05-08-2010, 11:27 PM
STOCK MARKET COLLAPSE:
MORE GOLDMAN MARKET RIGGING
Ellen Brown
Last week, Goldman Sachs was on the congressional hot seat, grilled for fraud in its sale of complicated financial products called “synthetic CDOs.” This week the heat was off, as all eyes turned to the attack of the shorts on Greek sovereign debt and the dire threat of a sovereign Greek default. By Thursday, Goldman’s fraud had slipped from the headlines and Congress had been cowed into throwing in the towel on its campaign to break up the too-big-to-fail banks. On Friday, Goldman was in settlement talks with the SEC.
Goldman and Wall Street reign. Congress appears helpless to discipline the big banks, just as the European Central Bank appears helpless to prevent the collapse of the European Union. . . . Or are they?
Suspicious Market Maneuverings
The shorts circled like sharks in the Greek bond market, following a highly suspicious downgrade of Greek debt by Moody’s on Monday. Ratings by private ratings agencies, long suspected of being in the pocket of Wall Street, often seem to be timed to cause stocks or bonds to jump or tumble, causing extreme reactions in the market. The Greek downgrade was suspicious and unexpected because the European Central Bank and International Monetary Fund had just pledged 120 billion Euros to avoid a debt default in Greece.
Markets were roiled further on Thursday, when the U.S. stock market suddenly lost 999 points, and just as suddenly recovered two-thirds of that loss. It appeared to be such a clear case of tampering that Maria Bartiromo blurted out on CNBC, “That is ridiculous. This really sounds like market manipulation to me.”
Manipulation by whom? Markets can be rigged with computers using high-frequency trading programs (HFT), which now compose 70% of market trading; and Goldman Sachs is the undisputed leader in this new gaming technique. Matt Taibbi maintains that Goldman Sachs has been “engineering every market manipulation since the Great Depression.” When Goldman does not get its way, it is in a position to throw a tantrum and crash the market. It can do this with automated market making technologies like the one invented by Max Keiser, which he claims is now being used to turbocharge market manipulation.
Goldman was an investment firm until September 2008, when it became a “bank holding company” overnight in order to capitalize on the bank bailout, including borrowing virtually interest-free from the Federal Reserve and other banks. In January, when President Obama backed Paul Volcker in his plan to reinstate a form of the Glass-Steagall Act that would separate investment banking from commercial banking, the market collapsed on cue, and the Volcker Rule faded from the headlines.
When Goldman got dragged before Congress and the SEC in April, the Greek crisis arose as a “counterpoint,” diverting attention to that growing conflagration. Greece appears to be the sacrificial play in the EU just as Lehman Brothers was in the U.S., “the hostage the kidnappers shoot to prove they mean business.”
The Nuclear Option
It is still possible, however, for the European Central Bank to snatch Greece from the fire and rout the shorts. It can do this with what has been called the nuclear option -- “monetizing” the debt of Greece and other debt-laden EU countries by effectively “printing money” (quantitative easing) and buying the debt itself at very low interest rates. This is called the “nuclear option” because it would blow up the hedge funds and electronic sharks operated by Goldman and other Wall Street heavies, which specialize in bringing down corporations and whole countries for strategic and exploitative ends.
Will the ECB proceed with this plan? Perhaps, say some experts. It could just be waiting for the German election on Sunday, which the ECB does not want to appear to be influencing.
FRAUDS AND SCANDALS FOLLOW THE COLLAPSE OF THE FINANCIAL SYSTEM
Bob Chapman
As the world faces an ongoing sovereign debt debacle we see an attempt to defuse an oncoming scandal involving Goldman Sachs, Paulson and perhaps others.
The collapse of the fiat money system is underway and each day picks up momentum. The only question is how long it can survive? In the interim we are faced with inflation and perhaps hyperinflation as the privately owned Federal Reserve and other central banks add stimulus and money and credit into their financial systems.
America’s system of finance and economy has been deliberately destroyed via regulation, illegal immigration and free trade, globalization, offshoring and outsourcing. We wrote about these issues and tactics as long ago as 1967. Taxes on both individuals and corporations are still onerous, the exception being the rich who pay far less than their fair share. By the way taxes will increase in the future and government may in the future attempt to take away your retirement plans and replace them with guaranteed annuities. We ask how can a bankrupt government guarantee anything? America and the rest of the world are realizing that you cannot live beyond your means indefinitely. The resultant poverty that eventually results is accompanied by the theft of wealth by inflation, subtly and secretly.
We have witnessed over the past few years a long line of frauds that usually accompany the collapse of a system. They are accompanied by government malfeasance and the arrogance of those who defraud the system with impunity. How can any nation survive if their currency and their bonds are worthless?
Someone’s loss is someone else’s gain and in this turmoil you can do two things. One is to protect your assets and the other is to capitalize on your knowledge. Do not allow the elitists to take your hard earned savings. It is our belief that 60% of sovereign debt will never be repaid.
The government is injecting a minimum of $1.5 trillion into the economy each year, as the Fed is adding at least $1 trillion. We are facing an end to stimulus and further Fed injections. If that happens it will thrust the US economy into a great dark pit a year from now. Then the insolvency of banking, Wall Street and government will become very apparent. What government has done is lie about everything, especially the amount of money they have thrust into the economy, via bailouts of the entire financial sphere and the manipulation of markets. If they had not done what they did the system would have collapsed long ago. What they have done has only delayed the inevitable. As we look back 50 years all we have seen is one crisis after another. There has never really been a meaningful recovery. The result is that Keynesian economics has had American economy on a roller coaster going nowhere. We have wasted opportunities and have destroyed our financial and economic structure to provide for the enrichment of the elitists who from behind the scenes control our economy and the world economy. G-20 debt is staggering, never mind US debt and worse yet, it is unpayable. The so-called recovery we are having is a sad joke. We have just had an interlude in an inflationary depression. The next phase is higher taxation and even more government control. Need we remind you that fascism is government by regulation and this is what we have in America today. Its evolution is a subtle, secret, strangling process. If only people would read the history of Europe during the late 1920s and throughout the 1930s and 40s, you would truly understand what is in process. You must remember Hitler was created at Versailles. Illuminists in the US, UK and across Europe financed both Hitler and Mussolini. Both did not have a clue they were being set up. This is the same thing that is happening in America today and in other countries as well.
We face one round after another of creative destruction. That is why we have real unemployment of 22-1/8%, almost as bad as during the 1930s. Banks are only selectively lending, so as a result the economy cannot grow. Inflation is 8%; wages are static, so buying power has been crippled. This predicament should be called corporatist fascism or socialism for the elitists and as a result 92% of small business polled said they see no recovery for 14 to 18 months. How can those who hire 80% of workers create new jobs – they cannot and won’t. That means there can be no sustained recovery.
This leads us to the frauds on Wall Street and banking. We have pointed out for some time that Wall Street and banking had turned into a criminal enterprise. They always skated down the edge, but nothing like what we have seen over the past 20 years. Having been in the brokerage industry for 28 years and around it for 50 years we have been in a position to observe it closely. Today it’s massively rife with criminality. The exposure of Lehman’s crimes in hearings has been unprecedented. We wonder how many other firms did the same thing and their actions were covered up by the Fed and the SEC, as well as the CFTC? They are still underestimating debt levels by 40 to 50 percent, which means their focus reports are useless. The spirit of honesty and integrity still doesn’t exist. They are essentially keeping two sets of books and that makes their financial statements useless and fraudulent. That doesn’t bother the SEC, the BIS, the FASB, the Treasury or the Fed; they supervise the lawbreaking. Debt levels are massively understated by keeping two sets of books and by marking-to-model, fantasy, not to market. All of this is a result of the termination of the Glass Steagal Act. It is all fraud, even if the government sanctions it. They are all acting in concert to screw the investor and the public. These people are all criminals. The excuse is that they are too big to fail. It is all fraud no matter which way you cut it. This is a criminal syndicate that should legally be out of business – bankrupt. They are all being bailed out, but we do not see the public being bailed out. The bailout of banking, Wall Street and insurance is still in process and there is no end in sight. There are two sets of laws. One for the Illuminists/elitist and another for us. Congress won’t do anything about it because most of them have been paid off. That is what campaign contributions and lobbying are all about. We espoused these views in university almost 60 years ago, and the only reason our views were tolerated was that we had two uncles who were professors at the university.
