Ponzi Finance

The GM BS

2010-11-18T11:48:00.000-08:00

People are either blind, suffer from amnesia, or are plain stupid that are buying the GM stock. This is still the same terrible company with lots of problems and huge competition from better players in the industry. Most importantly, the pension issue is still there. The markets celebrating this stock is ludicrous. Besides after being bailed out by the taxpayers, this IPO was closed to retail taxpayers. That is an outright crime by the banks and financial authorities as well as the government. That is unacceptable. The theft continues. William Dudley (ex-GS economist and current NY Fed head) coming out and saying outright that they are trying to force people to buy assets of their choices such as stocks is an admittance of criminal acts. It is not the Fed's job nor authority to manipulate the markets nor force people to buy anything by ruining other alternatives. The Fed needs to be shut down immediately and this charade needs to stop. There is no rule of law nor democracy given what is going on with the banks and the cooked dealings of the few at the expense of the many. This is unpatriotic and unamerican and hurting America.

Here is a great article that tells it all:

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GM's Pension: A Ticking Time Bomb for Taxpayers?

By Joseph R. Szczesny Thursday, Apr. 15, 2010

General Motors Corp. may no longer be the world's biggest automaker, but it still operates the country's largest pension fund. The threat to its pension plans has always been an issue, butit took on a new urgency when GM disclosed April 7 that its plans were underfunded by more than $27 billion, with more than half of that being owed to U.S. workers and retirees. Across town, a post- bankrupt Chrysler faces its own pension shortfall. Moreover, a report last week from the Government Accounting Office (GAO) says the pension crisis in the auto industry could create an unprecedented crisis for the federal Pension Benefit Guarantee Corp., a government-sponsored organization to backstop company pensions.

When the two automakers emerged from bankruptcy reorganization the pension problems were seen as a more distant issue, and presumably one that would be eased by economic growth. But the auto industry is facing a slow recovery, and neither the new GM nor the new Chrysler has produced a profit. Christopher Liddell, GM's new chief financial officer, has stopped short of predicting that GM will be profitable this year, while Chrysler CEO Sergio Marchionne is hoping Chrysler can break even this year. Both GM and Chrysler are also moving to build smaller vehicles, which have traditionally produced smaller profits. The pension funding crisis could begin in 2013, or before either company is fully profitable.(See a 1950 TIME piece on the history of pensions.)

Here are the chief questions raised by the potential pension crisis:

Could taxpayers really be on the hook for UAW pensions?

Yes. GM could face a funding crisis in 2013 or 2014 when, under the current projections, the automaker will be required to make more than $12 billion in contributions to its pension funds to keep them solvent, according to the GAO analysis. Chrysler's estimated future pension obligation is $3 billion. If the companies cannot meet their funding obligations they may have to terminate their plans, and the financial responsibilities (up to government limits) would be assumed by the Pension Benefit Guarantee Corporation. The funding could easily become a serious challenge for the PBGC, which says it is now facing $168 billion in possible plan terminations across a range of companies, many of them auto suppliers. The PBGC is privately funded, but since it was created by an act of Congress and its board of directors consists of the Secretaries of Labor, Commerce and Treasury, it's possible that the U.S. Government would step in if the agency came up desperately short of funds. Of course, the Obama Administration could allow GM or Chrysler to defer their pension contributions, but there would likely be stiff resistance to another wink-and-a-pass for automakers.(See 10 milestones on the road to GM's bankruptcy.)

Won't a successful IPO of new GM stock resolve the pension funding problem?

No. The actual timing of the initial public offering and the amount of money it raises will depend on market conditions. However, even if an IPO is successful the money would go to the U.S. Treasury to repay it for supporting the company through bankruptcy. In addition to direct aid of $8 billion that GM plans to repay, the government also loaned GM another $49.98 billion in exchange for a 61% stake in the automaker with the understanding the GM would do a public offering of stock as a way for the government to get repaid. The same holds true for Chrysler if and when it gets around to an IPO, which CEO Marchionne has said is unlikely before 2012.(See the 50 worst cars of all time.)

What happens to GM and Chrysler pensioners if the PBGC takes over the funds?

The retirees could face dramatic cuts. The PBGC promises a certain level of benefits, but $35 billion of the two automakers' promised pension benefits fall beyond the PBGC guarantees. In 2010, a single 65-year old retiree is guaranteed a maximum of $54,000 per year under the PBGC guidelines, and many GM retirees have earned benefits in excess of the PBGC limits. Last summer, the PBGC did take over the salaried pension plans belonging to GM's former subsidiary, Delphi Corp. Most of Delphi's 20,000 salaried pensioners, many of whom started out working at GM, saw their pensions cut. Thus, a termination of GM's or Chrysler's pension plans could likely result in pain for both pensioners and taxpayers.

Bubbles In The Clouds

2010-11-18T11:43:00.000-08:00

This one is a very fitting name: Cloud computing. Because the valuations and expectations are above the clouds. These cloud computing companies such as RVBD, FFIV, NTAP, CTXS, AMZN to count a few are the new bubble industry as were the solar stocks back in 2007-2008. The expectations are beyond belief. The results surely will disappoint over the next couple years as more and more companies such as IBM and MSFT enter this market and competition increases. Even without competition the usefulness, efficiency, or more importantly the security of this concept is very doubtful. I'd recommend buying puts in the front 3-5 months that are 10-30% out of the money and keep doing this for the next couple years at the most. By then the clouds will turn into raindrops as will the investors' (and speculators') optimism into tears.

Gold Manipulation and the Fed

2010-11-09T10:55:00.000-08:00

Gold and silver are being heavily manipulated again today in typical fashion we have seen in the past. Out of nowhere on no news some huge volume of paper gold on the comex is shorted to bring the price down. Their aim is to bring it down below $1400 psychological level. The Fed goes in and manipulates all sorts of markets, does useless and corrupt things like QE2 and then to make that horrendous corrupt policy look not as bad, they go in and attempt to bring the price of gold down. The Fed needs to be shut down as soon as possible as it is doing nothing but harm this country in a corrupt and illegal way.

Uselessness of the ISM

2010-10-16T10:02:00.000-07:00

The closely watched economic indicator ISM is not as useful as many think. It is a survey of several business managers answering several questions. These managers have the incentive to make their businesses look better than they really are, so any optimistic looking ISM survey results should be taken in with a grain of salt. Also, they have nothing to do with the reality and nominal levels. It is a relative survey in the sense that the questions ask things like compared to last year is your business better, etc. It is the negative readings that matter more as they are very real. One should really disregard the slightly positive readings as they are misleading for investment purposes. I am not even going to mention the problems with data collection and manipulation in this survey. One point about this topic is the revisions to prior numbers. How can you revise answers to a survey of questions? What new data did these guys get to revise previous readings????

QE2

2010-10-16T09:57:00.000-07:00

The second (although it is more like a 100th) round of so called "quantitative easing" has been what has driven the equity, bond, and commodity markets to new highs. Even the rise in gold is partially due to the prospect of another round of money printing. Quantitative easing is a fancy name aimed at fooling the public into thinking that there is something scientific about the things the Fed is doing. It is nothing different than printing an obscene amount of new paper money and buying bonds or other financial assets with that in trying to support certain interest groups such as the banks and rich money managers that are politically and monetarily connected to the Fed and the government. It is done in an unsterilized way in order to increase the money supply even further. The argument behind this strategy is the belief of the monetarists that increased money supply increases economic activity. This is partially supposed to be achieved through the lowering of borrowing costs by lowering the yields on treasury bonds so that businesses and individuals find it easier to borrow and invest.

This is all good and dandy in theory, but in practice it is hogwash. For one thing, rates are already very low and another 50bps to 1% is not going to start an investment boom. Corporations are flush with cash, so they do not need to borrow to invest. They are not investing because they do not have nay reason to increase production as the demand side of the economy is in trouble. It is the consumers that is facing close to 20% unemployment in an economy that is 70% consumer spending that is the issue. The problem is falling wages and declining living standards due to the inflation faced by the middle and lower classes through higher food and energy prices that is the problem. It s the increasing inequality between the ultra-rich that is getting richer through the operations of the Fed and the middle and lower classes that are sinking lower again because of the fraudulent practices of again the Fed. Fed is making the problem worse by increasing the inflation different groups of the society face. Asset prices coming down due to mispricings caused by the ultra-supportive Fed policies of the past is not deflation. It is a process where fair value is achieved after so much distortion caused by the Fed in what should be a free market economy. Fed officials themselves admit they are distorting prices when they say things like "we are supporting American families by increasing asset prices that would otherwise be lower". What kind of logic is that? Besides they are only helping the financial asset rich upper-classes who do not spend their extra income. It is the middle class that is the wheels of an economy and that class is being butchered by the Fed.

The markets are setting up a lot of disappointment down the road as the economy will fail to register any employment growth through more QE.

