By Claus Vistesen, on April 26th, 2010
Earlier this week Edward mused about whether we were about to see movements in the Greek trenches as yields on 10 year bonds rose to a record 7.76 per cent at one point and closed up 26 basis points on the day. Today, as yields on 2 year bonds flirted with the 10% marker Greece opted to call in the outstanding favor from the IMF and the EU at about as 45 billion euros ($60 billion) put up as a financial lifeline (and in an attempt to calm markets) a little over a week ago.
(quote Bloomberg)
Greece called for activation of a financial lifeline of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro’s stability and European political cohesion. The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels that undermine efforts to cut a budget deficit of more than four times the EU limit. Greek bonds and stocks rallied after the announcement.
“There was no response from the markets, either because they didn’t believe in the political will of the EU or because they decided to go on with speculation,” Papandreou said today. “The situation threatens to demolish not only the sacrifices of the people but also the regular course of the economy. All the efforts by the Greek people are in danger of being in vain.”
With national debt of almost 300 billion euros and investors demanding almost triple what they charge Germany for its 10-year bonds, Greece faces a fiscal mess that threatened to spread to Spain and Portugal, forcing the EU to set up a standby aid facility. At stake is the future of the euro 11 years after its creators gave the European Central Bank responsibility for interest rates while leaving budget policy in national capitals.
Obviously, this is more like to be the end of the beginning than the beginning and as Greece readies itself to receive the loan (which will be tallied at 5%) other countries are sitting in the holding room waiting for the doctor to call them. Spain and Portugal come immediately to mind here and it remains to be seen whether Germany or indeed the EU or the IMF have the will and capacity to take another tête-a-tête with the market as Portuguese and Spanish spreads begin to widen. Of course, we are not there yet and it is still highly doubtful that the current plan will help Greece to avoid a default.
Activating the aid and turning over economic policy to EU and IMF oversight was “a new Odyssey for Greece,” Papandreou said. “But we know the road to Ithaca and have charted the waters,” referring to the return of mythological hero Ulysses to his island home.
We should consequently remember the debt snowball here and my guess is that 5% is still way too high a levy to pay for Greece with the nature of nominal GDP growth the country can expect in the coming years as deflation is imposed on the economy. We will see soon enough, but my feeling is that part of the whole policy rigamole that will now unfold, Greece will have to “restructure” notable chunks of her debt.
Finally and on a brighter note, markets do not seem to be able to decide whether this is good or bad for the Euro. Consequently, Bloomberg’s ever flashing newsstream today pitted CMC Markets’ chief market strategist Ashraf Laidi predicting the Euro to move down to 1.27 to the USD against Commerzbank analyst Ulrich Leuchtmann who predicted the Euro to gain on the “successful” bailout.,
Well, well … place your bets accordingly gentlemen. Unlike in Greek’s case he who ultimately raises the white flag should be able to live another day.
By Eldon Mast, on March 29th, 2010
 You may remember that last year Citigroup (C) got a $25B bailout that was much bigger than the rest of the big banks. Now — about a year later — the company is about to pay dearly for the taxpayer provided lifeline.
In today’s market, the TARP’s 27% take in Citi has grown in value to $33B. And as the bank contemplates it’s payback, the ultimate size of the deal may be the largest in Wall street history… and may net U.S. taxpayers another cool $8B for their trouble. (Federal taxpayers received a 23% annualized return on their investment in Goldman Sachs when that wall street firm paid back it’s bailout.)
Leading financial firms, including J.P. Morgan Chase and Morgan Stanley, are vying to be chosen as the deal’s underwriters to gain the prestige of managing a historic stock sale as well as the fees from investors who buy the shares. To improve their chances, some big banks, such as Goldman Sachs, are offering their services to the Treasury Department at almost no cost.
The windfall expected from the stock sale would amount to a validation of the rescue plan adopted by government officials during the height of the financial panic, when the banking system neared the brink of collapse. A year ago, Citigroup’s stock hovered around a dollar a share, and the bank’s future seemed in doubt. On Friday, the stock closed at $4.31.
