DERIVATIVES BEAST ATE THE BANK TESTS!

 

gsucksx1I am certain most of the banks taking the recent bank test, failed.  So how to deal with this?  Sweep the tests under the rug?  Run and hide?  Tell us, ‘The dog ate my test!’  So many options and so few realistic ones!  And Keith Taylor sent us a cute Goldman Sachs cartoon.  

 

Bank Regulators Clash Over U.S. Stress-Tests Endgame (Update1) – Bloomberg.com

 

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests of 19 U.S. banks, with some officials concerned at potential damage to weaker institutions.

So many parts of our political/economic/military systems are so screwed up, nearly all things are hard to disclose.  This is because the news is nearly always bad.  So there has to be a way of framing the news so people don’t notice that we are all on this sinking Titanic.  On the Titanic, the captain decided to have the orchestra play MERRY tunes!  This way, no one would be too alarmed to see the decks shifting to a 45 degree angle.


With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements,–obviously, NO ONE wants THAT role!—people familiar with the matter said. While the Office of the Comptroller of the Currency and other regulators want few details about the assessments to be publicized, the Treasury is pushing for broader disclosure.

The OCC also tracks the immense Derivatives Beast. For years, they charted the massive growth of this creature and did absolutely nothing to stop it.


The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

 

This reminds me of a famous play by Ibsen:  An Enemy of the People 

 

Dr. Thomas Stockmann is the popular citizen of a small coastal town in Norway. The town has recently invested a large amount of public and private money towards the development of baths, a project led by Dr. Stockmann and his brother, the Mayor. The town is expecting a surge in tourism and prosperity from the new baths, said to be of great medicinal value, and as such, the baths are the pride of the town. However, as the baths are starting to succeed, Dr. Stockmann discovers that waste products from the town’s tannery are contaminating the baths, causing serious illness among the tourists. He expects this important discovery to be his greatest achievement, and promptly sends a detailed report to the Mayor, which includes a proposed solution, which would come at a considerable cost to the town.

But to his surprise, Stockmann finds it difficult to get through to the authorities. They seem unable to appreciate the seriousness of the issue and unwilling to publicly acknowledge and address the problem because it could mean financial ruin for the town. As the conflict ensues, the Mayor warns his brother that he should “acquiesce in subordinating himself to the community.” Stockmann refuses to accept this, and holds a town meeting at Captain Horster’s house in order to convince the people to close the baths.

The townspeople – eagerly awaiting the prosperity that the baths are believed will bring – refuse to accept Stockmann’s claims, as his friends and allies, who had explicitly given support for his campaign, turn against him en masse. He is taunted and denounced as a lunatic, an “Enemy of the People.” In a scathing rebuke of both the Victorian notion of community and the principles of democracy, Dr. Stockmann proclaims that in matters of right and wrong, the individual is superior to the multitude, which is easily led by self-advancing demagogues. Stockmann sums up Ibsen’s denunciation of the masses, with the memorable quote “…the strongest man in the world is the man who stands most alone.”

 

Instead of closing the baths, we must close banks.  Instead of closing banks, they are being kept open despite being obviously bankrupt.  How to hide this bankruptcy while pretending to be open and searching for flaws in the banks?  Ah, that is quite a riddle.  Maybe, we should write an updated play about this.  Starring Bernanke and Geithner with Obama as the present town mayor while Bush is the previous one who set up the diseased banks.

 

Credit-Swaps Sellers Take Beating on Latest Auction (Update1) – Bloomberg.com

 

Credit-default swaps traders set a value of 3.25 cents on the dollar for bonds of an AbitibiBowater Inc. unit to settle derivatives linked to the newsprint maker that’s now in bankruptcy protection.

Three cents on the dollar???? Wow.  HAHAHA.  Well, will we pay up on this stupid deal that should never have seen the light of day in the first place?  This is the burning question.  Since this entire system is totally crummy, it should never had been allowed.  The vast sums of corruption money that flowed like a sewer in to all the major governments on earth, to allow this system to be developed and not regulated, is many billions.  But the Derivatives mess is hundreds of trillions of dollars in size!

The price means sellers of credit swaps guaranteeing as much as $1.1 billion against a default by the Abitibi- Consolidated unit would pay 96.75 cents on the dollar to settle the contracts. Eleven dealers, including JPMorgan Chase & Co., Barclays Plc and Morgan Stanley, bid in the auction, which was administered by Markit Group Ltd. and broker Creditex Group Inc.

