Wall-Street Craziness Is Back

Wolf Richter's picture

Wolf Richter   www.testosteronepit.com   www.amazon.com/author/wolfrichter

The craziness on Wall Street, the reckless for-the-moment-only behavior that led to the Financial Crisis, is back. This time it’s Citigroup that is once again concocting “synthetic” securities, like those that had wreaked havoc five years ago. And once again, it’s using them to shuffle off risks through the filters of Wall Street to people who might never know.

What bubbled to the surface is that Citigroup is selling synthetic securities that yield 13% to 15% annually—synthetic because they’re based on credit derivatives. Apparently, Citi has a bunch of shipping loans on its books, and it’s trying to protect itself against default. In return for succulent interest payments, investors will take on some of the risks of these loans.

The first deal of this type was negotiated privately with Blackstone Group and closed last December. This second deal will be open to a broader group of institutional investors. Soon, similar synthetic securities will be offered to the treasurers of small towns in Norway.

But shipping loans are a doozy. After its bubble, the shipping industry fell into a deep crisis. It’s such a problem that Andreas Dombret, member of the Executive Board of the Bundesbank, listed it as one of the four risks to overall financial stability in Germany—in Hamburg alone, there were over 120 shipping companies. He fingered two causes: shipping rates that had plunged during the Financial Crisis and never recovered, and continued overbuilding of ships of ever larger sizes, driven by “cheaply available financial means,” a direct reference to the easy money handed out by central banks.

And then he waded into the bloodbath in Germany: retail funds that blew up and were shuttered, banks whose shipping portfolios suffered heavy hits, an industry that was breaking down.... Capital destruction, the inevitable consequence of central-bank passion to create bubbles. Now, the Bundesbank was looking at it from a “broader perspective,” he said, with an eye “on the stability of the entire financial system.”

That was mid-February. Two weeks ago, the largest ship-financing bank in the world, HSH Nordbank, which had already been bailed out in 2008, cratered and was bailed out again by its two main owners, the states of Hamburg and Schleswig-Holstein.

So, with the smell of putrefaction wafting from Citi’s shipping-loan closets, it’s time to sell high-yield derivatives based on them. If hedge funds buy them, fine. Presumably, they understand the risks. But these products may end up in funds favored by state and municipal retirement systems. They’re starved for yield and are chasing it every chance they get in this zero-yield environment. And “alternative investments” are hot. So, banking crap would be shifted once again to retirees—with a satisfied nod from the Fed.

The Fed’s drunken passion to print has led to the most gargantuan credit bubble ever, a farmland bubble, commodity bubbles, equity bubbles, heck, even a new housing bubble as hot money buys up billions of dollars in homes and now can’t rent them out [a debacle that I wrote about in.... Housing Bubble II: But This Time It’s Different].

It was never intended to fix the damage that the Financial Crisis had done to the real economy—as experienced by people, and not as measured by the Dow which is setting new highs. Some of these issues are very basic. For example, income.

Median household income in February was $51,404 (Sentier Research), down $590 on an inflation-adjusted basis, or 1.1%, from January. Culprit: the red-hot 0.7% increase in consumer prices that month. It wasn’t a fluke but part of an insidious long-term trend. Adjusted for inflation, median household income in February was:

  • 5.6% lower than in June 2009, during the Financial Crisis, or the beginning of the “recovery,” whichever.
  • 7.3% lower than in December 2007, the beginning of the recession.
  • 8.4% lower than in January 2000, when the data series began.

That year, median household income, expressed in February 2013 dollars, was $56,101! If it where this high today, households could spend more and save more, and they’d be more optimistic and enthusiastic, and the real economy would be humming along at a better clip.

Throughout these years, nominal wages have crept up just enough to bamboozle people into thinking that maybe this time it would be different, that this time they could actually buy more with the increased income, only to be whacked again by inflation. Their deteriorating circumstances shed a harsh light on the Fed-inspired craziness on Wall Street—and an even harsher light on the Fed’s persistent refusal to see it, though it’s happening right before their eyes.

The US-centric balance of economic power has been destabilized by the crumbling of EU welfare states and the rise of the state-sponsored capitalist BRICS, eager to seize the opportunity to attack the dollar’s preeminence. And so the inevitable is waiting to happen. Read....  The Dollar’s Death As Reserve Currency

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
q99x2's picture

They can't get my money. It is not in a bank.

kchrisc's picture

Garbage in, misery out.

And I do believe that the guillotines are on order.                           hujel

Vooter's picture

Sharpen up those knives, people...

dust to dust's picture

 Citigroup that is all you need to know. 

moneybots's picture

"The craziness on Wall Street, the reckless for-the-moment-only behavior that led to the Financial Crisis, is back. This time it’s Citigroup that is once again concocting “synthetic” securities, like those that had wreaked havoc five years ago. And once again, it’s using them to shuffle off risks through the filters of Wall Street to people who might never know."