I LOVE RICK SANTELLI

2010-08-13T12:17:00.000-07:00

He puts all these stupid bubbleheads on CNBC in their places.Let's hope he doesn't get let go from CNBC because of that. The best from today was when he answered the bubblehead whose name I don't even care to remember- said that the Fed made money on its mortgage bonds. Rick Santelli countered with the example of buying every single Pontiac Aztec ever made and marking it to model at outrageous prices. Of course you can show a profit he said. Then he asked what happens to the prices when you try to sell one... He tied that to the Fed's holding of mortgage bonds and how they were guaranteed by the Treasury and if it was not for the treasury making them whole, they would be losing a lot of money - not to mention if they were not marked to model, but let to freely trade.

The talk was similar of the questionable Bernanke claiming they were making money on those until a senator reminded him of how the treasury was making them whole and which is why they were not losing billions on it.

Bernanke and those bubbleheads are either living in a different universe or are outright lying. I think I've seen Bernanke in DC, so he must be living somewhere on earth....

AIG Scandal and One of the Reasons Why Fed Should Be Abolished and Geithner and Bernanke Should Go To Jail

2010-08-12T08:10:00.000-07:00

The AIG Bailout Scandal

William Greider | August 6, 2010

The government’s $182 billion bailout of insurance giant AIG should be seen as the Rosetta Stone for understanding the financial crisis and its costly aftermath. The story of American International Group explains the larger catastrophe not because this was the biggest corporate bailout in history but because AIG’s collapse and subsequent rescue involved nearly all the critical elements, including delusion and deception. These financial dealings are monstrously complicated, but this account focuses on something mere mortals can understand—moral confusion in high places, and the failure of governing institutions to fulfill their obligations to the public.
Three governmental investigative bodies have now pored through the AIG wreckage and turned up disturbing facts—the House Committee on Oversight and Reform; the Financial Crisis Inquiry Commission, which will make its report at year’s end; and the Congressional Oversight Panel (COP), which issued its report on AIG in June.
The five-member COP, chaired by Harvard professor Elizabeth Warren, has produced the most devastating and comprehensive account so far. Unanimously adopted by its bipartisan members, it provides alarming insights that should be fodder for the larger debate many citizens long to hear—why Washington rushed to forgive the very interests that produced this mess, while innocent others were made to suffer the consequences. The Congressional panel’s critique helps explain why bankers and their Washington allies do not want Elizabeth Warren to chair the new Consumer Financial Protection Bureau.
The report concludes that the Federal Reserve Board’s intimate relations with the leading powers of Wall Street—the same banks that benefited most from the government’s massive bailout—influenced its strategic decisions on AIG. The panel accuses the Fed and the Treasury Department of brushing aside alternative approaches that would have saved tens of billions in public funds by making these same banks “share the pain.”
Bailing out AIG effectively meant rescuing Goldman Sachs, Morgan Stanley, Bank of America and Merrill Lynch (as well as a dozens of European banks) from huge losses. Those financial institutions played the derivatives game with AIG, the esoteric practice of placing financial bets on future events. AIG lost its bets, which led to its collapse. But other gamblers—the counterparties in AIG’s derivative deals—were made whole on their bets, paid off 100 cents on the dollar. Taxpayers got stuck with the bill.
“The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America’s largest financial institutions,” the COP report said. This could have been avoided, the report argues, if the Fed had listened to disinterested advisers with a less parochial understanding of the public interest.
Fed and Treasury officials dismiss this critique as second-guessing of tough decisions they had to make in the fall of 2008, amid the fast-moving global crisis. Yet two years later, those controversial decisions remain highly relevant. Public anger has not abated. It fuels the election turmoil that this year threatens to bring down incumbents in both parties who voted for bank bailouts.
Although the AIG bailout was carried out in the waning days of George W. Bush’s presidency, the popular sense of injustice has deeply scarred Barack Obama, since he too adopted a forgiving approach toward culpable financial interests. Obama came to office intent on restoring public trust in government. His indulgence of the mega-banks led to the opposite result.
More to the point, the AIG story raises real doubts and suspicions about how the government will respond next time. Or whether the new financial reform legislation actually corrects government’s deference to the pinnacles of private financial power. Massive federal intervention was certainly necessary, the Warren panel agrees, including quick action to forestall AIG’s bankruptcy. But government declined to demand anything in return.
The AIG rescue was done in ways that had “poisonous effects” on the financial marketplace and public opinion, the report concluded. Cynical expectations were confirmed, both for citizens and financial players. Some financial firms are simply “too big to fail,” it seems; Washington will not let them collapse, no matter what the president claims.
The most troubling revelation in this story is the astonishing weakness of the Federal Reserve and its incompetence as a faithful defender of the public interest. In the lore of central banking, the Fed is awesomely powerful and intimidating. As regulator of the banking system, it has life-and-death influence over banks. As manager of the economy, it has open-ended authority to intervene in the financial system to restore stability, as the central bank did massively during the crisis.
Yet the Fed was strangely passive and compliant when it came to demanding cooperation and sacrifice from the largest financial institutions. Timothy Geithner was then president of the New York Federal Reserve Bank, the lead regulator of Wall Street’s largest banks. He briefly insisted they must accept the burden of rescuing AIG. But the bankers called his bluff and blew him off—and Geithner deferred to their wishes. The taxpayer bailout followed. The episode is relevant to the future, because Geithner is now Obama’s Treasury Secretary and in charge of preventing the next taxpayer bailout.
In the early autumn of 2008, mayhem swept through global financial markets. It engulfed AIG on Monday morning, September 15. Lehman Brothers had just failed. Panicky credit markets were seizing up. American International Group, largest insurance company in the world, was hemorrhaging capital, rapidly sinking toward bankruptcy. At the New York Fed, Geithner had the problem covered, or so he thought.
Geithner informed top executives of Wall Street’s most important financial houses—Jamie Dimon of JPMorgan Chase and Lloyd Blankfein of Goldman Sachs—that the banking industry, not the Federal Reserve, must step up and do the rescue. Geithner told them it was “inconceivable that the Federal Reserve could or should play any role in preventing AIG’s collapse.”
That Monday morning, Geithner summoned representatives from Goldman and the JPMorgan bank to Fed offices and told them to organize a private-sector consortium of major lenders to provide the emergency liquidity loans that would keep AIG afloat until things settled down. It was presumed JPMorgan would be the lead lender; Goldman, as an investment bank, could help AIG sell off assets to raise capital. Given the Fed’s blessing, other banks were expected to cooperate.
The New York Fed president did not need to threaten anyone. This was the gentlemanly way in which the central bank can invoke its informal authority, with numerous precedents in the past. Prodded by the Fed and Treasury, major banks had done something similar back in 1998 to save the hedge fund Long Term Capital Management, whose collapse threatened a chain reaction on Wall Street. During the Latin American debt crisis of the 1980s, the Fed had used its overbearing influence to make leading US banks grant concessions and write down outstanding loans—a grudging “workout” that saved Mexico, Brazil and Argentina from default but also saved some famous New York banks from imploding.
This time, the entire system was at risk, so virtually everyone was vulnerable. Geithner expected the biggest banks to package a substantial bridge loan that would give AIG the time to sell assets and raise capital, an orderly resolution. After all, AIG was an insurance corporation, not a bank. The Fed had no direct regulatory authority over it. Geithner had gotten an early glimpse of AIG’s troubles in the summer, when its CEO approached him and asked for access to the Fed’s discount window, the place banks go for short-term liquidity loans. Geithner turned him down, but learned how deeply Wall Street and Europe’s leading banks were entwined in AIG’s troubles.
The problem was derivatives. During the housing bubble, AIG had reaped a fortune selling derivative contracts based on mortgage-backed securities—hedging devices that made investors feel safe holding these assets. When the bubble burst and housing securities plummeted in value, AIG’s derivatives became its instrument of self-destruction. The counterparties, as per their contract, demanded immediate payment to cover their losses—more and more capital, as housing prices continued to fall. Goldman Sachs, almost alone among big banks, had bet right on the housing bubble. Now it was aggressively collecting on its bet.
The bankers’ committee assembled at the Fed worked all day and into the night, joined by AIG, the New York State insurance regulators, with investment bank Morgan Stanley acting as Treasury’s new adviser. The group drafted a “term sheet” that toted up AIG’s exposure. It would need as much as $75 billion, they estimated.
In Washington, Treasury Secretary Henry Paulson kept his distance, while fighting other bonfires. Paulson assured reporters the meeting under way at the New York Fed had nothing to do with a government bailout for AIG. “What’s going on in New York is a private-sector effort,” Paulson said.
Sometime after midnight, the bankers called to say, sorry, they were not interested. There would be no private-sector rescue. According to Thomas Baxter, general counsel at the New York Fed, notification came on Tuesday morning, not from the principal executives of Goldman and JPMorgan but from a bankruptcy lawyer, Marshall Huebner, advising JPMorgan on AIG’s problems. The New York Fed immediately hired him as its own lawyer and proceeded to do what the bankers had refused to do—bail out AIG.
JPMorgan and Goldman offered no public explanation for rejecting Geithner’s proposal. The public wasn’t ever told the banks were asked to do their part. Nor did Federal Reserve officials argue with the decision or try to apply persuasive pressures. It did not put the squeeze on to convince the bankers they must accept some kind of sacrifice in the interest of sharing the pain. Nor did Geithner threaten to pursue an alternative strategy that could have forced the banks to negotiate the terms. This was considered out of the question, though the central bank has employed all these tools on past occasions.
In a subsequent hearing, Damon Silvers, the AFL-CIO policy director who is a member of Warren’s oversight panel, asked Baxter, “When you’re pulling together the private sector to solve a problem that they’ve created of the type that AIG represented, is it typical to accept no for an answer?” Baxter fudged. “Well, I started out by saying there was nothing typical about the crisis,” he replied. He talked in circles and never answered the question.
If the bankers refused to participate, the Fed had to move fast to stanch the bleeding. AIG faced another downgrade from credit rating agencies (the same agencies that had given triple-A blessings to mortgage securities). The Fed adopted the bankers’ “term sheet” as its operating guide and swiftly created a revolving credit fund of $85 billion.
Late on Tuesday, the central bank lent $12 billion to AIG. The next day, it lent another $12 billion. This was only the beginning. The AIG operation became a gigantic spigot for circuitously distributing public money to private banking interests. As the New York Fed pumped more money into AIG, the insurance giant pumped it right out the door to satisfy the demands from counterparties like Goldman Sachs. Having helped scuttle the private rescue, Goldman collected $13 billion from this backdoor public assistance. The Fed did not stop AIG’s hemorrhage. It began financing it, with no questions asked.
The Fed has always insisted this financial daisy chain was not designed to pump more capital into the leading banks. “This was not about the banks,” a senior vice president of the New York Fed told the New York Times. If not, then why did the Federal Reserve work so hard to keep their names secret? Fed lawyers labored for months to prevent disclosure of the beneficiaries. Ranking Federal Reserve governors coldly rejected as “inappropriate” the repeated Congressional demands to know the names. If it wasn’t about helping those banks, why did the Fed not pause to reconsider its initial decision and develop a less costly approach? It became instead the paymaster for AIG’s failed derivative contracts—conducting business as usual in the midst of national emergency.
This process continued for nearly two months and swelled to horrendous proportions before the Federal Reserve finally figured out a way to turn off the spigot. In November, it arranged a complex swap, known as “Maiden Lane,” in which the government paid off counterparties, acquired the remaining derivative contracts and extinguished them. The bankers again collected roughly full value on assets that were then selling in financial markets for less than 50 cents on the dollar.
The Fed claimed victory for the public, but in reality the game was already lost, despite the generous public financing. AIG was facing another downgrade, and everyone understood this one would probably be fatal—triggering the bankruptcy the Fed had tried to avoid. After the bankers had gotten the money, they graciously agreed to settle.
Back in September, when the Federal Reserve hired JPMorgan’s lawyer as its own, there was no public outcry because the public didn’t know about it. Marshall Huebner of the law firm Davis Polk & Wardwell was an expert in corporate bankruptcy and would help the Fed get up to speed quickly. The arrangement was not illegal and not unethical, given the precious distinctions the legal profession makes on ethics. JPMorgan gave its lawyer consent to switch sides, though Huebner’s firm continued to represent the Morgan bank (Davis Polk graciously gave the Fed a 10 percent discount of Huebner’s $1,000-an-hour billing rate). The Federal Reserve limited his advice to AIG matters. Huebner later also became Treasury’s lawyer when it added TARP funds to AIG, though the Fed and Treasury do not have identical interests.
What was troublesome about swapping lawyers? There was a “third client” in this matter—the American public—who faced huge exposure to losses but didn’t have its own lawyer in the room. The central bank, with its high sense of rectitude, would insist it represents the public interest. The Congressional Oversight Panel did not buy that.
