By Charles Hugh Smith, OFTWOMINDS
by Charles Hugh Smith

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

The Daily Reckoning

“Happy families are all alike,” wrote Leo Tolstoy in Anna Karenina, “every unhappy family is unhappy in its own way.” Today’s Daily Reckoning looks at the unhappy family of nations in Europe and their coming family feud. Each is definitely unhappy in its way.

Yet there is a common thread to the current state of economic melancholy. It’s money. Most failed marriages, we’ve heard, end up breaking up over money. Why would Europe or America or Australia be any different?

But before we get into family counselling, let’s have a look at markets. Over in America the Dow Jones Industrials Index has closed at its highest level since October of 2008. The Dow sits at 10, 979 and has risen eight days in a row. Woop woop.

The volume figures on the Dow, however, show a disturbing lack of faith, or conviction if you prefer. The chart below shows the Dow since the March 9th low of 2009. It’s been a pretty steady rise since then. But you can see that average daily volumes are less than half of what they were when the low was made a year ago. What does it mean?

“It’s bearish. That’s what it means,” said Murray when we ambled over to his desk to show him the chart above. “It means there’s a general lack of conviction by buyers. You’d want to look out below.”

Where are all the buyers? Is the market just drifting higher based on programmed money flows by institutions? Granted this is an index of just thirty U.S. stocks. But it shows you that once you go below the surface of the index levels, the waters in the market are eerily calm and not frothy at all.

The other point about this is that in market-cap weighted index, a few key constituents can account for big day-to-day moves. For example, the table below from Standard and Poor’s shows the top ten weightings in the ASX/200. The financials and the miners dominate, with property, telecom, and consumer staples all making cameos.

Click to zoom in on Top Ten Weightings table

In other words an up or down move in BHP or Commonwealth Bank has a bigger effect on the direction of the index based on the size of their respective market capitalisations. That sounds like gobbeldy gook. But the takeaway is you should beware light volumes and indexes whose higher movements are driven by just a few stocks. It shows a lack of breadth which can turn quickly and result in big sell off.

Now, you probably don’t want to talk about this. But we need to talk about Greece. Its on-again, off-again bailout flirtation with the European Union is driving the market nuts. Its reality sovereign debt finance theatre at its most dramatic. But what, really, is at stake?

The European monetary family is in crisis. It meets on March 25th and 26th to discuss whether to kick Greece off the island (survivor style) or to intervene and save the prodigal son. The problem, from a German perspective, is that Europe is full of prodigal children. To save Greece means to save the rest of the economies troubled by rising public debt-to-GDP ratios. Where will it stop? With the trashing of the euro.

But is doing nothing an option? The Greeks have already said they will meet with the IMF on April 2nd if Europe resolves nothing by the end of March. And in the meantime, bond yields on Greek debt are left twisting in the wind. Rising bond yields wipe out the benefits of austerity measures and deficit reduction.

According to Bloomberg, “The yield on Greece’s 10-year government bond rose 12 basis points to 6.21 percent. The euro fell for a second day against the dollar, slipping as much as 0.7 percent to $1.3648. Credit-default swaps on Greek sovereign debt rose 7 basis points to 295, the highest in a week, according to CMA DataVision prices.”

It’s hard to imagine the Northern European powers hanging Greece out to dry. Families are supposed to look out for each other. You do more for your family when the chips are down than you do for most people in the world. But maybe Greece will spare Germany the hand-wringing and default on its own….just throw up its hands and shrug.

The willing default on sovereign debt is what Societe Generale analyst Albert Edwards expects. In a note to clients earlier this week Edwards wrote, “Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime.”

This is the old “asset-deflation-first-then-hyperinflation-later” two-step. It’s the Big Crash dance, with the Bernanke/CNBC orchestra providing mellow tunes as your promenade your way to the lifeboats. Edwards writes that, “In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort.”

Some readers think we’re trying to have it both ways on the inflation/deflation debate. But it is one of the issues you have to be flexible about and be willing to go both ways on in order to keep your money safe. Prepare for falling asset prices and a sovereign debt crisis. And then watch out as central banks reach out and take us to strange new monetary places and boldly go where Weimar Germany and Argentina have gone before.

