The Next Borrow-Short Lend-Long Guaranteed to Blow Up Bank Lending Scheme; Citigroup, Chase, Bank of America CD Ripoff
by ilene - February 16th, 2011 4:23 pm
Courtesy of Mish
Borrow-short lend-long strategies have caused more pain and grief than nearly any play in the book. They are virtually guaranteed to blow up given enough time if the duration mismatch and leverage is too great.
For those who do not know what I am describing, a couple examples below will help explain. The first example is a look at "cost of funds" and guaranteed profits that banks can make. It is not a borrow-short lend-long strategy but will morph into such a scheme as I vary the parameters.
Citigroup CDs
Inquiring minds investigating Citigroup’s cost of funds note that Citigroup 5 year CDs yield a mere 1.5%. For this example, Citigroup’s cost of funds is 1.5%, the rate it pays depositors. Here are a few snips from Citi’s website.
Who said there are no guarantees in life?
Some things in life are a sure thing. Like a Citibank CD, which offers a guaranteed—and highly competitive—interest rate. You also get a wide range of terms, from 3 months to 5 years.
Guaranteed Ripoff
Citigroup has the gall to brag about "guarantees in life" when the "guarantee" in question is a complete ripoff. It’s a ripoff because 5-year US treasuries currently yield 2.35%.
Anyone buying CDs at less than the treasury yield rate is a fool.
Rates at Bank of America, Northern Trust, JPMorgan Chase
I will tie this together shortly, but first make note that the Northern Trust, Bank of America, and JPMorgan Chase offer even lower 5-Year CD rates.
Here are some rates courtesy of Bankrate.Com as of 2011-02-15.
According to Bankrate, national average for 5 year CDs is 1.61% and the rock bottom low is .95%. The site average is 1.98% and the top yielding 5-year CD yields 2.75%. Thus Citigroup’s claim of competitive rates is absurd.
Although Bank of America makes no such claims, its CD rate is priced so preposterously low, that Bank of America must not even want to deal with them. Alternatively, B of A has an incredibly large pool of moronic depositors begging to be ripped off.
Guaranteed Free Money
Anyone buying 5-year CDs from Citigroup, Bank of America, Northern Trust, or JPMorgan Chase is giving those banks a shot at guaranteed free money.
All those banks have to do is take that money and invest in 5-year US treasuries to have a guaranteed profit. Here are the reasons…
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DiggPhilly Fed’s Plosser Goes Off the Reservation, Admits Monetary Policy is Impotent
by ilene - January 18th, 2011 10:34 pm
Courtesy of Jr. Deputy Accountant
That’s not omnipotent, that’s impotent as in the f**kers are shooting blanks and don’t even know it. Well Chuck Plosser knows it but if he keeps this up they’re going to drag him off and sequester him in the bunker they reserve for bad central bankers who can’t keep their mouths shut.
See The Scope and Responsibilities of Monetary Policy from Santiago, Chile yesterday:
Most economists now understand that in the long run, monetary policy determines only the level of prices and not the unemployment rate or other real variables.2 In this sense, it is monetary policy that has ultimate responsibility for the purchasing power of a nation’s fiat currency. Employment depends on many other more important factors, such as demographics, productivity, tax policy, and labor laws. Nevertheless, monetary policy can sometimes temporarily stimulate real economic activity in the short run, albeit with considerable uncertainty as to the timing and magnitude, what economists call the “long and variable lag.” Any boost to the real economy from stimulative monetary policy will eventually fade away as prices rise and the purchasing power of money erodes in response to the policy. Even the temporary benefit can be mitigated, or completely negated, if inflation expectations rise in reaction to the monetary accommodation.
Nonetheless, the notion persists that activist monetary policy can help stabilize the macroeconomy against a wide array of shocks, such as a sharp rise in the price of oil or a sharp drop in the price of housing. In my view, monetary policy’s ability to neutralize the real economic consequences of such shocks is actually quite limited. Successfully implementing such an economic stabilization policy requires predicting the state of the economy more than a year in advance and anticipating the nature, timing, and likely impact of future shocks. The truth is that economists simply do not possess the knowledge to make such forecasts with the degree of precision that would be needed to offset the economic shocks. Attempts to stabilize the economy will, more likely than not, end up providing stimulus when none is needed, or vice versa. It also risks distorting price signals and thus resource allocations, adding to instability. So asking monetary policy to do what it cannot do with aggressive attempts at stabilization can actually increase economic instability rather than reduce it.
