Wolf Richter www.testosteronepit.com [15] www.amazon.com/author/wolfrichter [16]
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 [17] 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 [18] 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 [19]].
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 [20]), 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 [21]