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Collapse Roundup #6: The European Bank Run Has Begun – This Is What a Collapsing Global (Ponzi) Banking System Looks Like
September 20th, 2011 | Filed under Economy, Feature, Hot List, News . Follow comments through RSS 2.0 feed. Click here to comment, or trackback.
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Here’s a roundup of recent news reports on the collapse of the global (Ponzi) banking system. The European bank run has begun and it’s just a matter of time before their Federal Reserve primary dealer cartel partners in the US go down with them. Thick as thieves!
Next time you come across someone still deluded enough to think that things will turn around economically, send them here. Stick this in your economic recovery propaganda pipe and smoke it:
“We have been pointing to the incessant rise in the risk of the Financial Stability Board’s most systemically important entities for weeks now. It appears the European Systemic Risk Board has, according to Dow Jones, issued its first warning to governments, urging them to prepare capital injections for some European banks. The ESRB urged governments to prepare capital injections for banks which failed or came close to failing the bank stress tests earlier this year. Europe remains, marginally, the weakest region from the perspective of financial risk but we note how the Asian region was initially unharmed but as 2011 has developed, risk has spread contagiously into that region’s financial system also.”
“As anticipated by LEAP/E2020 since November 2010, and often repeated up to June 2011, the second half of 2011 has started with a sudden and major relapse of the crisis. Nearly USD 10 trillion of the USD 15 trillion in ghost assets announced in GEAB N°56 have already gone up in smoke. The rest (and probably much more) will vanish in the fourth quarter of 2011, which will be marked by what our team calls “the implosive fusion of global financial assets”. It’s the two major global financial centers, Wall Street in New York and the City of London, which will be the “preferred reactors” of this fusion. And, as predicted by LEAP/E2020 for several months, it’s the solution to the public debt problems in some Euroland countries which will enable this reaction to reach critical mass, after which nothing is controllable; but the bulk of the fuel that will drive the reaction and turn it into a real global shock (1) is found in the United States. Since July 2011 we have only started on the process that led to this situation: the worst is ahead of us and very close! “
“The bottom line: this is a classic liquidity crisis now not just for the sovereigns but the banks in Euroland as well. I would consider this a bank run via the wholesale funding market – and it’s not just the Anglo-American wolfpack manipulating markets but genuine concern of creditors about the solvency of their financial institutions. The right thing to do is to accept the bitter pill and make substantially all of the credit writedowns at financial institutions quickly and recapitalize and/or nationalize the weakest banks. But remember, bank seizure can make the situation worse.”
“Roughly two quarters ago, I warned subscribers that markets were overlooking a distinct concentration of risk in France. Interestingly enough, many believed France to be a stalwart, alongside fellow ECB boss Germany, as one half of the strongest economic duo in the EU. Our take was that France’s exposure to Italy (and the other PIIGS states) through its highly leveraged and funding mismatched banking system was a house of cards waiting to happen. I also asserted that Italy was nowhere near as strong a credit as the media and the sell side has made it out to be. “
“Asian stocks and the euro fell on Tuesday after ratings agency S&P downgraded Italy and amid fears of a Greek default, as investors worried that the euro zone’s debt woes will pitch the global financial system into a full-blown banking crisis. Oil steadied after tumbling on Monday on concerns the economic damage wreaked by the euro zone crisis would hurt industrial demand. The dollar firmed as market players sought safety in the U.S. currency despite expectations of further easing steps by the Federal Reserve this week. Standard and Poor’s cut its unsolicited ratings on Italy by one notch to A/A-1 and kept its outlook on negative, a surprise move, saying the fragility of Rome’s ruling coalition would likely limit the government’s ability to tackle the crisis.”
“In a shocking representation of just how bad things are in Europe, the FT reports that major European industrial concern Siemens, pulled €500 million form a large French bank, which is not BNP and leaves just [SocGen|Credit Agricole] and deposited the money straight to the ECB. The implications of this are quite stunning, as it means that even European companies now refuse to work directly with their own banks, and somehow the ECB has become a direct lender/cash holder of only resort to private non-financial institutions! As Bloomberg reports further on the FT story, in total, Siemens has deposited between 4 billion euros and 6 billion euros, mostly through one-week deposits, with the ECB, FT says, cites the person. It isn’t clear from which bank Siemens withdrew its deposits, per the FT… but it is hardly difficult to figure out. BNP Paribas isn’t the bank involved, FT reports, cites unidentified person familiar with the bank. This story should be having far more impact on the EURUSD than any rumors about Greece lying it will fire all of its public workers only to make sure Eurobanks can survive one more day.”
“If you think, as banking expert Chris Whalen does, that BofA is a goner by virtue of the odds of very large damages in the various mortgage cases that are in progress, Bank of New York is a goner even faster if (and we really mean when) investors start saddling up to target the bank. The liability of trustees in mortgage securitizations is so obvious and comparatively easy to prove that I am surprised that no one has yet gone after it. However, investors are probably understandably cautious about filing suits that might expose widespread failures of originators and pacakgers to convey mortgage loans to securitizations, which would lead to lots of collateral damage (no pun intended). “
“Germany’s 10 biggest banks need 127 billion euros ($175 billion) of additional capital, German newspaper Frankfurt Allgemeine Sonntagszeitung reported, citing a study by economic research institute DIW. The paper on Sunday cited Dorothea Schaefer, research director for financial markets at DIW, as saying the ratio of banks’ equity capital to balance sheet total needs to rise to at least 5 percent. A source said this month that the International Monetary Fund has estimated European banks overall could face a capital shortfall of 200 billion euros.”
“The IMF criticised Greece for wasting time, being behind target with privatisation and for allowing reform momentum to slow down. But it also forecast that the recession-hit economy will recover from wave after wave of crisis cutbacks and tax rises in 2013. The International Monetary Fund’s representative to Greece, Bob Traa, said that more budget action was necessary. “The privatisation is behind schedule because politicians can’t agree how to do it. If you wait … the country will go to a default,” he warned. He also called for urgent reforms to tax administration. “Additional measures will be needed in order to reduce the budget deficit,” Traa told a symposium. “It is no secret that the (rescue) programme is at a difficult moment,” he said, adding that the Greek economy was likely to contract by 5.5 percent of output in 2011 and 2.5 percent on average in 2012.”
