SUBHEAD: Our government is now complicit in the massive securities fraud perpetrated by the banks.
By John Schettler on 25 April 2009 in The Writing Shop
http://www.writingshop.ws/html/tangled_web.html
Image above: "The Promised Land" by Mark Bryan, 2003. From http://artofmarkbryan.com/promised%20land.html
By now it’s fairly clear what happened the last six months in the great bank bailout bonanza. As the massive securities pyramid began to collapse with Bear Stearns, Lehman, Merrill Lynch, and Morgan Stanley, the fact that huge US banks absorbing some of these companies were actually insolvent drained the blood from the face of then Treasury Secretary Hank Paulson.
All these institutions were massively overleveraged, and hiding their equally massive losses in a dark corner of the wine cellar called “level three.” Securities quickly gained leper status and the market for them died. Paulson and Bernanke ran to congress with threats of imminent collapse, martial law, and calamity on their lips and wrangled $700 billion from the public trust.
They then bullied Bank of America to rescue Merrill Lynch, threatening to remove Lewis as CEO and replace the board when BofA learned of Merrill’s massive losses and began waffling on the deal. The truth about Merrill was covered up, not reported to BofA shareholders, and the shotgun wedding was on.
The banks were all called in and given their free handout—all of them, so the public would not know which ones were truly in dire straits. The failure of WaMu and Wachovia earlier in the year had seen billions sucked out of those banks in just a few weeks time. Paulson and Bernanke wanted to protect insolvent mega banks from a similar run, so they forced everyone at the table to drink the same cool aid. ABC news quoted former Treasury Secretary Paul O’Neill as saying:
The bailout was as much a cover-up of the true condition of the banks as anything else. Karl Denninger pulls no punches when he talks about how “this ‘crisis’ went from an ‘unanticipated’ event to the biggest cover-up and looting operation in the history of the world, encompassing both private and government interests. Chris Martenson talks about the tangled web of the financial crisis this month on his blog:
Visit the empty, abandoned districts of Detroit, Sacramento, Merced, Stockton, Las Vegas, and Phoenix to name but a few. What you will see is the destruction of American neighborhoods, families, livelihoods, and marriages all in the interest of making good on bad derivatives bets made by the Boyz on Wall Street—now with the full backing of the Federal Reserve and Treasury Department, the blessing of congress and yes, Change.gov as well.
This realization, that financial insiders have blatantly seized control of …. everything…. has been circulating on the web the last month in a number of well researched articles. Paul Farrell summed things up for Marketwatch.com when he laid out the script for a suspense drama he called The Goldman Conspiracy:
Then “The Quiet Coup", from Simon Johnson in Atlantic Magazine. He echoed Catherine Austin Fitts of Solari.com who has been writing about the coup staged by the financial institutions for some time. Next was Matt Tabbi’s “the Big Takeover” article for the Rolling Stone.
Yes, all these writers finally see what has been going on behind the curtains for decades. What amazes me about all this is how many educated, well informed economists and financial analysts failed to even see the crisis coming—this while intrepid bloggers were laying out a virtual roadmap for what was to happen years before these events made headlines.
It was clear to me years ago that the US economy was running mostly on fabricated wealth the financial gurus called “equity” that was created by simple speculation in a badly overheated housing market. People were borrowing at an unprecedented rate, and credit and debt were piling up far beyond levels seen in the Great Depression.
A crash was almost certain to follow. All it really took was a look at a single chart noting the enormous run-up of debt, on both a personal and government level, to realize it had to end in a lot of pain. Now the pain is here, though delusion and outright deception continue on the part of banks and major media.
The full magnitude of the crisis continues to be mitigated, explained away, underestimated, obfuscated by watered down statistics. People continually quote the government’s lame U-3 unemployment stat, and use that number to compare it with the unemployment figures of the Great Depression.
You would have to at least use the U-6 number, and then some, to approximate how unemployment was calculated back then, and I have shown in numerous articles how we are now well ahead of Depression era numbers in terms of our current job loss rate, and much worse off in many other metrics.