Buckle up buttercup.

Dan Denning
for The Daily Reckoning Australia

Similar Posts:

• USA Has Fives Times As Much Sovereign Debt As All the PIIGS Put Together
• It’s the Little Economies that Have Trouble
• The Sovereign Debt Disaster
• Historians May Write: In Order to Save Greece, it Was Necessary to Destroy the Euro
• European Governments of the Eurozone are Separately Responsible for Their Euro-debt

More articles from The Daily Reckoning….

By Chris Carey, Bailout Sleuth

The estimated cost to taxpayers of the Troubled Asset Relief Program has climbed $10 billion to $109 billion, according to the latest report by the Congressional Budget Office.

In January, CBO estimated the program would cost $99 billion, but the agency has revised that figure.

The shift was due primarily to an increase in the anticipated cost of assistance to American International Group Inc., which was revised from $9 billion to $36 billion — the result of a higher likelihood of default on its preferred stock.

But that change was partially offset by a decrease in the estimated cost of aid to the auto industry, which fell from $47 billion to $34 billion as the “companies have emerged from bankruptcy proceedings and demonstrated some measure of financial stability and an improved business outlook,” CBO wrote.

The overall price estimate is based on all TARP transactions, including investments, grants, and loans. The bulk of the cost is tied to assistance provided to AIG and the auto industry. The report also estimates that $344 billion of TARP funds are outstanding or will be disbursed before the program expires in October.

The agency expects the government to make a $2 billion profit on the Capital Purchase Program, in which the government invested $205 billion in 707 banks.

It also expects to turn a $5 billion profit on the additional $45 billion in assistance to Citigroup Inc. and Bank of America Corp. through the Targeted Investment Program and Asset Guarantee Program.

CBO also estimates that the proposed Community Development Capital Initiative, which would invest $1 billion in “community development financial institutions,” will cost the federal government less than $500 million.

CBO’s estimate is $18 billion less than estimates from the Office of Management and Budget due to differing projections on participation in the Home Affordable Modification Program. The offices also differ on how they valued the government’s subsidies to AIG.

The Treasury Department purchased $40 billion in preferred stock from AIG and also created a $30 billion preferred line of credit for the company. The stock is outstanding and the company has not paid dividends due on the investment.

More articles from the Bailout Sleuth….

Zero Hedge

Next step for the Fed weasels – petitioning the Supreme Court in an attempt to completely trample America’s constitution. In the meantime, Mark Pittman smiles from above as Satan reevaluates the amend and extend provisions of his affirmative covenants with the Fed.

From Bloomberg:

March 19 (Bloomberg) — The Federal Reserve must disclose
documents identifying financial firms that might have collapsed
without the largest ever U.S. government bailout, a federal
appeals court said.

The U.S. Court of Appeals in Manhattan ruled today that the
Fed must release records of the unprecedented $2 trillion U.S.
loan program launched primarily after the 2008 collapse of
Lehman Brothers Holdings Inc. The ruling upholds a decision of a
lower-court judge, who in August ordered that the information be
released.

The opinion might not be the final word in the bid for the
documents, which was launched by Bloomberg LP, the parent of
Bloomberg News, with a November 2008 lawsuit. The Fed could seek
a rehearing or appeal to the full appeals court and eventually
petition the U.S. Supreme Court.

The court was asked to decide whether loan records are
covered by the U.S. Freedom of Information Act, or FOIA.
Historically, the type of government documents sought in the
case has been protected from public disclosure because they
might reveal competitive trade secrets. The Board of Governors
of the Federal Reserve System had argued that disclosure of the
documents threatens to stigmatize lenders and cause them
“severe and irreparable competitive injury.”

Financial Crisis

Bloomberg, majority-owned by New York Mayor Michael
Bloomberg, sued after the Fed refused to name the firms it lent
to or disclose loan amounts or assets used as collateral under
its lending programs. Most of the loans were made in response to
the deepest financial crisis since the Great Depression.