“Whether it is due to the general investing public finally realizing that the market is neither fair nor efficient, that the scales are tipped against the common man from the moment the ‘Buy’ (or, more rarely, ‘Short’) button is pressed, or that as the past two years have shown the market is dominated by insider trading, “expert networks” and big legacy investors surviving only due to the government’s intervention on their behalf at critical times, is unknown, but Finra is now officially and finally drowning in a barrage of complaints about market manipulation. And to be sure such glaring reminders as 30 year-old UBS traders being singlehandedly responsible (of course, nobody noticed anything over the months and months of creeping illegal trades) for massive cumulative losses that amount to more than the entire net income for the bank (an odd and convenient scapegoat that), will surely not make Finra’s life any easier. As Reuters reports: “A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks’ internal controls over their traders. FINRA has received complaints this year about banks’ audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers. “
“It has been a while since JP Morgan has been sued for silver manipulation. Well, that changed on September 12, after JPM was served with its most recent lawsuit alleging silver manipulation, which we have no doubt will promptly move from JPM’s Inbox straight to the trash can. Since this is a class action, virtually everyone who has ever traded silver and lost on the trade appears to be on the list of plaintiffs (we jest, although the list of impaired parties a through x is rather, well, dillutive of the purpose). It is unfortunate that the John Doe defendants are not named as the general media will merely see this as just another lawsuit which serves simply to remind us that the CFTC still has to investigate any of the allegations against JPM and HSBC for silver manipulation. “
“Once again, that is an upwards revision from the previously reported figure. I’m feeling a tad too lazy to go back through all my blog posts to find the last week when there wasn’t an upwards revision from the previous week’s report but I know that it has been months since there has been anything but upward revisions. At best there might have been a week when the numbers reported were not revised at all a couple of months ago but that’s it. Realistically, I have to admit that the continual ‘surprise’ by the economists is just a continuation of the overall cluelessness shown by the financial elites as evidenced by this yesterday from the World Bank head (also via Reuters):
‘World Bank President Robert Zoellick said on Wednesday the world had entered a new economic danger zone and Europe, Japan and the United States all needed to make hard decisions to avoid dragging down the global economy.’
Zoellick’s speech focused on the shifting global landscape in which emerging market economies are playing a greater role in the world economy — and increasingly in development. He said developed countries had yet to fully recognize these global shifts were underway and still operated under a “do what I say, not what I do” policy. They preached fiscal discipline but failed to rein in their own budgets, and advocated debt sustainability yet their own debts were at record highs, he said. While I can applaud a recognition of the role of developing nations in the global economy, Zoellick’s prescription seems to this ol’ country boy to be a prescription for hastening and worsening a global recession. “
“Bank of America Corp. (BAC), the largest U.S. mortgage servicer, failed to make a list of companies doing a satisfactory job of assisting homeowners struggling to pay their mortgage, according to Fannie Mae. JPMorgan Chase & Co. (JPM), SunTrust Banks Inc. (STI), PHH Corp. (PHH), PNC Financial Services Group Inc. (PNC), OneWest Bank FSB and MetLife Inc. (MET) were the other companies that didn’t make the list. “
“FHFA has refrained from sugar coating the banks’ alleged conduct as mere inadvertence, negligence, or recklessness, as many plaintiffs have done thus far. Instead, it has come right out and accused certain banks of out-and-out fraud. In particular, FHFA has levied fraud claims against Countrywide (and BofA as successor-in-interest), Deutsche Bank, J.P. Morgan (including EMC, WaMu and Long Beach), Goldman Sachs, Merrill Lynch (including First Franklin as sponsor), and Morgan Stanley (including Credit Suisse as co-lead underwriter). Besides showing that FHFA means business, these claims demonstrate that the agency has carefully reviewed the evidence before it and only wielded the sword of fraud against those banks that it felt actually were aware of their misrepresentations.
Further, FHFA has essentially used every bit of evidence at its disposal to paint an exhaustive picture of reckless lending and misleading conduct by the banks. To support its claims, FHFA has drawn from such diverse sources as its own loan reviews, investigations by the SEC, congressional testimony, and the evidence presented in other lawsuits (including the bond insurer suits that were also brought by Quinn Emanuel). Finally, where appropriate, FHFA has included successor-in-interest claims against banks such as Bank of America (as successor to Countrywide but, interestingly, not to Merrill Lynch) and J.P. Morgan (as successor to Bear Stearns and WaMu), which acquired potential liability based on its acquisition of other lenders or issuers and which have tried and may in the future try to avoid accepting those liabilities. In short, FHFA has thrown the book at many of the nation’s largest banks.”
“Troubled euro zone banks probably need more aggressive capital injections to get through turmoil caused by Europe’s worsening debt crisis, top investors said at a Bloomberg Markets 50 Summit on Thursday. The European Central Bank said on Thursday it, alongside other major central banks, would hold three separate dollar liquidity operations between October and December to help see banks through the year-end. Some European banks have had trouble accessing short-term loans to fund operations because investors fear they are too heavily exposed to government debt from troubled euro zone countries such as Greece. John Taylor, founder and chairman of FX Concepts, the largest currency hedge fund with $8 billion in assets, said temporary measures are not enough to help euro zone banks.”
“Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy. The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said. The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years. “
“The Securities and Exchange Commission is investigating yet another mortgage securities deal [1] involving the hedge fund Magnetar—this time over a deal with Japanese bank Mizuho, a latecomer to the CDO market and one of its biggest losers, reported the Wall Street Journal. The Journal notes that the investigation into this collateralized debt obligation, Tigris, may not ultimately result in charges. It’s part of regulators’ wide-ranging probe into the CDO business, which fueled the housing bubble and worsened its eventual collapse. Tigris was one of more than two dozen collateralized debt obligations linked to Magnetar. As we detailed last year, Magnetar often pushed for riskier assets [2] to be included in deals and placed bets against many of the same investments. It ultimately helped create more than $40 billion in CDOs. (Magnetar has always maintained that it did not have a strategy to bet against the housing market. The hedge fund has also not been accused of wrongdoing as part of the SEC’s probe.)”
“The ratings firm Moody’s downgraded two of France’s biggest banks Wednesday, increasing pressure on governments across Europe to impose austerity measures on the working class. Moody’s cut its rating for France’s second largest bank, Société Générale, from Aa2 to Aa3, and downgraded the third biggest bank, Crédit Agricole, from Aa1 to Aa2, citing their exposure to Greek government bonds. It left BNP Paribas, France’s biggest bank, at Aa2, while putting it on negative watch. The move, which had been widely anticipated, came in the midst of mounting fears of a Greek debt default and resulting collapse in confidence in French and other European banks that have large holdings in Greek bonds.”
“The Justice Department is investigating whether French bank Société Générale SA helped facilitate Texas financier R. Allen Stanford’s alleged $7 billion Ponzi scheme by ignoring suspicious transactions, people familiar with the matter said. At issue is a Swiss bank account held by one of Mr. Stanford’s companies at SG Private Banking (Suisse) SA, a Société Générale subsidiary, that was allegedly funded with investors’ money and used to make payments into Mr. Stanford’s personal accounts and for bribes to his Antiguan auditor.”
“Last month, Sen. Bernie Sanders (I-VT) leaked confidential data about oil speculation to a number of media outlets, including the Wall Street Journal. Ordinarily, the Commodity Futures Trading Commission, the regulatory body that oversees futures trading, does not provide identities of speculators to the public. However, the data leaked by Sanders provides a rare snapshot into the trading volumes by major speculators right before the oil price spike in the summer of 2008. “
“Those who have been around for more than one trading generation (which in the old days was 3-4 years, but in the current centrally-planned, vacuum tube-traded times, is more like 3-4 months), will distinctly recall that the first rumbling of the financial crisis started not with the bankruptcy of Lehman, or even the handoff of Bear (and its massive silver legacy short) to Jamie Dimon, but in August 2007, when days after the market hit its all time high, something went massively wrong in the quant market segment (nobody still knows what it was but many speculate that is was simply every algo being on the same side of the trade and trading out all at the same time following the blow up of the Bear Stearns hedge funds).
