This analysis from the Wall Street Journal indicates that most of the big US Banks are engaging in the same kind of repo accounting at the end of the quarter that Lehman Brothers was doing to hide their financial instability until deteriorating credit conditions and liquidity problems made them precipitously collapse, as all ponzi schemes and financial frauds do when the truth becomes known.
The basic exercise is to hold big leverage and dodgy debt, but swap it off your books with the Fed at the end of each quarter for a short period of time when you have to report your holdings.
This could easily be corrected by requiring banks to report four week averages of their holdings for example, rather than a snapshot when they can hide their true risk profiles so easily, compliments of that protector of consumers and investors, the Fed.
This is nothing new to us. Many of us have noted this sort of accounting trickery and market manipulation at key events especially at end of quarter.
It is facilitated by the Federal Reserve, and FASB, and the agencies.
"Their Fraud doth rarely falter, and is subsidized, instead, for none dare call it bank fraud, if it’s sanctioned by the Fed." (apologies to Ovid)
The US is Lehman Brothers on a scale writ large. And when it is exposed by some series of events, the implosion could be more sudden than any can imagine. But in the meantime the US is still the ‘superpower’ of the world’s financial system, through its currency, its banks, and its ratings agencies.
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
First, let your greed overcome all regard for the stability of the global market, and overcome your aversion to illegal activities. Stay away from people like me, and fly under the radar, because I’d like to see you thrown in jail. Most Washington officials, regulators, and Wall Street managers are probably safe to hang around, especially if you cut them in for a piece of the action or give them vague promises of a future lucrative job.
Pump up the gold story. Get your friends to tell retail investors to buy some gold every month. Get your buddies in the financial business to offer exchange traded gold funds (ETFs) that claim to buy physical gold. This will sound safe to retail investors, but in fact, the ETFs are very risky. This will serve your purpose when you are ready to start a panic. These particular ETFs will allow the "gold" to be commingled with the custodian’s gold, and the custodian can lease out the gold. Moreover, the "gold" custodian can give it to a sub custodian that the manager doesn’t know. The sub custodian can give it to yet another sub custodian unknown to the original custodian. The manager will never audit the gold, and the gold is not "allocated" to a particular investor. Since this is an "exchange traded" gold fund, investors will probably assume the gold is regulated by the Commodities Futures Trading Commission (CFTC), but it isn’t. By the time investors wake up to the probability that there is very little actual gold backing their investment, your plan will be ready to execute.
Now you are ready to execute your plan.*
Step 1: Let everyone in the futures markets know you are buying gold, speculating in gold, and want to take physical delivery. It helps that China openly announced it wants to increase its gold reserves; the market isn’t looking too hard at you. At first, act like you’re naïve. Buy on margin and pyramid up by reinvesting your profits when you have them.
Step 2: Get the banks to let you finance your gold.
Step 3: Book up all of the space at gold refiners, so that no one else can do…
Have you been thinking about the "The Financial Crisis Responsibility Fee" and trying to decide whether or not you agree with it, or perhaps there are some better alternatives? Mark Thoma has put together an essay sharing his thoughts and those of others on this topic. – Ilene
Calculated Risk summarizes today’s proposal from the Obama administration for a "Financial Crisis Responsibility Fee" to recover the cost of the bailout of the financial system:
Fact Sheet: Financial Crisis Responsibility Fee: Today, the President announced his intention to propose a Financial Crisis Responsibility Fee that would require the largest and most highly levered Wall Street firms to pay back taxpayers for the extraordinary assistance provided so that the TARP program does not add to the deficit. The fee the President is proposing would:
Require the Financial Sector to Pay Back For the Extraordinary Benefits Received: …
Responsibility Fee Would Remain in Place for 10 Years or Longer if Necessary to Fully Pay Back TARP:
Raise Up to $117 Billion to Repay Projected Cost of TARP:
President Obama is Fulfilling His Commitment to Provide a Plan for Taxpayer Repayment Three Years Earlier Than Required: …
Apply to the Largest and Most Highly Levered Firms: The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets … Over sixty percent of revenues will most likely be paid by the 10 largest financial institutions.