If the sale proceeds as planned, Citigroup would be able to cut nearly all of its ties to TARP and the Obama administration can continue to highlight the profit generated from the rescue of big banks.
“It’s unprecedented to do [a stock sale] of this size right after the financial industry has been so battered,” said one industry official on Friday. “It’s just a very bullish sign.”
Citigroup was among nine major banks that were the first to take bailout funds in October 2008, and all have returned their federal loans. In addition to these repayments, the Treasury has received interest, dividends and about $3.5 billion from the sale of warrants, which are contracts allowing a holder to buy a company’s stock in the future.
To many it is now clear that rescuing large the Wall Street firms has come at a much lower cost to taxpayers than many had expected. In fact, so far the investment program has produced all net positive results for the U.S. Treasury.
By D H Smith, on December 14th, 2009
Via the terrific Girl on the Right Blog, these helpful suggestion from A. Nonymous:
Most of us are not doing God’s work trading credit derivatives at Goldman Sachs. You may be stunned when I tell you this, because I sure as heck was when I found out: the TARP program covers none of our credit card bills. Like, zero. All of that means another tough, tough Christmas, money-wise. The desperate economy calls for desperate measures to economize at Christmas. Here are twelve ways for the twelve days:
1. The first thing to do is to keep doing more of what you’re already doing: bitching and complaining. Cry poor mouth to everyone. Tell everyone you know how tough it is. Make a Bill Clinton face while you share people’s pain and make them feel yours. Next you say, “You know, let’s make it easy this year, you don’t have to buy me anything.” Of course, that means you don’t have an obligation to buy them anything! That works with everyone except your kids.
2. Tell your young kids Santa’s not real. Kids as young as four are old enough to get real in this day and age. In Indonesia and Pakistan kids are out sewing soccer balls to support a family at that age! So just explain to them that it’s all a scam meant to con them into good behavior, tell them how much you know they wouldn’t want to connive in such a fraud, and assure them you know they’ll behave perfectly well without bribery. They’ll thank you. Someday.
3. What about the older kids? They’re all so eco-conscious these days, and that’s an opportunity for the canny cheapskate. Just tell them instead of lame games for Wii and Xbox this year, you’re saving the planet on their behalf by planting a tree with their name on it in the Amazon! You can even work up some kind of authentic-looking certificate on the computer! People in the carbon-credit business are becoming billionaires doing just that, by the way.
4. You still feel you need some real gifts? Well how about re-gifts? You’ve been given things you never opened — herbal soap, crème brûlée mix, thermal bags for keeping wine cold — pass the parcel! Just try to remember not to give it to the person that gave it to you!
5. Books are such a popular item at Christmas. So many books can be had for free! Libraries put out boxes of new, unread, unmarked books that they want to get rid of. These include books about business, money, and investing that are still very attractive and were timely when they were published last year, but are entirely irrelevant under current conditions. Also look for container-loads of books about the Bush and Clinton administrations, and anything by Dick Morris. I don’t normally advocate illegal behavior, but one exception could be Saul Alinsky’s Rules For Radicals. Bookstores are full of this one – it’s the Obama playbook! Somehow it just seems right to go in there and liberate a copy or three, comrade!
6. One of my cheap-ass friends used to always joke, “I wanted to buy you a big plant for Christmas, but GM wouldn’t sell.” What a laff riot, and it got him off the hook for ever buying anything! Of course, now GM desperately wants to sell all its plants, so the 2009 revision of that joke is, “I wanted to buy you a big plant for Christmas, but the Chinese bought them all!” Ha ha! Your friends
will be falling over, and they won’t even notice you didn’t buy a round of drinks!
7. Speaking of drinks, ‘tis the season to bend the elbow, so herewith some recommendations from Chateau Wang. First, drink cheap beer. The cheapest stuff in my local is also the original and greatest . . . it’s Miller at $3.99 a six-pack, compared to $5.29 for Miller Light. That make any sense to you? Me neither, they take stuff out and charge you more? Forget that! Next, drink cheap wine. André’s Cold Duck is back, it’s $4.99, and it’s as good as it was when you were fourteen and sneaked it in the kitchen after the Thanksgiving dinner was cleared away. (You know you did.)