What the first week of August 2007 was notable for, in addition to massive losses for such legendary quants as RenTec (very well described in Scott Patterson’s book titled appropriately enough “The Quants”), was that for the first time ever, the infallible Goldman Sachs… fell. Specifically, its heretofore mythical Global Alpha quant fund, which had the mythical allure of a 33rd degree Freemason dinner, imploded, and crashed, forcing the end of a quant generation, and the beginning of the end of Goldman’s aura of invincibility….
Well, the reason we bring all of this up, is because unlike what everyone claims, it is not 2008…. it is 2007 all over again. To wit: Goldman Global Alpha just blew up, for the second and probably last time. “
“BNP Paribas (BNP) SA, Societe Generale SA and Credit Agricole SA (ACA), France’s largest banks by market value, may have their credit ratings cut by Moody’s Investors Service as soon as this week because of their Greek holdings, two people with knowledge of the matter said. Moody’s placed the three banks’ ratings on review in June to examine “the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels,” the rating company said at the time. Cuts are likely as the review period concludes, said the people, who declined to be identified because the matter is confidential. “
“Minnesota Attorney General Lori Swanson has released a letter that opposes giving a broad release to banks on foreclosure fraud in exchange for a quick settlement. In the letter, Swanson writes that “the banks should not be released from liability for conduct that has not been investigated and is not appropriately remedied in any settlement.” Specifically, she refers to “liability for securities claims or conduct arising out of the securitization of mortgages or liability arising out of the use of the Mortgage Electronic Registry System (“MERS”), where those claims have not been investigated or fairly addressed through the settlement.” She adds that bank officers should not be released from criminal liability in a civil settlement. Swanson lines up with New York Attorney General Eric Schneiderman, then, in saying that she would not sign off on any broad settlement without an actual investigation. But she actually goes a bit further. Swanson writes that due process rights of individuals cannot be impeded or compromised by any settlement.”
“I’m going to give the disgraceful New York Times story, “Outsiders’ Ideas Help Bank of America Cut Jobs and Costs” a long form treatment, not only because it may help readers recognize PR masquerading as news, but also because the bits of this story that the Times didn’t bother to probe help illuminate how the retail banking industry became predatory and how some of the mechanisms to transfer wealth to people at the very top are well hidden from the great unwashed public. Thus, this post is a companion piece to our piece today on the rise in poverty and continuing destruction of the middle class in the US. The New York Times piece is hagiography about the cost cutting process at Bank of America, in which the Charlotte bank will shed 30,000 jobs, more than 10% of its workforce. It starts with the misrepresentation of calling the belt-tightening a “turnaround plan.” That implies that the business of the bank is in trouble and the headcount reduction measures can save the day.”
“This is from the Austrian daily Der Standard: According to parliamentary correspondence, the Finance Committee of the National Council on Wednesday did not not approve the massive increase to 21.6 billion euros in Austrian liabilities for the provisional euro rescue fund (EFSF) sought by the government coalition. A two-thirds majority was required. FPÖ and BZÖ voted against it. Green Party Finance spokesman Werner Kogler said he would not stand behind “a rash majority procurement”. At issue was the planned increase in the euro rescue fund to 780 billion euros from the present 440 billion. Austria’s share was to be 21.6 billion euros.”
“US authorities on Wednesday ordered Bank of America to pay $930,0000 to an employee who was fired after exposing fraud at the bank’s disgraced mortgage unit, Countrywide Financial. The US Labor Department said in a statement that the employee was illegally fired after he led “internal investigations that revealed widespread and pervasive wire, mail and bank fraud” at Countrywide. Bank of America acquired Countrywide in 2008, a spectacularly bad move that has saddled the US banking giant with numerous lawsuits and billions of dollars in legal costs stemming from Countrywide’s mortgage-lending practices.”
“Does anyone remember how China’s 2008 “save the day” purchases turned out? How about Wall Street’s claims of being “well-capitalized” (including CEOs of Merrill Lynch, Lehman Brothers, even Goldman Sachs)? Have people really forgotten how that whole mess turned out in 2008? Most importantly, does anyone REALLY think this situation will turn out differently this time around? Who exactly would want to buy the market based on rumors of China buying European bonds? How did China’s support of the Euro work out earlier this year?”
“Are we on the verge of a massive financial collapse in Europe? Rumors of an imminent default by Greece are flying around all over the place and Greek government officials are openly admitting that they are running out of money. Without more bailout funds it is absolutely certain that Greece will soon default on their debts. But German officials are threatening to hold up more bailout payments until the Greeks “do what they agreed to do”. The attitude in Germany is that the Greeks must now pay the price for going into so much debt. Officials in the Greek government are becoming frustrated because the more austerity measures they implement, the more their economy shrinks. As the economy shrinks, so do tax payments and the budget deficit gets even larger. Meanwhile, hordes of very angry Greek citizens are violently protesting in the streets. If Germany allows Greece to default, that is going to start financial dominoes tumbling around the globe and it is going to be a signal to the financial markets that there is a very real possibility that Portugal, Italy and Spain will be allowed to default as well. Needless to say, all hell would break loose at that point.”
“It’s simple: We’re all Greece. There’s no material hiring going on in the US, nor will there be. Not because business wouldn’t like to hire, but because there’s no organic demand with which to require the hiring to take place. As a former CEO I can tell you that hiring is a dispassionate decision: You hire staff to produce the goods or services you sell – and for no other reason. The Government took upon itself to create false economic demand after 2008 through deficit spending. Private business knows this cannot continue forever, or you get Greece. It’s not really very complicated; try using your credit card to maintain a $173,000 lifestyle when you only make $100,000 and see for how long you’re able to do it. That’s what our Government has sequentially done for three years running from 2008-2011. Every businessperson with an IQ larger than their shoe size knows that this path forward will – because it mathematically must – fail. They were willing to accept a short-term incidence of this back in 2008, because that’s exactly what they believed it would be – a very short-term phenomena. “
“It is too early to proclaim that ding dong, the vampire squid is dead, but it just dropped below triple digit range for the first time since March 2009. To anyone who enjoys to wager, this may be a good time to put some money that a Management/Buffet Buy Out (MBBO) of Goldman Sachs may be in the works.”
