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Top 10 at 10: The US$4 trln toxic debt problem; the giant fraud on US taxpayers; the Dubai lie
April 13th, 2009Here’s my top 10 links from around the Internet at 10 am. I welcome your suggestions in the comments below.
1. The Americans are up to their old (Smoot Hawley) protectionist tricks again, launching an anti-dumping action against Chinese steel imports, Bloomberg reports. Perhaps China should call America’s bluff and pledge not to fund the ballooning American budget deficit? American politicians speak with forked tongues on free trade all the time. Obama pledges not to make the mistakes of the past and then his officials, egged on by lobbyists, launch trade restrictions regularly. New Zealand should avoid being dragged into a ‘Free Trade’ Agreement with the United States and stick instead to the much fairer WTO processes.
2. Nouriel Roubini at RGE points to the recent reports that the IMF will revise its forecast of toxic debt to US$4 trillion and concludes the recent stock rally was unjustified. Here’s a taste.
Banks are benefiting from close to zero borrowing costs; they are benefiting from a massive transfer of wealth from savers to borrowers given a dozen different government bailout and subsidy programs for the financial system; they are not properly provisioning/reserving for massive future loan losses; they are not properly marking down current losses from loans in delinquency; they are using the recent changes by FASB to mark to market to inflate the value of many assets; they are using a number of accounting tricks to minimize reported losses and maximize reported earnings; the Treasury is using a stress scenario for the stress tests that is not a true stress scenario but rather a benchmark of what the economy is likely to look like in 2009 and 2010; a true stress scenario would have considered a much more serious economic downturn.
3. This is compulsory reading from Christopher Whalen, an independent banking analyst at Institutional Risk Analytics (IRA). It’s a few weeks old, but essentially says the Obama/Geithner/Bernanke approach to fixing the banks amounts to a massive transfer of wealth from taxpayers to bank bond and shareholders. He points out it is happening without any public debate and risks being politically unsustainable (ie tax revolt tea parties and riots). Here’s a taste.
We see two issues facing Bernanke, Geithner and the Obama Administration when it comes to the cowardly “feed the zombies” approach articulated last week. First, it is not sustainable financially and must eventually be changed because of funding constraints. And two, the policy of subsidizing the bond holders of the largest banks is unworkable politically and must eventually also be changed to conform with domestic political reality. That’s right, at some point the Obama Administration may need to choose between our foreign creditors and American voters.
The Bernanke/Geithner approach to not dealing with the financial crisis amounts to a hideous public subsidy of the global transactional class, a transfer of wealth from American taxpayers to the institutional investors who hold the bonds and derivative obligations tied to the zombie banks, AIG and the GSEs. All of these companies will require continuing cash subsidies if they are not resolved in bankruptcy.
Remember that the maximum probable loss (“MPL”) shown in The IRA Bank Monitor for the top US banks with assets above $10 billion, also known as Economic Capital, is a cash number representing the amount of incremental capital the banks may require to absorb the losses from a 3-4 standard deviation economic slump, such as the one we have today. If you include the subsidy required for the GSEs and AIG, the US Treasury could face a collective funding requirement of US$4 trillion through the cycle. Do Ben Bernanke and Tim Geithner really believe that they can sell such a program to the Congress? To put it in perspective, the US$250 billion in the Obama Budget for additional TARP funds will not quite cover Citigroup.
4. I also strongly recommend these 3 videos. They are three chunks of a 30 minute interview on PBS with William Black, a former regulator from the Savings and Loan crisis of the 1980s. He describes the bailout as a fraud and Geithner as someone who has never done anything right. Frightening stuff from a very serious guy. Watch it if you want to understand the disaster unfolding for US taxpayers and the global financial markets.
5. Two more US banks were closed this week. One was the ‘Cape Fear Bank’ in North Carolina. I’m not kidding. A marketing nightmare from day one.
6. Barack Obama has pushed aside Paul Volcker as an adviser, the WSJ reports. A pity as this guy helped rescue the globe from stagflation in the late 1970s.
7. The protests are beginning in the United States, with nationwide rallies planned for Sunday. It is turning into an unholy alliance of the far left opposed to big bailouts for Wall Streeters and the far right opposed to massive government and deficits. Here’s what they’re proposing. It’s something both the left and the right can get behind.