I know you’re dying to know what footnote 2 is.…
Sovereign liquidity – Mike Whitney’s morning thoughts
by ilene - December 3rd, 2010 2:09 pm
Mike wrote to me this morning,
"Whoa! Have you seen this article? Sovereign liquidity, what lies beneath
"Am I misreading this or has Trichet pulled out the bazooka? My question: High ranking US officials from the Treasury flew to Spain yesterday. Do you or Phil think the Fed is on a euro bond spending spree to prevent a crash (because the Germans won’t support EU--QE?) Never a dull moment, Mike"
Excerpt:
Here’s a perfect end to a week in which the ECB has apparently bashed peripheral bond markets into submission. Apparently.
Watch those bid-offer spreads.
We couldn’t quite believe this chart of the bid-offer spread on ten-year Spanish government bonds, made by Divyang Shah of IFR Markets, when we saw it. But it checks out, and is worrying (click to enlarge):
(Still not at the May 2010/Greek crisis nadir… yet.)
Source: Sovereign liquidity, what lies beneath, by Joseph Cotterill
http://ftalphaville.ft.com/blog/2010/12/03/426946/sovereign-liquidity-what-lies-beneath/
How the Fed and the Treasury Stonewalled Mark Pittman to His Dying Breath
by ilene - November 18th, 2010 7:11 pm
How the Fed and the Treasury Stonewalled Mark Pittman to His Dying Breath
Courtesy of PAM MARTENS
Originally published at CounterPunch
On the President’s first day in office on January 21, 2009, he issued an Open Government memo promising the American people a new era of transparency. On March 19, 2009, under the President’s orders, the Attorney General’s office issued detailed guidelines on how Federal agencies were to respond going forward to Freedom of Information Act (FOIA) requests. The guidelines instructed the agencies as follows:
“The key frame of reference for this new mind set is the purpose behind the FOIA. The statute is designed to open agency activity to the light of day. As the Supreme Court has declared: ‘FOIA is often explained as a means for citizens to know what their Government is up to.’ NARA v. Favish, 541 U.S. 157, 171 (2004) (quoting U.S. Dep’t of Justice v. Reporters Comm. for Freedom of the Press, 489 U.S. 749, 773 (1989)…The President’s FOIA Memoranda directly links transparency with accountability which, in turn, is a requirement of a democracy. The President recognized the FOIA as ‘the most prominent expression of a profound national commitment to ensuring open Government.’ Agency personnel, therefore, should keep the purpose of the FOIA — ensuring an open Government — foremost in their mind.”
It pains me to inform you, Mr. President, but the Treasury Department, Board of Governors of the Federal Reserve, and Securities and Exchange Commission (the trio that has been variously distracted minting trillions in currency, trading cash for trash with Wall Street, surfing for porn, or mishandling multiple voluminous tips on Bernie Madoff’s Ponzi scheme) have misplaced your memo or, as many suspect, take their marching orders not from you but from Wall Street — perhaps because they perceive that this is where you take your orders too.
On October 6, 2010, I filed three FOIA requests with the Securities and Exchange Commission (SEC). I had come by information that the official government report on the stock market’s “Flash Crash” of May 6, 2010 was materially wrong and I wanted to buttress my investigative report to the public with documents the SEC had obtained or compiled in conducting its investigation.
I followed the SEC’s FOIA instructions and emailed the requests to foiapa@sec.gov as instructed by the web site, asking for a small amount of very…
Bernanke Gets His Pink Slip
by ilene - November 1st, 2010 12:59 pm
Bernanke Gets His Pink Slip
Courtesy of MIKE WHITNEY, originally published at CounterPunch
Question: What is the difference between a full-blown Depression and an excruciatingly "slow recovery"?
Answer--Inventories and a bit of fiscal stimulus.
On Friday, The Bureau of Economic Analysis (BEA) reported that 3rd Quarter GDP rose by 2% meeting most analysts expectations. The real story, however, is hidden in the data. Inventories added 1.44 percentage points to the 3Q real GDP, which means that--absent the boost to existing stockpiles-- GDP would be well-below 1%. If it wasn’t for Obama’s fiscal stimulus (ARRA), the economy would be sliding back into recession.
Improvements in consumer spending were too meager to indicate a "rebound", and residential investment dropped off sharply following the expiration of the firsttime homebuyer credit. The economy is in a coma and desperately needs more government support. But if Tuesday’s midterm elections turn out according to predictions--and the GOP retakes the House of Representatives--there won’t be any more stimulus. Instead, the economy will sputter along at a snail’s pace until festering bank woes (this time, the foreclosure crisis) trigger another contraction.