“Specific human beings at Fannie and Freddie lied, but no one goes to jail for securities fraud, no one pays any money, and no one is even sanctioned. This isn’t even a slap on the wrist; it’s a bald admission that the SEC is impotent. Mary Schapiro, Chair of the SEC, and Robert Kuhzami must think that corporations like Fannie and Freddie are persons, and that they, and not the humans who work there, are the only actors. They ignore black letter law that the corporate shield does not protect officers, directors and employees from criminal liability. That rule is basic to an understanding of personal accountability in a bureaucratic world. Peterr reminds us of the words of Justice Jackson in the Nuremberg Trials: Of course, the idea that a state, any more than a corporation, commits crimes, is a fiction. Crimes always are committed only by persons. While it is quite proper to employ the fiction of responsibility of a state or corporation for the purpose of imposing a collective liability, it is quite intolerable to let such a legalism become the basis of personal immunity.”
“Let’s start with some background. Treasury secretary Geithner said repeatedly during the Dodd Frank process that the shortcomings in the legislation didn’t matter all that much, since having banks carry larger capital buffers would do the trick, and that was coming with Basel III. In other words, Geithner argued the higher capital requirements to be imposed by international rulemaking process was where the critical banking regulatory fix would happen. And this is what Dimon is now, loudly, out to undermine. Let’s go to the Dimon argument, such as it is. What about “international” does he not understand? If you want to play outside America’s borders, you can expect to be subject to different rules. The Eurozone, much to the consternation of US and UK players, has basically told the Anglo private equity firms to go to hell. They are forbidden both from doing deals in EU countries and from raising funds there unless they register and obey local rules. The Eurozone has gotten sick of rapacious foreign players buying decent European companies, cutting jobs, saddling them with lots of debt, and shrugging their shoulders when they miscalculate (often) and the rent extraction kills the company. The EU rules, among other things, will restrict how much a PE firm could lever up a portfolio company.”
“Many of the country’s largest banks received $6 billion in kickbacks from mortgage insurers over the course of a decade, according to a previously undisclosed investigation by the Inspector General of the Department of Housing and Urban Development. The allegations, since referred to the Department of Justice, stem from lenders’ demand that insurers cut them in on the lucrative business of insuring the mortgages they produced during the housing boom. In exchange for their business, companies such as Citigroup Inc, Wells Fargo & Co, SunTrust Banks Inc. and Countrywide allegedly required reinsurance partnerships on generous terms that violated the Real Estate Settlement Procedures Act, a 1974 law prohibiting abusive home sales practices.”
“Let’s have a look at the REAL situation in the financial system. 1) Greece is bankrupt. It has been for years. The market has finally stopped being moronic and figure out the obvious (so much for the “efficient” hypothesis). 2) Greece WILL default. This WILL crush German and French banks. 3) The EU in its current form (as well as the Euro) are DONE. 4) The US banking system is similarly fragile and on the verge of collapse. 5) The US economy is in a DE-pression and rolling over in a big way AGAIN. All the economic data is being massaged to look better than it is. Look around you, does the economy look OK to you? 6) The US Government is broke. Obama’s jobs plans is absurd. Where’s the money going to come from? 7) Bank of America (as well as the other TBTFs) is insolvent. The only reason they’re still in business is rampant fraud, lies, and theft. What’s happening in Greece is coming to them soon. 
The Federal Reserve has lost control of the markets. QE 3, IF it comes, will accomplish nothing. Bernanke will be stepping down within 18 months and possibly facing legal battles.”
“If those who persue the BoomBust regularly recall, on Tuesday, 12 July 2011 I penned BoomBustBlog Traders Armed With BoomBustBlog Research Caught ~10% Deutsche Bank Fall. Deutsche Bank looks downright UGLY! Our new Forensic Analysis/Technical Trade combo called this one out about 2 weeks ago with impressive precission. Kudos to all who contributed. DB is now trading 20 points lower. Those that haven’t read said piece should check it out for the resident BoomBustBlog traders and fundamental analysts caught this one right on the money and a full three months before the sell side and the pop media. On that note, Bloomberg reports Deutsche Bank Risk Seen Rising as Puts Appreciate Most in Europe: Options 9 Sep 2011 ” There could be ongoing pressure on German markets because people want to be short and there could be some pricing… The price of options to protect against losses in Deutsche Bank … It would appear that much of the pop media should follow the BoomBust a tad bit more closely. I will probably release the prime French bank run candidate some time soon, potentially on in the Max Keiser Show, as I drop little bread crumb hints along the way since the banks share price is already approaching our valuation bands. Anyone in the pop media space who wants a scooping story, here is the motherload. On a separate, but related note, let’s look at what those DB puts looked like when the BoomBust first warned on said German bank.”
“Reading the FHFA complaints against many of the world’s largest banks is a fascinating and troubling process for anyone that understands “accounting control fraud.” The FHFA, a federal regulatory agency, sued in its capacity as conservator for Fannie and Freddie. Its complaints are primarily based on fraud. The FHFA alleges that the fraud came from the top, i.e., it alleges that many of the world’s largest banks were control frauds and that they committed hundreds of thousands of fraudulent acts. The FHFA complaints emphasize that other governmental investigations have repeatedly confirmed that the defendant banks were engaged in endemic fraud. The failure of the Department of Justice to convict any senior official of a major bank, and the almost total failure to indict any senior official of a major bank has moved from scandal to farce.”
“Banks including JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) may pay more to resolve claims over their alleged roles in the collapse of a $2.3 trillion mortgage- backed securities market if sophisticated investors are allowed to sue as a group along with less savvy ones. Class-action status allows investors to pool financial and legal resources, giving them greater leverage to win larger settlements or verdicts. The banks, however, have a court ruling on their side that may help fend off such blockbuster cases. It says class status is barred because some investors are too sophisticated — in fact, because some of them are other banks, including JPMorgan. “It is possible to be both an alleged perpetrator and victim at the same time,” said Jacob S. Frenkel, a former U.S. Securities and Exchange Commission lawyer now in private practice in Potomac, Maryland. “It’s unprecedented that you have the most sophisticated institutions as victims, to be in a position where their losses are so great that they have sued.” The ruling by U.S. District Judge Harold Baer Jr. in Manhattan, favoring defendants Royal Bank of Scotland Group Plc (RBS) and Ally Financial Inc., held that investors may not sue as a class in part because some of them are being sued over the same claims. Last month, that ruling was countered by two judges in Baer’s courthouse, both of whom ruled that investors in home- loan backed securities may sue as a class. “
“The correlation between the biggest 250 stocks in the S&P 500 over the past month has reached its highest since 1987 this week, at 81 per cent, according to JPMorgan figures. This means those stocks move in the same direction 81 per cent of the time. The historical average is 30 per cent. The measure peaked at 88 per cent during the October 1987 US crash, when the Dow Jones Industrial Average fell 22 per cent in one session. Other spikes in correlation, including the collapse of Lehman and the Japanese earthquake, peaked at about 70 per cent but quickly fell away. The unusually high level of correlation this month has raised speculation that markets could repeat the aftermath in 1987, when relationships between stocks did not return to their historical norm until several months later, in March 1988. “That was thought to be a freak event,” said Marko Kolanovic, head of derivatives strategy at JPMorgan. The extreme correlation might drive additional trading en masse, said Dean Curnutt, president of Macro Risk Advisors. Traders might be forced to cut positions due to rising volatility in indices such as the S&P 500, a result of their member stocks moving in one direction.”
