Lehman Brothers

Back in 2002 Warren Buffet famously proclaimed that derivatives were ‘financial weapons of mass destruction’ (FWMDs). Time has proven this view to be correct. As The Amphora Report's John Butler notes, it is difficult to imagine that the US housing and general global credit bubble of 2004-07 could have formed without the widespread use of collateralized debt obligations (CDOs) and various other products of early 21st century financial engineering. But to paraphrase those who oppose gun control, "FWMDs don’t cause crises, people do." But then who, exactly, does? And why? And can so-called 'liquidity regulation' prevent the next crisis? To answer these questions, John takes a closer look at proposed liquidity regulation as a response to the growing use of 'collateral transformation' (a topic often discussed here): the latest, greatest FWMD in the arsenal.

There may come a day soon where the markets sell off if one of the whiskers in Big Ben's beard is out of place. Or perhaps if his tie is a bit crooked. Or maybe we end up with Janet Yellen as the next puppet in charge over at the local banking cabal and we fret about her hairdo. I don't know, but one thing that is for certain is that this central bank so wants to be loved and we are so under psychological attack with all of this QE nonsense that it isn't even funny. QE is the endgame. ZIRP was only the beginning. QE, or monetization (which they'll never call it because of the negative connotations), is the heroic measure applied to an already dead system. Our system, for all intent and purposes, died in 2008. It ceased to exist. The investing, economic, and business paradigm that has existed since is drastically different than its predecessor despite all the efforts being made to convince everyone, including Humpty Dumpty, that it is in fact 2005 all over again.

It's as if we have two economies: the simulacrum one of stocks rising dramatically in a few months, and the real one of household earnings (down) and hours worked (down). It is difficult to justify the feeling that we are living in an extraordinary moment in time, for the fundamental reason that it's impossible to accurately assess the present in a historical context. Extraordinary moments are most easily marked by dramatic events such as declarations of war or election results; lacking such a visible demarcation, what sets this month of 2013 apart from any other month since the Lehman Brothers' collapse in 2008? It seems to me that the ordinariness of June 2013 is masking its true nature as a turning point. Humans soon habituate to whatever conditions they inhabit, and this adaptive trait robs us of the ability to discern just how extraordinary the situation has become.

Both the U.S. and China are now attempting to deflate asset bubbles. The former is likely to have second thoughts while the latter isn't.

We have warned a number of times that China is a ticking time-bomb (and the PBoC finds itself between a housing-bubble rock and reflationary liquidity injection hard place) but the collapse of trust in the interbank funding markets suggests things are coming to a head quickly. The problem the administration has is re-surging house prices and a clear bubble in credit (as BofAML notes that they suspect that May housing numbers might have under-reported the true momentum in the market since local governments are pressured to control local prices) that they would like to control (as opposed to exaggerate with stimulus). As we noted here, while the PBOC may prefer to be more selective with their liquidity injections (read bank 'saves' like ICBC last night) due to the preference to control the housing bubble, when they finally fold and enter the liquidity market wholesale, the wave of reflation will rapidly follow (and so will the prices of precious metals and commodities).

Dare 'Ye Test the Analysis To Ascertain It's Virility? Madness, I say! Sheer, Utter Madness! In other words - SYSTEMIC RISK is here, NOW!

The short but profitable tale of how 483,000 private individual have "top secret" access to the nation's most non-public information begins in 2001. "After 9/11, intelligence budgets were increased, new people needed to be hired, it was a lot easier to go to the private sector and get people off the shelf," and sure enough firms like Booz Allen Hamilton - still two-thirds owned by the deeply-tied-to-international-governments investment firm The Carlyle Group - took full advantage of Congress' desire to shrink federal agencies and their budgets by enabling outside consultants (already primed with their $4,000 cost 'security clearances') to fulfill the needs of an ever-more-encroaching-on-privacy administration.

Here are some of the most recent top insider dealing stories in the USA. The biggest in terms of fines!

