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So what will burst this latest bubble? It may be simpler than you think...
- AIG
- American Express
- American International Group
- BAC
- Bank of America
- Bank of America
- Barclays
- Bear Stearns
- Ben Bernanke
- Ben Bernanke
- Bond
- CDS
- Counterparties
- Countrywide
- CRE
- CRE
- Credit Line
- default
- Fail
- Fannie Mae
- Federal Reserve
- Financial Accounting Standards Board
- Foreclosures
- Freddie Mac
- Global Economy
- Goldman Sachs
- goldman sachs
- Green Shoots
- Henry Paulson
- Housing Bubble
- Housing Market
- Irrational Exuberance
- Japan
- Kohn
- Lehman
- Merrill
- Merrill Lynch
- New York Fed
- recovery
- Reggie Middleton
- Subprime Mortgages
- TARP
- Timothy Geithner
- Treasury Department
- Unemployment
- Wells Fargo
Maybe, it just may be the total collapse in credibility and trust in the US Federal Reserve and Treasury. I mean, come on. Have you heard the bullsh1t that they spouted in the news this morning? Quick Bloomberg scan:
Yellen Says Unclear If Use of Rates Can Stem Leverage (Update1) ...
... Fed Chairman Ben S. Bernanke said yesterday it’s “not obvious” there’sa bubble in the US and Yellen said today the US stock market is not overvalued. ...
- 2009-11-17Kohn Says US Asset Prices Don’t Seem ‘Out of Line’ (Update1) ...
... low interest rates don’t appear to be fueling another asset-price bubble in US ... Kohn’s remarks echoed comments made by Fed Chairman Ben S. Bernanke in an ...
- 2009-11-17
Bernanke Says ‘Not Obvious’ Asset Prices Misaligned (Update2) ...
... regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.
I would love to see Bernanke's personal investment accounts, just to note how many long bonds and equities he is piling into over the last few months. Yeah, price misalignent is "not obvious", equity market is not over priced, there is no bubble. They are right, the market is not over priced, it is priced for idiots, fools and the follow me crowd. I remember when Bank of America (the company that just bought the two largest, and the two sickest financial entities around at than time - Countrywide and Merrill Lynch, with no government subsidy on Countrywide) announced the price of a follow on equity offering at about $12 and its share price shot up to around $14 or so (going from memory, so don't hold me to the penny). You know things are bad when the company's own CEO says he doesn't know why the hell his stock is shooting up. For those who are not financial types, all anybody who wanted to buy $14 BAC stock had to do was to purchase it $12 directly from the underwriter. Whoever it was that was buying the stock was "literally" throwing the money away!
People may blame Greenspan for his low rate policy, but at least he had the balls to come out and declare how irrational market behavior was when it was irrational. Reference the Irrational Exburance speech during the dot.com days, which apparently was not nearly as bad as the Asset Securitization bubble days we see before us.
Greenspan's comment was made on December 5, 1996 (emphasis added in excerpt):
[...] Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? [There goes that Japanese thing again - Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?...]
You do know how the dot.com bubble ended, don't you? These guys/gals at the Fed are a step and a half away from condoning it.
And on this note of credibility, Geithner at the NY Fed said that he was not in the position to force counterparties to take less than the contractual 100% payout of CDS despite AIG's highly distressed situation. We will ignore the fact that highly distressed entities negotiate discounted payouts EVERY SINGLE day (we will not even broach what happens in bankruptcy), and that this is normal business in a capitalistic society, of which I am increasingly doubting this country as a card carrying member. Let's focus on the fact that at least one foreign counterparty actually OFFERED to take a reduced payment, and Geithner said NO! He literally opted to have Reggie Middleton pay AIG's full liability because Reggie (at least to him) obviously needs to carry a higher tax liability and suffer a lower standard of living. You see, Mr. Geithner doesn't believe that Reggie's 18 and 19 hour workdays are LONG enough!
From Bloomberg: Fed AIG Rescue Faulted by Inspector for Limited Effort on Bank Concessions
Timothy Geithner, now Treasury Department secretary, led the New York Fed when it negotiated with the banks in November 2008. The Fed contacted eight of AIG’s biggest counterparties to ask for discounts, Barofsky said. Only Zurich-based UBS AG was willing to take a haircut, a 2 percent discount, and that was under the condition other banks agreed to similar terms, Barofsky said. The Fed decided that all counterparties would receive full payment.
The French bank regulator, overseer for Societe Generale and Credit Agricole SA’s Calyon, “forcefully asserted” that the banks couldn’t accept less than full value on swaps unless AIG went bankrupt, Barofsky said. Because the Fed had already committed to preventing an AIG collapse, regulators had reduced leverage in negotiations, he said. Other counterparties included Merrill Lynch & Co., Barclays Plc and Bank of America Corp.