“Long before the banks started evicting delinquent homeowners, Wall Street, it appears, used robo-signers to ink mortgage deals that would eventually cost investors tens of billions of dollars and in part led to the financial crisis. According to lawsuits filed last week by the U.S.’s Federal Housing Financing Agency, one individual was used by three different banks to sign off on 36 different mortgage bond deals in 2006 alone. Many of the deals contained as many as 4,000 home loans. Yet, according to the lawsuits, the individual Evelyn Echevarria signed documents attesting to the fact that all the loans – well over 100,o00 in 2006 alone – met the underwriting guidelines set out in each of the deals’ offering statements for potential investors. In fact, according to the FHFA lawsuits, many of the loans in the deals were of much lower quality than the offering documents suggested. “Signing these documents should have been a meaningful function,” says Joel Laitman, a lawyer who suing Echevarria and Credit Suisse in a separate class action suit on behalf of investors. “But it is hard to see that one person could have fulfilled their legal obligation to vet all of these prospectuses if they were doing so many deals at the same time.”
“If there are any human traders still out there that happen to be reading this, the UK Foresight project team has some news for you : don’t expect to be trading for much longer. Here is what the report had to say: Read Paper Here “It is reasonable to speculate that the number of human traders involved in the financial markets could fall dramatically over the next ten years. While unlikely, it is not impossible that human traders will simply no longer be required at all in some market roles. The simple fact is that we humans are made from hardware that is just too bandwidth-limited, and too slow, to compete with coming waves of computer technology.” The UK Foresight project is a group of academics from over 20 countries who decided to get together and study the effects of computer based trading. Lots of familiar academics names appear in the report including the pro-HFT academic crowd of Brogaard, Angel and Hendershott. And lots of the same old, tired defenses of HFT appear in the report: no evidence that HFT increase volatility, liquidity has improved and transaction costs have been lowered. No doubt this report will be picked up by the HFT lobby and their friendly media contacts and waved around telling people that all is well in the stock market.”
“”It’s a sign that ECB policymaking is controversial even within the board. Clearly the German representatives have a position that differs from other central bankers. That makes ECB policymaking more difficult,” Lothar Hessler, analyst at HSBC Trinkaus told Reuters. A former finance ministry official and Bundesbank vice-president, Stark, known for his tough, no-frills style, has been a member of the ECB executive board since June 2006. His eight year term was due to run until May 31, 2014. Manfred Neumann, economics professor at the Bonn University said: “This is remarkable. Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president. It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB.”"
“Separately, the noises coming out of the German governing coalition show exasperation with the progress in Greece. Edward Hugh writes that “a Greek euro exit is no longer the unthinkable taboo topic”. This is especially true after the beating Angela Merkel’s party took in elections in her home state of Mecklenburg-Vorpommern this past weekend. Fiscal consolidation is not expansionary. Moreover, it increases deficits due to the increase in spending on fiscal stabilisers and the decrease in tax receipts – that is unless the cuts are extremely large. There is zero chance that Greece will make its targets. I don’t expect Portugal, Italy, Ireland or Spain to meet their targets either, especially given the incipient double dip we are witnessing. As the Germans are likely to see their fiscal trajectory deteriorate markedly in this environment due to the anaemic domestic demand and dependence on exports, their willingness to fund bailouts will evaporate. The political calculus may turn to topping up capital at underfunded German banks. Greece, at a minimum, will default. Indeed, without the ECB’s assistance Italy would default – that’s the real Armageddon scenario because no amount of recapitalisation would prevent a deep depression. Stark’s resignation increases the chances that just this will occur. “
“Fitch Ratings warned on Thursday that it might downgrade China’s credit rating within two years as the country’s banks struggle with debt loads following a lending surge to help lift the economy during the 2008 financial crisis. It also said that Japan, weighed down by a public debt load twice the size of the $5 trillion economy, faced a greater-than-even chance of a downgrade in part due to a political impasse that is stalling plans to clean up its finances. Asia’s two biggest economies are in the ratings firing line alongside Europe and the United States as they deal with massive debts built up during the global financial crisis.”
“In June, I wrote that the chances of a euro zone breakup are now increasing, giving background for the current political turmoil surrounding Greece. My conclusion was “the policy decisions that governments and the EU are making cannot be maintained politically in the periphery or in the core”. A few days later, Nouriel Roubini wrote a very good note explaining then why the Eurozone could break up over a five-year horizon. We both stated that the key to maintaining the euro zone at all was the potential for closer integration of the member states.”
“Bank of America is doomed, says bank analyst Chris Whalen, the founder and managing director of Institutional Risk Analytics. (See video below) Importantly, this dour outlook has nothing to do with the company’s operating businesses, which Whalen thinks are fine. In fact, says Whalen, there’s no need for the bank to be restructuring them and firing thousands of employees (40,000 is the latest estimate) to improve its bottom line. The part of Bank of America that’s not fine, in Whalen’s view, is the ongoing liability from the mortgage underwriting that Bank of America’s subsidiaries did during the housing bubble. The litigation exposure from this could be so humongous, Whalen argues, that it will bankrupt the company, forcing regulators to step in and restructure it. And Whalen doesn’t think the country should wait for that day.”
“Wondering what is next for Europe? Don’t be. With Jurgen Stark, aka the last real hawk at the ECB, gone, here comes “the printing.” SocGen’s Dylan Grice explains. From SocGen: Suppose that Italy or Spain get caught up in the whirlwind like Greece, Ireland and Portugal, as threatened to happen last month. Maybe the Italian political situation deteriorates, maybe Ireland defaults, maybe Greece will go revolutionary, or maybe an ill-advised wayward comment from an influential European politician will spook markets and send them into renewed tailspin. We don’t know which of these will happen, if any. All we know is that these are some of the many plausible triggers for a further deterioration in this fragile situation.”
“By suing 131 individuals in its effort to recover losses on $200 billion of mortgage debt that went sour, the federal agency overseeing mortgage giants Fannie Mae and Freddie Mac is doing one thing that the government has largely left alone. It is trying to hold actual people, not just companies, responsible for their roles in the global financial crisis. The 18 lawsuits by the Federal Housing Finance Agency, including 17 filed last week and one in July, signal a change from prior federal efforts to punish banks and bankers for their roles in the financial crisis. That difference may stem in part from the FHFA’s belief that it has enough evidence to pursue civil claims against banking executives. Its lawsuits draw on information generated by 64 subpoenas issued last year for details on pools of mortgage securities that Fannie Mae and Freddie Mac bought. They also draw on probes by a Senate investigation subcommittee and the Financial Crisis Inquiry Commission, among other sources.”