Paulson & the Big MAC Attack
No wonder there is an enormous deficit of confidence in the US these days. What can you believe? As more and more information comes to light, we stand aghast at scale of duplicity, fraud, and good old fashioned gangland corruption at every level, from John Thain’s $48,000 carpets to Hank Paulson’s strong arming of Ken Lewis at BofA. In a letter to congressional overseers, Mario Cuomo wrote:
The truth is never broadcast. We always find out the real facts later, usually on the Internet, which has become the bain of all fraudsters. So at every stage of our “crisis” we see the government complicit in deception, cover-ups, and outright flaunting of the law—all to try and prevent a “systemic failure.”
What we are seeing now is an effort to change the psychology around what has happened to fuel the spring rally, the great suckers rally, that was mounted by Wall Street. The message is obvious to anyone with a brain. It says: we broke all the rules and bent any that remained.
We’ve made it abundantly clear that we’ll do anything to protect the interests of the major banks—so come on Boyz, get back in the trading pits! The aim is to restore the securities game to its former glory, and the entire effort to date will be seen in the cold light of history as an enormous waste and misallocation of funds. How can mortgage backed securities ever recover anything close to their original nominal values in this housing market?
Foreclosures slowed due to a moratorium in December and January, but now have resumed with a vengeance. Analysts believe that the banks are already holding 600,000 homes off the market that are in REO status. What happens when they are eventually funneled to the auction blocks as the law requires?
And any look at the spiking delinquency rates in prime mortgages should chill a banker’s blood. They must know, in their dark heart of hearts, that the housing market is dead and will not rise, zombie like, to it’s old glory. A mortgage will not be anything safe to underpin a security for years and years to come. But still the banks and financial policy makers pretend that these securities will be restored to their old values. They are now deemed “legacy assets.”
Yes, a legacy of excess, imprudence, fraud, corruption, and shame. The banks are now being propped up by government money, which flowed to them through undisclosed channels at the Fed and through conduits like AIG. The deception and delusion extends all throughout the system.
The Bogus Stress Test
The results of the “Stress Test” banks were given was supposedly leaked and published by Hal Turner of the Turner Radio Network. It was fairly grim, though really presented nothing new, at least to me. I have reported as much in numerous articles over the last year. Quite simply, major banks are insolvent.
Here’s Turner’s list:
Profit From Thin Air
In spite of this, the latest news spin is that the banks are now “profitable” and the green shoots of recovery are growing. But read the blogs and you will see that a consensus has already formed that all these reports of bank “profits” are completely contrived, tricks of accounting, rules changes, shuffling debt to previous quarters, sweeping the toxic waste under any doormat they can find. Even the NY Times chimed in with the headline: “Bank Profits Appear Out Of Thin Air!” That should come as no surprise, for the banks already create credit, debt and print money from thin air. Delusion, denial, and blatant fraud, with full government complicity—this is the order of the day. But it no longer passes unnoticed. The Internet ferrets out the truth at light speed these days. Writers and bloggers nail the deception, exposing it for the sham it is, though nothing is really ever done about it. Economics professor William Black pulled no punches in his interview with Barrons when he describes the present situation as “the greatest financial scandal in history - swept under the rug by top government officials of both parties; it’s legally and morally indefensible, and it’s wrecking the country.” Oh, what a tangled web we weave, when first we practice to deceive… David Kellermann, the Chief Financial Officer of Freddie Mac, one of the great landfills of toxic mortgage backed securities, was found dead in his cellar, hanging from a strand of that tangled web. What truth was so devastating that he could no longer bear to live? Deceptive accounting changes and other book juggling tricks were used to make it seem like the large banks are finally starting to turn a profit—all so we’d start to feel better. Here’s the disingenuous language Well Fargo used to explain how they “profited” from simply changing the value of their toxic assets to levels higher than anyone in their right mind would ever pay: “it was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.” So they just marked their bad CDOs up closer to their peak housing boom values, though housing will not return to those values for a decade or more. This is duplicitous self-deception, at best, a downright lie if taken at its root. Will investors fall for this nonsense? Citigroup also reported a $1.6 billion profit. Now let’s subtract the $45 billion they got from the public.
My math indicates they actually had a loss of $43.4 billion. And the “profit” itself comes from deferred dividend payments and valuations based on options to buy back debt at a lower price! It’s like saying you have a thousand bucks in your checking account because you simply decided not to pay the$1500 in bills on your desk, hiding them in a drawer until next month.
The truth is, the banks had no profit at all, and still have massive derivatives exposure that makes them technically insolvent.