Taxes will rise substantially this year and next year because your representatives and senators know the government is broke. Among other things the medical reform bill is a tax bill as well.
Government is the problem but they are really useful idiots. The real power lies with the Illuminist behind the scenes. The financial sector is broke and it is unfixable. They know that and they are trying to stretch out the problem as far as possible to pick the right date to pull the deflationary plug.
If all this weren’t bad enough the Dodd bill in the Senate would create a permanent bailout mechanism that would create more risky behavior that would lead to perpetual bailouts for the financial industries. This is not financial reform, it is more corporatist fascism. To show you how bought and paid for Senate Banking Committee members are, the bill was voted out in 22 minutes with no amendments and no debate allowed. That is not democracy in action. The bill will now be rushed to the floor and passed.
The bill would also create a $50 billion bailout slush fund controlled by the FDIC and a new FDIC tax would be implemented on banks, which, of course, would be passed onto the public in higher banking costs.
The bill would also bail out creditors of companies. The slush fund would cover that as well. They call this riskless investment for corporate America and any bills would be picked up by the banks and passed on to Americans. We will then have hundreds or thousands of AIGs and GM’s. You ask yourself where does this all end? Read the history of the late1920s and into the 1930s of Italy and Germany and you will find out.
As the Senate and the House do the work of the bankers the bond market is in the process of sinking as yields rise. Higher rates, which we predicted last November, will become reality by the end of the year. A move by the US 10-year note from 3.20% to 4.5% or 5% will be the kiss of death for the mortgage industry. The 10-year yields 3.79% and the 30-year fixed rate mortgage is 5.07%. If 10’s go to 4.5%, mortgages will rise to 5.80% and a 5% ten-year note would work out to a 6.3% 30-year.
An increase in rates from 5.07% to 6.07% would add 19% to the total cost of a home, which means that any long-term recovery in housing is out of the question and that residential values would have to fall further as fewer and fewer people could qualify for loans. In fact, all loans would become more expensive, such as for business, credit cards, auto loans, etc. That 1% will increase debt service for the government by about $150 billion a year. This frankly presents the best of all worlds. If foreigners, such as the Chinese, Japanese or Russians became aggressive US bond sellers rates would climb considerably higher, inflicting even more damage to the economy and to US debt.
Most of you do not remember but mortgage rates hit about 18% in 1981, as official inflation hit 14-1/2%. Gold peaked out at $850, some six months earlier. On today’s mortgages that would triple payments on new mortgages and resets. As happened in 1981 the real estate market came to a standstill. Such an event would come when existing household debt is considerably higher. Debt today is already near 90% of GDP. Government debt is colossal, growing every minute and it is unpayable.
The bond market is going down and yields are going up and that is not good. The rise in interest rates has historically brought about higher gold and silver prices, because higher rates bring higher inflation. As we have said over and over again the only safe and profitable place to be is in gold and silver related assets. The storm is now just getting underway.
The MBA Mortgage Purchase Applications Index is 10.1%. The refi index was up to 15.8% versus 9.0% the prior week. The 30-year fixed rate mortgage was 5.04% and the 15’s were 4.34%.
The Treasury will sell $128 billion in notes next week, which is unprecedented. Talk about crowding out.
Governments worldwide will probably issue $4.5 trillion in debt this year, which is triple the 5-year average for industrial nations. Forty-five percent of that debt will be issued by the US.
We are told Russia and China are selling Treasuries and buying gold.
The US commercial paper market rose $1.5 billion to about $1.076 trillion this week.
Our sources within the banking industry tell us that 3-5 bank, First Source, Horizon and several others are in trouble. These are banks that refused TARP money. They have been told to expect an audit and that no further support can ever be expected from the Fed again. Auditors have already hit some of these banks and threatened them. One bank was told they were under capitalized and they were not. They arranged an additional line of credit with another bank and the Fed backed off. This criminal extortion is part of the move to eventual bank nationalization. The industry is hanging by a thread, as huge interest rate increases loom. The system lives on virtual money and that can only end up in real trouble. Again, do not hold CDs, annuities or cash value life policies, especially large balances. Not only banks will go under, but also so will insurance companies.
McClatchy: While Goldman Sachs' lawyers negotiated with the Securities and Exchange Commission over potentially explosive civil fraud charges, Goldman's chief executive visited the White House at least four times.
White House logs show that Chief Executive Lloyd Blankfein traveled to Washington for at least two events with President Barack Obama, whose 2008 presidential campaign received $994,795 in donations from Goldman's political action committee, its employees and their relatives. He also met twice with Obama's top economic adviser, Larry Summers.
Lawrence Jacobs, a University of Minnesota political scientist, said that "almost everything that the White House has done has been haunted by the personnel and the money of Goldman. as well as the suspicion that the White House, particularly early on, was pulling its punches out of deference to Goldman and its war chest.
"There's now kind of a magnifying glass on the administration for any sign of interference or conversations with the regulators and the judiciary," Jacobs said.
http://www.mcclatchydc.com/2010/04/21/92...white.html
Goldman Sachs was both an underwriter and an investor in Lloyds Banking Group’s vast refinancing deal late last year, the FT has learned, highlighting the potential conflicts of interest at the heart of the investment bank’s business model.
According to four people involved in the capital raising, Goldman – a dealer manager on the debt portion of the £23.5bn transaction – demanded last-minute changes to the structure of a deal it was underwriting. This had the effect of benefiting its position as a bond investor.
A Goldman director tipped off Galleon's Raj Rajaratnam about a $5 billion investment in Goldman by Berkshire Hathaway before a public announcement.
The revelation marks a significant turn in the government's case against Rajaratnam, the hedge-fund titan at the center of the largest insider-trading case in a generation.
After the SEC tagged Goldman, we opined that Bubblevision, or for that many virtually all pundits and media types, did not mention Buffett’s association with Goldman or how Buffett demanded and got heads after the Salomon-Treasury Auction rigging scandal. Maybe now someone will ask Warren about Goldie.
Buffett spokesman, Thomas Murphy surfaced last night, to say Buffett has ‘great confidence’ in Goldie.
U.S. mortgage applications bounced from three-month lows last week as potential buyers locked in lower borrowing costs before the federal tax credit expires, the Mortgage Bankers Association said on Wednesday.
Thirty-year mortgage rates dropped to hover around 5 percent, stoking home loan demand after applications slid for two straight weeks.
Refinancing picked up by 15.8 percent to represent 60 percent of all applications last week. Demand for loans to buy a home increased 10.1 percent to send the industry group's total applications index up 13.6 percent on a seasonally adjusted basis.
"Purchase applications continued to increase coming out of the Easter holiday, as we approach the end of the homebuyer tax credit, and are up modestly over last month," said Michael Fratantoni, MBA's vice president of research and economics.
Falling Treasury yields, used as a peg for mortgage rates, helped reduce the average 30-year loan rate by 0.13 percentage point to 5.04 percent.
The rate was up to 5.31 percent two weeks earlier, the highest since August 2009, and remains above the record low of 4.61 percent set in March of last year.
Harsh winter weather sapped housing demand in the first months of the year. The initial wave of the homebuyer tax credit, extended and broadened late last year, were seen having robbed some of this year's demand.
But some signs have emerged that buyers are surfacing to lock in the credit while they can. If they qualify for the incentives of up to $8,000, they need to have home contracts signed by the end of April and close loans by June 30.
Permits to build houses, for example, in April shot up to the highest level since October 2008. To read more, see [ID:nN16220782].
At best, though, housing is widely seen hovering around current weak levels at least through the year. The market still needs to work through a record stockpile of foreclosed properties, which RealtyTrac forecasts could drag into 2013. Read more at [ID:nNYS007912].
Jack Pritchard, Charlotte, North Carolina-based co-founder of Refinance.com, sees rising mortgage rates later this year and the expiration of the tax credits cutting into home sales and refinancing.
"The spring housing season, even with the tax credit, would be considered stable -- but stable at the bottom," he said.
"You've got a consumer trying to time the ultimate bottom in real estate prices and you still have extremely tight credit standards for consumers to qualify," Pritchard added.
FOX Business Network has expanded its quest for documents from the Federal Reserve in order to shed light on which financial firms borrowed funds during the financial crisis.