Lawyers for Bloomberg argued in court that the public has
the right to know basic information about the “unprecedented
and highly controversial use” of public money.

“Bloomberg has been trying for almost two years to break
down a brick wall of secrecy in order to vindicate the public’s
right to learn basic information,” Thomas Golden, an attorney
for the company with Willkie Farr & Gallagher LLP, wrote in
court filings.

Banks and the Fed warned that bailed-out lenders may be
hurt if the documents are made public, causing a run or a sell-
off by investors. Disclosure may hamstring the Fed’s ability to
deal with another crisis, they also argued.

Potential Harm

Much of the debate at the appeals court argument on Jan. 11
centered on the potential harm to banks if it was revealed that
they borrowed from the Fed’s so-called discount window. Matthew
Collette, a lawyer for the government, said banks don’t do that
unless they have liquidity problems.

FOIA requires federal agencies to make government documents
available to the press and public. An exception to the statute
protects trade secrets and privileged or confidential financial
data. In her Aug. 24 ruling, U.S. District Judge Loretta Preska
in New York said the exception didn’t apply because there’s no
proof banks would suffer.

The Fed’s balance sheet debt doubled after lending
standards were relaxed following Lehman’s failure on Sept. 15,
2008. That year, the Fed began extending credit directly to
companies that weren’t banks for the first time since the 1930s.
Total central bank lending exceeded $2 trillion for the first
time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009.

Payment Processors

The Clearing House Association, which processes payments
among banks, joined the case and sided with the Fed. The group
includes ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc,
Bank of America Corp., The Bank of New York Mellon Corp.,
Citigroup Inc., Deutsche Bank AG, HSBC Holdings Plc, JPMorgan
Chase & Co., US Bancorp and Wells Fargo & Co.

More than a dozen other groups or companies filed friend-
of-the-court briefs. Those arguing for disclosure of the records
included the American Society of News Editors and individual
news organizations.

The case is Bloomberg LP v. Board of Governors of the
Federal Reserve System, 09-04083, U.S. Court of Appeals for the
Second Circuit (New York).

More articles from Zero Hedge….

Zero Hedge

From the UK Telegraph: Latvia government collapses amid economic crisis

The People’s Party, the largest group in a five-party coalition, walked
out amid disputes over how to cope with the country’s severe problems.

Unemployment has now hit 20 per cent and the economy contracted by 18
per cent last year.

The People’s Party quit after its action plan failed to get the backing
of Valdis Dombrovskis, the Latvian prime minister, who labelled it
“populist”.

Mr Dombrovskis warned the People’s Party’s departure could cause yet
further economic instability.

“Any contradictions in the government are immediately reflected in the
financial markets, and they directly affect the fiscal stability our
country… a policy that is truly responsible for the country cannot be
self-centred,” he said.

But he said remained confident that an emergency IMF bail-out worth
£6.7bn would remain unaffected by the political instability.

New Era, Mr Dombrovskis’s party, confirmed it had already extended
invitations to other parties to join a new coalition in an attempt on
gain the majority in Latvia’s 100-seat parliament.

It attempted to play down concerns about the prospect of a minority
government at the helm of country in severe economic turmoil.

Laila Dimrote, a spokeswoman for New Era, said: “This is not a big
deal. Latvia has had many minority governments in the past, and often
this is the case prior to elections.”

Hopefully, subscribers and readers are taking full advantage of the
research at hand. This plays into the fact that Latvia, and its
neighboring countries, are
in a depression. This economic contagion will be both converted into
financial contagion through the banking system and transmitted as both
financial and economic contagion to the wealthier western countries that
have large economic claims on Latvia and do trade with them. 

Click to
Enlarge… 

Click any
graphic to enlarge…

For more opinion and analysis, see:

• The

  Depression is Already Here for Some Members of Europe, and It Just
  Might Be Contagious!

• and Financial

  Contagion vs. Economic Contagion: Does the Market Underestimate the
  Effects of the Latter?