8. As for food, the trick to economizing on food is not to cook any. Instead, head over to your brother’s house and scrounge Christmas dinner there. You need to go unannounced, early in the day, in case they have the same idea of coming over and scrounging from you. If that was the plan and your sister-in-law makes no move to put a turkey in the oven, give her one of your Miller’s and she’ll at least come through with some Dinty Moore. Note: If you were to show up on the doorstep at 7:00 AM, there are secondary benefits – you can reconnect with the Christmases of your childhood, when you punished everyone by getting up too early, and you’ll get breakfast too.
9. Here are the hard liquor recommendations from Chateau Wang. You want to drink cheap, cheap liquor too. The venerable and cheap bourbons and ryes from Old Huckaby, Rebel Heaven, and Elihu Walton lack the sophistication of single-malt Scotch, but they have all of the wallop! Also consider cheap and nasty tequila like Don Cheech and Señor Pepe brand – they mix great with green Gatorade!
10. You don’t feel you can scrounge 100% at your sister-in-law’s house? Try this recipe that will cost about 25 cents: Mix two cups of flour with a quarter teaspoon each of baking power and salt, and add up to two cups of water to make a heavy dough. Add a few raisins if you have any, tie it up in a clean handkerchief, and boil it in water until it’s time to go home. Then discard it. Tell them it’s the dumpling Oliver Twist had in the workhouse at Christmas. Your brother’s family doesn’t read! They won’t know! Ha ha! Give them a copy of Rules For Radicals.
11. Christmas trees are $60 at the VFW, and wreaths are $20. That make any sense to you? Me neither, so here you have many ways to go. You could wait until 4:30 on Christmas Eve, by which time the guy working at VFW will have gone home and abandoned whatever Charlie Brown Christmas trees he has left. Freebie! Option two, you may live in a place where trees are plentiful all around – neighbor’s yards, parks, and so on, if you “catch” my “drift” (wink wink!) Freebie! Another idea, if Border’s Bookstore actually survives far into this Christmas season, you may be able to buy one of the jokey artificial trees they had there last year – these things were some kind of intellectual joke, made with like a few bare wires covered in tinsel; this choice shows a certain post-modern hauteur which goes very well with Dinty Moore and Cold Duck. It’s about $5.99. But you can make it yourself, using wire coat-hangers, spray adhesive, and metallic flock or confetti. That’s a good thing!
12. Finally, we have to get control of this holiday again. Twelve days my wonderful arse! Our Jewish neighbors get by with just eight nights for Hanukkah, and even that is way too much noodle pudding. Let’s do away with this business of Christmas as a 3-month long retail opportunity. The retailers have been unloading container loads of useless crap from Yiwu, China into their Christmas displays since just after Labor Day! With the cheap and nasty Christmas I have outlined here, we can let them know that that is just not the way we want to be living anymore.
Have a happy.
By Dan McLaughlin, on November 12th, 2009
What’s A Trillion Dollars?
Economists are anticipating that the federal budget deficits will be in the trillions of dollars for a number of years. There are estimates that, with all federal efforts combined, the bailout and stimulus packages will be upwards of $7 trillion. I wonder if politicians who are so cavalier about using taxpayer money actually know how much a trillion dollars really is.
According to the Bureau of Engraving, a dollar bill is .0043 inches thick. That means that a stack of 100 new dollar bills would be .43 inches tall. A thousand is 4.3 inches. A million is a thousand thousands, so a million dollars is 4,300 inches. Converted to feet, that is about 358 feet high. A trillion is a million millions, so a trillion dollars would be a stack of money 358 million feet tall. If you convert that to miles, the dollar stack would stand 67,866 MILES high! It would wrap around the equator more than two times.