The network filed its new suit this afternoon in New York requesting documents from the Federal Reserve Board of Governors that will name each financial institution that borrowed from the various emergency lending facilities from November 1, 2008 through March 1, 2010. FOX Business originally sued the Fed for those documents but for a time period that ended on November 1, 2008.
The network scored a major victory in the original suit when the second circuit court of appeals ruled that the Fed had to turn over the requested documents. The Federal Reserve is expected to ask the court to reconsider the case and has said it is willing to take the case to the Supreme Court if necessary to protect the identity of the firms which received billions in taxpayer-backed guarantees.
The new suit expands the date through 2010 to learn which firms continued to seek emergency lending after the initial crisis had passed. FOX Business is also attempting to learn how much each individual institution received.
The U.S. Federal Reserve said on Wednesday it transferred a record $47.4 billion to the U.S. Treasury in 2009 as a result of its programs to help the economy and financial firms during the financial crisis.
The increase in income was primarily due to interest earnings on mortgage-backed securities issued by government supported mortgage finance agencies, the Fed said.
Some of the data in the Fed's 2009 annual financial statement revises estimates released in January.
The 12 Fed regional banks are required to transfer their profits to the Treasury after paying dividends to member banks and retaining some of their surplus.
Fed officials said the U.S. central bank's payment to the Treasury in 2009 was a $15.7 billion, or 50 percent, increase over 2008. The previous record was $34.6 billion in 2007, and the pre-crisis level was around $20 billion, Fed officials told reporters.
The Fed took unprecedented actions to prop up the economy during the storm but has been under fire from lawmakers on Capitol Hill over financial firm bailouts and regulatory lapses.
The credit risk on the Fed's balance sheet is down sharply as its loans have decreased and Treasury and government-sponsored mortgage finance agency securities make up a larger share of the central bank's assets, a Fed official said.
Financial reforms are a top priority for President Barack Obama, and news that the U.S. central bank has been profitable for taxpayers may strengthen the Fed's hand as lawmakers decide whether to enhance its powers over banks.
A Senate committee on Wednesday approved a bill aimed at reforming the derivatives market, moving the Senate one step closer to passing sweeping regulation over the $450 trillion derivatives market.
The Senate Agriculture Committee approved the legislation by a vote of 13 to 8, with one Republican, Charles Grassley, breaking ranks to vote with Democrats.
The measure, part of the Democrats push to crack down on Wall Street, is expected to be merged into a broader bill from the Senate Banking Committee. A full Senate debate is expected by next week.
Its passage through the committee was a first test of how strongly Democrats are willing to push reform and how easily Republicans may be prepared to play ball.
Regulators charged a Miami Beach, Florida, philanthropist with fraud for allegedly running a $900 million Ponzi scheme, the Securities and Exchange Commission said on Wednesday.
Nevin K. Shapiro, a major donor to the University of Miami's sports program, sold investors securities that he claimed would fund his Capitol Investments firm's grocery business and touted returns as high as 26 percent annually, the SEC said.
Instead, Shapiro repurposed funds, making extravagant donations to charities and running a Ponzi scheme where he used funds from new investors to pay the principal and interest to earlier investors, the SEC said.
The 41-year-old Shapiro surrendered to authorities Wednesday morning in New Jersey, his lawyer said.
According to the SEC, Shapiro used at least $38 million of investor funds to finance other business activities and a lavish lifestyle, including a $5 million home in Miami Beach, expensive clothes and season tickets to sporting events.
To raise funds, Shapiro attracted investors through word of mouth from friends and business associates, and reassured investors by boasting of his wealth, the SEC said.
When investors questioned Shapiro, he showed them fabricated invoices and purchase orders for nonexistent sales, the SEC said.
Existing home sales increased by 6.8%, good for a total of 5.35 million units, in March, thereby reversing three months of declining sales. This growth beats market forecasts of a more modest 5.6% increase. ??In related data, the US housing price index fell 0.2% in February. This marks the third consecutive month of falling home prices.
The Producer Price Index for the US grew 0.7% in March, beating forecasts of a 0.5% rise over February's 0.6% decline. ??Year-over-year, the PPI increased 6.0% in March compared to February's annual 4.4% boost. This growth is in line with expectations. ??The PPI excluding food and energy prices rose an expected 0.1% in March, thereby matching February's rate. ??Year-over-year, the PPI excluding food and energy increased as forecast by 0.9% in March, slightly down from February's 1.0% growth.
February Housing Price Index declines 0.2% MoM in March vs a 0.6% decline in February
The number of Americans filing claims for unemployment benefits fell last week as the rebounding economy prompted companies to make fewer job cuts.
Initial jobless applications dropped by 24,000 to 456,000 in the week ended April 17, the Labor Department said today in Washington. The number of people receiving unemployment insurance and those getting extended benefits also fell.
Employers enjoying improved sales and profits may be gaining confidence in the economy and retaining staff. A transition from less firing to consistent job growth will ensure the recovery from the deepest recession since the 1930s is sustained.
“The state of the job market is firming,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who forecast claims would fall to 458,000. Companies are “actually retaining headcount and growing.”
Economists anticipated claims would fall to 450,000 from a previously reported 484,000 the prior week, according to the median of 47 projections in a Bloomberg News survey. Estimates ranged from 430,000 to 480,000.
Sales of U.S. previously owned homes rose in March for the first time in four months as buyers took advantage of a government tax credit and the weather improved. Purchases climbed 6.8 percent to a 5.35 million annual rate, exceeding the median forecast of economists surveyed by Bloomberg News, data from the National Association of Realtors showed today in Washington. New applications for jobless benefits declined and producer prices rose, Labor Department reports showed.
A homebuyer incentive worth as much as $8,000 for contracts closed by the end of June may provide a short-term boost to the industry that helped trigger the worst recession since the 1930s. Housing’s outlook for the second half of the year will be linked to a rebound in hiring, indicating a recovery will probably take years to develop as foreclosures climb.
CAPITALISM WITHOUT CAPITAL
Mike Whitney
http://www.informationclearinghouse.info...e25431.htm
Volatility is back and stocks have started zigzagging wildly again. This time it's Greece in the hotseat, but tomorrow it could be someone else. The real problem is there's too much leverage in the system, so crises keep popping up one after another. For a long time, leverage wasn't an issue, because there was enough liquidity to keep things bobbing-along smoothly. But that changed when Lehman Bros. collapsed and non-bank funding began to shut down. When the so-called "shadow banking" system crashed, liquidity dried up and the markets went into a nosedive. That's why Fed Chair Ben Bernanke stepped in and provided short-term loans to under-capitalized financial institutions. Bernanke's rescue operation revived the system, but it also transferred $1.7 trillion of illiquid assets and non-performing loans onto the Fed's balance sheet. So the problem really wasn't fixed at all; the debts were just moved from one balance sheet to another.
Last Thursday, troubles in Greece triggered a major selloff on all the main indexes. At one point, shares on the Dow plunged 998 points before clawing back 600 points by the end of the day. Some of losses were due to High-Frequency Trading (HFT), which is computer-driven program-trading that executes millions of buy and sell orders in the blink of an eye. HFT now accounts for more than 60 percent of all trading activity on the NYSE. Paul Kedrosky explains what happened in greater detail in his article, "The Run on the Shadow Liquidity System". Here's an excerpt:
"As most will know, liquidity is, like so many things in financial life, something you can choke on as long as you don't want any....Liquidity is a function of various things working fairly smoothly together, including other investors, market-makers, and, yes, technical algorithms scraping fractions of pennies as things change hands. Together, all these actors create that liquidity that everyone wants, and, for the most part, that everyone takes for granted.....
Largely unnoticed, however, at least among non-professional investors, the provision of liquidity has changed immensely in recent years. It is more fickle, less predictable, and more prone to disappearing suddenly, like snow sublimating straight to vapor during a spring heat wave. Why? Because traditional providers of liquidity, market-makers and other participants, are not standing so ready to make the other side of the market. There are fewer traders prepared to make a market for the sake of market health.....