NATIONALIZE: Experts agree on the means — Insolvent banks that are too big to fail must incur a temporary FDIC intervention – no more blank check taxpayer handouts. (see Krugman on nationalization)
REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused. (see Simon Johnson on reorganizing)
DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place– new banks, managed by new people. Any bank that’s “too big to fail” means that it’s too big for a free market to function. (see Mike Lux on decentralization)
8. Here’s the real story behind Dubai, in this excellent piece from The Independent.
9. We may never know how stressed the US banks are. The US Federal Reserve has ordered the banks not to disclose the results of stress tests being conducted by the US government, Bloomberg reports.
H/T Rolfe Winkler at Option ARMageddon.
10. The recession is not over, says Paul Krugman at the New York Times.
Tags: Ben Bernanke, Cape Fear Bank, Christopher Whalen, Congress, Do Ben Bernanke, Dubai, Obama Administration, Paul Krugman, Paul Volcker, Tim Geithner, Top 10 at 10, William Black
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April 13th, 2009 at 10:28 am
Bernard,
http://watch.bnn.ca/#clip158793
Canadian business news show from 7th April features a bunch of bears, including Nouriel Roubini.
Title of the show is along the lines of “Bear Attack”.
Meredith Whitney on the second segment. Nouriel on the first segment.
Meredith Whitney makes observations about 14:30 into the second segment around Credit Card lines of credit. She estimates over 2 Trillion dollars in CC lines of credit will end up being cut. Talks about the psychological impact to the consumer of having their “What If” line of credit cut. That is, what if I have to have a month off work…Well I have 10K available on my credit card…D’oh, not any more…
April 13th, 2009 at 10:59 am
Bernard,
quite a few bloggers have been noting the way banks are being smuggled money via AIG.
Deninger / Mike Morgan / Mish Shedlock.
Quite a few. For an example, there is this article linked from a Chris Martenson forum
http://seekingalpha.com/article/128390-exclusive-big-banks-recent-profitability-due-to-aig-scam
Any bets on how good Citibank’s profit for the first quarter is going to be? And any correlation with the AIG transactions?
April 13th, 2009 at 12:01 pm
Hi Bernard,
).
When you mention that the left and right are in an “unholy alliance” you make the assumption that the old left-right political spectrum still exits (if it ever did exist). The ideological split between left and right effectively died with the demise of the Soviet Union in 1991 (and I happened to be in Moscow when the August Coup occurred). What currently exits is different forms of capitalism with different goals and aims. Some are more society focused (the “left”) and the others more individual focused (the “right”). Both are seeking the same thing an improvement in the world just at different levels – a utopia. Both are based on human arrogance and belief that the human race is the most intelligent creature on the planet. John Gray described the human race as “homo rapiens” , self interest is the heart of the unholy alliance each side is just looking out for number one (and no I’m not being cynical
Edmund
April 13th, 2009 at 12:41 pm
these are worth a look,
Did Obama take a bow?
http://informationclearinghouse.info/article22386.htm
The web site Goldman Sachs wanted taken down-
http://www.goldmansachs666.com/http://www.goldmansachs666.com/
April 13th, 2009 at 1:58 pm
Christopher Whalen is ONTO it:
“….The Bernanke/Geithner approach to not dealing with the financial crisis amounts to a hideous public subsidy of the global transactional class, a transfer of wealth from American taxpayers to the institutional investors who hold the bonds and derivative obligations tied to the zombie banks, AIG and the GSEs…..”
And, as he says, not a peep from the MSM?
I have been banging on about this for weeks, posting comments on blogs in the USA as I get time.
For example:
http://www.freerepublic.com/tag/by:philbest/index?tab=comments;brevity=full;options=no-change
April 13th, 2009 at 4:35 pm
Steve Keen has put up another compelling read…
http://www.debtdeflation.com/blogs/2009/04/13/talk-to-the-fabian-forum-the-global-financial-crisis-how-bad-will-it-get/
andrewj – supports your view on debt being the issue that has to be addressed.
April 13th, 2009 at 7:11 pm
Gibber
thanks its great to be in such esteemed company.
The problem I have is that when you accept debt is the problem then you need to ask yourself how do we reduce our debts. Two ways, bankruptcy or by paying back principal and interest. Then we run into some big hurdles because our Govt has grown huge in the last few years.( nearly half of us work for the state,indirectly it must be huge.)
We now live in a country of consumers and much of our economy is based on consumption, almost 1/2 of us work for the state. More debt repaid= less consumption = less employment = falling tax take.