Ilargi Meijer of the Automatic Earth has it exactly right when he concludes:
After taking $45 billion in taxpayer money, how did Citigroup say thanks? By raising interest rates across the board on all its credit card accounts, sticking it to the struggling Average Joes out there and insuring that they will remain in a revolving debt nightmare for years and years to come. The nifty term for these rate hikes is now “re-pricing.”
Robert S. McElvane commented for Huffington Post:
Better yet, suppose millions of Americans simply tell the banks to get lost. They cut up their credit cards and burn the statements when they arrive. This is already happening sporadically, as strapped debtors can no longer pay.
Capital One, the company that was always asking you what was in your wallet, now finally realized most Americans don’t have much there at all. The company has seen its credit card default rate shoot up from 2% to 9.33%. Nearly one in ten cardholders have defaulted!
Accounts have been closed at a break-neck pace, with over eight million cards pulled by the banks—and millions more have had their credit lines decapitated and interest rates hiked, all in an effort to reap as much hay as possible before congress imposes rules changes on the credit card business.
The banks are only likely to stimulate the default rate by their little re-pricing scheme. It will come back to haunt them in the end, for this economic downturn is far from over.
We see the hard numbers that have dogged this crisis for the last six months: housing sales, foreclosures, auto sales, retail sales, manufacturing, unemployment. The numbers from the wasteland just keep getting more and more grim. The Fortune 500 annual report called 2008 the worst year for business and finance in history. Here are the salient points:
The spending they were doing in the boom time was mostly done on the ever expanding credit the banks were pumping into the system, which was really nothing more than a continual creation of new debt. It’s really quite simple.
As long as the credit flowed, people kept charging. They used the home equity cash to install new granite counter tops, double pane windows, buy new appliances and cars. They used all those convenient balance transfer checks to shift their debt from one credit card account to another. The lovely little “congratulations” letters that came with credit line increases, (and three balance transfer checks), were all part of the game on a personal level for millions of Americans.
The banks would tell you how ‘responsible’ you were, and how you earned this extra credit—along with a strong pitch to go out and use it ASAP. “Use these checks for anything you want!” (Notice the word “need” was not used.)
So the wanton spending was fueled by the banks, and when they mucked up their own securities schemes, the game they used to try and avoid any liability for their actions, the money dried up. Now the securities game is over. Banks can’t create a CDO to pass on risk to the next fool in the investment world.
Now they have to carry losses on their books—at least on one set of books, the one hidden in the vault. Home equity loans are all but dead and credit card lines are shrinking each month, though interest rates and fees continue to increase. People are squeezed by the awful pressures of debt, and they no longer have any safety outlet—there’s no place to transfer that balance now. It will sit there at 29.99% interest for years and years. Default has become the only escape for many.
Even as beleaguered “homeowners” (which were really only debt owners), simply walk away from their underwater mortgages, people are now just throwing away their credit cards and the monthly bills as well. The reason is simple. When credit contracts as violently as it has in the last 6 months you get a massive deflation. People stop spending, and competition for remaining sales begins to erode prices. The PPI (Producer Price Index) has been falling.
The US consumer price index fell at an annual rate of 0.4% in March, the first time since August 1955 prices have decreased year-over-year—a once in a lifetime event. Like all government issued statistics, however, this one is also twisted to tell a story the powers that be want to hear. The government does not include the cost of housing in its calculation, so when housing costs were skyrocketing, they said inflation was still modest.
Now the inverse is true. As housing prices plummet, they will say deflation is not yet a concern, but they are wrong in both instances. The deflationary pressure of the collapsing housing market is far more severe than the chart above would make it seem.
On Main Street, retail prices are down 10% on many items, food being the stubborn exception. Rents are following that downward slope as well, albeit more slowly. ‘Landlords’ have this reflexive urge to raise rents on an annual basis, but now they find tenants are saying no, and meaning it. Rather than lose the tenant in an increasingly competitive rental market, landlords are finally being forced to lower rents or offer other incentives. It’s about time! But these price drops are only the symptom of deflation. The contraction of credit itself is the essence of this debilitating force. But aren’t price drops good?