For another perspective, I saw an ad in the paper just this morning, offering bread for $1.99 per loaf. A loaf is 4 inches tall, so one dollar will buy a 2 inch tall loaf of bread. If, instead of using .0043 inches, the thickness of a dollar bill, we substitute 2 inches, the thickness of a loaf of bread that 1 dollar will buy, we get a much more dramatic view. A stack of bread that $1 trillion can buy would reach up more than 31 million miles. Given the price of $2 per loaf, that would be 500 billion loaves of bread.
Considering that there are roughly 300 million people in the United States, that is enough bread to give about1600 loaves to every man, woman and child in America. It is enough to give each of the 6.5 billion people in the world 77 loaves apiece. Our politicians certainly don’t buy loaves of bread with the money. So where does it go? Where does it come from?
The answer to the second question is that it comes from out of thin air. Modern money is the creation of the monetary authorities, in the case of America, the Federal Reserve and fractional reserve inflationary credit. Money is only as valuable as the goods it can be used to buy. Wealth and prosperity only come from production and never, under any circumstances, from money created by a central bank. When more money is made from nothing, with no increase in production, the primary effect is to increase prices. More dollars in the system changes the ratio of dollars to goods, and prices have to rise.
Prices should be decreasing significantly at this point in the downturn, lowering the cost of living for everyone, making everything easier to buy. They are, however, being propped up by your government. They are also establishing the next big wave of the cycle, and the choice in the near future will be runaway inflation or excruciatingly high interest rates.
Not too many years ago, the outrage was over politicians’ callousness when dealing in terms of billions. Billions lead to trillions, which lead to tens of trillions, then hundreds of trillions. Zimbabwe has put it in high gear with an inflation rate of over 1 million percent per year. Their government destroyed their monetary system and economy by making lots of money out of thin air.
We may never get to the point where we have a million percent inflation rate, but if we don’t start holding our elected officials accountable, they will destroy our economy, even more so than they have so far. From the ridiculous and irresponsible things that they keep doing, that destruction actually seems to be their goal.
The first question above, where does all the money go, is a very good one. It’s all a deep, dark secret. In spite of the rhetoric about transparency, you won’t really see where most of it goes. I’m sure that bailout millionaires will be grateful for your contribution to their investment fund.
A trillion dollars is an incredible sum of money. Incredible sums invite incredible abuse. Maybe something good will come of this whole mess. Just maybe, the people of this country will finally see through the scam that both Republicans and Democrats in congress have been perpetrating for decades. Maybe we will start to see some real change in the next few years when hundreds of crooked Washington politicians are kicked out.
Hey, anything’s possible when people use their heads, isn’t it?
By Eldon Mast, on October 27th, 2009
This past week Warren Buffett said that is is now very clear that the low point in the US economy has already passed, with “enormous” progress being seen over the past year.
Buffett attributes much of the strong uptick to swift government action last fall and winter. The actions were paramount in keeping the economy from complete collapse.
“We made enormous progress since a year ago… What happened in September and October of 2008 will particularly be remembered for a long, long time,” Buffett said in an interview with Business Wire CEO Cathy Baron Tamraz that was released late in the day Tuesday.
Buffett continued, “And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff.”
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By Eldon Mast, on July 23rd, 2009
Federal taxpayers received a 23% annualized return on their investment in Goldman Sachs. On Wednesday Goldman announced that calculation by combining the interest it paid before repaying the Treasury’s $10 billion principal loan with the warrant buyback payments it made this week.
Goldman as led the way this week with surprise Q2 earnings… profits made on the back of government support for the firms.
Several analysts agree that Sachs paid fair value for the warrants. But JPMorgan Chase continues to haggle with the government over the value of its warrants. Whether or not JPMorgan ultimately settles or forces the government to auction the warrants on the open market, the TARP program is certainly turning out to be a boon for taxpayers.
By Eldon Mast, on July 13th, 2009
On Friday it was announced that State Street Corp. became the first of 10 large banks to repurchase warrants held by the US Treasury. The warrants were put in place to assure that taxpayers are rewarded for their collective TARP loan to banks as the finance sector recovers.