“The Vietnam War gave us the expression, “We had to destroy the village in order to save it.” The same kind of thinking might help explain the U.S. bank rescues of 2008: We had to save the banks in order to sue them. Last week, the conservator for Fannie Mae and Freddie Mac filed lawsuits against 17 financial institutions to recover losses on faulty mortgage bonds sold to the two government- backed housing financiers. One of the defendants was Ally Financial Inc., the lender formerly known as GMAC that once was the finance arm of General Motors Co. If the Federal Housing Finance Agency recovers damages from Ally for Freddie Mac, it will be a win for taxpayers. Yet it also will be a loss. That’s because Ally is still majority-owned by the U.S. Treasury. It’s a ridiculous situation, for sure. Then again the FHFA is doing what it’s supposed to do: preserve and conserve the assets of Fannie and Freddie. It’s not the agency’s fault that Congress passed the Troubled Asset Relief Program and gave the Treasury Department new powers to keep Ally and its ilk alive. Congress could have let those companies die, as they deserved to. It didn’t, though. So now the inevitable claims are working their way through the courts. The government’s roles as both a referee and a player in the financial markets remain as conflated as ever. “
“It was only a matter of time. A few weeks after every money losing firm in the US and the kitchen sink disclosed it would sue Bank of America in an accelerating attempt to salvage something through litigation, the worst case scenario for Brian Moynhian just got real. As of minutes ago, Norway’s Government Pension Fund, which is another name for its Sovereign Wealth Fund, has just announced it is suing Bank of America for mortgage fraud. Not only that but it is also going after Countrywide, obviously, but far more importantly, is also suing KPGM, the auditor on the Countrywide transaction, and, drumroll, ole’ Agent Orange himself. If US bank analysts were busy quantifying the damages from every bank in the US suing BofA, just wait until the calculation is expanded to included every firm that bought mortgages from Bank of America… ever…in the entire world.”
“While the easily amused were obsessing with choosing the best one line punchlines to describe the status quo posturing on TV in the form of another highly irrelevant political spectacle, Japan’s economy imploded, only this time for real. Unlike back in Q2 when every downtick in the economy was blamed on the Tsunami and on the Fukushima explosion, we just got, 6 months later, the report for Japanese machinery orders which collapsed 8.2% in the month of July, for the biggest drop in 10 months, over and above anything seen during the Fukushima days. This is exactly 100% worse than the 4.1% drop predicted. The reasons according to Reuters: “companies are delaying investment due to worries about a strong yen, slackening global growth and slow progress in reconstruction from the March earthquake.” Of these the Yen is by far the most relevant. And thanks to the SNB, the Bank of Japan, whose currency has suddenly become the only safe risk haven, will have no choice but to add balance sheet insult to economic injury and resume JPY interventions, only this time the duration will be even shorter than the last such episode which lasted all of 3 days (see below). This in turn will force all other central banks to do more of the same until relative devaluation, and the biggest currency lower, is the name of the only game in a few weeks. As for the winner: the only real currency which can not be printed, well, that story is very well known by now.”
“A year after it was warned that it might be violating federal law, the Securities and Exchange Commission is still breaking the law by destroying records of closed enforcement cases, a lawyer in the agency’s enforcement division has alleged. In addition, the purging of files has involved a wider range of investigative documents than previously reported, according to a signed statement by the enforcement lawyer. The new allegations are contained in a statement dated Tuesday by Darcy Flynn, a longtime SEC employee involved in managing records for the enforcement division. Flynn’s lawyer, Gary Aguirre, sent the statement and an accompanying narrative to SEC Chairman Mary L. Schapiro and SEC Inspector General H. David Kotz. Aguirre also addressed copies to several lawmakers, calling on Congress to step in. Flynn is under “standing orders to direct the destruction of records” that the SEC is legally required to preserve, Aguirre wrote.”
“Recall years ago when a Goldman Sachs economist John M. Youngdahl told his bond desk he heard rumors of the cancellation of the 30 year bond — that led to his going to jail (but not the traders or the firm, who kept their apparently illicit gains). If S&P told specific bond funds that material non public inside information — namely, that a US credit downgrade was coming — then how is this not illegal? While there are protections for opinions and other speech, the nature of this being in S&P’s control puts them on a different footing than an outside 3rd party making assumptions, analyses and educated guesses. Remember, this is speech by S&P about what S&P might do. As John Coffee, a Columbia University securities-law professor, suggested, there comes a point where the ratings agency may have gone too far: “If you add a wink and a nod to that, I think that goes over the line.””
“Angela Merkel is clearly trying to press the case that a Greek failure and exit would be catastrophic. Two Dow Jones headlines just out: *DJ Merkel Said Greek Euro Exit Could Trigger Domino Effect – Senior Lawmaker *DJ Merkel Warned Of Greek Exit From Euro Zone – Senior Govt Lawmaker.”
“Treasury 10-year note yields decreased to an all-time low as concern Europe’s sovereign-debt crisis will cripple the region’s financial institutions underpinned demand for the safest assets. Yields on 30-year bonds touched the lowest level since January 2009 on speculation Federal Reserve Chairman Ben. S. Bernanke may signal in a speech this week that the central bank will purchase longer-duration debt while shedding shorter maturities. Ten-year notes are the most overvalued ever, according to a financial model created by Fed economists that includes expectations for interest rates, growth and inflation. Stocks dropped. “The fear is that the debt contagion is not abating,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Because of the global stock meltdown, flight to quality came into play. The safest bet would be to jump into dollar-denominated assets, like Treasuries. The Fed will have to do something to stimulate the economy, and the only way to do that.”
“There’s no way to overstate the calamity that’s unfolding across the Atlantic. The eurozone is imploding. The smart money has already fled EU banks for safe quarters in the US while political leaders frantically look for a way to prevent a seemingly-unavoidable meltdown.The eurozone is experiencing a slow-motion run on its banking system. And–while the ECB’s emergency loans and other commitments have kept the panic from spreading to households and other retail customers–the big money continues to flee as leaders of large financial institutions realize that a political solution to the monetary union’s troubles is still out-of-reach.
“In my humble opinion the global economy is facing one of the toughest times it has seen in decades and the inter-connectivity of the “global village” will actually exacerbate the problems the developed world faces. The idea that the emerging world can de-couple and save the world is quite ludicrous when they rely so heavily on exporting to the developed nations. The demand drought that is coming from the consuming, developed world is only part of the problem. The perfect storm is still building out there and the consumer is the key. Global growth expectations seem far too optimistic in my view! The problem is that to make austerity measures work, the governments need the consumer to be strong not weak and they certainly do not need them to start deleveraging and refusing or reducing credit. This however, is exactly what austerity brings. A lack of confidence amidst rising unemployment and a reduction in benefits, coupled with falling housing prices and to some considerable extent, a loss of faith in government, does not fill consumers with an appetite for more risk. In fact the opposite is the case. Consumer confidence tells us that deleveraging will increase very soon.”