Doesn’t that make your dollar stretch further? The bright side of deflation sees each dollar able to buy more goods and services, and this is generally good except in one circumstance—when you also carry large amounts of debt. As deflation pushes down prices, the dollar buys more—but the awful weight of debt becomes even more crushing. Every dollar of debt owed gets heavier and heavier. No market force ever acts to reduce your debt, which only decreases by being paid off.
And in periods of deflation, you are forced to use stronger dollars to pay off debt for assets that have lost much of their value. (This is why it is wise to sell assets and accumulate cash during a deflationary period—then use the cash to eliminate all debt.) People that bought a home for half a million in 2005 still owe that half million, even though deflation in the housing market has reduced the value of the house to only $250,000. Your asset lost half its value, but the debt remains the same.
As prices shrink, and layoffs create a general lessening of income, the ability to service this massive debt comes under severe strain. Debt is your single greatest enemy in any time of deflation. In an article for the Atlantic, a survivalist was interviewed who talked about his attitude to money and debt. When asked how he might invest the answer was straightforward—the intangible economy of stocks and bonds was an illusion to him:
Consider that if you owe a credit card company $5000 at 29.99% interest, and you can retire that debt, you have just saved yourself that 30%, by avoiding interest. There’s no way you could invest $5000 today and earn anything even remotely close to 30%.
Nor can you buy anything today that will appreciate in value by that amount any time soon. Some would argue you could buy gold and get a 30% return, but if you still owe that $5000 to Citibank, that interest you pay on that debt offsets any gains you make with your Krugerrands! Therefore, retire the debt first. If you have debt you have no business buying gold.
Get debt free, then, if you must buy anything, buy tangible things that will contribute directly to your ability to live in the years ahead. The survivalist above is correct: food, fuel, tools, useful land, these things are all assets that will sustain life. Buy assets you will use, not things you hope will appreciate in value like real estate—it won’t appreciate again for the foreseeable future. Forget granite counter tops.
Virtually every nickel so called ‘homeowners’ have spent in upgrading and improving their homes has already evaporated with the massive losses of equity—and housing values may still have another 25% to fall before they reach a bottom, according to many analysts.
While none of this should be interpreted as professional “investment advice,” think of it as simple common sense in times of deflation. Good luck navigating the tangled web of the economy these days.
By John Schettler on 25 April 2009 in The Writing Shop
http://www.writingshop.ws/html/tangled_web.html
Image above: "The Promised Land" by Mark Bryan, 2003. From http://artofmarkbryan.com/promised%20land.html
By now it’s fairly clear what happened the last six months in the great bank bailout bonanza. As the massive securities pyramid began to collapse with Bear Stearns, Lehman, Merrill Lynch, and Morgan Stanley, the fact that huge US banks absorbing some of these companies were actually insolvent drained the blood from the face of then Treasury Secretary Hank Paulson.
All these institutions were massively overleveraged, and hiding their equally massive losses in a dark corner of the wine cellar called “level three.” Securities quickly gained leper status and the market for them died. Paulson and Bernanke ran to congress with threats of imminent collapse, martial law, and calamity on their lips and wrangled $700 billion from the public trust.
They then bullied Bank of America to rescue Merrill Lynch, threatening to remove Lewis as CEO and replace the board when BofA learned of Merrill’s massive losses and began waffling on the deal. The truth about Merrill was covered up, not reported to BofA shareholders, and the shotgun wedding was on.
The banks were all called in and given their free handout—all of them, so the public would not know which ones were truly in dire straits. The failure of WaMu and Wachovia earlier in the year had seen billions sucked out of those banks in just a few weeks time. Paulson and Bernanke wanted to protect insolvent mega banks from a similar run, so they forced everyone at the table to drink the same cool aid. ABC news quoted former Treasury Secretary Paul O’Neill as saying:
“They all took the money. Stop and think about that. What was the purpose of this policy? To deceive the people so that the public would not know which banks were in danger of failing?”Obviously. Every action taken to date, with a $12.5 trillion price tag, has made the US government more and more complicit in the massive securities fraud and deception perpetrated by the banks themselves.