Why commit to save AIG? The Fed should commit to save the US taxpayer, not AIG. The world would not have came to an end if said counterparties didn't get paid in full. Simply don't pay them in full! AIG didn't have the cash, it would not have been hard. The Fed should have supervised the states taking control of the truly state regulated insurance entities (which probably were shielded) and contolled the systematic dismantling of AIG - which is essentially what is happening anyway, just after the taxpayer has been raped, as opposed as before.
Before the Fed stepped in, AIG tried to persuade banks to accept haircuts of as much as 40 cents on the dollar, according to people familiar with the matter. The Fed’s decision to pay the banks in full may have cost taxpayers $13 billion, or 40 percent of the $32.5 billion AIG paid to retire the swaps. AIG paid the market price of $29.6 billion for the mortgage-backed assets that were protected by the derivatives.
...
AIG’s rescue includes a $60 billion Fed credit line, a Treasury investment of as much as $69.8 billion and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.
Barofsky faulted the Fed for its initial refusal to name AIG’s counterparties or how much they received. The Fed said in March that releasing details could harm AIG and later released the data under pressure from Congress.
“Notwithstanding the Federal Reserve’s warnings, the sky did not fall,” Barofsky said. “The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds.”
The guys at Austrian Filter have simply put my thoughts in a timeline. I don't usually reproduce posts from other blogs, but this one is precious [annotation in underlined italics are my comments]:
Zero Credibility from the Austrian Filter
Straight from the horses' mouths, a quick time line of Paulson's & Bernanke's economic assessments:
February 28, 2007 - Dow Jones @ 12,268
March 13th, 2007 - Henry Paulson: "the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained." A total lack of understanding of what caused this problem. It was never subprime, it was a dearth of underwritng prudence, which means that the losses will appear everywhere a loan was underwritten (or not underwritten). That is any loan, anywhere. A lot of loans in a lot of places. I think we are figuring this out by now, but my blog readers knew this back in 2007, and profited from it. See the Asset Sercuritization Crisis links at the bottom of the post.
March 28th, 2007 - Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," Same problem as above
March 30, 2007 - Dow Jones @ 12,354April 20th, 2007 - Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom," Same problem as above
April 30, 2007 - Dow Jones @ 13,063
May 17th, 2007 - Bernanke: "While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S." Same problem as above
May 31, 2007 - Dow Jones @ 13,627
June 20th, 2007 - Bernanke: (the subprime fallout) ``will not affect the economy overall.'' Same problem as above
July 12th, 2007 - Paulson: "This is far and away the strongest global economy I've seen in my business lifetime." This goes to show you the quality of Paulson's business lifetime!
August 1st, 2007 - Paulson: "I see the underlying economy as being very healthy," He was probably just lying!
October 15th, 2007 - Bernanke: "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions." He is right. To be honest, he was probably hamstrung between a rock and a hard place, but it really looks bad to have this thrown in your face in public, doesn't it???
December 31, 2007 - Dow Jones @ 13,265January 31, 2008 - Dow Jones @ 12,650
February 14th, 2008 - Paulson: (the economy) "is fundamentally strong, diverse and resilient." Well, if you look at it from a conceptual perspective...
February 28th, 2008 - Paulson: "I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street." Right, everything is going according to plan...
February 29th, 2008 - Bernanke: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system." Ignorance right here. He really should have been reading my blog. I told him Bear Stearns was going to fail and Lehman had issues the month before - Is this the Breaking of the Bear? Sunday, 27 January 2008March 16th, 2008 - Paulson: "We've got strong financial institutions . . . Our markets are the envy of the world. They're resilient, they're...innovative, they're flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."
March 18th, 2008 - Bear Stearns Bailout Announced - I told you so, right on schedule as quoted linked to above...
May 7, 2008 - Paulson: 'The worst is likely to be behind us," Need I comment???
May 16th, 2008 - Paulson: "In my judgment, we are closer to the end of the market turmoil than the beginning," he said. That's what anybody who relies on his judgement espoused in public deserves. I know a few people who are enamored with Fed and Treasury pronouncements... What a shame.
May 30, 2008 - Dow Jones @ 12,638June 9th, 2008 - Bernanke: Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned, Okay, if you say so...
July 16th, 2008 - Bernanke: (Freddie and Fannie) "...will make it through the storm", "... in no danger of failing.","...adequately capitalized" The ultimate contrarian indicator...
July 20th, 2008 - Paulson: "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation." And to think, some people dismiss me because I had bad quarter....
July 31, 2008 - Dow Jones @ 11,378August 10th, 2008 - Paulson: ``We have no plans to insert money into either of those two institutions." (Fannie Mae and Freddie Mac) That reminds me of the joke where the bill collector calls and asks when he can expect payment. The guy on the other end of the phone says, "You can EXPECT payment whenever you damn well please!"