“By flooring maturities out to two years then, and perhaps longer as a result of maturity extension policies envisioned in a forthcoming operation twist later this month, the Fed may in effect lower the cost of capital, but destroy leverage and credit creation in the process. The further out the Fed moves the zero bound towards a system wide average maturity of seven to eight years the more credit destruction occurs, to a US financial system that includes thousands of billions of dollars of repo and short-term financed-based lending that has provided the basis for financial institution prosperity. The Fed’s old M3 yardstick of credit growth which includes repo monetisation would likely similarly decline. If so the posit of American economist Hyman Minsky of an unstable financial system based on the leveraging of a positively sloped yield curve – and deleveraging when it was not – would be obvious for all to see. Helicopter Ben should be careful – another Blackhawk Down might be in our near-term future.”
“Prosecutors in New York are pressing ahead with their inquiry into the way Goldman Sachs Group Inc. marketed certain mortgage-linked instruments before the financial crisis, issuing subpoenas to Morgan Stanley and other investors in the deals, people familiar with the matter said. Some of the subpoenas were received in recent weeks, the people said. The Manhattan district attorney’s office began its probe into Goldman following the release in April of a U.S. Senate subcommittee report into the causes of the crisis. Goldman was featured prominently in that report.”
“In this world of rampant banking miscreance, it may seem hard to get worked up about $6 billion in impermissible kickbacks. But this is a case of a clear-cut legal violation, with the particulars sent to the Department of Justice by the HUD Inspector General’s office on a silver platter. And one of the alleged big bad actors was the ever-sanctimonious Wells Fargo. American Banker has a detailed write-up of a kickback scheme between major banks who were mortgage originators, in particular Wells, Citigroup, Countrywide, and SunTrust and mortgage insurers. The mortgage insurance was to insure the riskier portion of a highly geared mortgage. The borrower would pay a higher rate to compensate for the lack of a large (or much of any) down payment. The kickback was dressed up as reinsurance, meaning the mortgage insurer was laying off some of the risk to the originator and paying a fee to do so. But what instead happened was that fees were paid but the deals were structured so that no risk was shifted over to the banks. The violations were uncovered by HUD’s Inspector General office. IGs are tasked to prevent and uncover fraud, waste, and abuse. Its budget is separate from the rest of HUD. It has substantial law enforcement powers and can subpoena documents but not witnesses. Not surprisingly, this isn’t the first time that significant HUD IG finding has been ignored. The IG’s office found substantial evidence that the biggest servicers had defrauded taxpayers (with Wells again a particularly bad actor) But since that report contradicted the “see no evil” Foreclosure Task Force findings, nothing has been done.”
“While the United States has not openly claimed a weak dollar as a policy goal, its near-zero interest rates and two rounds of “quantitative easing” asset purchases by the Federal Reserve have had the effect of weakening the dollar 15 percent against the euro since June 2010. Brazil’s finance minister Guido Mantega said Friday that this cheap dollar policy was partly to blame for the fact Brazil’s growth rate slowed from 1.2 percent in the first quarter to 0.8 percent in the second.”
“Put a fork in it folks. As I write this the DAX is down well over 5% and there are multiple banks that are lock-limit down and have been suspended over in Europe. Greek 1 and 2 year bonds are trading over 50% on yield. That’s not a yield, it’s an implied recovery on a default which the market now says is inevitable. The fraud has finally caught up with the scammers and taking on more and more debt to cover up unpayable debt has run its course. Nobody believes it will work any longer, essentially. The market has called smiley on the scams and frauds and is now serially demanding proof that the banks can fund their liabilities. It is doing so by driving down equity prices, forcing the institutions into a corner where their cash flow inadequacy is exposed.”
“The warnings are flying today so let’s take a look at a few of them, including a couple of my own. Trichet Warns Heads of States The New York Times reports Euro Zone Leaders Get Warning From Central Bankers With stock and bond markets on a roller-coaster ride reminiscent of the 2008 financial crisis, Jean-Claude Trichet and Mario Draghi, the current and incoming chiefs of the European Central Bank, had a pointed message for European leaders Monday: Get your act together.”
“As noted previously, it is crystal clear to everyone but bankers and brain-dead analysts that banks need to be recapitalized, in Europe and the US as well. The crucial question is “how?”. In 2008, US taxpayers bailed out AIG (Goldman Sachs really), Fannie Mae, Citigroup, Bank of America and scores more financial corporations of all sizes, too numerous to mention. Why? Ben Bernanke, Hank Paulson, Tim Geithner, Larry Summers, and a parade of bankers and ex-Goldman employees all said this had to be done to spur lending. It was a lie. The bailouts were nothing but a gigantic transfer-of-wealth scheme from the poor to the wealthy.”
“The financial crisis in Europe has become so severe that it has put the future of the euro, and indeed the future of the EU itself, in doubt. If the financial system in Europe collapses, it is going to plunge the entire globe into chaos. The EU has a larger economy and a larger population than the United States does. The EU also has more Fortune 500 companies that the United States does. If the financial system in Europe breaks down, we are all doomed. An economic collapse in Europe would unleash a financial tsunami that would sweep across the globe. As I wrote about yesterday, the nightmarish sovereign debt crisis in Europe could potentially bring about the end of the euro. The future of the monetary union in Europe is being questioned all over the continent. Without massive bailouts, there are at least 5 or 6 nations in Europe that will likely soon default. The political will for continued bailouts is rapidly failing in northern Europe, so something needs to be done quickly to avert disaster. Unfortunately, as anyone that has ever lived in Europe knows, things tend to move very, very slowly in Europe.”
“The so-called 50 state attorney general mortgage settlement negotiations (a bit of a misnomer, since at least 4 attorneys general appear to be out, and various Federal banking regulators are alos party to the deal) are looking more and more like a desperate effort to reach any kind of a deal so as to save the officialdom’s face. The only good news is the banks are so insistent on total victory that despite the efforts to pretend the talks are making progress, the odds of a deal being consummated still look remote. It is nevertheless frustrating to continue to see the media depict the flailing about by the attorneys general headed by Tom Miller as progress. I’ve been involved in negotiations for much of my career, and I’ve never seen so much incompetence on open display. The Financial Times headline, “US banks offered deal over lawsuit” is substantively misleading. You can’t credibly put forward a proposal unless your side has signed off on it. Yet he has just made an offer that his own side may not support. And this isn’t the first time Miller has pulled this trick.”
“The Eurozone crisis moved into phase 2 this August when the contagion spread to Italian debt, Spanish debt, and most EZ banks. Radical ECB actions prevented a disaster. This column argues that the ECB emergency policies are unsustainable politically and perhaps legally. The only policy combination that EZ leaders could agree on quickly enough involves political cover for ECB bond buying in exchange for national fiscal reforms of the German “debt brake” type. IMF Chief Christine Lagarde made phase 2 official: “Developments this summer have indicated we are in a dangerous new phase” (Lagarde 2011). Phase 1 was the Eurozone (EZ) periphery; Phase 2 is the EZ core (Gros 2011). It is now possible that more Eurozone nations will need bailouts and Europe will fall into a Lehman-size recession (Wyplosz 2011). This changes everything. Eurozone leaders must wake up and get a grip on the situation before it tumbles out of control. They’ve been sleepwalking since May 2010, so it may take a stock market crash to stir them to action – and the stock-market alarm clock looks set to go off soon.”
