Kohn

Yesterday we broke the news of what is prima facie evidence, sourced by none other than the Federal Reserve's official August 16, 2007 conference call transcript, that then-NY Fed president and FOMC Vice Chairman Tim Geithner leaked material, non-public, and very much market moving information (the "Geithner Leak") to at least one banker, in this case then Bank of America CEO Ken Leiws, in advance of a formal Fed announcement - an act explicitly prohibited by virtually every capital markets law (and reading thereof). It was refreshing to see that at least several other mainstream outlets, including Reuters, The Hill and the NYT, carried this story which is far more significant than Season 1 of Lance Armstrong's produced theatrical confession and rating bonanza. What, however, the mainstream media has not touched upon, yet, is just how profound the market response to the Geithner Leak was, and by implication, how much money those who were aware of what the Fed was about to do, made. Perhaps, it should because as we show below, the implications were staggering. But perhaps what is even more relevant, is why the Fed's previously disclosed details of Mr. Geithner's daily actions at the time, have exactly no mention of any of this.

The corporatization of society requires a population that accepts control by authorities, and so when psychologists and psychiatrists began providing techniques that could control people, the corporatocracy embraced mental health professionals. In psychologist B.F. Skinner’s best-selling book  Beyond Freedom and Dignity  (1971), he argued that freedom and dignity are illusions that hinder the science of behavior modification, which he claimed could create a better-organized and happier society. Critically, given our current entitlement-heay environment, the finding that in order to get people to behave in a particular way, they must be “needy enough so that rewards reinforce the desired behavior.” should concern us all.

The cracks in the Fed's narcissism started to show at Jackson Hole, where Bernanke's speech did nothing for the market; and as the FT points out, the biggest worry on display was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand. Lurking behind many debates was this question: if central bank policies are so omnipotent effective, why is the global economy not growing faster? Everyone's favorite honest-dwarf Fed Governor, James Bullard, summarized perfectly:

"I am a little – maybe more than a little bit – worried about the future of central banking. We've constantly felt that there would be light at the end of the tunnel and there'd be an opportunity to normalize but it’s not really happening so far."

 

"What I’m worried about is this creeping politicization."

With monetary financing of governments on the increase (unconditionally by the Fed and conditionally by the ECB), it is clear that more radical options are increasingly mainstream as the textbook is not providing the answers. If the Fed itself is admitting it is becoming irrelevant and obsolete, then perhaps regimes are changing.

Here is the point; Bernanke thinks he can deal with this falling growth outlook and a deleveraging consumer by adding to QE to keep rates very low. I am not sure it will work and if it doesn’t yields could start to rise and the more he throws at it the more yields actually rise as vigilantes will fear pent up inflationary pressures. This is a potential disaster for central bankers and at some point the impact of QE may be proven limited. When it is the central banks will have shot the last bullet. Why is no one discussing this?

As always happens, about a week after Goldman telegraphs the need for QE3, which they did last Friday, the WSJ's Fed mouthpiece Jon Hilsenrath reaches out to the media and proceeds to give the secret QE handshake. Now in its third iteration. In an "exclusive" interview with the Fed's last tree monetary affairs committee, Donald Kohn, Vince Reinhart and Brian Matigan, Hilsenrath observes that according to these masters of the universe the chance of another recession is 20-40%, which we are confident is a given at 100%, but more importantly, he quotes Don Kohn who "said the Fed still has some options to support the economy, but "they're kind of limited." He said he expects the central bank, which holds a policy meeting Aug. 9, to wait and see whether the recovery is really losing steam before taking any action. If that's the case--and inflation is coming down--then he would give "very serious consideration" to a new round of bond purchases, he said." Well, the 30 Year is at 2011 lows, TIPS are screeching, and stocks are plunging: all indications that the market anticipates deflation. Looks like the only wildcard is whether the FOMC will determine next Tuesday that the economy has slowed down. Which it has. We believe the August 9 statement will be very interesting to most, and will result in some quite serious market volatility, as ever more are pricing in hints of an imminent resumption of LSAP or, in the least, Operation Twist with the confirmation likely to come at this year's Jackson Hole meeting, as we predicted back in April.

New story, old story. Same story.

