Fail

Yet another whistleblower has stepped up, this time one already known to the general public, and one that Zero Hedge covered just over a month ago: we refer to the case of former CBO worker, Lan T. Pham, who, as the WSJ described in early February, "alleges she was terminated [by the CBO] after 2½ months for sharing pessimistic outlooks for the banking and housing sectors in 2010" and who "alleges supervisors stifled opinions that contradicted economic fixes endorsed by some on Wall Street, including research from a Morgan Stanley economist who served as a CBO adviser." As we observed in February, "what is most troubling is if indeed the CBO is nothing but merely another front for Wall Street to work its propaganda magic on the administration. Because at the core of every policy are numbers, usually with dollar signs in front of them, numbers which have to make sense and have to be projected into the future, no matter how grossly laughable the resultant hockeystick." As it turns out, somewhat expectedly, the WSJ version of events was incomplete. There is much more to this very important story, one which has major implications over "impartial" policy decisionmaking, and as a result, Ms. Pham has approached Zero Hedge to share her full story with the public.

Why do families persist in taking on $100,000 student loans for mostly mediocre educations with mostly mediocre "benefits" in the job market? Because they feel they have no other choice. Why do people persist in mortgaging their future and accepting the yoke of debt-serfdom to own a house? Because they feel they have no other choice, and owning a house has become integral to the "American dream." Why do local state, county and city politicos continue playing absurd budget games, shuffling funds, borrowing from their employees' pension plans to make this year's pension plan contribution and similar threadbare tricks? You guessed it: they have no other choice, lest someone somewhere feel some pain. Why do our Federal "leaders" borrow $1.5 trillion each and every year now, fully 10% of the nation's total output, knowing full well that this level of borrowing will bankrupt the nation? (Don't forget to add in the "supplemental" off-budget borrowing.) You know: they have no other choice, lest someone somewhere feel some pain. So instead they keep the accelerating vehicle pointed straight for the cliff. There are only two end-states to this level of borrowing: hyper-inflation or default. Any other "choice" is mere fantasy.

Only in a debt-based money system could debt be curiously cast as an asset. We’ve made “extend and pretend” a quaint phrase for a burgeoning market for financial lying and profiteering aimed toward preventing the collapse of a debt- (or lack-) based system that was already doomed by its initial design to collapse. This primer will detail the major components and basic evolution of fake wealth creation, accelerating debt expansion, hollowing out of the economy, and inevitable financial implosion.

The actual numbers were blockbusters.

When we announced the news of Jamie Dimon's surprising announcement, we said that "Since we are now obviously replaying the entire credit crisis, from beginning to end, must as well go all in. Now - who's next? And perhaps just as importantly, who isn't." Who isn't it turns out are 4 banks that did not pass the Fed's stress test results. These are SunTrust, naturally Ally, MetLife and... Citi. Way to earn that 2011 $15 million comp Vic! To summarize: across the 19 banks taking the test, the maximum losses are projected to hit a total of $534 billion. But at least Jamie Dimon gets to pay his dividend. Also, the European LTRO stigma comes to the US in the form of banks who do dividend hike/buyback, vs those that do not.. and of course the 4 unlucky ones that fail the stress test entirely.

CDS is once again (still) in the spotlight. We have moved on from debating whether or not a Credit Event has occurred in the Hellenic Republic, to concerns about whether the CDS market will settle without a problem. There is a lot of talk about “net” and “gross” notionals and counterparty risk.  What I will attempt to do here, is build a CDS world for you. We will look at various counterparties, the trades they do, and the residual risks in the system. It will be loosely based on Greek CDS but some liberties will be taken. None of the institutions are real world institutions (in spite of how much they sound like some people we know). It is a simplification, but to make it useful, it has to be robust enough to give a realistic picture of the CDS market/system.

• Tainted Libor Guessing Games Face Replacement by Real Trades (Bloomberg) - so circular, self-reported data is "tainted" - but consumer confidence is great for pumping a stock market?
• Japan Sets up $12 Billion Program for Dollar Loans, Increases Growth Fund (Bloomberg)
• China Hints at Halt to Renminbi Rise (FT)
• Spain Pressed to Cut More From Its Budget (FT)
• Bailout can make Greek debt sustainable, but risks remain: EU/IMF (Reuters)
• Banks to Face Tough Reviews, Details of Mortgage Deal Show (NYT)
• U.S. and Europe Move on China Minerals (WSJ)
• Use of Homeless as Internet Hot Spots Backfires on Marketer (NYT)
• Obama administration seeks to pressure China on exports with new trade case (AP)

Today, almost every financial journalist that is published in the mainstream media prefers to be steered by their controlling interests into being a “cleaner”, scrubbing clean the facts and hard evidence of every financial crime scene and of inherent risks that lurk everywhere, and instead, opting to present a rosy, unrealistic, fantasy outlook of stock markets and the global economy.