I will be publishing the foreign claims model (which will tie all of the
myriad global risks into one, cogent risk model) and my analysis of
Italy early next week for subscribers, along with a free accompanying
analysis for non-paying subscribers and readers.  Ireland, the UK and
Spain are on tap. Earlier installments of the Reggie Middleton’s Pan-European Sovereign
Debt Crisis

1. The
   Coming Pan-European Sovereign Debt Crisis - introduces the crisis
   and identified it as a pan-European problem, not a localized one.
2. What
   Country is Next in the Coming Pan-European Sovereign Debt Crisis? -
   illustrates the potential for the domino effect
3. The
   Pan-European Sovereign Debt Crisis: If I Were to Short Any Country,
   What Country Would That Be.. - attempts to illustrate the highly
   interdependent weaknesses in Europe’s sovereign nations can effect even
   the perceived “stronger” nations.
4. The
   Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western
   European Countries

5. #993300; font-weight: normal;”>
   The
   Depression is Already Here for Some Members of Europe, and It Just
   Might Be Contagious!

6. The
   Beginning of the Endgame is Coming???

7. I
   Think It’s Confirmed, Greece Will Be the First Domino to Fall 

8. Smoking
   Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
   Beware!
9. Financial
   Contagion vs. Economic Contagion: Does the Market Underestimate the
   Effects of the Latter?
10. “Greek Crisis Is Over, Region Safe”,
    Prodi Says – I say Liar, Liar, Pants on Fire! 
11. Germany Finally Comes Out and Says,
    “We’re Not Touching Greece” – Well, Sort of…

12. The Greece and the Greek Banks Get the Word “First”
    Etched on the Side of Their Domino  

More articles from Zero Hedge….

Zero Hedge

Full report attached (it’s after 10am).

goldman-lowers-major-banks-projected-q1-eps-15>More articles from Zero Hedge….

Zero Hedge

If one were to think that the market is determined exclusively by the predominantly retarded action in equities over the past months or so, it would appear we have now fully entered the insanity dot com days, where each day could easily be the rally’s last, yet with shorts terrified of being steamrolled by the fine upstanding market manipulators at Liberty 33, the possibility of the Dow hitting 36,000 is distincitly realistic (only to be followed by Dow 0, and a Marsian bail out). What is notable, however, is that credit, which is and always has been the rational market, has not only bought this most recent melt up, but over the past week has in fact retrenched. Not only is credit weaker compared to its January tights, but is also at its widest over the past two weeks, just as equities were set to go parabolic on no volume and on giddy algos, already seeing themselves buying their third summer house in Binaryhampton.

More articles from Zero Hedge….

Zero Hedge

Congress is pretending to be investigating yet more criminality out of Goldman and out of the New York Fed, and specifically the nexus where the two streams intersect (aside from private room meetings at assorted Financial District restaurants) – Goldman’s very own/the Fed’s very ex-own, Stephen Friedman. We can’t wait to see how quick before this investigation quietly disappears. Pay particular attention to rhetorical question #13: ” 13. Has the Federal Reserve investigated whether Goldman Sachs or Mr. Friedman benefitted financially from Mr. Friedman serving as Chairman of the Board of the New York Fed?” Duh.

Below is the full letter from Edolphus Towns, Chairman of the Committee on Oversight Committee on Oversight and Government Reform to Ben “Capo di tutti capi” Bernanke

Dear Chairman Bernanke:

We write you in connection with the House Oversight and Government
Reform Committee’s hearings on the federal bailout of American
International Group (AIG). The Committee is the principal oversight
committee in the U.S. House of Representatives, with jurisdiction over
“any matter.” Under Rules X and XI of the Rules of the House of
Representatives, the Committee is investigating this matter further.

As you may recall, in the fall of 2008, at the height of the
financial crisis, Mr. Stephen Friedman served both as a member of the
Board of Directors of Goldman Sachs and as Chairman of the Board of
Directors of the Federal Reserve Bank of New York (New York Fed). In
September 2008, Goldman Sachs converted from an investment bank into a
bank holding company, making the New York Fed its primary regulator. At
the time of the conversion, Mr. Friedman owned approximately 46,000
shares in Goldman.