Wash, rinse, repeat.

waldo simon's picture

Flying into,or out of Singapore,and you'll see scores of large container ships seemingly permanently moored

in the channel. This has been the case for the last three years,but prior to '09 was seldom seen.

Yen Cross's picture

  Thanks Waldo and Angel. I'm getting ready to head back over to Queensland.  Thanks for the slow down in Asia confirmation.

Downtoolong's picture

No thanks, I'm going to buy a ticket on the Titanic instead.


Dewey Cheatum Howe's picture

Growing your own food is the same as printing money.

otto skorzeny's picture

build ships-have our otherwise unemployable US naval seamen sink them in target practice and build some more-repeat the process

rhinoblitzing's picture

Thought I heard they are building space ships with one way missions to Mars the other day.

Arnold's picture

The Marching Morons, a short story by Cyril Kornbluth has told today's story for 60 years.

espirit's picture

Don't think that it hasn't crossed the warped minds of the Shadow powers of a medium - sized war to reduce inventory of bulk ships.  Life cycle would take care of the rest and eventually restore balance in their favor.

Got to perceive greed like an insane person to understand that long term picture.

besnook's picture

the math behind derivatives is fun with numbers with cash extracted compliments of zirp.

at some point the bernank must realize that only a direct sustained cash infusion to the consumer much bigger than welfare is the only thing that can save the west. what i don't understand is why the phds haven't figured it out yet. maybe they will. they figured out they should buy the junk off the books of the banks and hide them permanently on the fed's balance sheet because they can but they really need inflation and a really good intense dose of it. exempting the first 100 grand of income should do it.

i don't agree with this on principle but if you are going to play the fiat game this is the only thing that works. the system only survives if the supply of money keeps expanding. the biggest problem currently is velocity so the people who spend all their money need more money to spend. i don't understand the objection to this plan since all the new money ends up in the hands of the .1% anyway in a fiat money world.


the brics meeting was a formal declaration of war. things begin to accelerate from here, escalating into a vertical spike(war).  may your god be with you.

bank guy in Brussels's picture

Yes, the latest BRICS meeting is a really big deal

Jim Willie's latest fire and brimstone had a lot to say about it

How the BRICS and the whole rest of the world will be 'financing' infrastructure and investments via dumping their US Treasury bonds back via London to the US

How the Saudis are about to dump the Petro-Dollar in favour of joining with Russia-China

How Germany is about to split away from the Anglos and join China-Russia, maybe right about one the euro-zone breaks up

How even the UK has already begun the switch away from the USA, to try and be a finance centre for EurAsia

Always great reading

Jim Willie, 'US Dollar: Ring-Fenced and Chekmate'


sun tzu's picture

I agree the US is a slowly sinking ship, but don't count on BRIC unity and especially don't count on the Germans and Russians ever being real allies. 

brettd's picture

Yes it is is a big deal.

But---there are some HUGE cultural/values differences between those (BRICs) countries, making unity as hard or harder even than the Euro "experiment."  The USA has been wrestling with these financial/power issues (fed v. state) for over 200 years.  


ebworthen's picture

Yes, if the FED's real goal is to stimulate the economy versus bail out corrupt bankers why not send every citizen a tax free $100,000 per year for five years?

I mean, if they are ladeling out $6+ Trillion of FED gravy to Wall Street, surely they can send some our way.

But oh, wait, that wouldn't be "moral" or there would be "moral hazard" doing something like that, is that it Ben?

kchrisc's picture

That is one of my best "shake awakes" that I use to try to stir sheeple awake.

I ask them about the TARP bailout (most only know of this one and not the others) and ask why the gov and FedRes did not just print the same money and bailout the home "owners" (mortgagee) instead of the banks. I tell them that if the mortgages were what were causing the problems then the bailout of the mortgagees would have reduced the mortgagee's burden AND cleaned up the bank balance sheets at the same time--two birsds, one stone.

However, they, the gov and banksters chose to ONLY save the banksters and leave the mortgagees and the taxpayers swinging in the wind. I do indicate that the inflation still would have been a problem, but the average person would have been better able to withstand it with a lessened financial burden.

Some sheeple stir a bit but most just stare and blink as if I just told them that the moon is made of cheese.

I think that the whole TARP thing, all of them and then some, but especially the first, just flat out reveals the pols, crats and banksters' sheer mendacity and depravity. Basically it was "save us and them" or "save us and save them for us." Fucking depraved!

Now has anyone seem my guillotine? I parked it right there and when I came back...


ebworthen's picture

Shipping hasn't recovered?  But, but, isn't the recovery was here?