There’s no doubt now, that the Fed’s efforts to engineer a sustained recovery have failed. The fact that Fed chairman Ben Bernanke is planning to resume his dubious Quantitative Easing (QE) program is an admission of failure. That said, I expect the Fed to “go large” on November 3, and purchase another $1.2 trillion of long-term Treasuries adding roughly $100 billion per month to the money supply. That should placate Wall Street and keep stock markets sufficiently “bubbly” for the foreseeable future. After 12 months of QE, unemployment will still be stuck at 10%, the output gap will have narrowed only slightly, and confidence in the Fed will have plunged to historic lows. Monetarism alone cannot fix the economy.
The fiscal remedies for recession are well known and have effectively implemented with great success for over a half century. QE is a pointless detour into uncharted waters. It is like treating a hangover with brain surgery when the bottle of aspirin sets idle on the bedstand. Why bother?
Bernanke is convinced that pouring money into the system will produce the results he wants. This is how the Fed chair pays homage to the great monetarist icon, Milton Friedman. Friedman had unwavering faith in the power of money. Here’s what he…
The Fed and “Plunge Protection Team”: Are They Manipulating Stocks?
by Chart School - October 29th, 2010 4:19 pm
The Fed and "Plunge Protection Team": Are They Manipulating Stocks?
Rumors are, the U.S. government "is propping up the stock market."
By Elliott Wave International
You will find many intriguing Q&As at EWI’s Message Board. We offer it as a free way for our Club EWI members and subscribers to interact with EWI and the Socionomics Institute’s experts. We strive to answer every Message Board reader, and publicly post the best Q&As.
By far, the most frequent question we’ve been asked recently is:
"What is your take on the persistent internet chatter that the Federal Reserve is holding up the stock market via QE2, POMO, etc.? How can stocks ever decline again if the Fed is in control?"
We have several active Message Board posts that touch on "market manipulation." But here is an eye-opening chart that will help shed more light on this issue.
EWI President Robert Prechter published this chart in his October 2008 Elliott Wave Theorist. Review this chart carefully. For too many investors, the crash of 2007-2009 is becoming a hazy memory. And almost no one in the mainstream financial media talks about the utter panic in the markets in September-October 2008, the worst part of the crash.
If you think back to that time, you may remember that the Federal Reserve and U.S. government took many aggressive steps to help stop the collapse. Every time they would announce a new intervention, the market would cheer. Result? Prechter’s chart gives an unequivocal answer:
As you can see, announcements of bailouts, unlimited credit, bans on short sales, etc., were powerless against the biggest stock market collapse in 76 years. The DJIA kept sliding. It didn’t stop until March 6, 2009 — after it had slipped below 6,500.
So: Is the Fed and the "Plunge Protection Team" engaged in market manipulation? You can browse EWI’s Message Board for some answers, but one thing is clear: When stocks were crashing two years ago, few dared to suggest that the Fed was in the saddle. Bob Prechter puts it best:
"When markets go up, the Fed seems to be in control; when they go down, it seems out of control. But the control aspect is an illusion."
Get the 33-page Market Myths Exposed eBook for…
The Fed and “Plunge Protection Team”: Are They Manipulating Stocks?
by ilene - October 29th, 2010 3:21 pm
The Fed and "Plunge Protection Team": Are They Manipulating Stocks?
Rumors are, the U.S. government "is propping up the stock market."
By Elliott Wave International
You will find many intriguing Q&As at EWI’s Message Board. We offer it as a free way for our Club EWI members and subscribers to interact with EWI and the Socionomics Institute’s experts. We strive to answer every Message Board reader, and publicly post the best Q&As.
By far, the most frequent question we’ve been asked recently is:
"What is your take on the persistent internet chatter that the Federal Reserve is holding up the stock market via QE2, POMO, etc.? How can stocks ever decline again if the Fed is in control?"
We have several active Message Board posts that touch on "market manipulation." But here is an eye-opening chart that will help shed more light on this issue.
EWI President Robert Prechter published this chart in his October 2008 Elliott Wave Theorist. Review this chart carefully. For too many investors, the crash of 2007-2009 is becoming a hazy memory. And almost no one in the mainstream financial media talks about the utter panic in the markets in September-October 2008, the worst part of the crash.
If you think back to that time, you may remember that the Federal Reserve and U.S. government took many aggressive steps to help stop the collapse. Every time they would announce a new intervention, the market would cheer. Result? Prechter’s chart gives an unequivocal answer:
As you can see, announcements of bailouts, unlimited credit, bans on short sales, etc., were powerless against the biggest stock market collapse in 76 years. The DJIA kept sliding. It didn’t stop until March 6, 2009 — after it had slipped below 6,500.
So: Is the Fed and the "Plunge Protection Team" engaged in market manipulation? You can browse EWI’s Message Board for some answers, but one thing is clear: When stocks were crashing two years ago, few dared to suggest that the Fed was in the saddle. Bob Prechter puts it best:
"When markets go up, the Fed seems to be in control; when they go down, it seems out of control. But the control aspect is an illusion."