Notably, under a long-standing policy of the Board of Governors of
the Federal Reserve System (Federal Reserve), Mr. Friedman was
prohibited from owning shares of any company under the supervision of
the Federal Reserve. Despite the clear prohibition and apparent conflict
of interest, Mr. Friedman requested a waiver from the Board of Governors
in Washington and was allowed to continue serving as chairman, in direct
violation of Fed policy, until a decision on the waiver was made.

In the meantime, on December 17, 2008, despite the prohibition, Mr.
Friedman bought an additional 37,000 shares of Goldman Sachs, a company
that was under the supervision at the New York Fed. A waiver was granted
by the Board of Governors on January 21, 2009.

It is also noteworthy that at the time of Mr. Friedman’s dual role,
the New York Fed was actively considering the possibility of paying tens
of billions of dollars in taxpayer funding to AIG’s credit default swap
counterparties, including Goldman. In Goldman’s case, this counterparty
payment was made in November of 2008 and it amounted to roughly $13
billion, courtesy of the American taxpayer.

What makes these transactions and the waiver that the Federal
Reserve granted Mr. Friedman even more troubling is that the precise
financial exposure Goldman faced from AIG was not publicly known when
Mr. Friedman bought the Goldman stock in December of 2008. Indeed, the
precise amount AIG paid Goldman was not released until March of 2009,
after Congress placed considerable pressure on the Federal Reserve to
disclose that information.

Mr. Friedman’s dual role at the New York Fed and Goldman, his
purchase of the Goldman stock in December 2008, and the Federal
Reserve’s waiver of its conflict of interest policy after the fact,
raise serious questions about the integrity of the Fed’s operations.

The Committee on Oversight and Government Reform received testimony
from Mr. Friedman at a hearing on January 27, 2010, but key questions
remain unanswered.

Please provide written answers to the following questions:

1. What is the official Federal Reserve policy on ownership
of stock by members of the Boards of Directors of the regional Federal
Reserve banks?

2. What measures has the Federal Reserve adopted to ensure
that the policy is enforced?

3. Who is currently responsible for board member compliance
with applicable stock ownership prohibitions and conflict of interest
policies at the Federal Reserve?

4. Who was responsible for board member compliance with stock
ownership and conflict of interest policies at the Federal Reserve
during the time that Mr. Friedman served as a board member at the New
York Fed?

5. When and how did the New York Fed and the Federal Reserve
become aware that Mr. Friedman was in violation of Federal Reserve
policy on ownership of stock?

6. When the New York Fed and the Federal Reserve became aware
that Mr. Friedman was not in compliance with Federal Reserve policy, why
wasn’t Mr. Friedman asked to resign or forced to remove the conflict by
selling the Goldman shares he already owned?

7. What was the basis for the decision by the Federal Reserve
to grant Mr. Friedman this waiver in light of the obvious conflict
presented by his role at the New York Fed and his simultaneous role as a
Goldman director and shareholder?

8. What were the terms and conditions of the waiver granted
by the Federal Reserve to Mr. Friedman?

9. Prior to granting the waiver, did the Federal Reserve
investigate to determine what non-public information Mr. Friedman may
have had access to by virtue of his positions on both the Goldman Board
of Directors and as Chairman of the New York Fed Board of Directors?

10. Was Mr. Friedman told by anyone at the New York Fed or at the
Federal Reserve that he should proceed as if the waiver had been
granted, even though the waiver was not issued until after he purchased
the Goldman stock? If he was so instructed, who gave Mr. Friedman this
instruction and why?

11. Did the waiver the Federal Reserve issued Mr. Friedman in
January 2009 explicitly permit him to purchase additional shares of
Goldman?

12. When the Federal Reserve made the decision to grant Mr.
Friedman the waiver in January 2009, was it aware that Mr. Friedman had
purchased the additional 37,000 Goldman shares a month earlier?

