Moral Hazard

From Reuters:

German Fin Min: Crisis Largely Over In Europe and Germany
German Fin Min: If Greek Budget Consolidation Succeeds, No Tax Money Will Be Lost
German Fin Min: Without Consolidation In Greece We Will Have Unforeseeable Market Consequences

German Fin Min: Failure With Greece Would Put Euro In Question
German Fin Min: Cannot Throw Greece Out Of Eurozone

It's over - the excess debt/GDP terrorists have won, and Moral Hazard is now a global phenomenon. There will be no more failures anywhere. In other words, all your stock profits will come straight from your taxes.

Here is what happens when you green light Moral Hazard - in less than two hours after the videoconference in which the EMU announced €30 billion in aid for Greece, a Greek senior official has already come up and said that they were only kidding about needing just €40 or so billion (with the IMF's 10). The full amount will actually be double that, or €80 billion, for the three year period. Look for Portugal, Spain, Ireland, Bulgaria, Hungary, Latvia, and Lithuania to come knocking in the next 45 minutes.

All eyes on the Vancouver games but there is a post-Olympics winter chill headed our way, and you'll be surprised to find out that all is not peachy in good old boring Canada...

Now that there is no more risk, anywhere, here are the preliminary thoughts on how kicking the can down the road has just taken on a whole new meaning, courtesy of the FT Deutschland. We are certain that citizens of Germany and France will be ecstatic to see their tax money used to first save Greece, then Spain, the Portugal, then Italy, then Lithuania, then Bulgaria, etc.

Zero Hedge embraces contrarian analysis. But its readers tend to be exaggeratedly and stubbornly critical of any opinion contrarian to the "ZH consensus". One of the most fallacious application of this proclivity is the never-ending attacks on TBTF banks, and the blame put on them for causing the current financial mess. We disagree with this myopic train of thought. Although banks have their share of criminality to pursue and prosecute, is the main blame argument posed against them merely the age-old straw man fallacy manifest?

As observant readers will recall, a week ago we pointed out a letter in which the New York Fed's Steven Manzari instructed AIG to stand down on all discussions with counterparties on "tearing up/unwinding CDS trades on the CDO portfolio." At the time we focused on the word "stand down" as an indication of the Fed's lead role in the process. At this point there is no doubt that the FRBNY, together with its law firm, Davis Polk, were in the pilot's seat during the entire AIG negotiation, and while Tim Geithner may not have been the responsible man for this, someone must have been - and for the record, our money is a double or nothing on recently promoted FRBNY Senior Vice President Sarah Dahlgren, who as of January 21st is in charge of the Fed's Special Investments [AIG] Management Group. We sure hope Sarah gets the chance to recall her memories beginning in the fateful month of September 2008 when she became the person in charge of the FRBNY's AIG relationship. But back to the letter - little did we know that our focus was on the right sentence... but on the wrong word. What should have struck us front and center, was Habayeb's admission that contract "tear downs" had been evaluated. This means that someone, aside from AIG, must have expressed an interest in a tear down, which if true would have dramatic consequences for the entire AIG debacle. Today, the WSJ presented the missing piece of the puzzle.

"[The Fed] is making the situation much, much worse and they actually caused the problem to begin with. They have the foolish belief that they can pick the right interest rate. The interest rate should be a function of the supply of savings versus the demand for money. If you have one person or twelve people on the FOMC deciding that interest rates should be 1% or 0% they distort the cost of money and they cause the demand for money to rise, they cause the amount of money in circulation to skyrocket, and then you get this rolling bubble economy. That has to stop, that's where we have to start...We have now inculcated firmly this bailout mentality in the country, and that also has to stop." - Michael Pento

"We now have a financial system that is completely based on moral hazard...Crazy things happen when you have financial system like that... The conventional wisdom is you can't have back to back major financial crises. I think we're going to push that, we're going to have a look and see whether that's true. The next 12 months could really be exciting... But we are setting ourselves up for an enormous catastrophe." - Simon Johnson

The last thing we need is moral hazard in media ...

You don't put out a fire with gasoline. You don't cure a hangover with vodka. You don't end a headache by banging your head against the wall. Apparently, at least in Washington, you do address a sick banking system by keeping more sick banks open. It's as if I'm in the Twilight Zone...

The only way to maintain the global ponzi bubble as insiders cash out in ever increasing droves has now become a wave of rolling bailouts not only in the US, but across the entire world. The latest little casualty that could: Austria's Hypo Group Alpe Adria, the country's fifth largest bank by assets, which was nationalilzed ealier in a €5.5 billion bailout package. But ignore that: Europe is long and strong, with no bank balance sheet assets writedowns, a flourishing export economy, a surging currency and unprecedented growth ahead of soon to be (non) bankrupt Eastern European and Baltic states. The sarcasm in the previous statement is certainly not lost on the Austrian National Bank which said that "the whole Austrian economy has been able to avert a massive threat at a critical moment in time." No further commentary needed. Ben Bernanke's Moral Hazard world tour soon coming to an insolvent bank near your cottage.

Courtesy of the SIGTARP's latest report, the events on November 6 and 7th, when Wall Street lackey extraordinaire Tim Geithner decided to pay $27.1 billion to make all of AIG's counterparties whole, have attained even more granularity. The main thing disclosed is just how willing Geithner was to extract absolutely no concessions from AIG's counterparties, and how after putting in a token effort, the best he could do was to just get UBS to agree to a contingent 2% haircut, which would only be effective if all the other counterparties agreed to the same. Of course, this approach failed, and the final "make whole" bailout was a foregone conclusion from the beginning. That Tim Geithner approached his duty of "preserving" taxpayer capital with such disdain, would be grounds for immediately termination for cause in any normal, non-banana society. Alas, America has long ceased being representative of one.

Tomorrow at 9 am, former Fed Chairman Paul Volcker will testify before the House Committee on Financial Services, discussing topics on Systemic Risk and Resolution Issues. Since a former Fed Chairman will effectively be discussing the actions undertaken by the current one, this promises to be a most interesting testimony. We present some key points from Volcker's prepared remarks below: at first blush it would appear that the former Chairman is distancing himself substantially from the activities of the current one, and among other things, is proposing serious curbs on Moral Hazard, on the lack of Fed's accountability, highlights the need for a return to a Glass-Steagall system, and blasts the prop trading/hedge fund business model, whereby in discussing what he believes should be prohibited activities by systemically important firms, he highlights "ownership or sponsorship of hedge funds and private equity funds [as] should in my view a heavy volume of proprietary trading with its inherent risks." If that is not a direct stab at Goldman Sachs, nothing is.

"As the US market is now back at fair value, I’ve been pondering what could drive the market higher. Jeremy Grantham provides some answers in his latest missive to clients. He argues that “the greatest monetary and fiscal stimulus by far in US history” coupled with a “super colossal dose of moral hazard” could generate a stock market rally “far in excess of anything justified by…economic fundamentals”. This viewpoint receives support from the latest finding from experimental economics. The evidence from this field shows that even amongst the normally well behaved ‘experienced’ subjects, a very large liquidity shock can reignite a bubble!" - Soc Gen

There is nothing quite like the acting Secretary of the Treasury promoting it on national TV. In his most recent Charlie Rose interview, TG openly tells the banks not to be concerned with things getting worse. Well, Mr. Geithner, if the banks by that definition always have the governmental backstop, then who are we kidding that the entire financial system has not be nationalized.