The transaction occurred on Wednesday and cost State Street $60 million dollars. The proceeds flowed directly into US government coffers. The transaction sets the warrant bar for the nine other top banks who have collectively repayed $66B in rescue aid principal, but have yet to retire their warrant obligations by negotiating deals with the Treasury.
The State Street transaction equates to $30M per $1B borrowed. That could well mean that the other nine banks are looking at a collective $2B payback on their $66B.
The warrant deals are politically sensitive, with congress calling on the Treasury to drive a hard bargain on behalf of taxpayers. Banks have complained that valuing the warrants too highly could impede the goal of restoring health to the financial system. (I’ll use that line on my bank loan officer the next time and see how well it works)
For taxpayers (many of which viewed the bailout monies as a gift rather than a loan to the banks) are now reveling in the reality that they’ve just made a quick 3% gain in less than a year.
A quite healthy return in the current investment climate.
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By David Barr, on June 18th, 2009
Sometime in the next couple of months The Federal Government is going to give the state of California a lot of money. After lavishing more than a trillion dollars on Banks, Insurers and Auto Companies, there is a 0% probability that the government will sit idly while the largest state collapses.
There real question is how do we go about propping up California. Whether we like it or not, California will set a precedent for the rest of the country. Believe it or not California is not the only State struggling to keep its head above water. Congress and the administration need to have a strategy ready before Arnold comes crawling cap in hand to Washington.
Rather than putting together an ad-hoc plan for California, we should develop a national strategy for dealing with insolvent states. The plan that I am proposing is simple, non-intrusive and will ensure that Federal Government gets back every penny that it spends bailing out the states.
Federal loans should be made available to any state that chooses to accept them. In exchange, the state will be required to levy a 1% sales tax, whose revenue would be directed to the Federal government until the loan is repaid.
While, no one would enjoy paying the extra tax, it wouldn’t be nearly as devastating as the massive budget cuts currently facing states across the country. By securing a dedicated revenue stream the loan would be virtually risk free for the Federal Government. Furthermore, enacting a national policy would assure investors that state bonds were a safe investment, reducing borrowing costs for every state.
The greatest advantage of this plan would be in avoiding the political circus of negotiating a special bailout for every state in need. My plan would not solve the underlying problems facing California, but that is intentional. It is up to voters and politicians in California to find a long term solution to the state’s budget crises. Allowing Washington to interfere in the fine details of the State budget would be far worse.
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By Thersites, on May 20th, 2009
We are living through a time in which all common sense and logic has been sacrificed for blind hope and misplaced faith. According to the current gospel, peddled by the Messiah and even his anti-Christ enemies (the Republicans ironically), in a crisis in which millions are being thrown out of jobs, debts are being called in and people are being forced to cut back and save more, naturally we must see to it that these forces are prevented.
So we pump public funds into failed banking institutions that took risks imprudently and followed a business model in which short-term windfalls were rewarded over long-term viability and sustainability…all at the cost of the taxpayers and the financial companies that would have been able to find value and profitability in the assets that would have been liquidated had the banks been allowed to fail. We do the same with the auto industry, bailing out our failing companies, and specifically the UAW – the union that pushed the companies towards failure by demanding the massive salaries and benefits that bankrupted the companies in the first place. We reward debtors who purchased homes they could never afford by forcing lenders to rewrite mortgage contracts and allowing the government to purchase mortgage debt to keep interest rates low, with the government thumbing its nose at those who had responsibly paid off their mortgages. We relieve people who took on too much credit card debt by forcing lenders to lessen their fees (the fees necessary to compensate them for the risk involved in allowing people to finance their purchases through debt) by putting restrictions on “unfair” charges, inevitably causing those who were more responsible in paying off their debts to pay higher rates of interest.
When it comes to the protection of failing bureaucracies, it looks as if all of the states in the nation will be forced to bail out California (amongst others) when the federal government comes in and helps ameliorate their debts created by reckless spending. More importantly, the responsible states will not only be sacrificing their money, but their sovereignty to the federal government, due to the fiscal idiocy of the other states.