I used to track the Markit site for this sort of information. Now, it is closed to outsiders.  Like the M3 data, the guys who are messing up the systems get all the new information while we are locked outside the Cave and have to guess at what the hell is going on inside.  So we listen to screams and wails. 

A combination of rising defaults and shrinking recoveries that are set through the auctions mean credit-protection sellers since the collapse of Lehman Brothers Holdings Inc. in September have lost as much as 70 percentage points more than rating services estimate the debt is worth.

How can the Government do a stress test on banks if any of them hold any derivative deal contracts and counterparty deals?  It is obvious, they are ALL screwed and royally screwed.  There is no escape.  Undoing this immense mess is like cleaning up after a motorcycle gang has destroyed a bar and then burned it down.  Can’t be done.

“Clearly, if you’re a seller of credit-default swaps in an auction, you are getting your head handed to you,” Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago, said in an interview before today’s auction. The potential for losses because of low recoveries “was underestimated, particularly on highly leveraged companies,” she said.

‘Highly leveraged’ is code for ‘deep in gambling debts.’  People took a gamble that there would not be any defaults and the raging derivatives market that grew in leaps and bounds due to the proliferation of pirate island hedge funds getting free loans from the Japanese carry trade meant, no one would ever pay off, they all bid up and up and up!

Losses on these derivatives, which insure a net $2.6 trillion of debt, may mount as the recession that started in December 2007 causes defaults on high-yield bonds to reach 14.6 percent by the fourth quarter, from 4.1 percent at the end of 2008, according to Moody’s Investors Service.

 

Time to look at official Fed graphs again:

 

St. Louis Fed: Series: DCBCCA, Corporate Business Capital Consumption Adjustment

picture-53

From WWII until Nixon cut the gold/dollar peg and the fiat currency was born, business capital consumption went through a brief fall below the 0 peg during the inflation/stagnation years of the 1970 bear market.  Then, it shot off as new ‘instruments’ were created that exploited the WEAKNESSES of the floating currency regime.  Especially instability between trade currencies and interest rates.  This reached its peak in the summer of 2003 to the spring of 2004.  This was right when the housing bubble really began in earnest.

 

By 2006, it was collapsing, big time.  At that time, the stock market was still heading towards its August/September 2007 peak!  But the capital consumption had already fallen MORE THAN HALF WAY to its bottom in September/October of 2008.

 

These obvious signs of distress were utterly ignored in early 2007.  I noted this at my other Culture of Life News blog at Typepad.  The psychotic need to lie about events is very, very strong.

 

Fed’s Flood May Leave Democracy Needing Bailout: Kevin Hassett – Bloomberg.com

 

Here’s a sketch of how it works. Many financial institutions have reserve accounts with the Fed. If one of them shows up with an asset it wants to ditch, the Fed takes it and ratchets up the balance in the reserve account. This means that the Fed is effectively summoning cash out of thin air to purchase the assets.

HAHAHA.  The entire system is ‘out of thin air’ since we killed the gold peg.

In isolation, such a move might be inconsequential. But the scale of this end-around is enormous. The Fed’s balance sheet is closing in on $2 trillion and stands ready to skyrocket above that. Last month, for example, the Fed committed to buy more than $1 trillion in mortgage-backed securities…

We should rename the Federal Reserve, ‘The Bank of Last Resort’.

Traditionally, the Fed might withdraw reserves by selling some of the Treasuries it owns. But the scale of the money creation is so grand this time that the Fed might not be able to sell enough Treasuries to meaningfully affect inflation without running up against the debt limit that Congress sets when it gives Treasury the authority to borrow money.

 

Hey, the Chinese aren’t buying!  Nor are the Japanese. I said two years ago, Japan can’t buoy up US overspending by itself.  Only if China joins, can they do this trick.  Well, China isn’t buying US Treasuries, they are buying other, much better stuff, all over the planet.  Here is another Fed graph:

 

St. Louis Fed: FRED GRAPH

picture-64

Public debt is skyrocketing.  It is an evil ‘hockey stick graph’.  These sorts of graphs all end the same way: total collapse and a sudden turn downwards. They don’t go to infinity.  Perhaps even the Universe, itself, can’t do this and will collapse inwards.

 

ECB’s Trichet Won’t Exclude Cut, Says Zero Rates Inappropriate – Bloomberg.com

 

“In the last press conference I said that we did not exclude to engage in a further decrease of rates which would be ‘very measured,’” Trichet said in response to a question in Tokyo today. “I have nothing to add to what I said in my last press conference.” Policy makers don’t consider that “a zero rate policy would be appropriate” for the ECB, he said.