Why am I not surprised Blackstoned is the peddler of this crap?

With populations so quiescent and somnolent over the blatant fraud and theft of Wall Street it looks like Bailout II is just around the corner after Housing Bubble II pops and the Securitized Derivative Shitcakes are sold to Pensions and Retirees.

NotApplicable's picture

I find it hilarious that 21st Century shipping has been slowed to speeds lower than in the 19th.

Long sailboats.

Mototard at Large's picture

A simple explanation of derivatives for non-specialists - includes an easy to understand example and explains why they are dangerous.  http://tinyurl.com/blhtc3q

NoWayJose's picture

Now we just wait for one of the TBTF's to get on the wrong side of one of these trades, have them leverage up to try to try to break even, then have the Vampire Squid take the other side and squash the trade.

delivered's picture

If parties responsible for making investment decisions don't understand the following two basic fundamental concepts of investing, then they are fools. First, if it sounds too good to be true, then it is. Second, if you don't understand the opportunity, then don't invest. For those out there that take on this crap, well as the old saying goes, fool me once, shame on you, fool me twice, shame on me. Anyone with half a brain and just a little bit of experience (from just five to six years ago) knows that when Wall Street comes peddling their latest crap, just learn to say no. And if you don't and for some reason, haven't bothered to read even a fraction of the reports and articles that have been published over the past half dozen years on the financial crisis, then shame on you.

brettd's picture

There's no "saying no" when the pension you manage is expecting you to deliver the 8%/year you promised....

Mr. Saxby's picture

We're going to buff those turds until they simply gleam.....

NotApplicable's picture


Hey that's my ass, there!

U4 eee aaa's picture

wall street craziness back


It left?


It is funny, I was listening to this old audio mystery book last night from the early 1900's and the author was going on about one of the characters and their kleptomania which was supposedly a fad disorder back then. Thinking about this character and how they explain that they just can't help themselves gave me a shock as it explained exactly the psychological problem these thieves and crooks seem to display on Wall Street.


They are kleptomaniacs and the government is doing nothing to stop them. In fact they are enabling them and reinforcing the behavior

Radical Marijuana's picture

Of course, U4 eee aaa, you know the answer to your rhetorical question, "It left?" ... "They are kleptomaniacs and the government is doing nothing to stop them. In fact they are enabling them and reinforcing the behavior!" ... 

In my view, the runaway triumph of frauds, which were legalized and enforced by the government, BECAUSE the government had been effectively taken over through the domination of the funding of the political processes by those profiting from those runaway frauds, HAS PRODUCED ALMOST INFINITE TUNNELS OF FRAUD. It is metaphorically like a mine with a vein of precious metals, that goes on, and on, without any apparent exhaustion, since, AFTER the government becomes the enforcer for the kleptomaniacs, there is no end in sight!

To change perspectives regarding these kinds of legalized tricks, where one can make money out of nothing, and sell things that one does not own, without any apparent legal limits, this runaway triumphant social insanity has its mother load in the area of "national security" ...

For a brief history of "National Security" as a runaway social psychosis, watch


The Black Budget

By Catherine Austin Fitts, March 29, 2013.

... the National Security Act of 1947, and

... the act that created the CIA in 1949 ...

and, then an executive order that was promulgated in 1980, when George Bush became vice president, and through the vice presidency assumed responsibility for the National Security Council, intelligence agencies, and enforcement agencies.

The '47 and '49 Acts, in combination, allowed appropriations on a non-transparent basis, which are not disclosed to citizenry, and so it are not in the budgets. It supposedly is disclosed to committees, overseeing intelligence agencies in Congress. However, that is obviously more of the foxes operating the hen house! The '47 and '49 Acts created an infrastructure that allowed money to be secretly channelled through to technologically very important, powerful projects, on a non-transparent basis, so there is NO accountability. Those things, combined with the Exchange Stabilization Fund, have enabled the big banksters to make money out of nothing, to use in secret ways to develop an insanely privatized military.

At present, the kleptomaniacs ARE being able to steal everything worth stealing, and thus, can easily continue to pay for everything that dominates the political processes, in order to continue to be allowed to do that, ... with no end in sight, as we accelerate straight down through those apparently endless tunnels of deceits, backed by destruction.

Old-fashioned human greed and stupidity is now rocket riding on the supersteroids of science and technology, with the most brilliant of human minds devoted to devising yet another new-fangled fraud, which will not be stopped by the governments, but rather be regarded as respectable, and so, be promoted and protected, so that it too could flourish ... at least as for as long as this entire crazy civilization can continue ...