Even looking to something as fundamental as our progressive tax structure, whereby those who generate more income are penalized through higher levels of taxation (and forced to subsidize) those who earn less income, in every single case the people that are in the wrong are rewarded, while the people that are right or at least not responsible for these problems are penalized. Given the rate at which our national debt is expanding, the burden of these current problems unfortunately will be borne on the backs of future generations of Americans as well.
At length I have spoken in the past about how economically destructive these policies are, merely exacerbating problems instead of allowing markets and the individuals that make up the markets to adjust. I have explained that many of these problems were created by the government in the first place. I have also spoken to the fact that the holes that we are digging in attempting to stave off our problems, in the wasted future resources and diverted current resources being put towards government-planned projects, the massive amounts of money and debt creation by the federal government and also in our move overall towards a collectivist society.
But fundamentally, what I am seeing is that there is something far more insidious at play. What this crisis has illuminated to me is that because everything the government does has the force of law, it allows it to embody all of the worst traits of fallible man, writ large. More specifically, practically every single thing the government does and has done is about taking things from one group of people or more often all people and redistributing them to other people. Since the government can tax, it has the legal authority to rob you of your wealth and give it to someone else. Since the government can regulate, it has the power to help certain companies and harm the ones it doesn’t like. Since all can vote for government officials, government can allow 50% + 1 of the people to destroy the rights of all people; or allow 99% of people to subjugate the rights of the other 1%.
What I have come to realize is that unfortunately, our Founding Fathers did not think through deeply enough how far men were from angels, because the Founders were imperfect just like the people that they built the government for. They did not understand that while they tried to protect us from democracy, given the power to amend the Constitution, democracy could be implemented, with certain classes plundering other ones and bankrupting the nation in the process. Were the document to lay out in clear language any number of restrictions separating the public sphere from the private, this would simply lead to innovation amongst the people in subverting law and usurping power. Unfortunately, they didn’t understand the fatal flaw that they designed a framework in which the people got the government they deserved, not the government that was best. I do not mean to decry their efforts, but merely point out that as great as the Constitution they crafted was, it still could not ensure that people did not corrupt or disregard it.
As some have argued, were the populace to be more educated, our government would be better policed and regulated by the people it is supposed to help protect, and closer to the kind of paradigm that was intended by our forefathers. However, the government through public education gets to indoctrinate the citizens from day one. Even for those who are home-schooled or receive a private education, they still might be deluded into voting for bad candidates — just look at the New York Times crowd or the Ivy League (I know, I can’t believe I am emerging from it with a clear head either). And an educated populace might be even more adept at using the government to serve its interests as is.
I have always found that more influential than any of these institutions are the people that we grow up with and live with – our families, our friends and our mentors. And this is why I believe that our role as free-thinking individuals is so important, and that we must seize this moment in which the world is upside down, when good is treated as bad and moral is treated as immoral to seek to open the eyes of our fellow men. We need to educate by teaching in theory, demonstrating in practice and appealing in good sense and morality to the fact that this system whereby everyone plunders everyone else in the end leads to our demise; into a land devoid of all values, corrupted and whithered like so many empires that came before us.
We need to engage in debate, unafraid of saying what we feel in our hearts and in our minds is right. We need to sharpen our arguments against our challengers so that we can swiftly, calmly and rationally show them the errors of their ways and turn them into our friends, or at least respectful enemies. We need to explain that our actions affect more than just those around us, but also our future: our children, and our children’s children. We need to preach that as Reagan put it “Freedom is never more than one generation away from extinction. We didn’t pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same.” We need to argue that principles and values do matter, and that the consequences of sidestepping them are fatal. We need to scream at the top of our lungs that all progress comes from individuals, not coercive powers that dictate to free men that they must build pyramids or dingy fuel-efficient cars.
As things get worse and worse, people will first most likely react angrily. They will be looking for heads to roll. But we must keep our heads. We must be there with the answers, because it is only when people have lost everything that they will be willing to listen to the voices they dismissed before. If socialism can come into fashion so quickly from the height of what people thought was capitalism, then why can’t Liberalism supplant socialism just as quickly?
