we see a restoration of the market for nonbank finance and a sustained turn in the EAD of the large bank peer group, which accounts for almost 70% of the entire US industry balance sheet, we do not believe that any economic recovery will be meaningful in terms of jobs or asset prices.

Banks Shrink; default; economy; exposure; IRA Analyst.

THE PRAGMATIC CAPITALIST Sun 2009-09-20 12:29 EDT

CHINA WILL BE A BIGGER BUBBLE THAN JAPAN >> Most Recent Stories >> THE PRAGMATIC CAPITALIST

SocGen analysts Dylan Grice says the Chinese economy has many similarities to the Japanese economy before it imploded in the 90's...the real cause of Japan's deflation is probably more demographic than debt-related...Japan has been the first industrial economy to begin demographic contraction. Indeed, thanks to Deng Xiaoping's 1979 one child policy, China will soon face the same problem...Japan's experience also hints at what may be the future catalyst unleashing this frenzy: capital account liberalisation. Financial history is filled with financial liberalisations gone wrong and Japan's bubble can be traced directly to the removal of controls on international capital flows and banking in the early 1980s. Seeking a larger international role for the renminbi, China is now, albeit tentatively, embarking on a similar path. Full liberalisation, when it occurs, could be the starting gun for the biggest bubble the world has ever seen.

bigger bubble; China; Japan; pragmatic capitalists; recent story.

Bank-Implode! Sun 2009-09-20 12:22 EDT

Bank-Implode! >> Blog Archive >> Exclusive -- Wells Fargo's Commercial Portfolio is a ticking time bomb

In order to sort through the disaster that is Wells Fargo's (quote: WFC) commercial loan portfolio, the bank has hired help from outside experts to pour over the books... and they are shocked with what they are seeing. Not only do the bank's outstanding commercial loans collectively exceed the property values to which they are attached, but derivative trades leftover from its acquisition of Wachovia are creating another set of problems for the already beleaguered San Francisco-based megabank...According to sources currently working out these loans at Wells Fargo, when selling tranches of commercial mortgage-backed securities below the super senior tranche, Wachovia promised to pay the buyer's risk premium by writing credit default swap contracts against these subordinate bonds...should the junior tranches eventually default, then the bank is on the hook.

bank implode; blogs Archive; exclusive; ticking time bomb; Wells Fargo's commercial portfolio.

The IRA Analyst Thu 2009-09-17 10:22 EDT

Back to Basis for Securitization and Structured Credit: Interview With Ann Rutledge

To get some further insight into the world of securitization and cash flows, we spoke last week to Ann Rutledge of RR Consulting...The difference between a futures contract for T-bonds and a credit default swap is that the former is a real contract for a real deliverable, whereas the CDS trades against what people think is the cash basis, but there is no cash market price to discipline and validate that derivative market. Rutledge: a contract or structure without a cash basis should not be allowed at all. You cannot have a derivative that is honest and fair to all market participants without a true cash basis. ...derivatives markets such as CDS and CDOs that have no cash basis tend to magnify speculative excesses, while derivative markets where there is a visible cash basis market to discipline investor behavior seem less unstable in terms of systemic risk. Rutledge: If the cash market were visible and could be examined by all participants, then it would give away the ability of the dealer banks to tax participants in the market and extract these abnormal returns. So how do we fix the problem... Rutledge: These originators play this game over and over again and they don't get caught, in part because we do not have a common, standardized set of definitions for governing the most basic aspects of the securitization process. The buyers don't do the work and the accounting framework is a counterparty-oriented framework, not one that is focused on the underlying assets. So banks like Countrywide and WaMu originated and sold some truly hideous structures during the bubble, but the buyers only diligence was reliance upon recourse to these banks. It costs maybe 50bp for a buyer to get the data and grind the numbers to really diligence a securitization based on cash flows, even a complex CDO. But the cost to the buyer and the system of not doing the diligence is an order or magnitude bigger. If the Congress, the SEC and the FASB, and the financial regulators only do one thing this year when it comes to reforming the world of structured credit, then it should be to impose by law and regulation common standards for the definitions used in the marketplace.

Ann Rutledge; basis; interview; IRA Analyst; securitizations; structured credit.

Mish's Global Economic Trend Analysis Thu 2009-09-17 09:47 EDT

Consumer Credit Contracts Record $21.6 Billion

Michael Shedlock

U.S. Consumer Credit Falls by a Record $21.6 Billion. U.S. consumer credit plunged more than five times as much as forecast in July as banks restricted lending terms and job losses made Americans reluctant to borrow. Consumer credit fell by a record $21.6 billion, or 10 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $15.5 billion in June, more than previously estimated. Credit fell for a sixth month, the longest series of declines since 1991.

21; 6; Consumer Credit Contracts Record; Mish's Global Economic Trend Analysis.

zero hedge Thu 2009-09-17 09:42 EDT

Excess Liquidity Game Is Coming To An End

David Rosenberg notes M1, M2 and MZM have commenced contracting at an alarming rate: M1 fell 1.0% in the August 24th week and over the past four weeks is down at a 6.5% annual rate. M2 has contracted in each of the past four weeks too and over that time has slipped at a 12.2% annualized pace, which is a near-record decline. We see the same trend in the broad MZM money measure -- off at a 15.8% annual rate over the past month. Bank credit also remains in a fundamental downtrend -- contracting at an epic 9% annualized pace over the past four weeks. So for the first time in the post-WWII era, we have deflation in credit, wages and rents, and from our lens this is a toxic brew that in the end will ensure that the focus on capital preservation and income orientation will be the winning strategy over a strict reliance on capital appreciation.

comes; ending; Excess liquidity game; Zero Hedge.

naked capitalism Sun 2009-09-13 15:59 EDT

Another Lehman Mess: No One Can Run the Software

Lehman's global derivatives book included contracts with a notional face value of $39,000bn and deals with 8,000 different counterparties when it went bust. The derivatives business was actually split into multiple strands, backed up by between 20 and 30 different systems. Once it went bankrupt, the staff who supported these systems "evaporated"...The more time goes by, the less insight remains in terms of the people who staffed those systems...Many previously hidden costs of running a derivatives business, including technology support of multiple disjointed systems, can no longer be discounted.

Lehman Mess; naked capitalism; running; software.