There is much more detail at the link. The proposed fee would be 15 bps of covered liabilities per year.
Free Exchange gives the motivation for the tax over and above the desire to recoup the money spent bailing the banks out:
The administration is clear in its desire that this function as an incentive for banks to get smaller and less leveraged:
The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms. By levying a fee on the liabilities of the largest firms – excluding FDIC-assessed deposits and insurance policy reserves, as appropriate – the Financial
Until 2004 (quick refresher) our investment banks had a leverage limit of 12:1. After Paulson led the multi-year effort to sway the SEC to drop these rules entirely, allowing 5 banks to utilize unlimited leverage, all 5 became effectively insolvent within 4 years.
It’s the most important factor in explaining how this banking crisis was so devastating compared to previous blow-ups, and why it was so widespread — European banks were (and remain) even more leveraged than our own.
And, it’s the easiest part to fix. Just turn the rule back to pre-2004.
There are only 2 possibilities.
Congress is completely, undeniably, captured by Wall Street and so they did not allow leverage limits to make their way into either the House or Senate bill? OR
Congress is so flipping stupid that no one thought to propose a leverage limit?
The obvious answer is ‘captured’, but the more I consider it, the second choice of ‘just plain stupid’ is not out of the realm of possibilities.
Raise capital requirements, forcing the banks to use their tremendous profits to build big cushions against future problems instead of paying huge bonuses. Given the forced bailouts of last year, why on earth should banks be allowed to pay out normal compensation ratios for the next few years? Why shouldn’t they be forced to keep this money on hand for a rainy day?
In a just world, the way out would be to finally make the bank bondholders pay for their stupidity, converting bank debt to equity and correcting the error made last time. In the heat of another crisis, however, the government will likely be terrified at the thought of rocking the boat and will fight tooth and nail to give bondholders another free pass. If this proves politically impossible, the government might actually have to let some firms fail, or risk being run out of town. And because we have yet to create a system in which banks CAN fail in an orderly
10 handles came off the S&P 500 in less than 30 minutes (a 1% move) when the dollar strengthened by about two tenths of 1%.
What would be the impact of the dollar moving higher by 10%?
This is the problem with the carry trade. The leverage that gets deployed, once it gets going, is typically in the range of 5:1, 10:1 or even more compared to the equity markets. (Absolute leverage in the FX markets is frequently 100:1 – in fact, even retail traders can run 100:1 leverage at most FX brokers!)
Just remember folks, ZIRP and it’s pals are always exploited by the politicians to issue debt "free" into the markets. But once issued that debt has to be rolled over (since governments almost never run an actual surplus allowing them to pay down that debt), which means that the issue is not whether you can make the interest payments today, it is whether you can make them tomorrow given the possible changes in interest rates.
If interest expense ever exceeds income, you’re finished, just as was the "buyer" who took out an OptionARM and then had his payment reset to more than his income. Instant Boom.
The same thing happens to nations.
The problem is that nobody knows exactly where the line is, because that debt must be rolled, and it is the future cost of that rollover, not today’s interest rates, that determine where the wall is.
Have we reached the wall? Probably not yet. But if we keep issuing debt into artificially-suppressed interest rates, we will hit it with certainty, and the carry traders are betting (successfully so far) that government will not stop issuing debt (spending more than they make) and Bernanke will not pull enough liquidity to cause short rates to rise by even 1 or 2%.
Better hope all those "ands" and "buts" hold up folks.
"I believe deeply that it’s very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar," he said at a roundtable discussion with Japanese reporters. "We bear special responsibility for trying to make sure that we
The most leveraged bank by far is the-investment-bank-which-must-not-be-named. It is followed by J.P. Morgan on a percentage basis, but JPM is far larger nominally than these charts indicate because of its much larger capital base. Its in the nature of the difference between a cardshark (GS) and a pawnshop (JPM). Or perhaps just the capital requirements of the short versus the long con.
Luckily for the US financial system the big banks are incapable of making errors in risk management, and always seem to get by with a little helpful information from their friends, and a lot of money from the public.