Until that day however, we must continue to advocate our principles in the face of angry, irrational intolerant sophists. We must keep fighting the good fight even if it means being hated. Derision and ridicule should be met with satisfaction, because it will mean that our detractors can only react emotionally to our reasoned arguments.
There is no shame in being hated by a group that is wrong theoretically, practically and morally. We must continue along, emboldened in the face of tyranny. We must defeat the gravest of evils with the greatest of goods: freedom.
By Trace Mayer, on May 1st, 2009
BANKS HAVE MORE THAN ENOUGH CAPITAL
At a congressional oversight panel on the government’s financial rescue program the tax evading Treasury Secretary Timothy Geithner testified, “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.” With the recent fair-value lying accounting changes banks have reported surging quarterly profits. Even the single digit midget Bank of America booked a first quarter net income of $4.247 billion – 6% more than it made in all of 2008.
Olivier Garret, CEO of Casey Research, asks a couple penetrating questions and gives a couple answers.
“For starters, just where did all this income come from? And has credit quality really improved.
The answers to both can be found buried in a company press release bearing the encouraging title “Bank of America Earns $4.2 Billion in First Quarter.”
I’d like to draw your attention to the four most telling excerpts from this release.
- Equity investment income includes a $1.9 billion pretax gain on the sale of China Construction Bank (CCB) shares.”
- Noninterest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening.”
- Credit quality deteriorated further across all lines of business as housing prices continued to fall and the economic environment weakened.”
- Nonperforming assets were $25.7 billion compared with $18.2 billion at December 31, 2008 and $7.8 billion at March 31, 2008, reflecting the continued deterioration in portfolios tied to housing.”
BANKRUPT BANKS
Bank of America makes $4.2B almost completely from a one time sale of a Chinese bank and some accounting sorcery on Merrill’s failing mortgages. Looking at the cash position of Bank of America if those two extraordinary events were backed out and preferred dividends were included then Bank of America actually bled about $1.3B.
The head of the sorcery order, Goldman Sachs, was very creative by changing its reporting calendar which effectively erased the impact of $1.5B loss in December from showing up in its earning statements although it still flowed through to the balance sheet. Bank of America is not the only bank with these shenanigans.
The FDIC poltergeist possessed another four banks on Friday bringing the total for the year to 29. The evaporated banks that went poof were dotted across the nation holding about $1.6B in deposits including American Southern Bank of Kennesaw, GA with $104M in deposits, Heritage Bank of Farmington Hills, MI with $152M in deposits, First Bank of Beverly Hills in Calabasas, CA with $1B in deposits and the First Bank of Idaho in Ketchum, ID with $374M in deposits.
DETERIORATING CREDIT QUALITY
It is clear that credit quality continues to deteriorate at the banks and almost all banks are engaged in fraudulent accounting sorcery. On the bright side for these vampires, the steep yield curve helps generate tremendous real income for the banks as they are able to suck the life out of the remaining wealth generating companies in the economy.
JP Morgan reported a stunning profit because the value of their bonds declined in the market and Citigroup had a similar $2.5B gain.
MARKED DOWN BUT NOT ENOUGH
A few days ago I attended an art walk with some colleagues. While the funnel cakes, BBQ, smoothies and live music were fun we began to chatter about business.
 One of them happened to be a commercial property appraiser. He was telling me about the difficulty of appraising buildings because the market is failing to clear and data points are getting extremely scarce. For example, quarterly he appraises a beautiful 100,000+ square foot high-quality office building that overlooking the Pacific in Oceanside, CA.
Usually this premium building is never vacant but starting November 2008 its vacancy rate climbed to about 20%. He avoided a write down in Q4 2008 turning in a $64M appraisal. But because the vacancy rate, lack of comps, etc. is now typical for the market in Q1 2009 he had to evaporate $8M from the building turning in an appraisal of $56M and did not receive any complaint from the client. He told me he is currently working on the Q2 appraisal and figures he will need to evaporate another $4M. This is what happens to real estate values when the discounted future cash flows decline because of huge vacancies and leases being renegotiated.