Get the 33-page Market Myths Exposed eBook…
WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”
by ilene - October 26th, 2010 1:28 am
WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”
Courtesy of The Pragmatic Capitalist
I wish I could say that I am surprised that Ben Bernanke’s
“In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”
Welcome to your darkest moments Mr. Fisher. The one thing we can positively confirm about QE2 is that it has not created one single job. But what has it done? It has caused commodities and input prices to skyrocket in recent months. Reference these 10 week moves that have resulted in the Fed already causing “mini bubbles” in various markets:
- Cotton +48%
- Sugar +48%
- Soybeans +20%
- Rice +27%
- Coffee +18%
- Oats +22%
- Copper +17%
Of course, these are all inputs costs for the corporations that have desperately cut costs to try to maintain their margins. With very weak end demand the likelihood that these costs will be passed along to the consumer is extremely low. What does this mean? It means the Fed is unintentionally hurting corporate margins. And that means the Fed is unintentionally hurting the likelihood of a recovery in the labor market.
Professors Black and Wray Confirm that Bear Pledged the Same Mortgage to Multiple Buyers
by ilene - October 25th, 2010 3:20 pm
Professors Black and Wray Confirm that Bear Pledged the Same Mortgage to Multiple Buyers
Courtesy of Washington’s Blog
I have repeatedly pointed out that mortgages were pledged to multiple buyers at the same time. See this and this.
Today, in another must-read piece, economics professors William Black and L. Randall Wray confirm:
Several banks would go after the same homeowner, each claiming to hold the same mortgage (Bear sold the same mortgage over and over).
As USA Today pointed out in 2008, Bear was one of the big players in this area:
Bear Stearns was one of the biggest underwriters of complex investments linked to mortgages. Two of its hedge funds, heavily invested in subprime mortgages, folded in July.
***
Bear Stearns was linked to many other financial institutions, through the mortgage-backed securities it sponsored as well as through complex financial agreements called derivatives.
The Fed wasn’t so much concerned that 85-year-old Bear Stearns would go bankrupt, but rather that it would take other companies down with it, causing a financial meltdown.
Alot of toxic mortgages and mortgage related assets ended up on the taxpayer’s tab directly or indirectly.
For example, as Bloomberg noted in April 2009:
Maiden Lane I is a $25.7 billion portfolio of Bear Stearns securities related to commercial and residential mortgages. JPMorgan refused to buy them when it acquired Bear Stearns to avert the firm’s bankruptcy.
The Fed’s losses included writing down the value of commercial-mortgage holdings by 28 percent to $5.6 billion and residential loans by 38 percent to $937 million as of Dec. 31, the central bank said. Properties in California and Florida accounted for 45 percent of outstanding principal of the residential mortgages.
A Whiff of a “Mini” QE-2?
by ilene - October 22nd, 2010 2:27 am
A Whiff of a “Mini” QE-2?
Courtesy of Bruce Krasting
The 100% certain sure thing in the market today is that QE-2 will come on November 3rd and that it will be decisive in its scope. Well I am not so sure any more.
-The Fed’s Beige Book from yesterday did not make a case for an economy that needed emergency measures. Yes there was some discussion about the weak housing market and soft loan demand. But we know that QE-2 is not going to fix those problems.
-It is of significance to me (and should be to all) that Zero Hedge was featured in a Time/CNN article titled, Will the Federal Reserve Start a Civil War?
I am certain that the Fed reads Zero Hedge. But how much influence they have is a question. When it gets up to Time magazine however, it is another matter altogether. It is not possible for the Fed to avoid the collective roar that is coming from across the country at this point. If the Fed blunders with an unpopular QE-2 the results will be disastrous. Not only will the economy tank but the Fed will have lost a good chunk of its remaining credibility. The downside risks to Bernanke are enormous. I don’t think he believes he is in a popularity contest, but he does know he can’t run monetary policy with protesters outside his door. How much is he prepared to gamble given that he clearly does not have a consensus amongst his own board? He is an academic, not a gambler.
-Today St. Louis Fed Bullard made remarks to reporters that were a warning sign to me (and the market). He talked a much different game than what has been dished out of late. He made reference to a smaller program. Maybe less than $500billion (about half what is now in the street). He also threw out something that blew me away. He suggested that the 11/3 decision was in someway dependant on the Q3 GDP numbers that come out before the Fed meets. Bullard even “spun” the numbers on the hot side:
"it may come in a little stronger than the second quarter." So we have to keep our eye on that."
Bond traders shit in their pants and hit bids on long coupons. I like…
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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...
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