Fractional reserve banking is unlike most other businesses. It's not just because its product is money. It's because banks can manufacture their product out of thin air. Under the bygone rules of free market capitalism, only one thing kept banks from creating an infinite amount of money, and that was fear of failure. Periodic bank failures remind depositors of the connection between risk and reward. What is not widely appreciated is that the ensuing government bailouts allowed an underlying shadow banking system to not only survive but grow even larger. To the frustration of Keynesians, and despite an unprecedented Quantitative Easing (QE) by the Federal Reserve, conventional commercial banks have broken with custom and have amassed almost $2 trillion in excess reserves they are reluctant to lend as they scramble to digest all the bad loans still on their books. So most of the money manufactured today is actually being created by the shadow banks. But shadow banks do not generally make commercial loans. Rather, they use the money they manufacture to fund proprietary trading operations in repos and derivatives. No one knows when the bubble will pop, but when it does a donnybrook is going to break out over that thin wedge of collateral whose ownership is spread across counterparties around the world, each looking for relief from their own judges, politicians, bureaucrats, and taxpayers.

Peak collateral is just a notion - one we have discussed in detail many times (most recently here). The notion that at the time we want yield and growth we are running out of collateral which is supposed to underpin the high yielding assets and loans. Such a shortage would cause the ponzi-like growth that is necessary to sustain a bubble, to stall and then implode. We think our lords and rulers know this and have decided that it must not be allowed. And this – the need for collateral – is the reason for the endless QE. If this is even close to the mark, then recent murmurings about the Fed tailing off its bond buying will prove to be hollow. The Fed will quickly find it cannot exit QE without precipitating precisely the disorderly collapse, to which it was supposed to be  the solution.

Through most of the 20th century, America led something of a charmed life, at least when compared with the disasters endured by almost every other major country. We became the richest and most powerful nation on earth, partly due to our own achievements and partly due to the mistakes of others. The public interpreted these decades of American power and prosperity as validation of our system of government and national leadership, and the technological effectiveness of our domestic propaganda machinery - our own American Pravda - has heightened this effect. Author James Bovard has described our society as an “attention deficit democracy,” and the speed with which important events are forgotten once the media loses interest might surprise George Orwell.

• Global shares sink, following 7.3 percent drop in Japan's Nikkei (Reuters)
• When all fails, pull a Kevin Bacon: Japan Economy Chief Warns Against Panic Over Stock Sell-Off (BBG)
• White House Feeds IRS Frenzy by Revising Accounts (BBG)
• In any scandal, lying to Congress is tough to prove (Reuters)
• Debt limit resets at higher level, budget impasse grinds on (Reuters)
• China factory data to test political calculations (FT)
• European Leaders Saying No to Austerity (BBG)
• And yet, nobody wants in anymore: Iceland’s new coalition government suspends EU accession talks (FT)
• Oil Manipulation Inquiry Shows EU’s Hammer After Libor (BBG)
• The Fed Squeezes the Shadow-Banking System (WSJ)
• Diamond Said to Weigh Backing Barclays Alumni in Venture (BBG)
• Spain’s Private Jets Disappearing as Tycoons Cut Flights (BBG)

News That Matters - Today's news in brief

... the Bank of Israel!

• Pentagon Plans for the Worst in Syria (WSJ)
• Russia and US agree to Syria conference after Moscow talks (FT)
• Hedge Funds Rush Into Debt Trading With $108 Billion (BBG)
• Detroit is the new "deep value" - Hedge funds in search of distress take a look at Detroit (Reuters)
• Commodities hedge funds suffer weak first quarter (FT)
• But... but... Abenomics - Toshiba posts 62% decline in Q1 net profit (WSJ)
• Americans Are Borrowing Again but Still Less Than Before Freeze (WSJ)
• Man Utd announce Alex Ferguson to retire (FT)
• Asmussen Says ECB Discussed ABS Purchases to Spur SME Lending (BBG)
• Benghazi Attack Set for New Review (WSJ)
• Belgium Says 31 People Arrested Over $50 Million Diamond Theft (BBG)
• Brazilian diplomat Roberto Azevêdo wins WTO leadership battle (FT)
• Bangladesh Garment Factory Building Collapse Toll Reaches 782 (BBG)