The government, the Warren report said, “put the efforts to organize a private AIG rescue in the hands of only two banks, JPMorgan Chase and Goldman Sachs, institutions that had severe conflicts of interest as they would have been among the largest beneficiaries of taxpayer rescue.”
Once the immediate panic subsided, the Fed did not seek out alternative opinions and proposals on what to do next, either from independent debtor counsel or even from AIG’s bankruptcy lawyer. “By failing to bring in other players, the government neglected to use all of its negotiating leverage,” the report observed.
In fact, the Congressional Oversight Panel found an incestuous stew of private financial players in the AIG case, who switched their allegiance between public and private roles numerous times. Severely conflicted loyalties are commonplace on Wall Street. The Fed saw nothing wrong with it.
Goldman Sachs always claimed it was fully hedged against loss, even if AIG went bankrupt, but the oversight panel discovered a crucial gap in its protection. Goldman would have been more vulnerable if the Fed had succeeded in arranging a “voluntary” workout by the private banks. Such a deal could have compelled Goldman and other counterparties to make concessions—accept a “haircut,” as Wall Street financiers put it. Goldman helped dump that possibility.
Morgan Stanley, another investment bank that had its own near-death experience in the fall of 2008, got a similar though much smaller benefit while also acting as adviser to the Treasury Department. The Federal Reserve provided both Goldman and Morgan Stanley with shelter from the storm by designating each as a “bank holding company,” even though neither owned many retail banks. The status gave them access to emergency loans at the Fed’s discount window—just in case.
JPMorgan Chase was vulnerable in a different way. It was not a counterparty holding AIG derivatives, but the Morgan bank was itself the banking industry’s largest issuer of derivatives. It held $9.2 trillion in credit derivatives—four times its capital assets—and many trillions more in other forms of derivatives. By its actions, the Fed greatly reduced the risks for the Morgan bank.
“The rescue of AIG distorted the marketplace by transforming highly risky derivative bets into fully guaranteed payment obligations,” the COP explained. “The result was that the government backed up the entire derivatives market, as if these trades deserved the same taxpayer backstop as savings deposits and checking accounts.”
Bankers will be bankers. But what about the Federal Reserve? The oversight panel expressed sympathy for the circumstances Fed officials faced, but drew a harsh conclusion: “By adopting the term sheet developed by the private sector consortium and retaining most of its terms and conditions, the Federal Reserve Bank of New York chose to act, in effect, as if it were a private investor in many ways, when its actions also had serious public consequences whose full extent it may not have appreciated.”
That summarizes the moral confusion of the Federal Reserve. In a state of national emergency, it was acting under the business-as-usual expectations of the private financial system, while skipping lightly over the public consequences. This quality was most clearly demonstrated in the choices it did not make. The oversight report explains in detail the alternative approaches the Fed did not even explore. The central bank has insisted that none of these were pursued because they were either unworkable or prohibited. The explanations tend to be legalistic and narrowly argued in the logic of Wall Street investors.
To put it crudely, the Fed could have taken some key players in a back room and discreetly banged their heads together. Central bankers do this on occasion with uncooperative bankers. In extreme circumstances, the Fed can apply formidable powers of persuasion. Most bankers do not wish to provoke the Fed’s disfavor, especially when the system is wobbly and they might need the central bank’s help to survive. This time the Fed did not even try.
Timothy Geithner told panel members he does not think it is the Federal Reserve’s role to use the tools at its disposal to induce the banks it regulates to do something they do not want to do. That posture implicitly gives the high ground to the regulated banks—their choice, not the government’s.
Baxter, general counsel at the New York Fed, testified that the Fed did not seek to pressure banks into compromising on their contract rights. “We see that as an abuse of regulatory power,” he said. Scott Alvarez, general counsel for the Federal Reserve Board in Washington, testified, “We had no legal authority to force anyone to take actions they did not want to take and at this time in this economic circumstance, they did not want to provide assistance to a struggling firm. So there was nothing more that we could do.”
The oversight panel did not accept these claims of regulatory impotence. Neither do many Wall Street veterans familiar with the Fed’s potential power. Given the scale of the crisis, the Fed could have decided to organize a joint public-private consortium to handle emergency lending for AIG. That inevitably pushes counterparties to make their share of concessions, like the “haircuts” creditors typically accept to settle corporate bankruptcy cases.
The Fed could not force them to accept, but it could make refusal very awkward. Any holdouts could be “named and shamed” and held up for public scorn—as bankers who accepted public bailouts but refused to do their part. There’s nothing irregular about that. Such “workouts” are standard practice when major creditors have to resolve problems of indebted companies. Typically they will settle for less to avoid the enormous costs and delay of long-running bankruptcy litigation. Martin Beinenstock of the law firm Dewey & LeBoeuf testified: “A fundamental principle of workouts is shared sacrifice, especially when creditors are being made better off than they would be if AIG were left to file bankruptcy.”
The alternatives described by the COP report are variations on this same theme of accountability—the equity of threatened bankers stepping up to “share the pain” alongside their public benefactors. Any of these other solutions would have been difficult and involved mind-bending legal complications. But the reality was that the largest financial players were far more vulnerable and dependent on the government than they or the Fed would acknowledge.
Instead of pumping out more billions, the central bank could have supplied short-term credit to AIG, while announcing that this was only a temporary measure to get through the storm. The Fed could then have declared it was preparing the insurance company to file for regular bankruptcy. This would put creditors on notice: they faced a long and expensive legal tangle in which they were unlikely to get everything they wanted. That would give them a strong incentive to negotiate a settlement for something less than 100 percent. As leading creditor, the Federal Reserve would have a lot of influence on the parties the bankruptcy judge helped or penalized.
This approach was roughly the strategy for bailing out General Motors. Government expended billions, but it also claimed the role as the lead player and asserted control—demanding new management and a thorough reorganization of the corporation. In this “managed bankruptcy,” every GM stakeholder took a hit—the workers and shareholders, but also the creditors. Fed defenders cite legal obstacles that made the AIG case different. And the Fed was also reluctant to take control of AIG, even after it became 80 percent owner.
Citing legal inhibitions seems a strange excuse for the Federal Reserve to invoke. During the larger crisis, the central bank dispensed trillions of dollars in imaginative and unprecedented ways, often with no explicit authority. The law is deliberately vague and says the Fed can lend to virtually anyone in “exigent circumstances.” The Fed itself gets to define what that vague phrase means.
The Federal Reserve proved to be a weak and unreliable regulator for the public interest, but blamed its weakness on inadequate laws. That excuse has now been taken away by the new financial-reform legislation, which gives the central bank more explicit legal authority to intervene and take control of troubled financial institutions. The Fed has always been able to do this—if it had the nerve to use its implicit powers in strong-armed ways. For longstanding reasons, it has lacked the will.
The Fed is now in the crosshairs and will be tested by future events. Officials may issue threats and warnings, but market players and the general public will remain skeptical until the central bank actually seizes an errant financial institution, disassembles its dangerous elements and shuts it down. That alone is needed to destroy the cynical assumption among investors, depositors and bankers that the unacknowledged doctrine of “too big to fail” still reigns. Taking this action would of course deliver a great shock to the financial system. That is why I doubt the Fed will do it.
The Congressional Oversight Panel did not address the new law and its potential effectiveness. What follows is my analysis, based on many years of observing the central bank during its turmoil of the past generation. The Fed is weak for many reasons, some revealed in the AIG story, but like any proud institution, it dares not speak candidly about its predicament. The political system is likewise still too intimidated to challenge the myth and mystery, but sharp questions have been raised since the financial crisis. If I am right, a stronger reform critique will be forthcoming when the Fed fails again to put its public obligations ahead of the banks.
One weakness is embedded in the institutional culture of the Fed—its chummy relations with the most powerful institutions and the moral confusion between public purpose and private returns. In some ways, these traits date back to the Federal Reserve’s origins in 1913, when this hybrid government agency was created, melding public and private interests. Regulated bankers participate side by side with their regulators. The central bank’s obligation to protect the “safety and soundness” of the financial system often becomes a euphemism for defending bank profitability. These qualities might conceivably be bleached away with fundamental reform of the venerable institution. Ideally, it could start with the conflicted loyalties so obvious at the powerful New York Fed.
Even in that unlikely event, the Federal Reserve will still be handicapped by the other great source of its weakness—the structural imbalance of power in which the banking giants can easily outgun their principal regulator. We saw how that happened in the AIG story when the bankers called Geithner’s bluff, after which he retreated obediently.
The awkward secret, understood by savvy Fed governors, is that the central bank has been steadily weakened by the deregulation of banking and finance over the past generation. As the Fed was deprived of various control levers with which it used to discipline the banking system, private financial power accordingly became stronger—more reckless and more concentrated at the top. As the mega-banks allied themselves with unregulated hedge funds and leverage was multiplied through off-balance-sheet gimmicks, the system became more powerful yet also more fragile, a dangerous combination. Some leaks have been plugged, but not all of them. And bankers are good at finding new ones.
Savvy bankers understand what Fed officials understand—the central bankers are trapped in a game of chicken with important banks that can call their bluff. If the Fed acts in a prompt fashion to curb or punish reckless behavior before it get dangerous, the bankers will accuse it of stifling profit and progress. Bank examiners are chastened, told to back off.
If the Fed waits too long to intervene, as it regularly did during the past twenty-five years, then it may be faced with a far more dangerous situation: given the globalization of financial markets, the system now operates with a hair-trigger response to threatening rumors or disclosures. We saw it happen in the fall of 2008. A broad panic raced around the world, freezing credit markets, collapsing financial assets and bringing down major institutions.
This discreet power struggle is never candidly acknowledged by the governing institutions (who fear it would weaken them further), but it has fed the growing instability for several decades. Fed regulators have lacked the nerve (or the hard evidence) to stop dangerous practices by banks before they reach the crisis stage. Yet once calamity appears imminent, it’s feared that taking action might provoke a wider disaster—a global “run” by investors—since other banks are engaged in similar behavior.
We might feel more sympathy for the Federal Reserve, except its leaders have actively contributed to their predicament. Paul Volcker, Fed chairman in the Carter and Reagan era, privately grumbled that removing ceilings on interest rates would weaken the central bank’s hand, but he reluctantly supported it. His successor, Alan Greenspan, led cheers for liberating the banks from government regulation. The consequences are now fully visible.
The first “too big to fail” bailout, of Continental Illinois Bank in 1984, was supervised by Volcker in circumstances that would lead to other bailouts in later years. Volcker knew the Chicago bank was drowning in bad loans, so he demanded that the board of directors fire its go-go chairman, Roger Anderson, and start writing off the bad debt. The directors called Volcker’s bluff and did the opposite. At the climax, Volcker arranged a federal rescue because he feared several other major banks were similarly vulnerable. If the Fed didn’t rescue Continental, that could touch off something worse.
“Yeah, maybe we should have nailed them,” Michael Bradfield, Volcker’s general counsel, acknowledged afterward (reported in my book Secrets of the Temple). “What are you going to say? Goddamn it, as long as Roger Anderson is chairman of your bank, we’re not going to lend any money at the discount window? You can say it and it’s pretty intimidating, but the directors can call your bluff…. as a practical matter, you can’t. The consequences of refusing to supply liquidity support to a bank are too severe.”
In other words, the AIG case was not only about weak regulators. Geithner was weak and easily spun around by the bankers, but Volcker was a monumentally tough regulator, and he made similar decisions when his bluff was called. That comparison is my evidence for the structural causes beneath politics and personalities. Those deeper causes have not been fixed.
Lots of ordinary citizens have figured this out. If some banks are too big to fail, then government should compel them to become smaller banks. The harsh reality is that our bloated financial sector is too large for the economy it serves, its power too concentrated at the top. Neither the president nor either political party is yet ready to face the imperative of breaking up the mega-banks. Until they do, the system will remain unstable and prone to excesses, maybe worse.
Meanwhile, the Federal Reserve’s dilemma has been made much larger. It has been given broad discretion to enforce many structural changes on the financial system. But discretion can be fatal for regulators, as AIG illustrated. It asks Fed leaders to get tough with their principal clients, when Congress didn’t have the nerve to do the same. Congress needs to write hard-nosed laws with concrete prohibitions and specific enforcement triggers, not wishful requests. If the Fed again fails to act, as I fear, another crisis becomes more likely. If that occurs, the Federal Reserve will be the next big subject for reform.