The bailout was as much a cover-up of the true condition of the banks as anything else. Karl Denninger pulls no punches when he talks about how “this ‘crisis’ went from an ‘unanticipated’ event to the biggest cover-up and looting operation in the history of the world, encompassing both private and government interests. Chris Martenson talks about the tangled web of the financial crisis this month on his blog:
“The unfortunate conclusion here is that our system and processes are fully ‘captured’ by a tangled web of interests that serve themselves over everything else. Your future, my future, and our future is being systematically ruined by a self-interested group of insiders that can no longer distinguish between their good and the common good.”I would argue further that the common good was never on their radar screen. The banks have never had anything more than their own interests as a concern, and now the US government has become their biggest facilitator and financial backer. Look around the nation.
Visit the empty, abandoned districts of Detroit, Sacramento, Merced, Stockton, Las Vegas, and Phoenix to name but a few. What you will see is the destruction of American neighborhoods, families, livelihoods, and marriages all in the interest of making good on bad derivatives bets made by the Boyz on Wall Street—now with the full backing of the Federal Reserve and Treasury Department, the blessing of congress and yes, Change.gov as well.
This realization, that financial insiders have blatantly seized control of …. everything…. has been circulating on the web the last month in a number of well researched articles. Paul Farrell summed things up for Marketwatch.com when he laid out the script for a suspense drama he called The Goldman Conspiracy:
“Drama? You bet. Six short months ago Hank led an assault on Congress. …The Hammer assaulted Congress with just a two-and-a-half page memo in hand. Like a crack special-ops warrior, he took down the enemy, demanding $750 billion, absolute control, total secrecy, no accountability and emergency powers to act immediately ... warning that inaction was not an option, that collapse of America's banking system was imminent, would bring down the global monetary system, pushing world's economies into a "Great Depression II."Congress surrendered. Farrell then recounted a list of articles that have appeared in reputable publications, Matthew Malone's article in Portfolio magazine, the conflicts of interest as ex-Goldman employees, heavily invested in AIG, rig the policies to protect their golden eggs.
Then “The Quiet Coup", from Simon Johnson in Atlantic Magazine. He echoed Catherine Austin Fitts of Solari.com who has been writing about the coup staged by the financial institutions for some time. Next was Matt Tabbi’s “the Big Takeover” article for the Rolling Stone.
Yes, all these writers finally see what has been going on behind the curtains for decades. What amazes me about all this is how many educated, well informed economists and financial analysts failed to even see the crisis coming—this while intrepid bloggers were laying out a virtual roadmap for what was to happen years before these events made headlines.
It was clear to me years ago that the US economy was running mostly on fabricated wealth the financial gurus called “equity” that was created by simple speculation in a badly overheated housing market. People were borrowing at an unprecedented rate, and credit and debt were piling up far beyond levels seen in the Great Depression.
A crash was almost certain to follow. All it really took was a look at a single chart noting the enormous run-up of debt, on both a personal and government level, to realize it had to end in a lot of pain. Now the pain is here, though delusion and outright deception continue on the part of banks and major media.
The full magnitude of the crisis continues to be mitigated, explained away, underestimated, obfuscated by watered down statistics. People continually quote the government’s lame U-3 unemployment stat, and use that number to compare it with the unemployment figures of the Great Depression.
You would have to at least use the U-6 number, and then some, to approximate how unemployment was calculated back then, and I have shown in numerous articles how we are now well ahead of Depression era numbers in terms of our current job loss rate, and much worse off in many other metrics.
Paulson & the Big MAC Attack
No wonder there is an enormous deficit of confidence in the US these days. What can you believe? As more and more information comes to light, we stand aghast at scale of duplicity, fraud, and good old fashioned gangland corruption at every level, from John Thain’s $48,000 carpets to Hank Paulson’s strong arming of Ken Lewis at BofA. In a letter to congressional overseers, Mario Cuomo wrote:
“Despite the fact that Bank of America had determined Merrill Lynch’s condition was so grave that it justified termination of the deal pursuant to the MAC clause (Materially Adverse Situation,) Bank of America did not publicly disclose Merrill Lynch’s devastation losses or the impact it would have on the merger. Nor did BofA disclose that it had been prepared to invoke the MAC clause and would have done so but for the intervention of the Treasury Department and the Federal Reserve.”Now… remember Thain and Lewis, all smiles, announcing their merger in glowing terms for the TV media? Then came Thain’s exorbitant office décor, the big bonus payouts at Merrill, and the concealment of massive losses from BofA shareholders.