For the first time we have large providers of this shadow liquidity, algorithms and high-frequency sorts, that individually account for large percentages of daily trading activity, and, at the same time, that can be turned off with a switch, or at an algorithmic w him. As a result, in market crises, when liquidity was always hardest to find, it now doesn't just become hard to find, it disappears altogether, like water rushing out sight via a trapdoor to hell. Old-style market-makers are standing aside as panicky orders pour in, and they look straight at shadow liquidity providers and say, "No thanks." (Paul Kedrosky, "The Run on the Shadow Liquidity System" Infectious Greed)
The fact that the SEC can't figure out what happened, has been a bigger blow to investor confidence than the erratic behavior of the markets themselves. It shows that regulators really don't have a handle on the technology that's driving the markets. That just reinforces the perception that trading is a crap-shoot and the market is a casino.
Deregulation has also eroded confidence in the markets. Since Glass Steagall was repealed in 1999, the financial markets have been completely overhauled. Unfortunately, the new architecture is riddled with flaws. The main levers of credit creation are now in the hands of privately-owned shadow banks instead of highly-regulated "depository" institutions. That's a problem, because the hedge funds, insurers, brokerage houses, SIVs and off-balance sheet operations are mostly unsupervised, so they can ignore capitalization requirements and traditional lending standards. Even worse, they can crank out as much credit as they want via the repo market or by using financial instruments (like MBS, CDS, CDO) Here's how economist James Hamilton explains it in a recent post titled "Follow The Money". Here's an excerpt:
"If you buy a mortgage-backed security (or collateralized debt obligation constructed from assorted MBS), you could then issue commercial paper against it to get most of your money back, essentially making the purchase self-financing. This was the idea behind the notorious off-balance sheet structured investment vehicles or conduits, which basically used money borrowed on the commercial paper market to buy various pieces of the mortgage securities created by the loan aggregators. The dollar value of outstanding asset-backed commercial paper nearly doubled between 2004 and 2007.
Yale Professor Gary Gorton has also emphasized the importance of repo operations involving mortgage-related securities. If I buy a security, I can then pledge it as collateral to obtain a repo loan, again getting most of my money back and allowing the purchase to be mostly self-financing as long as I keep rolling over repos. Although I have not been able to find numbers on the volume of such transactions, it appears to have been quite substantial.
The question of how the house price run-up was funded thus has a pretty clear answer: Other People's Money. Because of so much money pouring into house purchases, the price was driven up." ("Follow The Money", James Hamilton, Econbrowser)
This is how Wall Street pumped up leverage to ungodly levels and steered the financial system off the cliff. The debt-instruments and repo market were used to create a ginormous debt pyramid balanced precariously atop a few crumbs of capital. The system was bound to crash.
Naturally, the people who benefit from credit default swaps (CDS) and other derivatives, continue to sing their praises, but their numbers grow smaller and smaller all the time. Many people now understand the role that derivatives played in crashing the system and are demanding change. But Wall Street doesn't care about public opinion. The big banks have already deployed their army of lobbyists to Capital Hill to make sure that the new reform legislation doesn't restrict their use of hybrid derivatives which have become their biggest profit-makers. Considering the amount of money they've spread around, it would be a miracle if they didn't get their way.
LOW INTEREST RATES DIDN'T CAUSE THE CRISIS
Last week, economists Edward L. Glaeser, Joshua Gottlieb and Joseph Gyourko published a research paper and presented their findings to the Federal Reserve Bank of Boston. Here's what they said:
"It isn't that low interest rates don't boost housing prices. They do. It isn't that higher mortgage approval rates aren't associated with rising home values. They are. But the impact of these variables, as predicted by economic theory and as estimated empirically over many years, is too small to explain much of the housing market event that we have just experienced."
Glaeser, Gottlieb and Gyourko say those factors can explain only about a 10 percent increase in home prices between 2000 and 2006. That's only one-third of the 30 percent increase in prices (adjusted for inflation) during that period, as measured by the Federal Housing Finance Agency, or the 74 percent increase measured by the Case-Shiller/Standard and Poor's index of prices in 20 large metro areas.
So what is to blame for the bubble? Well, they're not sure. "Using the standard toolkit of the empirical economist, we are unable to offer much of an explanation for what happened," they write." ("Low interest rates didn't cause the bubble economists say", Elizabeth Razzi, Washington Post)
The crisis was not sparked by interest rates or lax lending standards, but by leverage. In fact, the repo market, securitization and the vast array of debt-instruments are all designed with one purpose in mind; to conceal the amount of leverage in the system. It's capitalism without capital.
The $1.5 trillion in subprime mortgages wasn't nearly enough to bring down the entire financial system. But the losses on trillions of dollars of derivatives that were balanced on top of these mortgages, certainly was. So, what really happened? Here's a summary of the meltdown by economist Henry Liu:
"...the current financial crisis that began in mid-2007 was caused not by bank runs from depositors, but by a melt down of the wholesale credit market when risk-averse sophisticated institutional investors of short-term debt instruments shied away en mass.
The wholesale credit market failure left banks in a precarious state of being unable to roll over their short-term debt to support their long-term loans. Even though the market meltdown had a liquidity dimension, the real cause of system-wide counterparty default was imminent insolvency resulting from banks holding collateral whose values fell below liability levels in a matter of days. For many large, public-listed banks, proprietary trading losses also reduced their capital to insolvency levels, causing sharp falls in their share prices." ("Two Different Banking Crisis--1929 and 2007" Henry Liu)
The banks don't fund themselves by taking deposits and then using them to lend out money at higher rates. What they do is buy long-term illiquid assets (mortgage-backed securities, asset-backed securities) and exchange them in the repo market for short-term loans. It's like going to a pawn shop and borrowing money by posting collateral, except --in this case--a financial institution (counterparty) takes the other side of the deal.
When the subprimes started blowing up, the institutions that had been taking the other side of the deals, (the counterparties) got nervous, because they thought the subprime-backed collateral might be worth less than the money they were providing in loans. So they demanded more collateral from the banks which forced the banks to sell more assets to raise money to cover their losses. This pushed prices down, sparked a flurry of firesales, and drove the weaker institutions into bankruptcy.
The amount of leverage built up in these derivatives was mind-boggling. Take a look at this article from the Wall Street Journal:
"Documents released by Senate investigators last week provide clues as to why the losses were so severe. The documents show how Wall Street banks packaged and repackaged the same risky bonds into securities that ultimately helped magnify the impact of defaulting subprime mortgages on the financial system.
In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors by the time the bond's principal was wiped out in 2008, according to data reviewed by The Wall Street Journal.....("Senate's Goldman Probe Shows Toxic Magnification", Carrick Mollenkamp and Serena Ng, Wall Street Journal)
So it wasn't the subprime mortgages that caused most of the damage, but the amount of leverage bundled into the derivatives and the repo market. Congress needs to focus their attention on the particular instruments and processes (derivatives, repo and securitization) that are used to maximize leverage and inflate bubbles. That's where the problem lies.
Nomi Prins explains it a bit differently in this month's The American Prospect. Here's an excerpt from her article "Shadow Banking":
"Between 2002 and early 2008, roughly $1.4 trillion worth of sub-prime loans were originated by now-fallen lenders like New Century Financial. If such loans were our only problem, the theoretical solution would have involved the government subsidizing these mortgages for the maximum cost of $1.4 trillion. However, according to Thomson Reuters, nearly $14 trillion worth of complex-securitized products were created, predominantly on top of them, precisely because leveraged funds abetted every step of their production and dispersion. Thus, at the height of federal payouts in July 2009, the government had put up $17.5 trillion to support Wall Street's pyramid Ponzi system, not $1.4 trillion. The destruction in the commercial lending market could spur the next implosion." ("Shadow Banking", Nomi Prins, The American Prospect)
This is a point that bears repeating: "...nearly $14 trillion worth of complex-securitized products were created" on top of just "$1.4 trillion" of subprime loans." No doubt, the investment bankers and hedge fund managers who inflated these monster balloons, knew that they were doomed from the get-go, but then, they must have also known that "I.B.G.-Y.B.G.", which in Wall Street parlance means, "I'll Be Gone and You'll Be Gone."
For a long time, Wall Street concealed its bubblemaking and racketeering behind theories that glorified the wisdom and flexibility of unregulated markets. Government intervention was disparaged as an unnecessary intrusion into a divinely-harmonized system. Now the curtain has been drawn and the sham exposed. The state has a clear interest in making sure that credit-generating institutions are adequately capitalized, that lending standards are strictly upheld, and that reasonable limits are put on the amount of leverage that financial institutions are allowed to use. That's the only way the public can be protected.