With a gentleman I am always a gentleman and a half, and with a fraud I try to be a fraud and a half.--Otto von Bismarck

A month ago Zero Hedge, based on some Goldman observations, asked a simple question: is Okun's law now terminally broken? Today, with about a one month delay, the mouthpiece of the New York Fed (which in itself is nothing but a Goldman den of central planners, and Bill Dudley and Jan Hatzius are drinking buddies), Jon Hilsenrath shows that this is just the issue bothering his FRBNY overseers. In an article in the WSJ he ruminates: "Something about the U.S. economy isn't adding up. At 8.3%, the unemployment rate has fallen 0.7 percentage point from a year earlier and is down 1.7 percentage points from a peak of 10% in October 2009. Many other measures of the job market are improving. Companies have expanded payrolls by more than 200,000 a month for the past three months, according to Labor Department data. And the number of people filing claims for government unemployment benefits has fallen. Yet the economy is barely growing. Many economists in the past few weeks have again reduced their estimates of growth. The economy by many estimates is on track to grow at an annual rate of less than 2% in the first three months of 2012. The economy expanded just 1.7% last year. And since the final months of 2009, when unemployment peaked, the economy has expanded at a pretty paltry 2.5% annual rate." Hilsenrath's rhetorical straw man: "How can an economy that is growing so slowly produce such big declines in unemployment?" The answer is simple Jon, and is another one we provided a month ago - basically the US is now effectively "printing" jobs by releasing more and more seasonally adjusted payrolls into the open, which however pay progressively less and less (see A "Quality Assessment" Of US Jobs Reveals The Ugliest Picture Yet). After all, what the media always forgets is that there is a quantity and quality component to jobs. The only one that matters in an election year, however, is the former.  As for whether Okun's law is broken, we suggest that the New York Fed looks in the mirror on that one.

While AIG FP often made the contracts look like insurance products, the banks were very careful to make sure that the products were “credit derivatives” because they needed the regulatory capital relief provided by them.  Didn’t the Fed at some point get concerned about the counterparty exposure to AIG FP?  Isn’t counterparty risk something that the Fed is responsible for monitoring (or the ECB in the case of foreign banks)?  When the Fed let MS and GS become bank holding companies and get the ability to use Fed lending programs, didn’t they ask about the AIG FP exposure?  Goldman, which always claimed it was hedged, must have had a massive short position in AIG CDS to be hedged – again, no one at the Fed noticed this?  CDS may be unregulated, but when virtually every big financial company in the world has large notionals on with AIG, huge mark to market gains on those positions, no collateral from AIG, and big shorts in AIG CDS, couldn’t someone do their job?   This should have been noticeable in 2007!

For all this talk and hype, QE 3 is nowhere to be found. And it won’t be showing up anytime soon unless a full-scale Crisis hits. The reason for this is that the political landscape in the US has changed dramatically with the Fed becoming more and more politically toxic. As a result of this, the Fed (with few exceptions)  has begun to shift into damage control mode.

Greece defaults & if it works, what makes anyone with a thirdof a synapse think that Portugal/Ireland will NOT jump in line to stiff creditors? This is more the end of the beginning than the beginning of the end of the crisis.

The Fed can get more market gains from Charles Evans than $600 billion in QE. Hey Bernanke, here’s an idea: just stop bothering with monetary policy at all give Charles Evans his own TV show. Heck, we'd get the same effect with less Dollar devaluation. 

While the general market mood is one of pre-default euphoria reminiscent of that in the pre-Lehman weekend, clouds may be brewing. As Reuters reports, "Some hedge funds have found a legal loophole they believe will force Greece to repay some of its debt in full, three sources close to the matter said on Thursday, in a move that would intensify the standoff between the country and its debtors." The loophole? A tiny €412.5 million bond issued by Hellenic Railways with a clause that "allows bondholders to argue that Greece is in default if it is trying to restructure or change the terms of its debt, the sources said. The creditors could already argue that Athens has defaulted, and if they buy up a quarter of that bond -- or enough of it not to be forced into the debt swap -- they can also then demand immediate repayment, a process known as acceleration." More: "The funds are now trying to buy up enough of the bond -- issued by state-owned Hellenic Railways and guaranteed by the government -- to force Greece to repay them in full, to the tune of some 400 million euros. If Greece refuses to do so, this may trigger similar provisions on other Greek railway bonds, potentially landing Athens with a bill of about 3 billion euros, with investors demanding immediate repayment, the sources said." Things could move very fast since the PSI results are due in 7 hours: "Sources close to Greece's negotiation fear the funds could already start the acceleration process by Friday, or next week, if they find they have a big enough majority."