Now the Govt has to either increase taxes or borrow more to meet the increasing demands on a welfare state. Eventually the Govt has to cut its expenditure meaning well paid jobs in the state sector go that dont exist in the commercial world = a large drop in income for many state employees. Somehow in all of this it has to try and increase exports.
So we end up in a world of falling real wages at a time when debt is way to high. Govt is forced to borrow heavily, increasing interest rates leading to eventual default and IMF taking over. $ collapses, inflation rates go sky high,house prices collapse and even more pressure is applied, we all get a lot poorer. Im intrigued by the debate on housing but every body needs to recognise its a debt problem.
Our Agricultural base has at the same time enjoyed its own unsustainable bubble,it wont be there to help us. Maybe we should all move to the south Island and sell the North to the Chinese.
the great, Steve Keen
http://www.debtdeflation.com/blogs/2009/04/13/talk-to-the-fabian-forum-the-global-financial-crisis-how-bad-will-it-get/
Putting 290% of GDP in context, in terms of debt levels, that is 60% higher than the peak debt reached during the Great Depression in America and about 120% higher than it reached when the Depression began. The reason the ratio was that high during the Great Depression was because the level of debt caused a period of deflation. And that deflation and collapsing output meant that even though Americans reduced their nominal debt levels from 1929 to 1932, their indebtedness relative to their income rose from about 175% of GDP to 235% of GDP. Now, we’re starting this crisis at 290% of GDP
I know that, again having some conversations with Reserve Bank staff, their attitude was, and this in print from the current Governor in a hearing before the House of Representatives committee about 3 or 4 years ago, that there’s an inverse relationship between debt servicing and interest rates. So, when interest rates fall, debt will rise. And when interest rate rise, debt will fall.
That’s not at all what happened, unfortunately. A good look at the data shows simply an exponential take off of debt to GDP, independent of what interest rates were doing. If you simply look at the ratio of debt to GDP, and do a regression on that, using an exponential function, you’ll find a correlation between a simple exponential growth of that ratio and the actual data of .9912.
It’s changing direction now. In Australia’s case the level of debt to GDP, is almost 3 times what we had prior to the Great Depression. And there I come to a strong criticism of how our Reserve Banks have behaved. Because they have ignored the actual dynamics of the capitalist economy, because they haven’t understood them, they followed the wrong theories. I might actually add, without knowing that there are alternative theories. Because they’ve done that, they’ve ignored the actual problem as it’s run away from us.
And therefore their decisions have actually encouraged the financial system to get back on the speculative band wagon when they should have been kicking them off it in the first place. If you look at the data, I think it’s fairly convincing if we hadn’t had central banks then in 1987 we would have had a crisis about the same size or smaller than the Great Depression. It would have been attenuated by the scale of government. That would have turned us around. We’ve gone another 20 years and we therefore, I think, face a crisis which is bigger than the Great Depression and of which our managers of the economy have less of an idea of how the economy functions, than we had back in 1929.
It’s going to be a long one. Thank you.
April 13th, 2009 at 8:20 pm
Good link bernard I have just listened to an interview that William K Black gave to Alex Jones a few days ago scary stuff my advice to everyone is huncker down and pay off debt as soon as you can and dont be fooled by the crap comeing forth from RENZ,the banks,the reserve bank etc etc
BAZ
April 13th, 2009 at 8:20 pm
Andrewj – your link to the site that Goldman Sachs is trying to have shut down was a bit wonky. Here it is again:
http://www.goldmansachs666.com/
And here are some further allegations from the never-dull market ticker, Karl Denninger
http://market-ticker.denninger.net/archives/953-Goldman-and-other-banks-Hedges.html
Some of these allegations need some serious investigating, if only to separate the fact from the fiction.
Come back Elliot Spitzer, all is forgiven!
April 13th, 2009 at 8:33 pm
Nikki truth is stranger than fiction these allegations are most likley at the lest true these people are just plain thevies and robbers and they also put Obama into office’
Baz
April 13th, 2009 at 10:15 pm
Hi Baz – According to the William Black interview it seems that Wall Street may have had a hand in putting the last few administrations into office…
http://www.pbs.org/moyers/journal/04032009/watch.html
April 13th, 2009 at 10:23 pm
Another William Black interview.
This one dated April 12th
http://online.barrons.com/article/SB123940701204709985.html
and discussed at
http://www.financialarmageddon.com/2009/04/too-naive.html
“We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.”