MORE GOLDMAN MARKET RIGGING
Ellen Brown
Last week, Goldman Sachs was on the congressional hot seat, grilled for fraud in its sale of complicated financial products called “synthetic CDOs.” This week the heat was off, as all eyes turned to the attack of the shorts on Greek sovereign debt and the dire threat of a sovereign Greek default. By Thursday, Goldman’s fraud had slipped from the headlines and Congress had been cowed into throwing in the towel on its campaign to break up the too-big-to-fail banks. On Friday, Goldman was in settlement talks with the SEC.
Goldman and Wall Street reign. Congress appears helpless to discipline the big banks, just as the European Central Bank appears helpless to prevent the collapse of the European Union. . . . Or are they?
Suspicious Market Maneuverings
The shorts circled like sharks in the Greek bond market, following a highly suspicious downgrade of Greek debt by Moody’s on Monday. Ratings by private ratings agencies, long suspected of being in the pocket of Wall Street, often seem to be timed to cause stocks or bonds to jump or tumble, causing extreme reactions in the market. The Greek downgrade was suspicious and unexpected because the European Central Bank and International Monetary Fund had just pledged 120 billion Euros to avoid a debt default in Greece.
Markets were roiled further on Thursday, when the U.S. stock market suddenly lost 999 points, and just as suddenly recovered two-thirds of that loss. It appeared to be such a clear case of tampering that Maria Bartiromo blurted out on CNBC, “That is ridiculous. This really sounds like market manipulation to me.”
Manipulation by whom? Markets can be rigged with computers using high-frequency trading programs (HFT), which now compose 70% of market trading; and Goldman Sachs is the undisputed leader in this new gaming technique. Matt Taibbi maintains that Goldman Sachs has been “engineering every market manipulation since the Great Depression.” When Goldman does not get its way, it is in a position to throw a tantrum and crash the market. It can do this with automated market making technologies like the one invented by Max Keiser, which he claims is now being used to turbocharge market manipulation.
Goldman was an investment firm until September 2008, when it became a “bank holding company” overnight in order to capitalize on the bank bailout, including borrowing virtually interest-free from the Federal Reserve and other banks. In January, when President Obama backed Paul Volcker in his plan to reinstate a form of the Glass-Steagall Act that would separate investment banking from commercial banking, the market collapsed on cue, and the Volcker Rule faded from the headlines.
When Goldman got dragged before Congress and the SEC in April, the Greek crisis arose as a “counterpoint,” diverting attention to that growing conflagration. Greece appears to be the sacrificial play in the EU just as Lehman Brothers was in the U.S., “the hostage the kidnappers shoot to prove they mean business.”
The Nuclear Option
It is still possible, however, for the European Central Bank to snatch Greece from the fire and rout the shorts. It can do this with what has been called the nuclear option -- “monetizing” the debt of Greece and other debt-laden EU countries by effectively “printing money” (quantitative easing) and buying the debt itself at very low interest rates. This is called the “nuclear option” because it would blow up the hedge funds and electronic sharks operated by Goldman and other Wall Street heavies, which specialize in bringing down corporations and whole countries for strategic and exploitative ends.
Will the ECB proceed with this plan? Perhaps, say some experts. It could just be waiting for the German election on Sunday, which the ECB does not want to appear to be influencing.
FRAUDS AND SCANDALS FOLLOW THE COLLAPSE OF THE FINANCIAL SYSTEM
Bob Chapman
As the world faces an ongoing sovereign debt debacle we see an attempt to defuse an oncoming scandal involving Goldman Sachs, Paulson and perhaps others.
The collapse of the fiat money system is underway and each day picks up momentum. The only question is how long it can survive? In the interim we are faced with inflation and perhaps hyperinflation as the privately owned Federal Reserve and other central banks add stimulus and money and credit into their financial systems.
America’s system of finance and economy has been deliberately destroyed via regulation, illegal immigration and free trade, globalization, offshoring and outsourcing. We wrote about these issues and tactics as long ago as 1967. Taxes on both individuals and corporations are still onerous, the exception being the rich who pay far less than their fair share. By the way taxes will increase in the future and government may in the future attempt to take away your retirement plans and replace them with guaranteed annuities. We ask how can a bankrupt government guarantee anything? America and the rest of the world are realizing that you cannot live beyond your means indefinitely. The resultant poverty that eventually results is accompanied by the theft of wealth by inflation, subtly and secretly.
We have witnessed over the past few years a long line of frauds that usually accompany the collapse of a system. They are accompanied by government malfeasance and the arrogance of those who defraud the system with impunity. How can any nation survive if their currency and their bonds are worthless?
Someone’s loss is someone else’s gain and in this turmoil you can do two things. One is to protect your assets and the other is to capitalize on your knowledge. Do not allow the elitists to take your hard earned savings. It is our belief that 60% of sovereign debt will never be repaid.
The government is injecting a minimum of $1.5 trillion into the economy each year, as the Fed is adding at least $1 trillion. We are facing an end to stimulus and further Fed injections. If that happens it will thrust the US economy into a great dark pit a year from now. Then the insolvency of banking, Wall Street and government will become very apparent. What government has done is lie about everything, especially the amount of money they have thrust into the economy, via bailouts of the entire financial sphere and the manipulation of markets. If they had not done what they did the system would have collapsed long ago. What they have done has only delayed the inevitable. As we look back 50 years all we have seen is one crisis after another. There has never really been a meaningful recovery. The result is that Keynesian economics has had American economy on a roller coaster going nowhere. We have wasted opportunities and have destroyed our financial and economic structure to provide for the enrichment of the elitists who from behind the scenes control our economy and the world economy. G-20 debt is staggering, never mind US debt and worse yet, it is unpayable. The so-called recovery we are having is a sad joke. We have just had an interlude in an inflationary depression. The next phase is higher taxation and even more government control. Need we remind you that fascism is government by regulation and this is what we have in America today. Its evolution is a subtle, secret, strangling process. If only people would read the history of Europe during the late 1920s and throughout the 1930s and 40s, you would truly understand what is in process. You must remember Hitler was created at Versailles. Illuminists in the US, UK and across Europe financed both Hitler and Mussolini. Both did not have a clue they were being set up. This is the same thing that is happening in America today and in other countries as well.
We face one round after another of creative destruction. That is why we have real unemployment of 22-1/8%, almost as bad as during the 1930s. Banks are only selectively lending, so as a result the economy cannot grow. Inflation is 8%; wages are static, so buying power has been crippled. This predicament should be called corporatist fascism or socialism for the elitists and as a result 92% of small business polled said they see no recovery for 14 to 18 months. How can those who hire 80% of workers create new jobs – they cannot and won’t. That means there can be no sustained recovery.
This leads us to the frauds on Wall Street and banking. We have pointed out for some time that Wall Street and banking had turned into a criminal enterprise. They always skated down the edge, but nothing like what we have seen over the past 20 years. Having been in the brokerage industry for 28 years and around it for 50 years we have been in a position to observe it closely. Today it’s massively rife with criminality. The exposure of Lehman’s crimes in hearings has been unprecedented. We wonder how many other firms did the same thing and their actions were covered up by the Fed and the SEC, as well as the CFTC? They are still underestimating debt levels by 40 to 50 percent, which means their focus reports are useless. The spirit of honesty and integrity still doesn’t exist. They are essentially keeping two sets of books and that makes their financial statements useless and fraudulent. That doesn’t bother the SEC, the BIS, the FASB, the Treasury or the Fed; they supervise the lawbreaking. Debt levels are massively understated by keeping two sets of books and by marking-to-model, fantasy, not to market. All of this is a result of the termination of the Glass Steagal Act. It is all fraud, even if the government sanctions it. They are all acting in concert to screw the investor and the public. These people are all criminals. The excuse is that they are too big to fail. It is all fraud no matter which way you cut it. This is a criminal syndicate that should legally be out of business – bankrupt. They are all being bailed out, but we do not see the public being bailed out. The bailout of banking, Wall Street and insurance is still in process and there is no end in sight. There are two sets of laws. One for the Illuminists/elitist and another for us. Congress won’t do anything about it because most of them have been paid off. That is what campaign contributions and lobbying are all about. We espoused these views in university almost 60 years ago, and the only reason our views were tolerated was that we had two uncles who were professors at the university.