The truth is never broadcast. We always find out the real facts later, usually on the Internet, which has become the bain of all fraudsters. So at every stage of our “crisis” we see the government complicit in deception, cover-ups, and outright flaunting of the law—all to try and prevent a “systemic failure.”
What we are seeing now is an effort to change the psychology around what has happened to fuel the spring rally, the great suckers rally, that was mounted by Wall Street. The message is obvious to anyone with a brain. It says: we broke all the rules and bent any that remained.
We’ve made it abundantly clear that we’ll do anything to protect the interests of the major banks—so come on Boyz, get back in the trading pits! The aim is to restore the securities game to its former glory, and the entire effort to date will be seen in the cold light of history as an enormous waste and misallocation of funds. How can mortgage backed securities ever recover anything close to their original nominal values in this housing market?
Foreclosures slowed due to a moratorium in December and January, but now have resumed with a vengeance. Analysts believe that the banks are already holding 600,000 homes off the market that are in REO status. What happens when they are eventually funneled to the auction blocks as the law requires?
And any look at the spiking delinquency rates in prime mortgages should chill a banker’s blood. They must know, in their dark heart of hearts, that the housing market is dead and will not rise, zombie like, to it’s old glory. A mortgage will not be anything safe to underpin a security for years and years to come. But still the banks and financial policy makers pretend that these securities will be restored to their old values. They are now deemed “legacy assets.”
Yes, a legacy of excess, imprudence, fraud, corruption, and shame. The banks are now being propped up by government money, which flowed to them through undisclosed channels at the Fed and through conduits like AIG. The deception and delusion extends all throughout the system.
The Bogus Stress Test
The results of the “Stress Test” banks were given was supposedly leaked and published by Hal Turner of the Turner Radio Network. It was fairly grim, though really presented nothing new, at least to me. I have reported as much in numerous articles over the last year. Quite simply, major banks are insolvent.
Here’s Turner’s list:
1) Of the top nineteen banks in the nation, sixteen are already technically insolvent.Edmund Conway reported on the IMF (International Monetary Fund) assessment concerning the world’s banks: “Today the Fund delivered its verdict and it is both clear and terrifying…if banks were to bring forward to today loss provisions for the next two years, before expected earnings, US and European banks in aggregate would have tangible equity close to zero." In other words, the entire global banking system would be bankrupt - kaput - if its institutions immediately wrote off all the toxic assets still sitting in their vaults without any government assistance. And bear in mind this already takes into account the money we have already thrown at the banks. So even after all this has been spent the financial system remains, effectively, insolvent…” Profit From Thin Air
2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.
3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.
4) Of the top 19 banks in the nation, the top five largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.
5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.
6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!
7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1 ,800 regional and smaller institutions are at risk of failure despite government bailouts!
Profit From Thin Air
In spite of this, the latest news spin is that the banks are now “profitable” and the green shoots of recovery are growing. But read the blogs and you will see that a consensus has already formed that all these reports of bank “profits” are completely contrived, tricks of accounting, rules changes, shuffling debt to previous quarters, sweeping the toxic waste under any doormat they can find. Even the NY Times chimed in with the headline: “Bank Profits Appear Out Of Thin Air!” That should come as no surprise, for the banks already create credit, debt and print money from thin air. Delusion, denial, and blatant fraud, with full government complicity—this is the order of the day. But it no longer passes unnoticed. The Internet ferrets out the truth at light speed these days. Writers and bloggers nail the deception, exposing it for the sham it is, though nothing is really ever done about it. Economics professor William Black pulled no punches in his interview with Barrons when he describes the present situation as “the greatest financial scandal in history - swept under the rug by top government officials of both parties; it’s legally and morally indefensible, and it’s wrecking the country.” Oh, what a tangled web we weave, when first we practice to deceive… David Kellermann, the Chief Financial Officer of Freddie Mac, one of the great landfills of toxic mortgage backed securities, was found dead in his cellar, hanging from a strand of that tangled web. What truth was so devastating that he could no longer bear to live? Deceptive accounting changes and other book juggling tricks were used to make it seem like the large banks are finally starting to turn a profit—all so we’d start to feel better. Here’s the disingenuous language Well Fargo used to explain how they “profited” from simply changing the value of their toxic assets to levels higher than anyone in their right mind would ever pay: “it was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.” So they just marked their bad CDOs up closer to their peak housing boom values, though housing will not return to those values for a decade or more. This is duplicitous self-deception, at best, a downright lie if taken at its root. Will investors fall for this nonsense? Citigroup also reported a $1.6 billion profit. Now let’s subtract the $45 billion they got from the public.