China Not Comfortable With Treasuries Mid to Long Term

2010-08-03T11:24:00.000-07:00

Yet another negative USD articel originating from Chinese authorities:

This is from BW:

"

Treasuries Lack Safety, Liquidity for China, Yu Says

August 03, 2010, 4:08 AM EDT

Story Tools

By Bloomberg News

(Adds government researcher’s comment from 7th paragraph.)

Aug. 3 (Bloomberg) -- U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser.

“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.

The State Administration of Foreign Exchange, which manages the nation’s reserves, said last month that U.S. government debt has the benefits of “relatively good” safety, liquidity, low trading costs and market capacity. China’s holdings of Treasuries, the largest outside of the U.S., totaled $867.7 billion at the end of May, down from $900.2 billion in April and a record $939.9 billion in July 2009.

To help cool demand for the securities, China needs to curb the growth of its foreign reserves by intervening less in the currency market, Yu said. The People’s Bank of China said June 19 it would let the yuan float with reference to a basket of currencies, ending a two-year-old dollar peg.

The yuan has since appreciated 0.8 percent to 6.773 per dollar and analysts surveyed by Bloomberg predict the currency will end the year at 6.67, based on the median estimate. China limits appreciation by buying dollars, fueling its demand for Treasuries.

Less Intervention

“China has to depend more on demand and supply in the foreign exchange market for the determination of the yuan exchange rate,” Yu wrote. “Only God knows how much value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves.”

The cost of pegging the Chinese currency to the dollar is “intolerably high” and threatens the welfare of Chinese people, Zhang Ming, deputy chief of the International Finance Research Office at the Chinese Academy of Social Sciences, wrote today on the website of China Finance 40 Forum.

“The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation,” he said. “Whichever way it is, the yuan-recorded market value of Treasuries will fall, causing huge capital losses to China’s central bank.”

Sliding Dollar

The dollar has weakened against all 16 major currencies monitored by Bloomberg in the past month, sliding 5.4 percent versus the euro and 4.7 percent against the pound. The Dollar Index, which the ICE futures exchange uses to track the greenback against the currencies of six major U.S. trading partners, is headed for its lowest close since April 15.