Taxes will rise substantially this year and next year because your representatives and senators know the government is broke. Among other things the medical reform bill is a tax bill as well.
Government is the problem but they are really useful idiots. The real power lies with the Illuminist behind the scenes. The financial sector is broke and it is unfixable. They know that and they are trying to stretch out the problem as far as possible to pick the right date to pull the deflationary plug.
If all this weren’t bad enough the Dodd bill in the Senate would create a permanent bailout mechanism that would create more risky behavior that would lead to perpetual bailouts for the financial industries. This is not financial reform, it is more corporatist fascism. To show you how bought and paid for Senate Banking Committee members are, the bill was voted out in 22 minutes with no amendments and no debate allowed. That is not democracy in action. The bill will now be rushed to the floor and passed.
The bill would also create a $50 billion bailout slush fund controlled by the FDIC and a new FDIC tax would be implemented on banks, which, of course, would be passed onto the public in higher banking costs.
The bill would also bail out creditors of companies. The slush fund would cover that as well. They call this riskless investment for corporate America and any bills would be picked up by the banks and passed on to Americans. We will then have hundreds or thousands of AIGs and GM’s. You ask yourself where does this all end? Read the history of the late1920s and into the 1930s of Italy and Germany and you will find out.
As the Senate and the House do the work of the bankers the bond market is in the process of sinking as yields rise. Higher rates, which we predicted last November, will become reality by the end of the year. A move by the US 10-year note from 3.20% to 4.5% or 5% will be the kiss of death for the mortgage industry. The 10-year yields 3.79% and the 30-year fixed rate mortgage is 5.07%. If 10’s go to 4.5%, mortgages will rise to 5.80% and a 5% ten-year note would work out to a 6.3% 30-year.
An increase in rates from 5.07% to 6.07% would add 19% to the total cost of a home, which means that any long-term recovery in housing is out of the question and that residential values would have to fall further as fewer and fewer people could qualify for loans. In fact, all loans would become more expensive, such as for business, credit cards, auto loans, etc. That 1% will increase debt service for the government by about $150 billion a year. This frankly presents the best of all worlds. If foreigners, such as the Chinese, Japanese or Russians became aggressive US bond sellers rates would climb considerably higher, inflicting even more damage to the economy and to US debt.
Most of you do not remember but mortgage rates hit about 18% in 1981, as official inflation hit 14-1/2%. Gold peaked out at $850, some six months earlier. On today’s mortgages that would triple payments on new mortgages and resets. As happened in 1981 the real estate market came to a standstill. Such an event would come when existing household debt is considerably higher. Debt today is already near 90% of GDP. Government debt is colossal, growing every minute and it is unpayable.
The bond market is going down and yields are going up and that is not good. The rise in interest rates has historically brought about higher gold and silver prices, because higher rates bring higher inflation. As we have said over and over again the only safe and profitable place to be is in gold and silver related assets. The storm is now just getting underway.
The MBA Mortgage Purchase Applications Index is 10.1%. The refi index was up to 15.8% versus 9.0% the prior week. The 30-year fixed rate mortgage was 5.04% and the 15’s were 4.34%.
The Treasury will sell $128 billion in notes next week, which is unprecedented. Talk about crowding out.
Governments worldwide will probably issue $4.5 trillion in debt this year, which is triple the 5-year average for industrial nations. Forty-five percent of that debt will be issued by the US.
We are told Russia and China are selling Treasuries and buying gold.
The US commercial paper market rose $1.5 billion to about $1.076 trillion this week.
Our sources within the banking industry tell us that 3-5 bank, First Source, Horizon and several others are in trouble. These are banks that refused TARP money. They have been told to expect an audit and that no further support can ever be expected from the Fed again. Auditors have already hit some of these banks and threatened them. One bank was told they were under capitalized and they were not. They arranged an additional line of credit with another bank and the Fed backed off. This criminal extortion is part of the move to eventual bank nationalization. The industry is hanging by a thread, as huge interest rate increases loom. The system lives on virtual money and that can only end up in real trouble. Again, do not hold CDs, annuities or cash value life policies, especially large balances. Not only banks will go under, but also so will insurance companies.
McClatchy: While Goldman Sachs' lawyers negotiated with the Securities and Exchange Commission over potentially explosive civil fraud charges, Goldman's chief executive visited the White House at least four times.
White House logs show that Chief Executive Lloyd Blankfein traveled to Washington for at least two events with President Barack Obama, whose 2008 presidential campaign received $994,795 in donations from Goldman's political action committee, its employees and their relatives. He also met twice with Obama's top economic adviser, Larry Summers.
Lawrence Jacobs, a University of Minnesota political scientist, said that "almost everything that the White House has done has been haunted by the personnel and the money of Goldman. as well as the suspicion that the White House, particularly early on, was pulling its punches out of deference to Goldman and its war chest.
"There's now kind of a magnifying glass on the administration for any sign of interference or conversations with the regulators and the judiciary," Jacobs said.
http://www.mcclatchydc.com/2010/04/21/92...white.html
Goldman Sachs was both an underwriter and an investor in Lloyds Banking Group’s vast refinancing deal late last year, the FT has learned, highlighting the potential conflicts of interest at the heart of the investment bank’s business model.
According to four people involved in the capital raising, Goldman – a dealer manager on the debt portion of the £23.5bn transaction – demanded last-minute changes to the structure of a deal it was underwriting. This had the effect of benefiting its position as a bond investor.
A Goldman director tipped off Galleon's Raj Rajaratnam about a $5 billion investment in Goldman by Berkshire Hathaway before a public announcement.
The revelation marks a significant turn in the government's case against Rajaratnam, the hedge-fund titan at the center of the largest insider-trading case in a generation.
After the SEC tagged Goldman, we opined that Bubblevision, or for that many virtually all pundits and media types, did not mention Buffett’s association with Goldman or how Buffett demanded and got heads after the Salomon-Treasury Auction rigging scandal. Maybe now someone will ask Warren about Goldie.
Buffett spokesman, Thomas Murphy surfaced last night, to say Buffett has ‘great confidence’ in Goldie.
U.S. mortgage applications bounced from three-month lows last week as potential buyers locked in lower borrowing costs before the federal tax credit expires, the Mortgage Bankers Association said on Wednesday.
Thirty-year mortgage rates dropped to hover around 5 percent, stoking home loan demand after applications slid for two straight weeks.
Refinancing picked up by 15.8 percent to represent 60 percent of all applications last week. Demand for loans to buy a home increased 10.1 percent to send the industry group's total applications index up 13.6 percent on a seasonally adjusted basis.
"Purchase applications continued to increase coming out of the Easter holiday, as we approach the end of the homebuyer tax credit, and are up modestly over last month," said Michael Fratantoni, MBA's vice president of research and economics.
Falling Treasury yields, used as a peg for mortgage rates, helped reduce the average 30-year loan rate by 0.13 percentage point to 5.04 percent.
The rate was up to 5.31 percent two weeks earlier, the highest since August 2009, and remains above the record low of 4.61 percent set in March of last year.
Harsh winter weather sapped housing demand in the first months of the year. The initial wave of the homebuyer tax credit, extended and broadened late last year, were seen having robbed some of this year's demand.
But some signs have emerged that buyers are surfacing to lock in the credit while they can. If they qualify for the incentives of up to $8,000, they need to have home contracts signed by the end of April and close loans by June 30.
Permits to build houses, for example, in April shot up to the highest level since October 2008. To read more, see [ID:nN16220782].
At best, though, housing is widely seen hovering around current weak levels at least through the year. The market still needs to work through a record stockpile of foreclosed properties, which RealtyTrac forecasts could drag into 2013. Read more at [ID:nNYS007912].
Jack Pritchard, Charlotte, North Carolina-based co-founder of Refinance.com, sees rising mortgage rates later this year and the expiration of the tax credits cutting into home sales and refinancing.
"The spring housing season, even with the tax credit, would be considered stable -- but stable at the bottom," he said.
"You've got a consumer trying to time the ultimate bottom in real estate prices and you still have extremely tight credit standards for consumers to qualify," Pritchard added.
FOX Business Network has expanded its quest for documents from the Federal Reserve in order to shed light on which financial firms borrowed funds during the financial crisis.
