Structured Finance

"Goldman was not a disinterested party in AIG’s bailout. AIG’s bailout—and the way the payouts were handled for its trading counterparties—hugely benefited Goldman Sachs. Goldman received a cash payment worth more than $10 billion from the U.S. Treasury—via AIG—during a system?wide liquidity crunch. Under the circumstances, I cannot think of any scenario that would have provided a more certain and stable outcome for Goldman Sachs." Janet Tavakoli

Janet Tavakol says:

"During World War II, we imposed an excess profits tax. We should impose a 95% excess profits tax—or windfall profits tax—on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees."

What do you think?

"I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked." - David Einhorn

Courtesy of the Fed's own disastrous policy of flooding the market with trillions of cheap credit over the past several decades, the resulting massive one-sided trade of buying dollar denominated securities, funded with inappropriately duration matched products, ended up in $6.5 trillion of Fed-funded global Moral Hazard exposure. When the wheels came off the financial system last fall, the Fed had to step in and bail out all foreign Central Banks. From the BIS: "In providing US dollars on a global scale, the Federal Reserve effectively engaged in international lending of last resort...What pushed the system to the brink was not cross-currency funding per se, but rather too many large banks employing funding strategies in the same direction, the funding equivalent of a crowded trade." The imminent question - How long until the next iteration of the Fiat banking system's most crowded trade (long US-denominated securities, courtesy of a cheap carry trade somewhere in the world) pulls the system back to the brink again?

Prosecute the criminals, or else the economy won't improve...

Experts say that the economy will not recover until trust is restored.

So how do we restore trust?

One of the foremost experts on structured finance and derivatives presents a holistic overview of not only the current economic fiasco, and in 10 brief minutes with Max Keiser she provides more succinct, unbiased and relevant information that most pundits are able to convey in years on and off TV, but also highlights the bigger problem of how the administration keeps treating the US public as a bunch of stupid infants, throwing paper blankets over raging systematic fires that are anything but doused. And yet, the administration's ploy so far is successful, unfortunately speaking volumes about the intellectual rigor of the average American.

"Wall Street supplies a swinging door of jobs for its financial regulators, and—in the case of many members of Congress and our Presidents—campaign contributions. This dependence is known as “capture,” and the result is that instead of reigning in Wall Street, dependent thinking enables mayhem. In the recent Ponzi scheme only the agents—mortgage lenders, rating agencies, fund managers, securitization professionals, CFOs, CEOs, and other fee or bonus beneficiaries—prospered. Controls and risk management were undermined. The financial institutions and their shareholders, for which these agents are failed stewards, collapsed. Investors in toxic securitizations lost money. Had regulators done their jobs, they would have shut down Wall Street’s financial meth labs, and the Ponzi scheme would have quickly choked to death from lack of monetary oxygen." - Janet Tavakoli

Frequent Zero Hedge readers are aware of our fascination by the ethically pure and intellectually honest legacy rating agencies (read S&P and Moody's), whose primary goal in life is to provide readers of its reports with unconflicted, unbiased research, without regard for the top and bottom line of key Wall Street firms, which purely by accident happen to be the biggest sources of revenue to these same NRSRO via structured products which are spun off from the banks' balance sheets and sold to highly sophisticated, erutide yet unfortunately bankrupt island nations (which luckily have a monopoly on geysers and 6 foot tall women to feed their GDP). The complete transparency that shrouds the work of these rating agencies, and the integrity of its professionals is beyond reproach, and where, contrary to litigation disclosure, the phrase "let's hope we are all wealthy and retired by the time this house of cards falters", was massively taken out of context and was simply referring to an intern's attempt at recreating the Sistine Chapel using nothing but 10 decks of Bicycle cards.

Recently, we have had a rally in the bond market, a rally in the stock market, and a rally in gold bullion with tame currency moves. What gives?

"One might argue there was no Fed bailout involved with Bank of America’s purchase of Merrill Lynch, but I am not the one to make that argument. Merrill’s purchase by Bank of America at a premium price seems to only make sense with the huge assist of the Fed’s largesse in suddenly agreeing to accept lower quality collateral for its loans."

"The main beneficiaries are the insiders who have Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke on speed dial. The Fed has undertaken a massive bailout using U.S. taxpayer dollars."

- Janet Tavakoli

Our good friends at the CMSA (where alas Chris Hoeffel has recently passed on the baton of preexisting conflict to Patrick Sargent), have issued a lengthy missive in which they implore the administration to make sure it changes the rules so that not only do investors eat 90% of all CRE losses, but if possible to make it so Joe Sixpack actually pays for a little over 100% of the bill. Otherwise, the Commercial Mortgage Securities Association may actually have to mark its book to market and, we all know, that can't happen without a singularity erupting in the immediate subsequent moment.

In a sign of the upcoming TALF-subsidized apocalypse, none other than Moody's is now complaining that issuers are shopping for ratings, or seeking ratings only from those agencies they know apriori will provide the highest rating (AAA) needed for TALF inclusion. Yes, Virginia, we have gone full circle to 2005, and now the government itself is promoting the same vicious rating loop that got us into this credit mess in the first place.

Some very fitting words from Mike Cembalest of JPM, putting the Green Shoots theory, and the irrational exuberance of the past 2 months, in perspective (highlights added).

The charts below demonstrate unmistakably just how phenomenally bipolar the market has become, and just how aggressively asset managers are chasing after risky assets in order to make up for 2008 losses. Alas, nobody has learned any lessons from the credit bubble where fast, slow, dumb and smart money was all chasing the riskiest assets, all of which ended in tears for far too many people. The result so far for 2009: exactly the same pattern is repeating itself.