Premier Wen Jiabao in March urged the U.S. to take “concrete steps” to reassure investors about the safety of dollar assets after President Barack Obama stepped up spending to help end a recession. The White House predicts the U.S. budget deficit will hit a record $1.47 trillion this year, about 10 percent of gross domestic product.

An “appropriate” policy for China would be to allocate its reserves with reference to the weightings of Special Drawing Rights, a unit of account of the International Monetary Fund, Yu said in May. China bought a net 735.2 billion yen ($8.3 billion) of Japanese bonds in May, doubling purchases for this year.

--Editors: James Regan, Ven Ram
%CNY %USD
To contact the Bloomberg news staff on this story: Belinda Cao in Beijing at lcao4@bloomberg.net
To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.
"

Central Bank Of China Supporting Gold Company Takeovers By Chinese Companies

2010-08-03T07:26:00.000-07:00

The Central Bank of China comments on gold are tantamount for the future of gold and dollars and the monetary system going forward.

Here is the Bloomberg article:

"
Gold Takeovers Set Record to Boost Fees at BMO, HSBC (Update1)
2010-08-03 11:36:09.499 GMT

     (Adds China’s acquisition plans in fifth paragraph.)

By Rebecca Keenan
    Aug. 3 (Bloomberg) -- Global gold mining takeovers set a record this year with “chest-beating” miners chasing deals as the price of the metal surged, boosting fees at advisory banks BMO Capital Markets, HSBC Bank Plc and Merrill Lynch.
     Kinross Gold Corp.’s purchase of Red Back Mining Inc. for about $7.1 billion yesterday took the value of gold deals to $32 billion this year, accounting for 38 percent of all mining acquisitions, according to data compiled by Bloomberg. That’s more than twice last year’s total for the industry.
     “The reason why we may have seen a pickup in activity this year is because gold prices are around $1,200” an ounce, said Greg Fournier, Hong Kong-based head of Asia Pacific region metals and mining investment banking at Merrill Lynch. “If you have a view that the gold price is strong and is going to go higher then acquiring more reserves or producing properties today makes sense.”
     Bullion advanced to a record $1,266.50 an ounce in June and is set for a 10th straight annual gain, the longest winning streak since at least 1920, attracting investment by fund managers including George Soros and John Paulson.

                         China’s Growth

     Takeovers may increase as China, the world’s largest gold producer, backs acquisitions abroad. The nation’s central bank today said it will help its bullion companies expand overseas by extending credit lines and offering loans. The bank also said it will let more banks import and export gold, and wants to spur the development of yuan-denominated derivatives trading.
     “China’s domestic production of gold, albeit being the largest in the world, cannot satisfy its demand,” Ellison Chu, managing director of the precious-metals desk at Standard Bank Asia Ltd., said in Hong Kong.
     Bank of Montreal’s BMO Capital Markets unit remains the top gold adviser, with nine deals worth $20 billion, according to the data. That’s followed by HSBC and Bank of America Corp.’s Merrill Lynch unit, which wasn’t in the top 20 last year. BMO Capital is also the top mining acquisitions adviser this year.
     “There’s always a battle of the elephants with gold companies, they like to be the biggest,” Grant Craighead, managing director and co-founder of Sydney-based research company Stock Resource, said after Kinross agreed to buy Red Back yesterday. “It’s a real chest-beating industry.”
     Newcrest Mining Ltd. and Resolute Mining Ltd. are among potential takeover targets, according to Midas Fund Inc., which holds Newmont Mining Corp. and Barrick Gold Corp.

                       Depleting Reserves

     “There is likely to be more consolidation in the medium-to long-terms as gold producers struggle to grow organically,”
said Evy Hambro, who oversees about $35 billion in natural- resources funds for BlackRock Inc. “This is a global trend,”
said Hambro, whose responsibilities include Blackrock’s Gold & General Fund, which has gained an annualized 24 percent in the past five years.
     Gold discoveries have dropped by 4 million ounces a year for the past three decades, Credit Suisse Group AG’s Michael Slifirski said in November, citing a presentation from Gold Fields Ltd.
     “Gold companies have finite assets,” said Richard Phillips, managing director of merger adviser Greenhill Caliburn Pty Ltd. “Producers are under pressure to continue to buy or find gold to replenish the production pipeline and many companies look to do both.”
     Greenhill, founded by Robert Greenhill, agreed in March to buy Sydney-based Caliburn Partnership Pty for as much as $181 million. The company is advising Lihir Gold Ltd., which has agreed to an $8.9 billion takeover from Newcrest, in the second- biggest gold acquisition so far this year.

                          Biggest Deal

     KazakhGold Group Ltd.’s $11 billion bid to take over its parent OAO Polyus Gold to create the largest producer among the former Soviet republics is the biggest deal this year.
     China “will place heavy emphasis on supporting large-scale gold producers in their development and overseas expansion plans,” the nation’s central bank said in today’s statement.
     Zijin Mining Industry Co., China’s biggest gold producer, this year pulled a planned A$545 million ($498 million) purchase of Australia’s Indophil Resources NL after failing to win approval from the Chinese government. The transaction would have given the company a stake in the Philippines’ Tampakan project, Southeast Asia’s largest untapped copper and gold deposit.

                          Size Matters

     “Larger size means greater access to capital markets, geographic and metallurgical diversity, with increased options to redeploy capital,” said New York-based Tom Winmill, who helps manage $120 million at the Midas Fund, which had an 83 percent gain last year, including dividends. He said there will “definitely” be more consolidation in the gold industry.
      Barrick, the world’s biggest producer, and Newmont, the largest U.S. gold company, have both signaled in the past two months that they may consider “opportunistic” acquisitions.
Producers may generate more than $80 billion in free cash flow through to 2015, according to a Merrill Lynch report on July 27.
     To be sure, elevated valuations and restricted access to loans may damp appetite for takeovers. Europe’s debt crisis and global market volatility curbed the attractiveness of riskier asset classes in the first half, making it more expensive for companies to finance new deals.

                      Limits on Borrowing

     “Potential acquirers and operators have been continually disappointed at how debt markets aren’t functioning,” said Peter Arden, a Melbourne-based senior mining analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co. “It will constrain” takeovers, he said.
     Gold will climb to $1,500 an ounce by the end of 2011, Merrill Lynch said last month, maintaining a forecast made shortly after Lehman Brothers Holdings Inc. collapsed in September 2008.
     “The larger companies like Barrick and Newmont and Goldcorp, Kinross in North America in particular, they are all very active consolidators,” Merrill Lynch’s Fournier said in an interview. “They will continue to be pretty active buying smaller companies and also potentially we’ll see some mergers of some of the senior companies at some point in time.”

For Related News and Information:
Today’s top metals stories METT
Global commodity prices, data GLCO
Commodity price forecasts CPF

--With assistance from Shani Raja in Sydney and Feiwen Rong in Beijing. Editors: Hwee Ann Tan, Amanda Jordan

To contact the reporter on this story:
Rebecca Keenan in Melbourne at +61-3-9228-8721 or rkeenan5@bloomberg.net

To contact the editor responsible for this story:
Andrew Hobbs at +61-2-9777-8642 or
ahobbs4@bloomberg.net
"

Banks Giving Out Unallocated Gold Of Customers After Being Approached By BIS

2010-08-02T09:34:00.000-07:00

There is something seriously BS about the BIS and the gold swap devised to bring down the price of gold and mask the shortages of physical gold.

Here is the FT article.

BIS gold swaps mystery is unravelled

By Jack Farchy and Javier Blas in London
Published: July 29 2010 19:10 | Last updated: July 29 2010 19:10

Three big banks – HSBC, Société Générale and BNP Paribas – were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals that caused confusion in the gold market and left traders scratching their heads.

The mystery of who was involved in deals with the BIS, the bank for central banks, and what they were doing, has become clearer.
The Financial Times has learnt that the swaps, which were initiated by the BIS, came as the so-called “central banks’ bank” sought to obtain a return on its huge US dollar-denominated holdings. The BIS asked the commercial banks to pledge a gold swap as guarantee for the dollar deposits they were taking from the Basel-based institution.

