Moral Hazard

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...

It was just a matter of time before the administration's covert plan of rewarding bank execs for massive failure by allowing them to load up their balance sheets with record risk once again, while paying out historic bonuses, blew up in Larry Summers' face. Today's attempt by the government to not only allow the failed Citi management team to pay itself an infinite amount of money more than it deserves for destroying one of America's landmark companies (why the hell is Vikram Pandit still in charge of the Titanic?) but to pretend that it "generated" another taxpayer win by selling off its shares at a profit, was aborted after hours, when Citi could barely find enough interest to sell $17 billion at the embarrassingly low price of $3.15, below that government's cost basis. This will preclude Obama from making a TV appearance tomorrow of how the US taxpayer made even more money by backstopping Moral Hazard. What the US taxpayer however did do, is funnel money straight out of its pocket, into that of Vikram's worthless lackeys. We somehow doubt this will make the teleprompter of whatever it is Obama will be praising in his TeeVeethon tomorrow.

The apocalyptic flavor of the month is dollar crisis. One should take the possibility seriously. The data does offer reasonable assurance that it won’t happen anytime soon. Yes, even in spite of massive (but not unprecedented) fiscal and monetary craziness, a socialist president, a populist legislature, and seething people just itching for the whole outhouse to go up in flames. Why doesn’t it make sense that the dollar should be out on its rear while gold or oil and their devotees dance in the street?

Because those distinctly American circumstances don’t incorporate a wide enough range of vision. The issue isn’t about the United States in a vacuum. It is about the United States as a reserve currency country whose debt acts as the world financial system’s risk-free collateral. Before any imminent implosion of the dollar, there is a whole zoo of more flawed economies like Dubai and Greece and dozens of others that would fall. As old as history itself is the truth that the last ones standing claim the spoils of victory. The United States has the 61st highest public debt ratio in the world.

"The intensifying economic and solvency crises, and the responses to both by the U.S. government and the Federal Reserve in the last two years, have exacerbated the government's solvency issues and moved forward my timing estimation for the hyperinflation to the next five years, from the 2010 to 2018 timing range estimated in the prior report. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, gross mismanagement, and a deliberate and ongoing effort to debase the U.S. currency. Accordingly, risks are particularly high of the hyperinflation crisis breaking within the next year." - John Williams, ShadowStats

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.

"Last week I was a participant in the Wall Street Journal's Future of Finance Initiative in England. WSJ has written a summary of the conference highlights, and missed some key points. Allow me to fill in the blanks." - Janet Tavakoli

The government of Abu Dhabi and the Central Bank of the United Arab Emirates agreed to provide $10 billion to the Dubai Financial Support Fund, allowing Dubai World to repay $4.1 billion of Islamic sukuk bonds that are due today, the government of Dubai said in an e-mailed statement. Statement from Dubai Supreme Fiscal Committee attached.

In a headline piece on roubini.com, Nouriel Roubini writes an extended article slamming both gold bugs, and the so-called gold bubble, which he believes is far too volatile, and which, contrary to ever increasing claims to the opposite, will likely not get to the mythical price of $2000/ounce, and instead will head lower. The argument presented, as is widely the case, boils down to the trifecta of i)gold having no industrial utility, ii) no intrinsic value (no associated cash flow streams) and iii) costing an arm and a leg to store. While Roubini's thesis is attractive on the surface (if somewhat Keynesian and thus often reiterated by mainstream Economists), we present some counter arguments to Roubini's thesis.

It is a well documented fact that a few big American banks have long fostered and enjoyed close relationships with U.S. regulators and agencies such as the Federal Reserve Board and the U.S. Treasury. History is also replete with Goldman Sachs executives attaining government postings such as the Secretary of the Treasury; including Robert Rubin and Hank Paulson of recent decades. These relationships of trust are developed and nurtured over time to the point where advice is sought and information exchanged regarding situations on a strictly confidential basis. It is difficult for Long Wave Analytics to believe, for example, that the Federal Reserve didn’t send up a trial balloon last February musing about the prospect of initiating a quantitative easing program involving new Treasury bond issues. How else could Goldman amass $27 billion (U.S.) in trading profits in the first nine months of the year. A 50 basis point move in yield on a 10-year maturity, for example, translates into a price change of $4.20 per $1,000 bond. On a long position of $1 billion (U.S.) of a 10-year Treasury bond, this means a capital gain of $42 million (U.S.).

Who’s in charge? We believe it to be the big American and European banks because, after all, they are the owners of the U.S. Federal Reserve.

"The equity bear market has not finished. The valuation bear market began in 2000 and we have only seen two Acts of a far longer and more disturbing play. The mega-rally in the equity markets this year is little different from what we saw in Japan during the mid-1990s. Even a structural bear could have made a lot of money in Japan playing cyclical rallies, but he/she needed to sell as the cycle turned downwards. Hence the topping out of some key US leading indicators may signal that the top of the equity rally is close. Look to exit risk positions." - Albert Edwards

In what is the start of the biggest uphill battle in D.C., arguably even bigger than deposing the printing press leprechaun, five democrats are proposing an amendment to reinstate Glass-Steagal, whose repeal, through the Larry Summers orchestrated Gramm-Leach-Bliley Act, in 1999 set the economy on the collision course that culminated with the implosion of every single Goldman Sachs FICC competitor in 2008. The five Democrats who have undertaken thesisyphean task of taking on both Wall Street and their direct boss, are Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts.

With everyone expecting the Chairman's reconfirmation process on Thursday to be merely a formality, Senator Bob Corker throws this wrench after he "said he wasn't sure yet whether the chairman had the votes on the Banking committee or in the Senate as a whole." The Hill reports, "I don't know where that sits," Corker told reporters when asked if Bernanke would have the votes to get a second term, adding he wasn't sure whether Bernanke would have the votes in the 23-member Senate Banking Committee, either.

On December 3rd, senators will have to decide: will they vote with their conscience, or with Wall Street's checkbook. Bernie Sanders has made his choice: "No, I absolutely will not vote for Mr. Bernanke. He is part of the problem. He's the smartest guy in the world, why didn't he do anything to prevent us from sinking into this disaster that Wall Street caused and which he was a part of? No, I will not vote for Bernanke to stay on as chairman."

Interestingly, though implicit and Fanniesque guarantees by Abu Dhabi have always colored the pricing of Dubai's debt (along with the image, apparently exaggerated both in will and ability, of the virtually unlimited backing of Abu Dhabi's "$600 billion" sovereign wealth fund) most stories covering the Reuters disclosure this morning focus on the (so far ethereal) assistance Abu Dhabi will be giving Dubai, and not that which it will not.