U4 eee aaa's picture

That does create a problem though. At some point, the population is going to want to press the point that they are the ones who authorize and control of the government. At some point they are going to stand up and demand the government act on behalf of those who believe they are supposed to be their true authorities, the voters.

That point is approaching (especially, as you say, if the unethical mining of the population's assets continues) and it looks like that point will be pressed hard. When the voters wake up and are finally made angry regarding the government sanctioned theft, they won't be happy and they will be calling for blood. It is human nature. I'd hate to be the elitest lackey that is sitting in power on that day

DoChenRollingBearing's picture

The Baltic Dry Index (ticker $BDI at stockcharts.com) is still quite low by historical standards.  The BDI is just ONE measure of the health of shipping (it measures an "average" of dry bulk shipping rates), but it is an indicator of the overall healthe of the shipping business.

Any institutional investor (and I include small municipalities, etc.) who do NOT understand the risks now in these shipping derivatives, is negligent, and would deserve any shellacking when these derivatives go to zero...

Homework, bitchez.

CTG_Sweden's picture



"Soon, similar synthetic securities will be offered to the treasurers of small towns in Norway."


My comments:

I read about a Norwegian municipality a couple of years ago which had invested heavily in American housing related bonds that all of a sudden became worthless. As far as I remember, this municipality had invested most of its money in such bonds.

Tombstone's picture

You cannot blame any of this on the perps.  That is because the central banks have mortgaged the future to save eveyone's arse from the debt wringer.  With no losers or culpable mistakes, banks and businesses are free to do as they please. 

NotApplicable's picture

Culpable? Where on Earth did you ever come up with such a word?

Next time, please try and use words that others use, like say "unforseen" (everybody is familiar with that one).

Peter Pan's picture

The same old mutton dressed as lamb and I bet they are even taking bets against the products they are selling.

rhinoblitzing's picture

Same old mutton.... Wasn't that Wilbur Ross on BB the other day talking up shipping? When he was asked about buying up Cyprus banks - he "balked"

disabledvet's picture

That's possible. Of course if you want Citi to be your banker you'll have to buy as well. Since we don't live in a world of usurious rates right now "those needing income will have to pay." not a pretty picture I agree. I hate to say "this is the road to recovery"...but..."this is the road to recovery." forget gold (for a moment) there has always been very little money as well. "now you know where your high yield is!" move along..."this is Wall Street doing it's job." complaints are handled "over there."

Tinky's picture

Wolf, your regular contributions are consistently good, and far better (and more terse) than most other regular ZH (post) contributors.

Keep up the good work.

Peter Pan's picture

+100. That's exactly what we need with so much stuff to read. To the point and clear.

SafelyGraze's picture

it's not a ponzi if you attract investors by offering to pay 13% based on a security that goes bust.

it's only a ponzi if you use the invested funds to pay the previous investors.

- chuck ponzi

jftr, shipping accounts are paying 15% right now, so the 13% is *not* a loss-leader

NotApplicable's picture

Meanwhile, the money market option in my 401 was removed last week, only to be replaced with a "fixed income" option that invests in GICs, because as the bankster put it, "people wanted safety AND enhanced yields." My reply was that anyone putting their money in an MM fund was doing it as an attempt for return OF principal, not return ON it (as who invests in order to get a single fucking basis pt. per year?). Then she was dumb enough to bring up the non-safety of MMs since Lehman's collapse "broke the buck." Then I described how they made damn sure they got bailed out, since the whole system would go "poof" otherwise, and I felt that was the safest position I could take with the options available. Then I accused her of pushing me out to riskier investments, which of course, she denied (even though later after looking through the holdings/investment strategy I noted that the DWAM went from under 6 months in the MM to 5 years in the GICs).

While this conversation didn't change anything, it felt damn good to put a bankster on the hot seat. By the end of the conversation she could barely function, sounding every bit as intelligent as Cramer and the rest of the clowns on CNBS.

One thing I noticed looking at the fund holdings was that most of the GICs were 5 year loans to insurance companies at around 5%. Makes me wonder how much longer that industry can last if they're having to borrow at those rates in order to remain liquid.

max2205's picture

Boy this throws cold water on this viagra market

OutLookingIn's picture

Get out.

Out of paper.

Into tangibles eg. gold, silver, farmland, ammunition, agriculturals (fertilizer, livestock), etc.  

brettd's picture

how many tractors, trucks, guns and ammo can I buy?

espirit's picture

+1 I'll have to up arrow you for that strategy, although in the past my 401k had made some great gains with proper timing.  I'd cashed out and took the penalty prior to Y2K, but in 2008 I took a 20% hit because the fuckers wouldn't let me move (and locked me in) 3 days before the 777 pt. drop.

Now I'm out and feeling free.  Long phyzz and boating accidents.