My math indicates they actually had a loss of $43.4 billion. And the “profit” itself comes from deferred dividend payments and valuations based on options to buy back debt at a lower price! It’s like saying you have a thousand bucks in your checking account because you simply decided not to pay the$1500 in bills on your desk, hiding them in a drawer until next month.
The truth is, the banks had no profit at all, and still have massive derivatives exposure that makes them technically insolvent.
Ilargi Meijer of the Automatic Earth has it exactly right when he concludes:
“Wall Street banks, who own more of your town, your country and your world as every single day passes, have no problem coming up with numbers that show they are profitable, while in reality they're losing more money every single hour than you can ever hope to make in a lifetime. And you are covering their losses.”Tightening Up The Thumbscrews
After taking $45 billion in taxpayer money, how did Citigroup say thanks? By raising interest rates across the board on all its credit card accounts, sticking it to the struggling Average Joes out there and insuring that they will remain in a revolving debt nightmare for years and years to come. The nifty term for these rate hikes is now “re-pricing.”
Robert S. McElvane commented for Huffington Post:
“The Fed effectively lowers the interest rate that banks pay to zero and the banks respond by raising the interest rates they charge to levels that used to be charged only by organized criminals."Suppose we all go to the banks and tell them the same thing—that we are “re-pricing” the interest they pay us on our savings deposits, upping it to an nice fat figure. (Can you believe that WaMu/Chase is now offering a savings account that pays all of one tenth of one percent in interest?) Let’s arbitrarily bump it to 5%. It’s either that or we want our money—now.
Better yet, suppose millions of Americans simply tell the banks to get lost. They cut up their credit cards and burn the statements when they arrive. This is already happening sporadically, as strapped debtors can no longer pay.
Capital One, the company that was always asking you what was in your wallet, now finally realized most Americans don’t have much there at all. The company has seen its credit card default rate shoot up from 2% to 9.33%. Nearly one in ten cardholders have defaulted!
Accounts have been closed at a break-neck pace, with over eight million cards pulled by the banks—and millions more have had their credit lines decapitated and interest rates hiked, all in an effort to reap as much hay as possible before congress imposes rules changes on the credit card business.
The banks are only likely to stimulate the default rate by their little re-pricing scheme. It will come back to haunt them in the end, for this economic downturn is far from over.
We see the hard numbers that have dogged this crisis for the last six months: housing sales, foreclosures, auto sales, retail sales, manufacturing, unemployment. The numbers from the wasteland just keep getting more and more grim. The Fortune 500 annual report called 2008 the worst year for business and finance in history. Here are the salient points:
- 2008 was the worst year in the history of the Fortune 500 for America’s largest companies;
- Profits fell from $645 billion in profits in 2007, to just $98.9 billion - an 84.7% decline;
- Eleven of the top 25 largest corporate losses in history took place last year;
- Insurance giant AIG posted a $99.3 billion loss — the biggest corporate loss of all time;
- Thirty-eight companies disappeared from the list altogether;
The spending they were doing in the boom time was mostly done on the ever expanding credit the banks were pumping into the system, which was really nothing more than a continual creation of new debt. It’s really quite simple.
As long as the credit flowed, people kept charging. They used the home equity cash to install new granite counter tops, double pane windows, buy new appliances and cars. They used all those convenient balance transfer checks to shift their debt from one credit card account to another. The lovely little “congratulations” letters that came with credit line increases, (and three balance transfer checks), were all part of the game on a personal level for millions of Americans.
The banks would tell you how ‘responsible’ you were, and how you earned this extra credit—along with a strong pitch to go out and use it ASAP. “Use these checks for anything you want!” (Notice the word “need” was not used.)
So the wanton spending was fueled by the banks, and when they mucked up their own securities schemes, the game they used to try and avoid any liability for their actions, the money dried up. Now the securities game is over. Banks can’t create a CDO to pass on risk to the next fool in the investment world.
Now they have to carry losses on their books—at least on one set of books, the one hidden in the vault. Home equity loans are all but dead and credit card lines are shrinking each month, though interest rates and fees continue to increase. People are squeezed by the awful pressures of debt, and they no longer have any safety outlet—there’s no place to transfer that balance now. It will sit there at 29.99% interest for years and years. Default has become the only escape for many.