13. Has the Federal Reserve investigated whether Goldman Sachs or
Mr. Friedman benefitted financially from Mr. Friedman serving as
Chairman of the Board of the New York Fed?

14. Has the Federal Reserve investigated whether Mr. Friedman
benefitted financially from his purchase of 37,000 shares of Goldman
Sachs shares while he served as Chairman of the Board of the New York
Fed? If so, has the amount of financial benefit been determined?

In addition, please provide copies of the following records:

15. All records in the care, custody, or control of the Federal
Reserve relating to Mr. Friedman’s purchases of Goldman stock in
December 2008 and January 2009.

16. A copy of the specific provision of Federal Reserve policy
that prohibited Mr. Friedman from serving on the New York Fed while
owning shares of a company subject to Fed supervision.

17. All records relating to the Federal Reserve’s decision to
grant Mr. Friedman a waiver that allowed him to serve as Chairman of the
New York Fed while also owning millions of dollars of stock in a company
that was supervised by the Federal Reserve.

18. Copies of all waiver requests submitted by members of the
boards of directors of the regional Federal Reserve banks to the Federal
Reserve during the past ten years in connection with the prohibition
against ownership or purchase of stock, or options to purchase stock, in
an entity supervised by the Federal Reserve, along with copies of all
decisions to grant or deny such requests.

Please deliver the requested information and records to the
Committee on Oversight and Government Reform, room 2157 Rayburn House
Office Building, no later than 12:00 noon on Thursday, March 25, 2010.
To facilitate delivery and review, we prefer that the records be
delivered in digital form. Please note that the terms “records” and
“relating to” are defined in the attachment to this letter.

Should you have any questions about this request or need additional
information, please contact Committee staff at 202-225-5051, or Cara
Camacho of Congressman Lynch’s staff at 202-225-8273.

Edolphus Towns Stephen Lynch

Chairman Member

Committee on Oversight Committee on Oversight and Government Reform

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

Remember, Bernanke said under questioning the other day that “they hid it” in response to a question about whether or not The Fed knew about the Lehman “105″ repo arrangements, which appear to have been structured to intentionally mislead the public (and investors) about its liquidity position.

But in the deep of the night Financial Times published an article that resoundingly calls “BS” on that claim:

Securities and Exchange Commission and Federal Reserve officials were warned by a leading Wall Street rival that Lehman Brothers was incorrectly calculating a key measure of its financial health months before its collapse in 2008, people familiar with the matter say.

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less ­liquid than Lehman.

Beyond the apparent perjury (which our Congress seems to ignore any time a “powerful” person commits it) there is the larger problem in that if the Chairman of  The Fed has lied about this, what else has he lied about?

Most critically, what about all those other banks out there with HELOC exposure behind underwater first mortgages that are not being paid on time? 

The Market Ticker has reported on the wildly inaccurate and ridiculous treatment of firsts in this environment – people being “allowed” to remain in a home even though they haven’t made a payment in a year – and sometimes two, loans that are reported to credit bureaus as having payments made on them “by agreement” when the consumer is not only not paying but has never talked with the financial institution involved about it.  A quick look at the 10Qs and 10Ks filed by the big financial institutions discloses that these institutions have literal hundreds of billions of HELOCs and Second Lines on their balance sheets that are behind underwater first mortgages.  Each and every one of those loans is worth nothing if the first mortgage it is subordinate to fails to pay.

There is thus every reason to believe that not only did Lehman materially misstate its balance sheet position and financial strength but that this deception is ongoing right here and now. 

Further, Diana Olick of CNBS has reported on what I have asserted repeatedly over the last three years:

If the banks really accounted for all the losses in the home loan market, they’d all be insolvent.

I have every reason to believe that not only is there a pattern of conduct here in deceiving the American People as to the “financial strength” of the banks and other financial institutions in this nation but that this deception is willful, ongoing, and reaches all the way to The Federal Reserve Chairman.