September 8th, 2008 - Fannie and Freddie nationalized. The taxpayer is on the hook for an estimated 1 - 1.5 trillion dollars. Over 5 trillion is added to the nation's balance sheet. Whoa!September 16th, 2008 - $85 Billion AIG Bailout "Loan" Whoa! again.
September 19th, 2008 - $700 Billion Bailout Plan Announced Whoa! cubed...
September 19th, 2008 - Paulson: "We're talking hundreds of billions of dollars - this needs to be big enough to make a real difference and get at the heart of the problem," he said. "This is the way we stabilize the system." The mathematically challenged Treasury Secretary and ex-Goldman CEO, or does he think we are mathematially challenged?
September 19th, 2008 - Bernanke: "most severe financial crisis" in the post-World War II era. Investment banks are seeing "tremendous runs on their cash," Bernanke said. "Without action, they will fail soon." There it goes. Should we expect a similar reversal on the Green Shoots Theorem as well?
September 21st, 2008 - Paulson: "The credit markets are still very fragile right now and frozen", "We need to deal with this and deal with it quickly.", "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing." I really shouldn't comment any further...
September 23rd, 2008 - Paulson: "We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses, both small and large, and the very health of our economy," Whoa! to the fourth degree
September 23rd, 2008 - Bernanke: "My interest is solely for the strength and recovery of the U.S. economy," Why doesn't the Fed and the Treasury spend some of that TARP money to spring for a subscription to my blog?October 31, 2008 - Dow Jones @ 9,337
March 31, 2009 - Dow Jones @ 7,609
The authors of this very interesting blog post conclude: If Bernanke and Paulson were doctors, and our economy was the patient, they would be in jail for malpractice. If they were graded for their performance in public, they would have failed, if they had a private sector job, they would have been fired. If they were attached to a lie detector with 500 volt biofeedback, they would have been electrocuted!
I've commented on the accuracy of these guys' statements many time in the past:
- advertisements -
hey the voter is is the issue these clowns are entertainment value only. Tell the senate to grow a set until then its all over. game set match as rome burns
Technical analysis can assist us as to the direction of the economy.
My long term USD indicator has been giving BULLISH warnings for some time and I am expecting a USD rally.
My indicators can identify trend changes before they occur.
They warned me of an impending market crash back in early *2007*
The VIX continues to give bullish warnings as well.
http://www.zerohedge.com/forum/market-outlook-0
They "Bernanke, Paulson, Geithner, Obama, Yellen, Summers etc." all continuously lie. They say one thing and then do the opposite. All to distract observers from what they're really doing. What they're really doing is continuously shoveling money into the banks.
Reggie, Really good post, thanks
Agree Brother, the recap establishes Reggie's cred for those that don't know him.
Well said Arthur and Brother ... no offense to Reggie, who has written some fantastic stuff and I've learnt much from ... apologize for taking out my anti-Peter Schiff et al. here.
if you think bernanke is supposed to do anything for the american taxpayer except fuck him in the ass then you have been riding unicorns shitting skittles over rainbows...
bernanke runs the 4th branch of government without answering to a single voter and is subject to no authority but the rockefeller / rothschild cabal....
People write entire books about what you so rightly say in two sentences.
Good post Reggie ... always enjoy your insightful pieces. But what does the word of a gov't official have to do with anything in terms of fundamental valuation?
Just one tongue in cheek comment ... can we start a repository for each of our calls over the past years about these very issues and have log-off's? If a call is neither immediately actionable nor content specific, then what is the big deal? What is the point other than to recap what already happened, which we all know already happened? Don't mean any disrespect, just wondering what we're supposed to take away other than you got the gist of the issue well ahead of time.
I don't see reggie's articles as simply nah nah I was right. He shows the indepth analysis as to why he was correct and If he can show that he was ahead of the game then it would probably behoove people to listen to him as apposed to oh say paulson or uncle ben.
Anyone can say "I told you back in August 2008 that the market was going to crash".
The fact is even a broken clock is right twice a day. If you keep saying the market is going to crash you will eventually be correct. Then you pull up your closest prediction and say "Look at me! Look at me! I was right!!"
Put a precise date and time stamp on your future predictions, that's how you earn credibility.
This guys a blow hard clown.
"p.s. As perplexed as all the neighbors are, I don't think anyone is going to make a call to let them know since the electriciy is turned off, that sump pump won't be keeping the basement from flooding in the first decent rain/snow."
Won't the flooded basement require the FHA to secure more taxpayer money in order to fix the house for future re-sale? Won't that put people to work? Won't that increase GDP? Isn't that the financial equivalent of bulldozing the house, just much less efficient, more expensive, and thus the best use of infinite taxpayer funds?
Inquiring minds want to know........
Jesus you're long winded!