NO BID THEN NO VALUE ASSESSMENT
My suggestion for valuing the building if the market was not clearing and there were no comps was a simple $0. Then I told him the story of my encounter with a senior partner from DLA Piper whose client had a 40+ story condominium that was worth less than worthless.
Why is there such an effort to keep the asset prices high? If these assets are being ‘held for the long-term’ then it should not matter if they are carried on the balance sheet at tremendously understated values. After all, Mr. Buffett often takes this approach.
I have never heard of an investor suing or regulator prosecuting fraud, except perhaps in divorce, tax or similar cases, because assets were undervalued on the balance sheets. They can always be marked up later or a gain can be taken at a sale. Additionally, this may even have beneficial tax consequences.
Of course, this type of accounting methodology may have a negative effect on fraudsters, Ponzi scam artists and fractional reserve bankers who are by definition engaged in embezzlement. These immoral individuals always want to misrepresent asset values to the upside but never the downside and prosecuting fractional reserve banking as embezzlement would be beneficial for society and lead to a more efficient allocation of resources.
ILLUSORY INCOME VERSUS REAL ASSETS
So let me get this straight: the greater depression is intentionally exacerbated with a skyrocketing unemployment rate, construction and commercial loans become impaired as projects are either stopped because the unsustainable consumer economy is grinding to a halt or phantom equity is evaporated. This causes the banks to either go under or become more of a credit risk. If the bank survives then it is an even a higher credit risk as their debt trades at a discount and that discount is booked as income. The banks record profits, CNBC declares all is well and the stock market soars.
By comparison, a consumer charges up a bunch of credit card debt at McDonald’s, loses their job, their credit worthiness diminishes and the bid for the consumer’s credit card debt in the market declines so the the consumer books income. Which begs three important questions: Is there any real income? Will a real economic loss be taken? By whom?
Wealth can take two forms: (1) a financial asset or (2) a tangible asset. Tangible assets have intrinsic value and can never become worthless.
Uncertainty from the lying on financial statements and by costumed government officials is briskly eroding the confidence of a inherently unsound confidence based system. In times like these there stands only one safe haven: commodity currency. At all times and in all circumstances gold and silver remain money. Their value is not subject to counter-party risk and accounting sorcery, unless it is fool’s gold or silver held in the GLD or SLV ETFs, and the metals will always buy something. Gold is the risk-free asset and does not require fraudulently induced confidence because it generates real confidence.
CONCLUSION
Fractional reserve banking is embezzlement and the accounting rules have changed to protect those engaged in fraud. The intrinsic value of the financial companies mentioned is almost impossible to accurately determine, may be nothing and therefore should be avoided. Asset values are rapidly evaporating and the credit quality of borrowers is quickly deteriorating which will lead to more banks failing. On 20 March 2009 FDIC Chairwoman Sheila Bair said some very scary words, “Without additional revenue beyond the regular assessments, current projections indicate that the fund balance will approach zero.”
The Great Credit Contraction grinds on and holders of capital continue migrating down the liquidity pyramid seeking the safest and most liquid assets. Your electronic digits representing illusory currency are not safe in any of the fractional reserve banks and when the FDIC fails there will more pandemonium. With the FDIC begging to increase its line of credit from the Treasury from $30B to $500B the likely cure, whatever it may be, will inflict another laceration on the already mortally wounded FRN$ and further destroy wealth and hobble the economy.
During these relatively calm times for your businesses and daily transactions I recommend developing an alternative plan, and eventual substitute, to the current monetary system. For reducing your risk and keeping your capital safe there are three main options: (1) using gold and silver coins, (2) using the services of a full reserve institution, like GoldMoney, or (3) withdrawing the Federal Reserve Notes, putting them under the mattress and using cash as much as possible.
 Disclosures: Long physical gold and silver with no position in GS, JPM, BAC, C, CCB
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