The network filed its new suit this afternoon in New York requesting documents from the Federal Reserve Board of Governors that will name each financial institution that borrowed from the various emergency lending facilities from November 1, 2008 through March 1, 2010. FOX Business originally sued the Fed for those documents but for a time period that ended on November 1, 2008.
The network scored a major victory in the original suit when the second circuit court of appeals ruled that the Fed had to turn over the requested documents. The Federal Reserve is expected to ask the court to reconsider the case and has said it is willing to take the case to the Supreme Court if necessary to protect the identity of the firms which received billions in taxpayer-backed guarantees.
The new suit expands the date through 2010 to learn which firms continued to seek emergency lending after the initial crisis had passed. FOX Business is also attempting to learn how much each individual institution received.
The U.S. Federal Reserve said on Wednesday it transferred a record $47.4 billion to the U.S. Treasury in 2009 as a result of its programs to help the economy and financial firms during the financial crisis.
The increase in income was primarily due to interest earnings on mortgage-backed securities issued by government supported mortgage finance agencies, the Fed said.
Some of the data in the Fed's 2009 annual financial statement revises estimates released in January.
The 12 Fed regional banks are required to transfer their profits to the Treasury after paying dividends to member banks and retaining some of their surplus.
Fed officials said the U.S. central bank's payment to the Treasury in 2009 was a $15.7 billion, or 50 percent, increase over 2008. The previous record was $34.6 billion in 2007, and the pre-crisis level was around $20 billion, Fed officials told reporters.
The Fed took unprecedented actions to prop up the economy during the storm but has been under fire from lawmakers on Capitol Hill over financial firm bailouts and regulatory lapses.
The credit risk on the Fed's balance sheet is down sharply as its loans have decreased and Treasury and government-sponsored mortgage finance agency securities make up a larger share of the central bank's assets, a Fed official said.
Financial reforms are a top priority for President Barack Obama, and news that the U.S. central bank has been profitable for taxpayers may strengthen the Fed's hand as lawmakers decide whether to enhance its powers over banks.
A Senate committee on Wednesday approved a bill aimed at reforming the derivatives market, moving the Senate one step closer to passing sweeping regulation over the $450 trillion derivatives market.
The Senate Agriculture Committee approved the legislation by a vote of 13 to 8, with one Republican, Charles Grassley, breaking ranks to vote with Democrats.
The measure, part of the Democrats push to crack down on Wall Street, is expected to be merged into a broader bill from the Senate Banking Committee. A full Senate debate is expected by next week.
Its passage through the committee was a first test of how strongly Democrats are willing to push reform and how easily Republicans may be prepared to play ball.
Regulators charged a Miami Beach, Florida, philanthropist with fraud for allegedly running a $900 million Ponzi scheme, the Securities and Exchange Commission said on Wednesday.
Nevin K. Shapiro, a major donor to the University of Miami's sports program, sold investors securities that he claimed would fund his Capitol Investments firm's grocery business and touted returns as high as 26 percent annually, the SEC said.
Instead, Shapiro repurposed funds, making extravagant donations to charities and running a Ponzi scheme where he used funds from new investors to pay the principal and interest to earlier investors, the SEC said.
The 41-year-old Shapiro surrendered to authorities Wednesday morning in New Jersey, his lawyer said.
According to the SEC, Shapiro used at least $38 million of investor funds to finance other business activities and a lavish lifestyle, including a $5 million home in Miami Beach, expensive clothes and season tickets to sporting events.
To raise funds, Shapiro attracted investors through word of mouth from friends and business associates, and reassured investors by boasting of his wealth, the SEC said.
When investors questioned Shapiro, he showed them fabricated invoices and purchase orders for nonexistent sales, the SEC said.
Existing home sales increased by 6.8%, good for a total of 5.35 million units, in March, thereby reversing three months of declining sales. This growth beats market forecasts of a more modest 5.6% increase. ??In related data, the US housing price index fell 0.2% in February. This marks the third consecutive month of falling home prices.
The Producer Price Index for the US grew 0.7% in March, beating forecasts of a 0.5% rise over February's 0.6% decline. ??Year-over-year, the PPI increased 6.0% in March compared to February's annual 4.4% boost. This growth is in line with expectations. ??The PPI excluding food and energy prices rose an expected 0.1% in March, thereby matching February's rate. ??Year-over-year, the PPI excluding food and energy increased as forecast by 0.9% in March, slightly down from February's 1.0% growth.
February Housing Price Index declines 0.2% MoM in March vs a 0.6% decline in February
The number of Americans filing claims for unemployment benefits fell last week as the rebounding economy prompted companies to make fewer job cuts.
Initial jobless applications dropped by 24,000 to 456,000 in the week ended April 17, the Labor Department said today in Washington. The number of people receiving unemployment insurance and those getting extended benefits also fell.
Employers enjoying improved sales and profits may be gaining confidence in the economy and retaining staff. A transition from less firing to consistent job growth will ensure the recovery from the deepest recession since the 1930s is sustained.
“The state of the job market is firming,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who forecast claims would fall to 458,000. Companies are “actually retaining headcount and growing.”
Economists anticipated claims would fall to 450,000 from a previously reported 484,000 the prior week, according to the median of 47 projections in a Bloomberg News survey. Estimates ranged from 430,000 to 480,000.
Sales of U.S. previously owned homes rose in March for the first time in four months as buyers took advantage of a government tax credit and the weather improved. Purchases climbed 6.8 percent to a 5.35 million annual rate, exceeding the median forecast of economists surveyed by Bloomberg News, data from the National Association of Realtors showed today in Washington. New applications for jobless benefits declined and producer prices rose, Labor Department reports showed.
A homebuyer incentive worth as much as $8,000 for contracts closed by the end of June may provide a short-term boost to the industry that helped trigger the worst recession since the 1930s. Housing’s outlook for the second half of the year will be linked to a rebound in hiring, indicating a recovery will probably take years to develop as foreclosures climb.
CAPITALISM WITHOUT CAPITAL
Mike Whitney
http://www.informationclearinghouse.info...e25431.htm
Volatility is back and stocks have started zigzagging wildly again. This time it's Greece in the hotseat, but tomorrow it could be someone else. The real problem is there's too much leverage in the system, so crises keep popping up one after another. For a long time, leverage wasn't an issue, because there was enough liquidity to keep things bobbing-along smoothly. But that changed when Lehman Bros. collapsed and non-bank funding began to shut down. When the so-called "shadow banking" system crashed, liquidity dried up and the markets went into a nosedive. That's why Fed Chair Ben Bernanke stepped in and provided short-term loans to under-capitalized financial institutions. Bernanke's rescue operation revived the system, but it also transferred $1.7 trillion of illiquid assets and non-performing loans onto the Fed's balance sheet. So the problem really wasn't fixed at all; the debts were just moved from one balance sheet to another.
Last Thursday, troubles in Greece triggered a major selloff on all the main indexes. At one point, shares on the Dow plunged 998 points before clawing back 600 points by the end of the day. Some of losses were due to High-Frequency Trading (HFT), which is computer-driven program-trading that executes millions of buy and sell orders in the blink of an eye. HFT now accounts for more than 60 percent of all trading activity on the NYSE. Paul Kedrosky explains what happened in greater detail in his article, "The Run on the Shadow Liquidity System". Here's an excerpt:
"As most will know, liquidity is, like so many things in financial life, something you can choke on as long as you don't want any....Liquidity is a function of various things working fairly smoothly together, including other investors, market-makers, and, yes, technical algorithms scraping fractions of pennies as things change hands. Together, all these actors create that liquidity that everyone wants, and, for the most part, that everyone takes for granted.....
Largely unnoticed, however, at least among non-professional investors, the provision of liquidity has changed immensely in recent years. It is more fickle, less predictable, and more prone to disappearing suddenly, like snow sublimating straight to vapor during a spring heat wave. Why? Because traditional providers of liquidity, market-makers and other participants, are not standing so ready to make the other side of the market. There are fewer traders prepared to make a market for the sake of market health.....