Why can't anyone here see that the panic selling that ensued after Lehman collapsed was over done. The same strong handed traders that were pushing the market down, are now buying it back to equilibrium.
It's not a bubble. It's a forward looking mechanism.
We're going to be just fine big guy, relax.
The other day on another board the statement was made that the unemployment rate at 10% (or whatever) is a faulty barometer. That actually only 50% of the people in the United States actually are in the workforce at any one time. That means there are 143,000,000 who constantly do not work. (but apparently have money to spend).
You may have a point. Even with unemployment being a snag in any recovery, at any one time over half the populaion seems to be surviving without working, so what can a few million more do to cause a further problem.
Those are idiotic statements.
Imagine, if you will, a family of 5, with both parents working and earning the same wage. Those 5 people spend the total earnings of the 2 parents plus debt they take on (can service). One parent loses a job. The spending power of 5 people halved (because of one job loss), plus lost some more on top of that because the servicing of debt is now harder...
Grow a brain.
I don't know if I prefer the moniker Helicopter Ben over Not Obvious Bernanke. Maybe I can have my cake and eat it too (the Goldman Sachs way) and just go with:
Helicopter Ben "Not Obvious" Bernanke
I found a good replacement for Bernake ... he'll probably take the job for peanuts too:
"April 6, 2003
"Whenever we attack, they retreat. When we pound them with missiles and heavy artillery, they retreat even deeper. But when we stopped pounding, they pushed to the airport for propaganda purposes." Mohammed Saeed al-Sahaf
At least we could laugh at Bahgdad Bob!
Bernake is NOT funni at all.
Same universe, just needs ever-increasing doses of surreality and confusion to part fools with their money. Of course, if your assets are being managed by others you have already parted with it, are most likely about to part with a lot more of it, and with the tax liabilities on top.
I despise the people who have put my babies into an extra half million in debt before they are out of diapers. It is evil, the essence thereof, and yet they are on TV in nice hotel conference rooms with a cool glass of water always at hand, always refreshed for them.
They have robbed all of our babies. On purpose, with corrupt and criminal intent. Wiping the caviar from their smiling, proud and arrogant mouths.
Thanks Reggie and thanks ZH for their contributions to understanding. Would that it were for some better end. We bear witness, and analyze the heist. Bravo, thieves, and God waits for thee. Oh, and abides in His own way.
Meanwhile, stay frosty and look sharp. Remember, a bond fund is NOT a bond and is NOT a safe investment in this environment! They will crash and burn when rates turn. Stocks, ha ha ha ha ha ha ha etc. Cash, eh, OK...unless you have an active strategy, this is the end of real returns. Just forget it.
At first glance, I would have said that Basket-case Ben can make such predictions because the mighty GS have have promised they will continue to pump the market indefinitely with their HFT equipment.
At second glance -reading Reggie's Austrian filter link- Ben just talks baloney all the time, and is never called on it.
Me-thinks the laws of physics have changed, and we are now in a parallel universe. How did I miss the switchover.
Just had FHA buy a house nearby for 50% more than it could get in any market, let along today's. Bought it sight unseen, and because it was foreclosed and trashed, it will take another 40% on top of the price paid in order to restore it to livability for anyone to purchase.
The loan was through...no surprise...Countrywide. This will never end?
p.s. As perplexed as all the neighbors are, I don't think anyone is going to make a call to let them know since the electriciy is turned off, that sump pump won't be keeping the basement from flooding in the first decent rain/snow.
Where did you get that information?
This is so very easy.....
RISK IS OVERPRICED ....
WHY ?????
GOVT. forced 0% interest rates....
WTF is the matter with Bernanke ????
One has to believe somebody else tells him
what to say and do ????
"One has to believe somebody else tells him
what to say and do ????"
That depends whether or not you think he's completely incompetent.
Incompetence, negligence, or old-fashioned misdirection - all solicit a lashing.
There's no reasonable way to justify hiring him for a second term, yet - we will.
Agree. If BS could burst the bubble, it would have burst a long time ago. Only rising interest rates will pop this puppy.
Exactly right: 0% interest rate means no crash. For now, investors are forced into A-B-C, anything but cash. Stocks will hold up to some extent until interest rates are allowed to rise.
bullshit. the economy is disaving and 0% rates do not mean that people have to buy bubble equities. this market is being manipulated higher, not driven higher by investors. it's a god damned criminal racket and these scumbags driving the train deserve life sentences. this farcical stock market will crash at the precise moment these dirtbags decide to crash it and 0% rates will have nothing to do with it. damn the lot of them.
I gotta agree that the constant parading of Fed governors is approaching a bad night at a neighborhood comedy bar. Tells me that things are probably worse than even I think lol!
as for treasury, Geithner jumped the shark a loooong time ago.
does anybody even listen to Geithner anymore? He is lying about the dollar and he is an embarassment to the USA.