AIG

Excuse me for asking, but what in the name of Jesus H. Christ is wrong with us? Oh, I forgot. If you're rich, you can do anything you want. If you're poor, you have the be the apotheosis of rectitude. And talk about swift justice! This incident took place not even two weeks ago! And yet Blankfein, a man who torture is too good for, smirks and leers his way to mega-riches.

Kyle Bass, addressing Chicago Booth's Initiative on Global Markets last week, clarified his thesis on Japan in great detail, but it was the Q&A that has roused great concern. "The AIG of the world is back - I have 27 year old kids selling me one-year jump risk on Japan for less than 1bp - $5bn at a time... and it is happening in size." As he explains, the regulatory capital hit for the bank is zero (hence as great a return on capital as one can imagine) and "if the bell tolls at the end of the year, the 27-year-old kid gets a bonus... and if he blows the bank to smithereens, ugh, he got a paycheck all year." Critically, the bank that he bought the 'cheap options' from recently called to ask if he would close the position - "that happened to me before," he warns, "in 2007 right before mortgages cracked." His single best investment idea for the next ten years is, "Sell JPY, Buy Gold, and go to sleep," as he warns of the current situation in markets, "we are right back there! The brevity of financial memory is about two years."

The fiscal cliff is permanent and insurmountable. It stands at the edge of a $20 trillion abyss of deficits over the next decade. And this estimation is conservative, based on sober economic assumptions and the dug-in tax and spending positions of the two parties, both powerfully abetted by lobbies and special interests which fight for every paragraph of loophole ridden tax code and each line of a grossly bloated budget. Fiscal cliffs as far as the eye can see are the deeply troubling outcome of the Great Deformation. They are the result of capture of the state, especially its central bank, the Federal Reserve, by crony capitalist forces deeply inimical to free markets and democracy. Why we are mired in this virtually unsolvable problem is the reason I wrote this book. It originated in my being flabbergasted when the Republican White House in September 2008 proposed the $700 billion TARP bailout of Wall Street. When the courageous House Republicans who voted it down were forced to walk the plank a second time in betrayal of their principled stand, my sense of disbelief turned into a not-inconsiderable outrage. Likewise, I was shocked to read of the blatant deal making, bribing, and bullying of the troubled big banks being conducted out of the treasury secretary’s office, as if it were the M&A department of Goldman Sachs.

• Cardinals head to conclave to elect pope for troubled Church (Reuters)
• Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei)
• Ryan Plan Revives '12 Election Issues (WSJ)
• Italy 1-yr debt costs highest since Dec after downgrade (Reuters)
• Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade
• CIA Ramps Up Role in Iraq (WSJ)
• Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG)
• SEC testing customized punishments (Reuters)
• Judge Cans Soda Ban  (WSJ)
• Hungary Lawmakers Rebuff EU, U.S. (WSJ)
• Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong
• Funding for Lending ‘put on steroids’ (FT)
• Investigators Narrow Focus in Dreamliner Probe (WSJ)
• With new group, Obama team seeks answer to Karl Rove (Reuters)

The topic of Illinois' various insolvent pension systems is not news to regular Zero Hedge readers. One needs but to recall our articles from mid/late 2010: "61% Underfunded Illinois Teachers Pension Fund Goes For Broke, Becomes Next AIG-In-Waiting By Selling Billions In CDS", "Illinois' Pension Fund Death Spiral Revisited: "10 Years Of Money Left" or "Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations" in which we clearly explained how the state's teachers pension fund was systematically doing everything in its power to mask its massive underfunding, and the fact that it was rapidly running out of money. The retiremnet fund, in turn, took things very personally, prompting Dave Urbanek, Public Information Officer at the Teachers’ Retirement System of the State of Illinois (TRS), to write an impassioned response to Zero Hedge denying all allegations. Today, over two years after the above news, the SEC finally concluded their analysis of one part of the massively underfunded Illinois Pension system and found the Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. The SEC also said Illinois failed to disclose that it had underfunded the state's pension obligations, increasing the risk to its overall financial condition.

Failure to Prosecute Fraud Causes Economic Downturns

As is now confirmed, at least one of many JPMorgan margin calls directed at Lehman in the days before the world's biggest bankruptcy became fact, were based on glaringly erroneous information and an error so profound one wonders if this was not a premeditated "hit" on one bank by another bank. Yet a purposeful "hit" orchestrated by one bank, even JPMorgan, would require the involvement of the highest echelons of the US government. So was the US government complicit and give its blessing in this historic liquidation? The Abu Dhabi Investment Council would like to know.