We would ask Timmy for an explanation on how this could happen so soon after a crisis in which the Treasury had to ask Congress to stop financial armageddon overnight because of the perils of excessive leverage on dodgy capital, but he is taking dictation from Lloyd on line 1, and Jamie is on hold on line 2.
Ponzi Scheme: a fraudulently artificial investment scheme that pays returns to investors from their own money and that of subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually offers returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors, as well as the necessary ‘accounting adjustments,’ in order to keep the scheme going. When the flow of money falters, the scheme begins to collapse, until confidence in its sustainability is lost, and the scheme quickly collapses.
Why say it myself, when this video featured below says it so well and so reasonably and completely?
A less probable but rather nasty twist on the probable scenario in the video is that after an initial reversal in the dollar that is quite sharp due to a short squeeze and a liquidity crunch, the buck and bond turn lower WITH stocks, in a general revulsion towards the Fed’s financial engineering and a loss of confidence in Wall Street.
These are all just probabilities, extrapolated from some very real current indicators and phenomena. Equities are a puffball based on fundamental measures, the insiders are selling in droves, and there is a general movement out of dollars into ‘real assets’ such as gold despite a huge drop in nominal aggregate demand.
The Fed has had a few tricks up its sleeve, and was able and willing to create a deadly housing bubble through willful policy and regulatory error in response to the tech bubble collapse of 2000.
There is still a genuine possibility that a stubborn adherence to policy errors will lead us into a decade of Japanese style stagnation as the real economy is crushed under the weight of the zombie banks. The Fed is neutral only in the headlines; it is owned by and serves Wall Street when push comes to shove. The limiting factor will be international acceptance of an increasingly debased bond and dollar.
We ought not to underestimate their desperation and ingenuity in the present situation. Much of financial innovation is a subversive response to regulation or the opportunistic arbitrage of asymmetries in leverage and information, often created for the occasion. And the Fed and the Treasury…
Government officials will not set new capital and leverage standards for financial institutions until next year, Treasury Secretary Timothy Geithner said Thursday.
"The world is a little fragile; people aren’t willing to take enough risk now, and we don’t want to do anything that would push people to delever," Geithner said to Fox News Sunday anchor Chris Wallace at an event in Washington hosted by the Atlantic magazine in partnership with the Aspen Institute and the Newseum. "We’ll have the agreement on the numbers, but it won’t happen until next year; in the absence of fragility."
Geithner acknowledged that existing bank-capital restrictions were "too low and easily evaded."
"It’s going to take a while to come out of this because we are saving more money, something we have to do," he commented. "Growth is going to be slower coming out of this, and it is a reasonable expectation that this is going to take a while."
"It’s not a tenable situation for the government to be in the business of running large parts of the economy, and we won’t do it," Geithner said.
Geithner finished speaking the same way he always does, with a lie.
"We won’t do it" is a blatant lie. The government has its direct hand in autos, banks, insurance companies, stock brokers, home builders, and the entire mortgage industry.
The first thing any regulator in his right mind would do would be to dissolve Fannie Mae, Freddie Mac, and the FHA. Instead, leverage was increased to allow loans up to 125% of assessed value and the mortgage lenders of only resort are the GSEs and the FHA.
It was idiotic to take over AIG yet the government did. Cash for clunkers was economic idiocy but the government did that too. Ditto for screwing GM bondholders in favor if the union. We had to do those things under the guise "things were too fragile".
"We’ll have the agreement on the numbers, but it won’t happen until next year; in the absence of fragility."
We’re at a truly fascinating crossroads in modern economic times. Financial theory as we have come to know it will be changed forever based the recent actions of Ben Bernanke and global central bankers. Millions of textbooks will be rewritten in the coming 10 years and careers will either flourish or die on the back of the actions of these bankers. Those in favor of Bernanke’s legendary helicopter drop are celebrating a 6 month rally in equities, but a vital piece of the recovery puzzle remains missing. While Bernanke and Co. fire up the printing presses, and the banks sell the recovery hook line and sinker to the investing public, we continue to see very weak consumer trends.