EDITOR’S CHOICE

In depth: Gold - Jul-29

Lex: Gold and the BIS - Jul-07

European banks use gold reserves to raise cash - Jul-06

RBS to offload £3bn of property loans - Jul-06

US heat wave slows rise in gas inventories - Jul-06

Short View: Gold bugs change story - Jun-30

When news of the swaps, which were disclosed in a note to the BIS’s latest annual report, circulated among traders this month, it caused a sharp fall in the gold price, sending bullion to what was then six-week lows. Gold has since fallen further: it was trading at $1,164 an ounce on Thursday.
Some analysts speculated that the swap deals were a surreptitious bail-out of the European banking system ahead of last week’s publication of stress tests. But bankers and officials have described the transactions as “mutually beneficial”.
“The client approached us with the idea of buying some gold with the option to sell it back,” said one European banker, referring to the BIS.
Another banker said: “From time to time, central banks or the BIS want to optimise the return on their currency holdings.”
Nonetheless, two central bank officials said some of the commercial banks also needed the US dollar funding and were keen to act as a counterparty with the BIS. The gold swaps began in December and surged in January, when the Greek debt crisis erupted and European commercial banks were facing funding problems.
Jaime Caruana, head of the BIS, told the FT the swaps were “regular commercial activities” for the bank.
In a short note in its annual report, published at the end of June, the BIS said it had taken 346 tonnes of gold in exchange for foreign currency in “swap operations” in the financial year to March 31.
In the same fiscal year, the BIS took three times the amount of currency deposits it had taken the previous year as central banks around the world became concerned about using commercial banks for their deposits and turned to the Basel institution.
In a gold swap, one counterparty, in this case a bank, sells its gold to the other, in this case the BIS, with an agreement to buy it back at a later date.
The gold swaps were, in effect, a form of collateral against the US-dollar deposits placed by the BIS with commercial banks. Gold is widely regarded as one of the safest assets, but has not been widely used as collateral in the past. Mr Caruana described the transactions as “loans with a guarantee”.
Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee.
George Milling-Stanley, managing director for government affairs at the industry-backed World Gold Council, said: “The gold swaps commercial banks carried out with the BIS demonstrate the effectiveness of gold as an asset class, because even in the depths of the worst liquidity crisis in living memory, institutions with access to gold were able to make use of it to generate dollar liquidity.
“The issue also feeds right into the current debate among Asian central banks about the lack of assets suitable for use as cross-border collateral.”
Last year, CME Group, the world’s largest derivatives exchange, allowed investors to use gold futures as collateral for some operations. Other institutions, such as central banks, had begun using and requesting gold as collateral in the past two years as perceptions of counterparty risk have risen, bankers and officials said.
The gold used in the swaps came mainly from investors’ deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called “allocated accounts”, which restrict the custodian banks’ ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper “unallocated accounts”, which give banks access to their bullion for their day-to-day operations.
Officials said other commercial banks obtained the gold from the lending market, borrowing bullion from emerging countries’ central banks.

Today's Stock Market Action

2010-07-30T12:27:00.000-07:00

Bonds are ripping as yield tank. Equity markets did the right thing today early in the morning when they were tanking given all the terrible economic news, but then we saw some extreme futures buying that brought the market up on the day and any selling pressure has been met by these outsized futures buys that push the market back to the 1100 level. The most likely explanation is that today is the end of month and end of month options expiration so the S&P is getting pinned at 1100 level. Similarly there is window dressing by fund managers to make their month end look better especially if they missed most of the bounce-back rally. It does not matter however ridiculous and stupid that rally is.

This market is still more than 50% overvalued by any measure and the outlook for the economy looks terrible. You do not want to be long stocks except for defensive names such as utilities and some consumer staples. Even those are suspect when the crash comes, but holding some as a hedge against a currency/fiat money collapse is a smart idea. Of course you need to have gold in your portfolio and it has to be in the physical form. If after everything happens, you come up to me and tell me and say you have been saying this all along, but I didn't do it, I might headbutt you.

Enjoy the weekend.

Can't Help It: Have To Comment On CNBC

2010-07-30T12:13:00.000-07:00

This is the worst TV channel ever with the most annoying group of people getting together daily and saying the stupidest things possible about things they do not even understand or care to understand in a true representation of the greed and deception of Wall Street. The bubbleheads called the speakers -Maria, Kudlow, Cramer, Liesman (he lies all the time), Erin Burnett, and the older Blond woman whose name I will not even bother to look up, Bryan or whatever that Brit's name is, and the poor man Pisani- get out there and talk about how the economy is getting much better and how the stocks should increase all the time. They remind me of George Orwell's 1984 and the TV in that book.

Cramer and Burnett took it to a new high today by talking about Chelsea Clinton's wedding and how they are spending $15 grand on a party-potty and claiming that this is a show of confidence as if the Clinton's are regular people representative of the population. What world do these bubbleheads live in? That party-potty is more luxurious than half the studio apartments in NYC and many other mid to low income people's houses in the country.

Rick Santelli is the one guy that makes any sense and has a brain behind his mouth.

We know who Bartiromo slept with to get where she got. What about Burnett and the others????

Investing Ideas - Not Trading

2010-07-28T11:42:00.000-07:00

The idea for longer term investors and not traders that can stomach market volatility in the meantime is to be in high dividend paying companies facing inelastic demand curves. These would be utility and consumer staples companies. The idea behind this is that it does not make sense to park your money in bonds given the very low yields you would be earning and the inherent risk in owning fiat money instruments. Stocks are paper assets, too, but assuming the world does not go into a Mad Max state, one should still be fine holding certain stocks that are based on real things with as low volatility as possible. Had I liked stock valuations, I would like mining stocks, but at current valuations -even though they are 30% to 50% below their 2007-2008 peaks- are in the bubble territory. This does not mean that in all this illogical market action they cannot go higher into the bubble territory, but that is not investing, but gambling. My advice is for those concerned investors who cannot put all their money into gold.

You should still put at least 5-20% of your money in physical gold. Possibly even more is smart, but I know most people are still not too comfortable with the idea of holding physical gold. On top of that 5-20% in gold you should put some money into silver, palladium and to a lesser extent platinum. I, similar to Jim Rogers and Marc Faber, like agriculture and arable land and cows and wheat, etc. But these are not realistic investments for many not so wealthy people. I do not believe in holding the futures for the longer term, but you can go that route if you really want to. Comex is a fraud, so I do not like doing anything related to them personally.

Utility and consumer stocks should hopefully be better inflation hedges than bonds for sure. They should, also, act as hedges against a collapse of fiat money. While banks and many other companies will falter in such an environment, people cannot live without food and energy, so utility and consumer companies should still be around and doing well in such a scenario. These are not sexy investments, but rather hedges and longer term protection of buying power ideas with a little bit of an income kicker through high dividends.

Some of the names that come to mind are Verizon (VZ), Exelon (EXC), PPL Corporation(PPL), Public Service Enterprise (PEG), First Energy (FE), etc. There are a lot of them. The best idea would be to create a diversified portfolio of these to hedge yourself against company risk. As a complementary speculative idea, I like some oilsands companies with high dividend rates such as Canadian Oilsands (COS-U CN) in Canada with its 7% dividend yield.

China's Long Term Plans And End of The USD and Treasuries

2010-07-23T08:53:00.000-07:00

The following is from the FT:
"

China rating agency condemns rivals

By Jamil Anderlini in Beijing
Published: July 21 2010 16:22 | Last updated: July 21 2010 16:22

The head of China’s largest credit rating agency has slammed his western counterparts for causing the global financial crisis and said that as the world’s largest creditor nation China should have a bigger say in how governments and their debt are rated.
“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards,” Guan Jianzhong, chairman of Dagong Global Credit Rating, told the Financial Times in an interview. “China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged.”

On the corporate side, Mr Guan argues Moody’s Investors Service, Standard & Poor’s and Fitch Ratings – the three companies that dominate the global credit rating industry – have become too close to the clients they are supposed to be objectively assessing.
He specifically criticised the practice of “rating shopping” by companies who offer their business to the agency that provides the most favourable rating.
In the aftermath of the financial crisis “rating shopping” has been one of the key complaints from western regulators , who have heavily criticised the big three agencies for handing top ratings to mortgage-linked securities that turned toxic when the US housing market collapsed in 2007.
“The financial crisis was caused because rating agencies didn’t properly disclose risk and this brought the entire US financial system to the verge of collapse, causing huge damage to the US and its strategic interests,” Mr Guan said.
Recently, the rating agencies have been criticised for being too slow to downgrade some of the heavily indebted peripheral eurozone economies, most notably Spain, which still holds triple A ratings from Moody’s.
There is also a view among many investors that the agencies would shy away from withdrawing triple A ratings to countries such as the US and UK because of the political pressure that would bear down on them in the event of such actions.
Last week, privately-owned Dagong published its own sovereign credit ranking in what it said was a first for a non-western credit rating agency.
The results were very different from those published by Moody’s, Standard & Poor’s and Fitch, with China ranking higher than the United States, Britain, Japan, France and most other major economies, reflecting Dagong’s belief that China is more politically and economically stable than all of these countries.
Mr Guan said his company’s methodology has been developed over the last five years and reflects a more objective assessment of a government’s fiscal position, ability to govern, economic power, foreign reserves, debt burden and ability to create future wealth.
“The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings ,” Mr Guan said. “Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.”
A wildly enthusiastic editorial published by Xinhua , China’s official state newswire, lauded Dagong’s report as a significant step toward breaking the monopoly of western rating agencies of which it said China has long been a “victim”.
“Compared with the US’ conquest of the world by means of force, Moody’s has controlled the world through its dominance in credit ratings,” the editorial said.
First established in 1994, Dagong signed a three-year “technology co-operation” agreement in 1999 with Moody’s, which provided the Chinese company with its “core knowledge” and its first “systemic understanding”, according to Mr Guan.
In fact, Dagong is more similar to its three global competitors than it might like to admit.
Dagong’s share of China’s fledgling credit rating market is around 25 per cent, while subsidiaries of the big three global agencies control most of the rest.
Dagong’s next goal is to break into the international market, starting with the US.
But even if the company can overcome reluctance from US regulators it may have a hard time convincing international clients that it is more objective than its western peers, especially considering the overtly nationalistic tone it strikes at home.
Additional reporting, David Oakley in London

"

The following is the Xinhua News Agency report:

"

Toward a fair ratings system

English.news.cn 2010-07-19 09:07:29

Feedback Print RSS

By Deng Yuwen

BEIJING, July 19 (Xinhuanet) -- A recent report by Dagong Global Credit Rating Co Ltd on the world's sovereign credit status and its risks, is a significant step by a non-Western entity to break the long-established monopoly of Western ratings agencies over the global credit ratings business.