ZIRP continues to expand.  It is like a black hole.  The Fed, like the Bank of Japan, is in a trap.  If they raise rates to kill inflation, everyone will go bankrupt.  Japan is very deep in debt despite having an immense sovereign wealth fund.  And the US is simply going bankrupt.

The bank this month cut its benchmark rate less than economists had forecast, by a quarter point to 1.25 percent, and delayed a decision on new, so called non-standard policy tools such as purchases of debt securities until May 7…

The European Central Bank governor said yesterday the ECB would do everything possible to restore confidence and prosperity….

Trichet said European inflation expectations were “anchored.” The most recent reading of inflation expectations in the euro area was 1.9 percent, near the central bank’s target of below or close to 2 percent, he said. Since the euro was established, inflation expectations oscillated between 1.7 percent and 2 percent, he said.

 

Everyone claims to hate inflation.  This means, they will topple into depression.  But we hate this, too.  So they figure, jiggering interest rates will prevent inflation yet, not fall into depression.  But the train has long left the station.  When Japan had an immense bubble which popped, they tried to export their way out of the mess.

 

Now, it is impossible for them to do this.  They need the US and Europe to run deep in the red so Japan can pay off all its bad deals.  Instead of facing this and dealing with it, both Japan and the other G7 powers decided to blame China, not themselves, for the mess that began to unfold.  When Japan collapsed into the ZIRP system first, China was barely a blip in world financial markets.

 

Asia Times Online :: Central Asian News and current affairs, Russia, Afghanistan, Uzbekistan

The global downturn is spreading to Central Asia. It may lead to a marked shift of fortune in the Great Game for control of Caspian energy reserves. On the surface, the intensity of the rivalries may appear to have subsided, as the principal protagonists – Russia and the West – brood over the precarious state of their own finances and prioritize fixing their domestic economies. 

But the slowing down of the Great Game bears a deceptive appearance. China gains out of any changing equations. Of all the major economies of the world, it is in China that the government’s 4 trillion yuan (US$585 billion) stimulus package may have begun showing results, which puts the economy in a “better-than-expected” shape, as Premier Wen Jiabao said on Thursday. 

CHINA HAS SOVEREIGN WEALTH AND POWERFUL LEADERS WHO HAVE HIGH INTELLIGENCE LEVELS.  We chose a total dunderhead for President in 2000 or rather, the Supreme Court crowned him king.  We kept this court jester for 8 long years of total incompetence at nearly every level.  Now, we are in super-trouble and our new king has courtiers who are either corrupt, criminal or are working for Israel.

China’s prospects as the first major economy to recover gives it a crucial role to lead the world economy as a whole and the Central Asian region in particular. Following up on a $25 billion loan to Russia that China dished out in February, it has agreed to lend $10 billion to Kazakhstan. China expects both the recipients to reciprocate by bolstering their energy supplies to China. 

Sovereign wealth, not derivatives, is the ultimate driver of both international markets as well as international banking systems.  Period.  Anyone who thinks banks can run with virtually no capitalization is fooling themselves.  History is extremely severe about this rule.  Not that anyone seems to listen to her!

 

St. Louis Fed: Series: DGI, Federal National Defense Gross Investment

national-defense-gross-investment

We decided to park our own sovereign wealth in our military.  Instead of being the world’s bank, we decided to be the world’s looting operation.  We thought, if we could win control of OPEC, we would then rule the planet and suck down all energy system profits.  Alas, poor Yorik!  Yikes.  Well, look at this graph!  From Eisenhower to Nixon, thanks to the growing US economy and the fact that we had sovereign wealth, we had a huge military and the military/industrial mix was even in size.

 

Then it took off!  As the US budget deficit began to seriously soar, so did the DGI.  During Clinton’s years, it fell significantly. Only to take off just as fast as the 1970-1987 period.  And despite pretending to cut things, the Democrats are actually increasing spending by over 5%.

 

St. Louis Fed: Series: FGDEF, Net Federal Government Saving

picture-3

WHERE IS OUR SOVEREIGN WEALTH???  EH?  Under Clinton, tax revenues began to climb.  But Bush cut them drastically so we are deep in the cellar now and no hope of ever seeing daylight, again.  Note how this dire situation began with the Nixon/Burns cutting of the dollar/gold peg!

 

St. Louis Fed: Series: FGCE, Federal Consumption Expenditures & Gross Investment

picture-44

A double hockey stick graph!  If we want to see a gallery of hockey sticks bigger than the NHL, go to the Fed Reserve’s FRED@ page!

 

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  1. Pingback: DERIVATIVES BEAST ATE THE BANK TESTS! « Culture of Life News

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