April 14th, 2009 at 7:29 am
Hi,
Why does this sound like a conspiracy theory? Is there any evidence or just someone’s opinion? Is the evidence being selectively present and used to fit the theory? Hard facts, why don’t we throw the Illuminati, the Easter Bunny and Santa into the mix as well. I suspect there is myth making going on here, I don’t think that the bankers et al have the ability to coordinate and conduct a conspiracy as outlined above. I think it is people just trying to make sense of a chaotic world, by joining dots by tenuous facts and theories – creating certainty in an uncertain world.
Edmund
April 14th, 2009 at 7:40 am
http://informationclearinghouse.info/article22407.htm
this on US $ printing from Fox
April 14th, 2009 at 9:12 am
An interesting graph tracking the falls in the markets.
“The Great Depression” dropped a staggering 89% over 34 months
http://dshort.com/charts/bears/four-bears-large.gif
We are half through that time line and at 57%, but my worry is that huge drop in month 2, that was the panic, we have not seen the panic yet….Govns are trying to prop things up, what happens if they fail? I think the greedy and desperate are still in there hanging on expecting a Govn bailout of thier losses….
April 14th, 2009 at 5:39 pm
Come on Edmund most of us havent seen Santa or the easter bunny but Andrews link with that of Nikkis link clearly show that there is something going on behind the wall maybe a shadow Goverment working through the bankers these things just dont happen,there will never be a investigation just more coverups ,this Obama Guy the saviour of the world he works for wall street look at the goons that are in his team and what about the bailout king Paulson a Goldman Sachs Zoombie come on these guys are pure evil .
Baz
April 14th, 2009 at 9:58 pm
Hi Baz,
Sorry I still see a conspiracy theory with no facts, sorry
Edmund
April 14th, 2009 at 10:39 pm
Edmund the facts are everywhere you have just seen the mother of all bailouts by the tax payer in the USA to bankrupt banks,A private banking system called the federal reserve, Trillons of dollars pumped into a dead system more will be required, the printing of more paper the list goes on and on and the bankers are also having good first quarter results . you also have Gordon Brown calling for a new world order this is all out there in full view they even anounce what they are going to do. Its all there for you Edmund theres nothing hidden.
Baz
April 15th, 2009 at 7:22 am
Baz
I see incompetence and a lack of understanding of risk and the models/tools that were used to manage the “risk”. The quants who devised the tools were very aware of the limitations of the tools they were creating, the people who used them were not. The tools / software where a “black box” to the empty suits – they had no understanding of the assumptions nor the process by which they were valuing risk, therefore they miscalculated risk and exposed the financial system to a greater degree of risk than was actually realized. Sure the bankers have been trying to protect their “position” by devising schemes to get out of the hole they are in – but not very effectively, people are angry and the bankers are so dumb they haven’t woken up and smelt the roses yet. Sorry no conspiracy – just incompetence.
Edmund
April 15th, 2009 at 11:31 am
@ Edmund – I don’t buy the Conspiracy theory, but I do believe that the US finance industry has basically raped it’s own country. Get a copy of the book “Maxed Out” by James Scurlock and read it. You will get a good feel for the depth of the US debt nightmare. Sadly, the whole sorry saga will affect the whole world.
Wall Street made so much money and used that money to buy influence in Washington.
April 16th, 2009 at 7:26 am
Trev,
Sure the finance industry over the entire world is partly to blame – consumers are to blame also, but the main concern I have is the quality of the information that is being presented as fact. Many of the websites (and books) on the internet contain vast amounts of spin – the internet was once described as ” a herd of performing elephants with diarrhea- massive, difficult to redirect, awe-inspiring, entertaining, and a source of mind boggling amounts of excrement when you least expect “. I don’t watch the six o’clock news any more because of the spin, ambulance chasing and general disgust at the quality of the news – I skim read the internet news, and read that which I find interesting. Humans I think are more intelligent than that, but the numbing down of our society I find very sad and disturbing – the ability to critically think is being lost (or not taught).
Edmund
April 19th, 2009 at 12:20 pm
those videos seem to have been withdrawn from U Tube?
April 20th, 2009 at 11:57 am
jh – try here:
http://www.interest.co.nz/ratesblog/index.php/2009/04/07/housing-bubbles-deceit/
April 20th, 2009 at 12:23 pm
@ Edmund – Thoroughly agree with you. Especially re the 6 o’clock news, the fact that they report a strengthening of our currency as good news is particularly irritating, especially in the current crisis/recession/depression.