It turns out that public and private US corporations aren't the only ones cooking their books, and that PricewaterhouseCoopers' consent can be easily purchased. Here is an excerpt from the Fed's 1999 minutes confirming that the books at America's central bank have been "fudged" on at least one occasion: "The Board’s staff and our accounting function at the New York Fed have worked out an accounting treatment to correct for both the $5 million and the $26.6 million errors. That involves reducing the accrued interest asset account by the entire $31.6 million, with an offsetting reduction in interest income on foreign currency investments. We will make that adjustment before the end of the year and spread it among all the Reserve Banks. Of course, for all of us with responsibilities for SOMA this is an embarrassing, indeed humbling, event. As a technical matter, though, I understand that PricewaterhouseCoopers is comfortable with the conclusion of both our accounting and audit function and the Board staff that this is not a material event for purposes of disclosure for any Reserve Bank." Perhaps PwC can come out, unsolicited for now, and disclose just how many other such borderline disclosable events it may have encountered while helping the Fed cooks it books in the past several decades?

After years of threats about untold destruction should the Fed release discount window borrowings by both the Fed and the Clearinghouse Association (read the bulk of the Primary Dealers), the Fed today released "thousands of pages" of discount window borrowings. And while we are waiting for the docs to be uploaded in a publicly disclosable and legible format, we observe that not only has the market not plunged, but the Dow is in fact higher at this moment, confirming yet again that not only is each and every threat by the Fed that if it does not get its way hollow and baseless, but the whole TARP rescue which pledged over $20 trillion in taxpayer capital to prevent the apocalypse was likely just as much of an empty threat, whose sole purpose was to prevent the bankruptcy of bank management and shareholders. We will release the documents with our analysis as soon as we get them, but in the meantime, here is the summary on this event from Bloomberg, whose employee Mark Pittman was responsible for this lawsuit, and won.

So that's why we're shorting small business. The worst part is they are too stupid to know who their enemies are.

Who's the next biggest culprit of them all?

Forget what the Fed is saying ... what is it actually doing?

Fasten your seatbelts: Bernanke, retail sales, CPI, Empire Index, Michigan consumer sentiment, Business inventories, Donald Kohn, Budget Balance, and, of course, POMO

It was a quiet day on the Street as the bond markets and federal offices were closed to celebrate one of the greatest threesomes of all time, and no, Money McBags isn't talking about the Three Stooges, the Dahm triplets or that scene in Meggann and Hanna love Manuel, he's talking about the voyage of the Nina, Pinta*, and Santa Maria as today was Columbus day so hopefully you all coughed in to a blanket and handed it to your neighbor in order to celebrate.

Jan Hatzius, who has been spot on in every prediction so far this year, provides the following rhetorical Q&A on what is now a definitive QE2 announcement in less than 30 days (and if one doesn't come, the mid-term elections will be accompanied by a whole host of flash crashes). In a nutshell: "we continue to believe that these purchases will ultimately involve at least $1trn, possibly quite a lot more...more importantly, QE2 works on other elements of financial conditions, including equity prices and the exchange rate." In other words, look for gasoline at $10 at a gas station near you within 6 months, promptly to be followed by complete economic collapse and a 25% chance of revolution on the side.

As everyone knows by now, Goldman's (now former) top economist (and creator of such K-11 magic as BRIC and N-11) Jim O'Neill has auspiciously found a new role at Goldman Sachs, as Chairman of Goldman Sachs Asset Management (proverbially, the place which will house all remaining 99.9% of the firm's prop traders, and which with $802 billion in AUM should have enough money to pay all of the Goldman hedge funders' salaries no matter how badly they perform), even as in a completely unrelated departure, Eileen Rominger, the global chief investment officer of Goldman Sachs Asset Management is planning on retiring at the end of the year. The two are obviously completely unrelated. What can we say: on behalf of the bear (or is that realist?) community we will miss Mr. O'Neill taunts, just as he will sorely miss the "few incoming hostile emails in response, and references to some weird blog sites who apparently opine on my views." All in good humor, Jim. That said: after succeeding in (at least on the surface) eliminating Goldman Prop, Zero Hedge will next focus its attention on all the juicy gossip, innuendo, and endless fun emanating out of Goldman Sachs Asset Management. We are sure that Jim will find our continued interest in his activities almost as delightful as a ManU come back victory from 3+ goals down. And now, without further ado, here is Jim O'Neill's farewell letter...