Credit Crisis

Local Governments Which Entered Into Interest Rate Swaps Got Scalped

Volunteering to join the military has always been a process rife with internal and external conflictions.  A vital aspect of one’s ultimate decision to do so often depends greatly upon the era in which one becomes eligible.  U.S. citizens leaped at the chance to defend their country at the onset of World War II because the enemies were indeed a legitimate and obvious threat to the freedom and sovereignty of all nations.  During Vietnam, the waters were muddied (at least in the view of millions of citizens), and many Americans did not see the fight as their own.  The line between our system, and the enemies we were supposed to despise, had become progressively more foggy and disjointed.  For any wise and honorable man to go out of his way to risk his life, the fight must be clearly just, otherwise, he may feel that his death will serve no purpose.  No matter what era of war an American soldier happens to take part in, his desire is usually simple and honest; most seek to defend the underlying principles of freedom which have guided the soul of this country for generations.  They seek a righteous cause, and transparent leadership.  Unfortunately, for decades, sincere leadership by our government, from Washington D.C. down to the good-old-boy networks of county politics, has all but been erased.  Not even a trace of truth permeates the bedrock of our legal or bureaucratic structure anymore.  The system has become so corrupt, so leprous and putrid, that it now actually influences originally honorable men and women to do great evil just to survive and to thrive.  Our administrative structure encourages and even breeds thieves, murderers, and tyrants.  It is a self-perpetuating monster machine. 

From Deutsche Bank, below is a list of key events to watch over the next several weeks – events that could have bearing on how the euro sovereign debt crisis evolves. Of particular note: in the next 6 weeks there are 18 or so days on which Spain, Italy or, yes, Greece will be issuing debt. Have that espresso machine ready.

The financial elite - using academe for intellectual cover - want you to believe that markets are efficient, as defined by the Efficient Market Theory (EMT). Neoliberal economic philosophy is based on the belief that neoclassical economic theory is correct. That is, that “markets are efficient”. Wall Street touts markets as trustworthy and infallible, but that faith is misplaced. Gullible US politicians believe that markets are efficient and defer to them. Therefore, US politicians abdicate their responsibility to manage the overall economy, and happily for them, receive Wall Street money. Mistakenly, the primary focus during the 2008 credit crisis is on fixing the financial markets (Wall Street banks) and not the “real economy.” The financial elite are using this “cover-up and pray” policy—hoping that rekindled “animal spirits” will bring the economy back in time to save the status quo. This is impossible because the trust is gone. The same sociopaths control the economy. A Federal Reserve zero interest rate policy (ZIRP), causing malinvestment, and monetizing the national debt with quantitative easing by the Fed, and austerity for the 99% to repay bad bank loans has not worked—and doing more of the same will not work—and defines insanity.

All you need to read and some more.

Thus we have the world’s three most important Central banks as well as the global economy’s “economic miracle” retreating from aggressive monetary intervention.

Last September we were delighted to bring you the following great news:

DAVID BIANCO NO LONGER WORKS AT BOFA, SPOKESWOMAN SAYS

Now, we are even more delighted to bring you the following breaking news:

BLACKROCK CHIEF EQUITY STRATEGIST BOB DOLL TO RETIRE

And then there were three...

First the ECB kicked the stimulus junkies in the crotch in the after hours session, now the PBOC is about to eat their faces for breakfast as both rumors causing overnight and intraday stock ramps are systematically denied. From Bloomberg: "China has no plan to introduce stimulus measures to support growth on the scale unleashed during the depths of the global credit crisis in 2008 according to the nation’s state-run Xinhua News Agency. “The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said yesterday in the seventh paragraph of a Chinese-language article on economic policy, without attributing the information. “The current efforts for stabilizing growth will not repeat the old way of three years ago." And with that the rug is pulled out from below anyone praying for non-Fed stimulus.

All you need to read and some more.

As either taxpayers or long-term JPM investors, we should be more grateful than sorry about the JPM CIO Ina Drew.

A month ago we warned that JPM's CIO office is nothing short of the world's largest prop trading desk. Not only were we right, but what just transpired is just shy of our worst possible prediction. At the end of the day, the real question is why did JPM put in so much money at risk in a prop trade because we can dispense with the bullshit that his was a hedge, right? Simple: because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least "net" is not "gross" and we know, just know, that the SEC will get involved and make sure something like this never happens again.

Fraud ... What Fraud?

Much has been made of the apparent lack of demand for credit as well as apparent supply (especially well-collateralized and credit-worthy credit) during a period when the banks have been mouth-to-a-fire-hose gorged on money. Small businesses, as UBS notes, have been at the center of this debate - as the engine of the economy, politicians have been vociferous in the face of banks ignoring their suggestions to lend. This initial credit crunch, however, has led to a structural change among small businesses which may have a much larger slowing-impact on OECD growth than is currently understood. Small businesses horded cash and reduced their reliance on bank loans after the crisis as the fear of the credit crunch remains front-and-center (and therefore crushed a key transmission mechanism of monetary policy). This drop in demand is driven by the hidden credit crunch - a structural shift to more just-in-time inventory management regime. This in turn reduces the inventory:sales ratio (which is exactly what we have seen in an unusual divergence from large business and appearing like a structural decline). The worrying aspect of this, and indeed the other credit crunch is that the inventory management regime-change among small businesses exaggerate anaemic growth since restocking has traditionally helped to drive economic growth above trend in a recovery phase. As UBS' Paul Donovan concludes, "the traditional concept of inventory restocking may be a great deal more lacklustre in the current environment."

When we talk about Europe today in an economic context, we really mean the Eurozone, whose seventeen members are the core of Europe and share a common currency, the euro. The euro first came into existence thirteen years ago, on January 1, 1999, replacing national currencies for eleven states; Greece joined two years later. In theory, the idea of a common currency for European nations with common borders is logical, and it was Canadian economist Robert Mundell's work on optimum currency areas that provided much of the theoretical cover. However, the concept was flawed from the start.

Bill Black is a former bank regulator who played a central role in prosecuting the corruption responsible for the S&L crisis of the late 1980s. He is one of America's top experts on financial fraud. And he laments that the US has descended into a type of crony capitalism that makes continued fraud a virtual certainty - while increasingly neutering the safeguards intended to prevent and punish such abuse. In this extensive interview, Bill explains why financial fraud is the most damaging type of fraud and also the hardest to prosecute. He also details how, through crony capitalism, it has become much more prevalent in our markets and political system.  A warning: there's much revealed in this interview to make your blood boil. For example: the Office of Thrift Supervision. In the aftermath of the S&L crisis, this office brought 3,000 administration enforcements actions (a.k.a. lawsuits) against identified perpetrators. In a number of cases, they clawed back the funds and profits that the convicted parties had fraudulently obtained. Flash forward to the 2008 credit crisis, in which just the related household sector losses alone were over 70x greater than those seen during the entire S&L debacle. So how many criminal referrals did the same agency, the Office of Threat Supervision, make?

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