As we sit on the one year anniversary of the demise of Lehman Brothers it’s most appropriate to ask what we have achieved over the last few months and years in regards to policy action. Many say we avoided the second great depression and praise Bernanke for his innovative and swift actions. Others (myself included) believe we have simply kicked the can down the road and foresee an end to Bernanke’s career that very much mirrors Mr. Greenspan’s. As we noted back in August, Bernanke’s real report card is less than impressive:
• 4 million lost jobs
• 4.6 percentage point surge in the unemployment rate
• 20% decline in the S&P 500
• 30% plunge in house values
• A 3.5% reduction in real GDP per capita
• 11% decline in the trade-weighed dollar
• 109 failed banks (almost matching the total from the prior 13 years combined)
If you think about the cause of the credit crisis (excessive debt, excessive leverage and a banking sector that is too large and too powerful) and what we have solved in the last year it’s actually quite apparent that we haven’t solved any of the structural problems that actually caused the crisis. The debt in this country is still extraordinary, leverage is making a comeback and the banks have grown larger in what has to be the most incredible power grab in modern economic times. Meanwhile, Bernanke is like the doctor who keeps the cancer patient…
Improvement in first time unemployment claims is slowing. Actual, not seasonally manipulated data, including an adjustment for the usual weekly upward revision, shows that the year to year rate of change is on the cusp of a possible upside breakout, which would be good news for stock market bears if it happens.
Initial Unemployment Claims Chart- Click to enlarge
Here’s why it’s mind blowing. I’ve plotted it below on an inverse scale with the S&P 500 overlaid.
Unemployemt Claims and Stock Prices - Click to enlarge
Major US Markets including (NYSEARCA:DIA), (NYSEARCA:SPY), (NASDAQ:QQQ), and (NYSEARCA:IWM) dropped over 3% each on Italian bond fears and an increased worry that Europe will not be able to bail out its 4th largest economy. Furthermore, the iShares MCSI Italy Fund (NYSEARCA:EWI) wiped out over 9% today, further illustrating the dire situation in Italy and the European Union: ...
The second economic disappointment of the day comes from the Dallas Fed, which dropped from -2.0 to -11.4 on expectations of -9.0- this was the 4th consecutive negative print month. The report was, in a word, horrible, with just 2 of the 15 constituent indices posting an increase, and the bulk solidly in the red, led by Unfilled and New Orders which dropped 16.8 and 11.2, respectively: not good for economic growth. On the employment side there was nothing good either, with both employment and hours worked declining by -...
Bloomberg reports that Diana Containerships (NASDAQ: DCIX) files to offer stock up to $172.5M. Diana Containerships says that Diana shipping will also buy $20M of stock.
Top 5 RisersStockRatingAnalysisVLOSTRONGBUYAn increasingly positive growth rate of past earnings, along with improving expectations for long term growth, make Valero a good prospect for high returns.KROSTRONGBUYKronos Worldwide has been gaining recognition from analysts as a good canditate for achieving higher than expected earnings along with higher overall projected valuation.SFIBUYiStar is one of the top candidates projected to achieve both higher than previously projected earnings in the short run and a higher earnings growth rate in the long run.AMATSTRONGBUYApplied Materials has been...
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February is now past, and the Biotech Porfolio is loaded with winners and a miss (PLX). MRK is down a bit, but I expect that trade to recover, and one could be more agressive and double down on it, or play another round at the Jan13 $30 options for roughly the same price. Below is the summary, and note the grey boxes are ones that did not fill. I am still a fan of BMRN, and like DEPO as well. Now let's look at a few others.
Table 1. PSW Biotech Plays Since January 2011
 
Our newest play is Momenta Pharmaceuticals (MNTA), who is pursuing a three-part business model which includes complex generic equivalents in partnership with the Sandoz division of Novartis, proprietary compounds, and follow-on- biologics (FOB). It seems that this company is tied up in competition/litigation wit...
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Better hope all those "ands" and "buts" hold up folks.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(