The report by China's first domestic ratings agency covered 50 countries whose gross domestic product (GDP) accounts for 90 percent of the world economy, and evaluated 27 countries differently from how Western rating agencies such as Moody's, Standard & Poor's (S&P) and Fitch have been doing.

In its report, Dagong gave some emerging and well-performing economies higher ratings than the three Western rating giants did. It also gave a comparatively lower rating to those slow-growing developed countries that have been bogged down in economic and debt troubles.

Due to its good economic performance in the context of the global financial crisis, China received a higher credit rating than the United States and some other Western countries, chiefly due to their worsening deficits.

China's local-currency rating was AA+ and foreign currency rating AAA, according to the Dagong report, both higher than those given by Moody's, S&P and Fitch. In its report, Dagong rated the US "AA" with a negative outlook both in its local as well as foreign currency.

In its report, Dagong mainly based its credit ratings criteria on different countries' comprehensive institutional strength and their fiscal conditions, with the former reflecting an economic entity's ability to guarantee wealth creation, an index that indicates its potential to create wealth and fiscal revenues in future, according to a manager of the agency's risks evaluation department.

Fiscal conditions reflect an economic entity's funding fluidity in future through comparing its revenues and debt status.

Dagong rated the 50 countries according to its own credit rating standards, which include the ability to govern a country, economic power, financial ability, fiscal status and foreign reserves, according to Guan Jianzhong, chairman of the non-governmental ratings agency.

Undoubtedly, China's current political and economic institutions ensure that it has far higher ability than the US in wealth creation and revenue collection. Beijing's fiscal conditions are also much better than Washington's, not just now but also likely in the years ahead.

A comparison between the two countries' GDP growth trends, foreign trade, international balance of payments, foreign reserves, their foreign debt and its structure, fiscal revenues and financial policies, all factors that influence a country's debt repayment ability, easily helped draw these conclusions.

Dagong's report is expected to help break the long-established monopoly of Moody's, S&P and Fitch over the global credit ratings market. For a long time, the credit ratings offered by the three have caused controversies across the world due to their lack of an independent, impartial, objective and scientific perspective.

Also, US values and standards have been mainly used to evaluate other countries' sovereign debt as well as those of their enterprises. This has not only resulted in their repeated failure to issue a necessary alert in a timely and accurate manner but has also contributed much to global financial turbulences.

There exists two super-hegemonies in the current world, with one being the US and the other Moody's, a US politician once put it. Compared with the US' conquest of the world by means of force, Moody's has controlled the world through its dominance in credit ratings.

Credit ratings agencies are a new hegemony in the post-Cold War period, a New York Times editorial once pointed out. That could explain why the European Union felt anger at Moody's, S&P and Fitch and announced that it would set up its own ratings agency after the three US-led agencies rated the Greek sovereign credit as junk, a rating that caused Greece's crisis to spread to the rest of the european continent.

China has also been a victim of the three ratings agencies. At a time when China launched accelerated efforts to list some domestic banks in overseas markets in 2003, S&P turned a blind eye to the country's fast and sustainable economic growth and announced that it would maintain its BBB-grade rating of the country's sovereign debt, the minimal level "suitable for investment".

It also gave 13 Chinese commercial banks a junk rating. S&P, together with Moody's and Fitch, even gave China's sovereign debt a lower credit rating than debt-plagued Spain.

To reform the West-dominated international financial order, more credit ratings agencies should be set up in non-Western countries to break Western monopoly over the global credit ratings business.

Dagong's recent report signals China's efforts to participate in making new rules for international ratings and to seek a larger say in this area. However, China still has a long way to go before it can increase its own influence in its credit ratings system given that the country still faces huge difficulties in expanding the authority of its fledgling credit ratings agency and letting its ratings report be accepted by the international community.

As its economic strength grows further, China's credit ratings agency is expected to win a proportionate international status. What the country should do now is to map out the development layout for its credit ratings system as soon as possible and make related laws and regulations in a bid to offer institutional support for the country's pursuit of a deserved voice in the international financial market and the power to make international financial rules.

The author is a senior editor with the Study Times.
Editor: Wang Guanqun
"

Gold Manipulation Continues Everyday

2010-07-23T08:31:00.003-07:00

From the mouth of the beast:

“Central banks stand ready to lease gold in increasing quantities should the price rise.”

Sir Alan Greenspan, US Federal Reserve Bank, 24 July 1998

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K."

Sir Eddie George, Bank of England, September 1999

Deflation vs. Inflation

2010-07-22T11:08:00.001-07:00

There is a lot of talk and discussion between people talking about inflation and deflation. People who think inflation will be the problem point out the hyperbolic expansion in the money supply due to the printing press of Bernanke doing overtime for the last few years as well as since the closing of the gold window in 1971 by Nixon and cutting all ties of money with gold. Deflationists argue that Fed is failing on expanding the money supply due to a fall in the velocity of money and lack of lending by the banks even as the Fed continues to increase the monetary base to unprecedented levels. These people argue that "asset" prices will go down and people will be faced with deflation.

Without picking a winner first, we can see how we would first see deflation (as described by the deflationists as a decrease in asset prices) followed by even more money printing by the Fed ending in a hyperinflationary scenario as more financial institutions, municipalities, and sovereigns have trouble raising more debt to cover their interest payments and deficits and in the case of banks mask their insolvency. However, there is a possibility where we have deflation in asset prices and inflation in consumer prices. Asset prices that could fall meaningfully are houses and stocks and debt instruments. Consumer prices that could go up in the face of falling asset prices are food and energy prices as well as other essentials as well as some other discretionary items that are consumable. The main reason for this is demand and supply and valuations. Stocks, houses, and bonds are very overvalued. By ridiculous amounts. They should all be down 50% and more. On the other hand the prices of a lot of commodities such as wheat, beef, gold, silver, natural gas, sugar, soy beans, and etc. are still very cheap compared to what stock, home, and debt instrument prices have done in the past several decades. There is an imbalance between different asset prices due to government subsidies, policies, central bank manipulation, and the bubble mindset of moneyed interests and the common public.

Imbalances never last for ever even if they can last for quite a few decades. We are coming to the end of one of those cycles. Another cycle that is ending is the expansionary cycle of debt and that of the experiment of fiat money that enabled another cycle that is about to be over: ever expanding deficits and indebtedness of both individuals (mainly Americans) as well as firms and governments.

Gold continues to be a highly manipulated (suppressed by the Federal Reserve) asset that is a great investment for the longer term both as a way to preserve your wealth and as a speculative investment if you have the time as the unsustainable short position of the Federal Reserve, which is short 30,000 to 50,000 tonnes of gold (to put it in perspective: all central banks combined claim to have 30,000 tonnes of gold and all the gold ever mined in history add up to 160,000 tonnes of gold) creates a very explosive situation with a very uncertain timing due to lack of justice and transparency in the current environment surrounding the Fed.

GM Buys Subprime Lender Americredit

2010-07-22T06:32:00.000-07:00

I thought this was the problem with the economy and part of the problem with GM, which is why they let go of GMAC, which is practically bankrupt. They are 61% owned by the government and they are going out and doing more of what got themselves and the whole economy in trouble???!!! What kind of a joke is this? History repeats itself. The crisis that we never got out of is going to repeat itself as these clowns keep doing the same thing. It is more an more obvious nobody learned anything. The same is true for the whole market. How are stocks still not tanking and sovereign bonds, especially that of peripheral Europe and US and Japan still going as high as ever. This will all end really bad again.

The following is from Yahoo.