“The first, second and third priorities of European economic policy should be to stop and reverse the downturn. If they fail to achieve that, the eurozone’s crisis will end in catastrophe because every single resolution programme will be in danger of failing. Unfortunately, economic policy is utterly unprepared for an economic downturn. The European Central Bank has been tightening monetary policy since the spring. Fiscal policy is contracting as governments rush to announce austerity programmes. Policymakers seem in no hurry to fix the problem. Monetary policy is the most important tool at this stage because the ECB has the greatest room for manoeuvre. Inflation expectations have subsided. My favourite market-based measure is zero-coupon inflation swaps. They now point towards an undershoot of the ECB’s inflation target. The central bank no longer has an excuse not to cut its main refinancing rate back to 1 per cent, or possibly even lower. The goal should be to ensure that the overnight money market rate converges towards zero. It is now close to 1 per cent, so the effective scope for an interest rate reduction at the short end is close to a full percentage point. “
“The Bundestag will have one chance to stop Angela Merkel’s plan to provide hundreds of billions of dollars to underwater EU banks that made bad bets on sovereign bonds. If the German parliament fails to block Merkel on September 23, then–under the “expanded powers” of the European Financial Security Facility (EFSF)– insolvent banks will be bailed out and the costs will be passed on to eurozone taxpayers. Despite her populist bloviating (“We won’t be bullied by the markets”), Merkel is a devout Europhile committed to a fiscal union ruled by bankers and bondholders, a Banktatorship. Presently, she is doing whatever she can to hurry the process along before hostile bond vigilantes roil the markets and bring the EU banking system crashing down. This is from Der Spiegel: ”In a situation of market panic, the EFSF has to act quickly,” Holger Schmieding, chief economist of Berenberg Bank, told the Financial Times Deutschland. “It could happen overnight or on a weekend.” Guntram Wolff of the Brussels-based think tank Bruegel agreed. Parliamentary approval “must not take too long.” (“Parliamentary Influence over Euro Bailouts Naive’”, Der Spiegel)”
“Any time a major bank releases a report saying a given course of action is too costly, too prohibitive, too blonde, or simply too impossible, it is nearly guaranteed that that is precisely the course of action about to be undertaken. Which is why all non-euro skeptics are advised to shield their eyes and look away from the just released report by UBS (of surging 3 Month USD Libor rate fame) titled “Euro Break Up – The Consequences.” UBS conveniently sets up the straw man as follows: “Under the current structure and with the current membership, the Euro does not work. Either the current structure will have to change, or the current membership will have to change.” So far so good. Yet where it gets scary is when UBS quantifies the actual opportunity cost to one or more countries leaving the Euro. Notably Germany. “Were a stronger country such as Germany to leave the Euro, the consequences would include corporate default, recapitalisation of the banking system and collapse of international trade. If Germany were to leave, we believe the cost to be around EUR6,000 to EUR8,000 for every German adult and child in the first year, and a range of EUR3,500 to EUR4,500 per person per year thereafter. That is the equivalent of 20% to 25% of GDP in the first year. ” It also would mean the end of UBS, but we digress.
Where it gets even more scary is when UBS, like many other banks to come, succumbs to the Mutual Assured Destruction trope made so popular by ole’ Hank Paulson : “The economic cost is, in many ways, the least of the concerns investors should have about a break-up. Fragmentation of the Euro would incur political costs. Europe’s “soft power” influence internationally would cease (as the concept of “Europe” as an integrated polity becomes meaningless). It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war.” So you see: save the euro for the children, so we can avoid all out war (and UBS can continue to exist). The scariest thing, however, by far, is that for this report to have been issued, it means that Germany is now actively considering dumping the euro.”
“M.M. hears that instead of contemplating settlements of the FHFA mortgage-backed securities lawsuits, big banks and their attorneys are more likely to pursue what insiders describe as an all out war strategy in which they go after Fannie Mae and Freddie Mac (and by default their Democratic supporters) in a scorched earth strategy to show the GSE’s took an active role in creating the very securities they are now suing the banks over. “
“Here are a few zingers for the “recovery” crowd. § The US economy added no new jobs last month. That’s the first time this has happened in the post-WW II period. § Productivity in the US has declined in back to back quarters (despite QE 2). If we get another decline in 3Q11 it will be the first time this has happened since the depths of the 1979 recession. § Today, the US employs less people in manufacturing than it did in 1942. By the way, the US population has doubled since then. § The mean duration of unemployment is at an 80-year high. These are not simply “things are bad” numbers. These are “economic disaster” numbers. The fact they’re coming after the Government and US Federal Reserve have spent TRILLIONS in stimulus should give you an idea of just how dire the situation is in the US economy.”
“It’s not just the U.S. economy that is throttling growth back to stall speed but the global economy as a whole. One of the most powerful big picture concepts that has taken place over the last decade is globalization, the interconnectedness of the world economy, and right now it’s skating on thin ice. While the U.S. may have been the fire starter with its subprime crisis back in 2007-2008, this time it may be the Euro crisis that pulls the global economy underwater. The heart of the matter in the Eurozone and other developed economies is too much debt relative to their productive output—a situation set to intensify as a slowdown in growth (shrinking economies) exacerbates the debt to gross domestic product (GDP) ratios as it becomes more difficult to service debt with shrinking revenue.”
“Sometimes, personal-finance gurus advise cash-strapped consumers to pay off their high interest-rate credit cards by using a lower-rate one. Banks have been trying the same tactic to get out from what they owe to Uncle Sam – by borrowing from Uncle Sam. And guess what? Uncle Sam is encouraging it. TARP, the US Treasury’s $700 billion bailout of banks and the housing market, technically expired all the way back in October 2010. The exhausting debate about whether TARP was successful persisted more than two years after the program started. Neil Barofsky, the official in charge of keeping TARP accountable, stepped down in February and slammed the program in a New York Times op-ed in March. So it’s no surprise the government wants to clear its rolls of the hundreds of banks that have been dawdling in paying back their TARP bailouts from January 2009. Keefe Bruyette & Woods says that Treasury has $19.1 billion still invested in about 473 banks through TARP. “
“I warned in my 2010 book The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble that the US was in a race against time to get its economic house in order. The window of opportunity to get the economy back on a strong growth track was approximately two years starting in the second quarter of 2009. By the time my book came out in the fall of 2010, I was warning in book tour interviews that recovery policies were taking us in the wrong direction, that attempts to restart the FIRE Economy — the economy oriented around the finance, insurance, and real estate industries — will fail at the expense of the Productive Economy — the economy of goods and services producers that employs over 90% of consumers. If policy makers persist with this wrong-headed approach, I warned, the result will be persistent high unemployment, a depreciating dollar, rising consumer price inflation, falling home prices, and rising budget deficits. “
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