For the first time we have large providers of this shadow liquidity, algorithms and high-frequency sorts, that individually account for large percentages of daily trading activity, and, at the same time, that can be turned off with a switch, or at an algorithmic w him. As a result, in market crises, when liquidity was always hardest to find, it now doesn't just become hard to find, it disappears altogether, like water rushing out sight via a trapdoor to hell. Old-style market-makers are standing aside as panicky orders pour in, and they look straight at shadow liquidity providers and say, "No thanks." (Paul Kedrosky, "The Run on the Shadow Liquidity System" Infectious Greed)
The fact that the SEC can't figure out what happened, has been a bigger blow to investor confidence than the erratic behavior of the markets themselves. It shows that regulators really don't have a handle on the technology that's driving the markets. That just reinforces the perception that trading is a crap-shoot and the market is a casino.
Deregulation has also eroded confidence in the markets. Since Glass Steagall was repealed in 1999, the financial markets have been completely overhauled. Unfortunately, the new architecture is riddled with flaws. The main levers of credit creation are now in the hands of privately-owned shadow banks instead of highly-regulated "depository" institutions. That's a problem, because the hedge funds, insurers, brokerage houses, SIVs and off-balance sheet operations are mostly unsupervised, so they can ignore capitalization requirements and traditional lending standards. Even worse, they can crank out as much credit as they want via the repo market or by using financial instruments (like MBS, CDS, CDO) Here's how economist James Hamilton explains it in a recent post titled "Follow The Money". Here's an excerpt:
"If you buy a mortgage-backed security (or collateralized debt obligation constructed from assorted MBS), you could then issue commercial paper against it to get most of your money back, essentially making the purchase self-financing. This was the idea behind the notorious off-balance sheet structured investment vehicles or conduits, which basically used money borrowed on the commercial paper market to buy various pieces of the mortgage securities created by the loan aggregators. The dollar value of outstanding asset-backed commercial paper nearly doubled between 2004 and 2007.
Yale Professor Gary Gorton has also emphasized the importance of repo operations involving mortgage-related securities. If I buy a security, I can then pledge it as collateral to obtain a repo loan, again getting most of my money back and allowing the purchase to be mostly self-financing as long as I keep rolling over repos. Although I have not been able to find numbers on the volume of such transactions, it appears to have been quite substantial.
The question of how the house price run-up was funded thus has a pretty clear answer: Other People's Money. Because of so much money pouring into house purchases, the price was driven up." ("Follow The Money", James Hamilton, Econbrowser)
This is how Wall Street pumped up leverage to ungodly levels and steered the financial system off the cliff. The debt-instruments and repo market were used to create a ginormous debt pyramid balanced precariously atop a few crumbs of capital. The system was bound to crash.
Naturally, the people who benefit from credit default swaps (CDS) and other derivatives, continue to sing their praises, but their numbers grow smaller and smaller all the time. Many people now understand the role that derivatives played in crashing the system and are demanding change. But Wall Street doesn't care about public opinion. The big banks have already deployed their army of lobbyists to Capital Hill to make sure that the new reform legislation doesn't restrict their use of hybrid derivatives which have become their biggest profit-makers. Considering the amount of money they've spread around, it would be a miracle if they didn't get their way.
LOW INTEREST RATES DIDN'T CAUSE THE CRISIS
Last week, economists Edward L. Glaeser, Joshua Gottlieb and Joseph Gyourko published a research paper and presented their findings to the Federal Reserve Bank of Boston. Here's what they said:
"It isn't that low interest rates don't boost housing prices. They do. It isn't that higher mortgage approval rates aren't associated with rising home values. They are. But the impact of these variables, as predicted by economic theory and as estimated empirically over many years, is too small to explain much of the housing market event that we have just experienced."
Glaeser, Gottlieb and Gyourko say those factors can explain only about a 10 percent increase in home prices between 2000 and 2006. That's only one-third of the 30 percent increase in prices (adjusted for inflation) during that period, as measured by the Federal Housing Finance Agency, or the 74 percent increase measured by the Case-Shiller/Standard and Poor's index of prices in 20 large metro areas.
So what is to blame for the bubble? Well, they're not sure. "Using the standard toolkit of the empirical economist, we are unable to offer much of an explanation for what happened," they write." ("Low interest rates didn't cause the bubble economists say", Elizabeth Razzi, Washington Post)
The crisis was not sparked by interest rates or lax lending standards, but by leverage. In fact, the repo market, securitization and the vast array of debt-instruments are all designed with one purpose in mind; to conceal the amount of leverage in the system. It's capitalism without capital.
The $1.5 trillion in subprime mortgages wasn't nearly enough to bring down the entire financial system. But the losses on trillions of dollars of derivatives that were balanced on top of these mortgages, certainly was. So, what really happened? Here's a summary of the meltdown by economist Henry Liu:
"...the current financial crisis that began in mid-2007 was caused not by bank runs from depositors, but by a melt down of the wholesale credit market when risk-averse sophisticated institutional investors of short-term debt instruments shied away en mass.
The wholesale credit market failure left banks in a precarious state of being unable to roll over their short-term debt to support their long-term loans. Even though the market meltdown had a liquidity dimension, the real cause of system-wide counterparty default was imminent insolvency resulting from banks holding collateral whose values fell below liability levels in a matter of days. For many large, public-listed banks, proprietary trading losses also reduced their capital to insolvency levels, causing sharp falls in their share prices." ("Two Different Banking Crisis--1929 and 2007" Henry Liu)
The banks don't fund themselves by taking deposits and then using them to lend out money at higher rates. What they do is buy long-term illiquid assets (mortgage-backed securities, asset-backed securities) and exchange them in the repo market for short-term loans. It's like going to a pawn shop and borrowing money by posting collateral, except --in this case--a financial institution (counterparty) takes the other side of the deal.
When the subprimes started blowing up, the institutions that had been taking the other side of the deals, (the counterparties) got nervous, because they thought the subprime-backed collateral might be worth less than the money they were providing in loans. So they demanded more collateral from the banks which forced the banks to sell more assets to raise money to cover their losses. This pushed prices down, sparked a flurry of firesales, and drove the weaker institutions into bankruptcy.
The amount of leverage built up in these derivatives was mind-boggling. Take a look at this article from the Wall Street Journal:
"Documents released by Senate investigators last week provide clues as to why the losses were so severe. The documents show how Wall Street banks packaged and repackaged the same risky bonds into securities that ultimately helped magnify the impact of defaulting subprime mortgages on the financial system.
In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors by the time the bond's principal was wiped out in 2008, according to data reviewed by The Wall Street Journal.....("Senate's Goldman Probe Shows Toxic Magnification", Carrick Mollenkamp and Serena Ng, Wall Street Journal)
So it wasn't the subprime mortgages that caused most of the damage, but the amount of leverage bundled into the derivatives and the repo market. Congress needs to focus their attention on the particular instruments and processes (derivatives, repo and securitization) that are used to maximize leverage and inflate bubbles. That's where the problem lies.
Nomi Prins explains it a bit differently in this month's The American Prospect. Here's an excerpt from her article "Shadow Banking":
"Between 2002 and early 2008, roughly $1.4 trillion worth of sub-prime loans were originated by now-fallen lenders like New Century Financial. If such loans were our only problem, the theoretical solution would have involved the government subsidizing these mortgages for the maximum cost of $1.4 trillion. However, according to Thomson Reuters, nearly $14 trillion worth of complex-securitized products were created, predominantly on top of them, precisely because leveraged funds abetted every step of their production and dispersion. Thus, at the height of federal payouts in July 2009, the government had put up $17.5 trillion to support Wall Street's pyramid Ponzi system, not $1.4 trillion. The destruction in the commercial lending market could spur the next implosion." ("Shadow Banking", Nomi Prins, The American Prospect)
This is a point that bears repeating: "...nearly $14 trillion worth of complex-securitized products were created" on top of just "$1.4 trillion" of subprime loans." No doubt, the investment bankers and hedge fund managers who inflated these monster balloons, knew that they were doomed from the get-go, but then, they must have also known that "I.B.G.-Y.B.G.", which in Wall Street parlance means, "I'll Be Gone and You'll Be Gone."
For a long time, Wall Street concealed its bubblemaking and racketeering behind theories that glorified the wisdom and flexibility of unregulated markets. Government intervention was disparaged as an unnecessary intrusion into a divinely-harmonized system. Now the curtain has been drawn and the sham exposed. The state has a clear interest in making sure that credit-generating institutions are adequately capitalized, that lending standards are strictly upheld, and that reasonable limits are put on the amount of leverage that financial institutions are allowed to use. That's the only way the public can be protected.