This Financial Times report, along with the report on Lehman Brothers (which asserts that The Federal Reserve Bank of NY had the information necessary to discern what Lehman was doing – whether it acted on it or not) makes a prima-facie case of willful and intentional regulatory blindness to balance sheet fraud and intentional misrepresentation of capital positions.

This is not the only regulator against which such charges have been lodged.  OTS appears to have intentionally permitted Indymac Bank to backdate deposits – and the firm subsequently failed.

This sort of regulatory malfeasance must not be allowed to stand. 

These are not accidents, they are intentional acts.

When multiple people conspire together to break the law you have the very sort of act that the Racketeering Statutes were designed to prohibit – and punish.

The assertion by The Fed (and FDIC) that ”it lacks the authority” to resolve large failed institutions is a lie.  “Prompt Corrective Action” (Title 12, Chapyer 16, Sec 1831o) of US Code not only provides all the authority necessary to close a bank – any bank – that fails to meet statutory capital limits it mandates that action.

There is no discretion permitted in that statute and The Federal Reserve, as one of the Federal banking agencies, has no right to ignore this section of black-letter law.

Yet it, along with the FDIC, OTS and OCC all have.

The balance-sheet games and holding of loans that have no collateral and are behind non-performing firsts yet have not been written down to their recovery value, which as a matter of statutory law is zero, is an outrage.

We must not permit federal officials, including Bernanke, to come before Congress and thumb their nose at the rule of law, just as we must not permit so-called “federal regulators” to thumb their noses at the black-letter law that not only is more than sufficient to resolve these failed and failing institutions but mandates that these regulators do so.

More articles from the Market Ticker….

By Karl Denninger, The Market Ticker

Now here’s a good idea:

“The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk-adjusted capital,” Greenspan said in a paper prepared for a Brookings Institution conference today. “Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.”

Banks may need to hold capital equal to 14 percent of their assets, compared with about 10 percent in mid-2007 before the financial crisis, Greenspan said.

Really Alan?

Does the capital have to be real?  That’s the question, you know.  Lehman allegedly had plenty of capital and plenty of cash too – $50 billion worth, in fact, that was allegedly “cash” on their balance sheet.

Oh wait – it wasn’t real, was it?  Well ok, it was real – for a day.  Then it went right back to its lender and the garbage can full of used dogfood that they “tendered” to get the $50 billion came back to them!

This is the general problem with Greenspan’s “solution” – all solutions for sound lending require regulators that are not corrupt, so when someone tries to pull a scam like that they get arrested and the scammer is outed so the investing public knows what’s going on!

This means that FRBNY (and counterparties!) that become aware of such frauds must have a duty to report them.  In this case we know for a fact that counterparties were aware of the problem and we have reason to believe from the narrative that FRBNY was.  Yet nothing was done.

But we can’t have that!  Why if we had that happen then we’d be stuck with firms that couldn’t hide risks off their balance sheets, we wouldn’t have firms that claimed fictitious levels of cash, and we wouldn’t have firms that claim HELOCs are all “money good” when behind underwater and defaulted first mortgages!

All of those sins are still occurring.

I agree that “more capital” solves most problems with banks.  But the simplest way to do this is to set reasonable standards for excess capital (e.g. 6% Tier 1) and then enforce one dollar of capital (beyond that “last chance” reserve) for each dollar of unsecured lending.

The “last chance” reserve is thus present to cover the liquidation costs and insure that the FDIC doesn’t have to cover anything.  Bondholders and shareholders are fully exposed to being wiped out, of course.

If you take this approach then the problem disappears.  A HELOC behind an underwater first is an unsecured loan, as the collateral is insufficient to cover the paper.  Therefore, if a bank wants to hold a HELOC on a home where the first is underwater they must hold one dollar of capital for each dollar out in that HELOC.  If the HELOC is then not paid for any reason, the bank is still secure and cannot go bust.

The question we have to ask is this: Do we really want a secure and sound banking system, or do we want a system that has to be bailed out every few years because at the end of the day too many people are crooked and we haven’t busted enough of them for the crooks to be concerned about being arrested.

More articles from the Market Ticker….