GM to buy AmeriCredit to expand subprime lending

General Motors says AmeriCredit acquisition will boost financing, lease options for car buyers

Tom Krisher, AP Auto Writer, On Thursday July 22, 2010, 9:15 am

DETROIT (AP) -- General Motors Co. will buy AmeriCredit Corp. for $3.5 billion, a deal that allows the automaker to expand loans to customers with poor credit and offer more leases, key areas where GM must grow to accelerate its car sales.
But the acquisition, announced Thursday, also means that GM, which is 61 percent owned by the U.S. government, is getting back into the business of making risky loans.
GM executives have said for months that they were missing sales opportunities due to lack of credit for lease deals and financing for subprime buyers, those with credit scores below 620 on a 300-to-850-point scale.
GM Chief Financial Officer Chris Liddell said Thursday that customers could now expect more lease deals from GM. Only 7 percent of its sales are from leases, compared with 21 percent for the industry, he said. Only 4 percent of GM's sales come from subprime buyers, which the company hopes to expand with its AmeriCredit acquisition.
"If you just had a modest increase from 4 to 5 percent, that's a significant number in its own right," Liddell told reporters.
GM sold just over 1 million vehicles in the U.S. during the first half of the year.
The Detroit automaker will pay $3.5 billion in cash to buy all of the Ft. Worth, Texas-based AmeriCredit's shares at a price of $24.50 each -- a 24 percent premium over Wednesday's close.
GM expects the deal to close in the fourth quarter.
The automaker says that its partner Ally Financial -- formerly known as GMAC Financial Services Inc. -- will continue to finance GM's dealer inventory and make loans to buyers with good credit.
GM says it is not considering a purchase of Ally's auto financing unit. GM sold controlling interest in GMAC in 2006. The company eventually had to be bailed out by the U.S. government because of problems with its home mortgage loan unit.

China Should Sell Treasuries When Demand Is String Says Chinese Economist

2010-07-20T10:26:00.000-07:00

Here is an article from Reuters:

BEIJING | Sun Jul 18, 2010 9:24pm EDT

BEIJING (Reuters) - China should cut its holdings of U.S. Treasury securities when market demand is strong, a prominent economist said in remarks published on Monday.
Beijing reduced its Treasury holdings in May by $32.5 billion to $867.7 billion, but it actually bought a net $3 billion in long-term Treasuries and remained the largest single holder of U.S. government debt, the Treasury reported on Friday.
Yu Yongding, a former academic adviser to the central bank and now a professor with the Chinese Academy of Social Sciences, said Beijing should invest in assets denominated in other currencies as well as other financial instruments and real goods.
"Although assets in other currencies and forms are not an ideal replacement for U.S. Treasury bonds, diversification should be a basic principle," Yu wrote in the China Securities Journal.
"When demand for U.S. Treasury securities is strong, it's a rare opportunity for us to gradually pull back. That way, it will not have a big impact on prices and China will not suffer too much," he said.
Zhang Monan, a researcher with the State Information Center, a think tank under the powerful National Development and Reform Commission, told the paper that China should invest more of its $2.5 trillion of foreign exchange reserves, the world's largest stockpile, in hard assets such as gold.
(Reporting by Langi Chiang and Alan Wheatley; Editing by Ken Wills)

Gold Manipulation and the BIS

2010-07-08T19:38:00.000-07:00

Gold keeps being manipulated down by heavy hands everyday in the fraudulent paper market mainly in the Comex. What is going on has no ties to the physical market. There is a shortage of physical, yet gold price keeps falling due to 10,000 contracts being sold in less than 2 minutes on the Comex. 10,000 contracts is $1.2 billion of gold considering each contract is 100 ounces. 10,000 contracts is 1,000,000 ounces. That is a 31 tones of gold. Considering the annual global production is 2,300 tones, 31 tones and more being sold in minutes is beyond ridiculous. Especially considering the seller has no regard for falling prices as if it (the Fed) wants to sell it as cheap as possible.

Now we have the news of the BIS (Bank of International Settlements) and central banks -mainly the Fed- doing gold swaps to the tune of 346 tones which is roughly $14 billion. Now this is obviously not to raise money. They can and have been printing trillions at will. The central banks do not need to swap gold to raise/borrow money. They can just print it and the number is laughable in the realm of the liabilities of all the big financial institutions that are still way insolvent, but in the gold market 346 tones is sizable since gold is so rare. There could be two reasons this is done.

First reason could be to bail out some run on the Comex or bullion banks that do not have the physical gold to back up their manipulation scheme as more and more investors are asking for physical delivery as they realize that the Comex and GLD are both frauds. This is to mask the fact that there is a huge shortage problem in the physical market, which would cause the gold to reach $2,000 in a heartbeat. The only reason gold is not at $5,000 is the heavy manipulation of the Fed as it is short close to 50,000 tones of gold.

The second reason could be to create an atmosphere of fear for gold buyers and manipulate the price down. The repetitive news of IMF announce that it is selling the same gold over and over is not working any longer as people realize that IMF keeps saying that, but does not sell it as well as people realizing that India or China or some other central bank being ready to by this gold. Even Eric Sprott offered to buy the gold IMF had to sell. The IMF denied Mr. Sprott's request to buy it. This is a case of Sprott calling the bluff of IMF and IMF tucking its tail in between its legs and running away. So the Fed had to find another way to try and attempt to manipulate the markets with some other ridiculous news. And that is why we hear about the BIS having 346 tones of gold in swaps from central banks.

Give it a rest you crooks. Your game is almost up. You'll have a gold run on you and it will be apparent you are short 50,000 tones of gold and gold will skyrocket beyond belief at that point. Good luck covering that short and avoiding jail time.

Dave Rosenberg On Distrust In Governments

2010-06-28T18:25:00.003-07:00

This is from Dave Rosenberg.

"The fact that you have CDS on Greek sovereign debt blowing out to new highs despite the EU-IMF package is the most telling sign there is now a growing distrust of government spending, manipulation of information, and demagoguery. The only way to regain confidence is to come clean and to then do something about it."

I am not the only one thinking the government is manipulating information.

French Revolution

2010-06-28T18:25:00.001-07:00

This one is from Dave Rosenberg:

"...While the congress couldn't find it in its heart to extend unemployment benefits again, it did manage to throw a nice bone to the banks (after all the banks donate more to political campaigns than those in the unemployment line) in the form of a watered-down financial overhaul bill and a major softening of the Volcker Rule."

Wait till people cannot take the ridiculousness of the banks any longer and due to hunger and injustice social unrest starts. The mess weapons of sedation will not work for much longer at this rate as people will not be able to afford TVs. American Idol, LeBron James and Jersey Shore will be the last thing on people's minds when their kids are starving...

This is a great example of "cutting the branch you are sitting on".

Federal (Reserve) Punishment

2010-06-28T18:24:00.000-07:00

Today, some people seeing the markets continue to tank in the morning dared to buy around 6k contracts of gold in a relatively short time pushing 5the prices up in the meantime. Of course the Federal Reserve got very upset with this defiant action, so it decided to punish these people for being prudent and came in and sold RIDICULOUS amounts of paper gold to bring the price down ridiculously obviously to prevent a break out above the $1265 level. The Federal Reserve should be punished by the law, but who's listening????

FOMC Day Gold Manipulation

2010-06-27T15:34:00.000-07:00

So Federal Reserve manipulates gold. Everybody knows this, But one picture is worth a thousand words. The huge bars that coincide with the big sudden declines without any news happened in a matter of couple minutes for each of them. No one who cares about profits trades that way unless they are trying to bring the price down. And no one who is short and wants to bring the price down is short that much officially except for JPM and even for JPM these are some ridiculous sizes. Fed needs to be abolished or at least put under a leash. This is enough illegal activity - not mentioning the stock market manipulations they do.

Problem With Economists

2010-06-27T14:59:00.001-07:00

so krugman at a conference in tel aviv says that inflation isn't a threat and the global economy needs more stimulus according to a bloomberg article. this is at a point when the mountains of sovereign debt is starting to cause a lot of trouble as the debt collapse has already started.

the problem with people on certain payrolls whether they are nobel prize winners or not -other than the obvious bias for favor of their feeders- is that they concentrate on a small portion of the population -the ultrarich that are controlling the majority of assets, especially the stock market- as well as inflation, a meaningless number that is the rate of change. What people need to concentrate on is purchasing power and living standards both of which have been consistently falling with the advent of fiat money. inflation is a meaningless number. Consider a situation where for 5 years prices rise 20% of the initial price, so the total price increase is 100% of the initial year. This is terrible, right? Constant high inflation. Now consider a situation where the first year prices double -an increase of 100%, and for the rest of the 4 years, they are stable. People would think the second scenario is better, whereas in reality you are better of in scenario one if you are part of the majority of the population where you earn wages for your services and do not own that much assets because you can accumulate more assets under scenario one.

An even better scenario is deflation for you where your purchasing power increases. Do not believe the lies that in a deflationary period unemployment rises. Look at history, look at Japan... It is not true. Of course if it is run away deflation and there is too much instability, that is a different thing, but an orderly deflation is welcome for prudent savers as well as the majority of the population earning fixed incomes and are not asset rich. So why are we secretly ruled (think Goldman Sachs aka Government Sachs) by a bunch of rich people that only pursue their own interest and ruining us all. Do these people not realize that by lying about the economy and a lot of other things they are pursuing all of us towards a second global French Revolution????

Michigan Lack of Confidence Number

2010-06-27T14:57:00.000-07:00

There is no confidence left in the University of Michigan Confidence number. One can't help, but wonder, where they are doing the survey. Must be the hallways of Goldman Sachs or JPMorgan. With everything going on around the world, as unworldly as Americans are and how blind they are thanks to the horrendous media of the country that is controlled by certain interests, people must have heard of the Greek tragedy and the troubles with sovereign debt and unemployment numbers as manipulated as they are similar to the University of Michigan Lack of Confidence Survey. You're not fooling anybody and these little games will end poorly.