• US braced as cuts deadline passes (FT)
• U.S. stares down start of steep "automatic" budget cuts (Reuters)
• Yeltsin-Era Tycoons Sell Resources for Distance From Kremlin (BBG)
• Italy's center-left leader rules out coalition with Berlusconi (Reuters)
• Apple Required Executives to Hold Triple Their Salary in Stock (WSJ)
• BOJ Seen Spiking Punchbowl in April Under New Chief Kuroda (BBG)
• Diplomatic fallout from EU bonus cap (FT)
• Italy’s Stalemate Jeopardizes Resolution of Crisis, Finland Says (BBG)
• Chinese trader accused of busting Iran missile embargo (Reuters)
• JPMorgan No. 1 Investment Bank Amid a Flurry of New Deals (BBG)
• Eurotunnel’s Ferry Strategy at Risk as Rivals Cry Foul (BBG)
• Telepathic rats team up across continents (FT)

Ben Bernanke: "In terms of exiting from our balance sheet, we have put out -- a couple of years ago we put out a plan; we have a set of tools. I think we have belts, suspenders -- two pairs of suspenders. We have different ways that we can do it."

Waste and Fraud Are the Real Causes of the Deficit

• Spain’s Deficit Widened to 10.2% on Bank-Rescue Cost (BBG) - or as Rajoy would say, when one excludes all negatives, it was a surplus
• Monti Austerity Pushes Italians Toward Parliament Upheaval (BBG)
• Russia accuses U.S. of double standards over Syria (Reuters)
• Euro Area to Shrink in 2013 as Unemployment Rises (BBG)
• UK, China central banks to discuss currency swap line (Reuters)
• Italy Court Rejects Challenge to Bailout of Monte Paschi (BBG)
• Japan's Abe to showcase alliance, get Obama to back Abenomics (Reuters)
• Russia’s missing billions revealed (FT)
• China Home-Price Gains May Presage Policy Tightening (BBG)
• Fed unlikely to curtail stimulus despite rising doubts (Reuters)
• Banks face fines up to 30 per cent of revenues (FT) - just as soon as Basel III is passed (i.e., never)
• J.C. Penney Can Raise Billions Under Revised Credit Line (BBG)
• Cost of Dropping Citizenship Keeps U.S. Earners From Exit (BBG)

How many trillions of Dollars are we going to let the Fed spend? The Fed balance sheet is now over $3 trillion… making it larger than the GDP of France, the UK, or Brazil. Indeed, if the Fed’s balance sheet were a country, it’d be the FIFTH LARGEST COUNTRY IN THE WORLD.

Quarter after quarter we would recap the hedge fund world's infatuation with one stock and one stock alone: Apple. This inverse-mormon love affair hit its peak in the quarter ended September 30, when a record number of hedge funds were invested in AAPL stock. This was also the quarter when AAPL hit its all time high price and has since proceeded to slump by nearly 40% in four short months. Which was to be expected: hedge fund hotels always become flaming death traps when the sucker rally finally ends and what so many mistook and goalseeked for fundamentals, ended up being merely euphoria and momentum chasing as one after another marginal buyer put their money into a stock that seemingly could do no wrong or so we were told day after day. As of December 31, AAPL is no longer the darling of hedge fund groupthink. In its place we have a new hedge fund hotel.   Presenting: AIG, which with 80 hedge funds reporting it as a Top 10 holding (compared to GOOG with 73, and AAPL with 67), is now the stock that has suckered in the most hedge fund capital, and where any future growth will depend solely on pulling incremental dumb money in.

Back in 2007, at the peak of the credit and housing bubble, Wall Street knew very well the securitization (and every other) party was ending, which is why the internal names used for most of the Collateralized Debt Obligations - securitized products designed to provide a last dash trace of yield in a market in which all the upside had already been taken out - sold to less sophisticated, primarily European, investors were as follows: "Subprime Meltdown," "Hitman," "Nuclear Holocaust," "Mike Tyson's Punchout," and, naturally, "Shitbag." Yet even in the last days of the bubble, Wall Street had a certain integrity - it sold securitized products collateralized by houses, which as S&P, and certainly Moody's, will attest were expected to never drop in price again. But one thing that was hardly ever sold even in the peak days of the 2007 credit bubble were securitizations based on personal-loans, the reason being even back then everyone's memory was still fresh with the recollection that it was precisely personal-loan securitization that was at the core of the previous, and in some ways worse, credit bubble - that of the late 1990s, which resulted with the bankruptcy of Conseco Finance. Well, in a few short days, those stalwarts of suicidal financial innovation Fortress and AIG, are about to unleash on the market (or at least those who invest other people's money in the absolutely worst possible trash to preserve their Wall Street careers while chasing a few basis points of yield) the second coming of the very worst of the last two credit bubbles.