Even as beleaguered “homeowners” (which were really only debt owners), simply walk away from their underwater mortgages, people are now just throwing away their credit cards and the monthly bills as well. The reason is simple. When credit contracts as violently as it has in the last 6 months you get a massive deflation. People stop spending, and competition for remaining sales begins to erode prices. The PPI (Producer Price Index) has been falling.
The US consumer price index fell at an annual rate of 0.4% in March, the first time since August 1955 prices have decreased year-over-year—a once in a lifetime event. Like all government issued statistics, however, this one is also twisted to tell a story the powers that be want to hear. The government does not include the cost of housing in its calculation, so when housing costs were skyrocketing, they said inflation was still modest.
Now the inverse is true. As housing prices plummet, they will say deflation is not yet a concern, but they are wrong in both instances. The deflationary pressure of the collapsing housing market is far more severe than the chart above would make it seem.
On Main Street, retail prices are down 10% on many items, food being the stubborn exception. Rents are following that downward slope as well, albeit more slowly. ‘Landlords’ have this reflexive urge to raise rents on an annual basis, but now they find tenants are saying no, and meaning it. Rather than lose the tenant in an increasingly competitive rental market, landlords are finally being forced to lower rents or offer other incentives. It’s about time! But these price drops are only the symptom of deflation. The contraction of credit itself is the essence of this debilitating force. But aren’t price drops good?
Doesn’t that make your dollar stretch further? The bright side of deflation sees each dollar able to buy more goods and services, and this is generally good except in one circumstance—when you also carry large amounts of debt. As deflation pushes down prices, the dollar buys more—but the awful weight of debt becomes even more crushing. Every dollar of debt owed gets heavier and heavier. No market force ever acts to reduce your debt, which only decreases by being paid off.
And in periods of deflation, you are forced to use stronger dollars to pay off debt for assets that have lost much of their value. (This is why it is wise to sell assets and accumulate cash during a deflationary period—then use the cash to eliminate all debt.) People that bought a home for half a million in 2005 still owe that half million, even though deflation in the housing market has reduced the value of the house to only $250,000. Your asset lost half its value, but the debt remains the same.
As prices shrink, and layoffs create a general lessening of income, the ability to service this massive debt comes under severe strain. Debt is your single greatest enemy in any time of deflation. In an article for the Atlantic, a survivalist was interviewed who talked about his attitude to money and debt. When asked how he might invest the answer was straightforward—the intangible economy of stocks and bonds was an illusion to him:
“I don’t believe in the intangible economy; I believe in the tangible economy. When I have extra money, I buy tools, food, or land. I like to be able to see what I’m buying. And I really don’t like debt, so I’d rather not have certain things than be in debt to anyone. I just feel better knowing that I don’t owe money, and I feel good knowing that I can take care of myself. That’s the American way, to be able to be self-reliant.”Retiring debt is therefore the smartest thing a person could do when facing a deflationary depression such as we have now.
Consider that if you owe a credit card company $5000 at 29.99% interest, and you can retire that debt, you have just saved yourself that 30%, by avoiding interest. There’s no way you could invest $5000 today and earn anything even remotely close to 30%.
Nor can you buy anything today that will appreciate in value by that amount any time soon. Some would argue you could buy gold and get a 30% return, but if you still owe that $5000 to Citibank, that interest you pay on that debt offsets any gains you make with your Krugerrands! Therefore, retire the debt first. If you have debt you have no business buying gold.
Get debt free, then, if you must buy anything, buy tangible things that will contribute directly to your ability to live in the years ahead. The survivalist above is correct: food, fuel, tools, useful land, these things are all assets that will sustain life. Buy assets you will use, not things you hope will appreciate in value like real estate—it won’t appreciate again for the foreseeable future. Forget granite counter tops.
Virtually every nickel so called ‘homeowners’ have spent in upgrading and improving their homes has already evaporated with the massive losses of equity—and housing values may still have another 25% to fall before they reach a bottom, according to many analysts.
While none of this should be interpreted as professional “investment advice,” think of it as simple common sense in times of deflation. Good luck navigating the tangled web of the economy these days.
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