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What’s a few billion dollars?

October 26, 2011

Must read

Perspective;  A billion dollars effectively represents about $3.20 for every adult and child in the U.S.  A trillion dollars represents about $3,200 dollars pehe person. The National Institutes of Health (NIH), which funds basic medical research in cancer, diabetes, multiple sclerosis, Alzheimer’s, autism, and other conditions, and where the total annual budget is about $31 billion annually (roughly $100 per American). Add in just over $7 billion in research through the National Science Foundation, and about $120 per citizen a year is spent by the government on essential medical and non-military scientific research through these agencies. These figures pale in comparison to the amounts that are increasingly demanded in order to make bondholders whole on their voluntary, bad investments. 

The Federal Reserve provided an amount equal to the entire NIH budget simply to backstop the rescue of Bear Stearns, which allowed those bondholders who voluntarily lent to Bear Sterns to receive 100 cents on the dollar, plus interest. 

The federal Govt provided $185 billion to bail out AIG

The most troubling revelation in this story is the astonishing weakness of the Federal Reserve and its incompetence as a faithful defender of the public interest.
“A five-member COP, chaired by Harvard professor Elizabeth Warren, has produced the most devastating and comprehensive account of the AIG ordeal. Unanimously adopted by its bipartisan members, it provides alarming insights that should be fodder for the larger debate many citizens long to hear—why Washington rushed to forgive the very interests that produced this mess, while innocent others were made to suffer the consequences. The Congressional panel’s critique helps explain why bankers and their Washington allies do not want Elizabeth Warren to chair the new Consumer Financial Protection Bureau.”

Incomprehensibly large bailout figures now get tossed around unexamined in the wake of the 2008-2009 crisis (blessed, of course, by Wall Street), while funding toward NIH, NSF and other essential purposes has been increasingly squeezed. At the urging of Treasury Secretary Timothy Geithner, Europe has been encouraged to follow the “big bazooka” approach to the banking system. That global fiscal policy is forced into austere spending cuts for research, education, and social services as a result of financial recklessness, but we’ve become conditioned not to blink, much less wince, at gargantuan bailout figures to defend the bloated financial institutions that made bad investments at 20- 30- and 40-to-1 leverage, is Timothy Geithner’s triumph and humanity’s collective loss.

The most depressing display of math-illiteracy by investors last week was the excitement over a report suggesting that France and Germany had agreed to a 2 trillion euro bailout package for Europe. It was almost beyond belief that investors took that report seriously, but people have become so tolerant of unbelievably large figures that virtually any bailout number can now be tossed out without triggering the least bit of scrutiny. Notably, 2 trillion euros is more than the GDP of France, and is half the GDP of Germany and France combined.

The way that Europe can be expected to deal with this is as follows. First, European banks will not have their losses limited to the optimistic but unrealistic 21% haircut that they were hoping to sustain. In order to avoid the European Financial Stability Fund from being swallowed whole by a Greek default, leaving next-to-nothing to prevent broader contagion, the probable Greek default will be around 50%-60%. Note that Greek obligations of all maturities, including 1-year notes, are trading at prices about 40 or below, so a 50% haircut would actually be an upgrade. Given the likely time needed to sustainably narrow Greek deficits, a default of that size is also the only way that another later crisis would be prevented (at least for a decade, and hopefully much longer).

Gradually, but eventually, European leaders are beginning to recognize that you can’t solve a sovereign debt crisis by expanding the quantity of sovereign debt, when even the strongest countries are already bloated with it. You can’t get “Out” by walking through yet another door marked “In.” 

Of course, Europe wouldn’t need to blow all of these public resources or impose depression on Greek citizens if bank stockholders and bondholders were required to absorb the losses that result from the mind-boggling leverage taken by European banks. It’s that leverage (born of inadequate capital requirements and regulation), not simply bad investments or even Greek default per se, that is at the core of the crisis.


On the subject of bank capital, I can’t stress enough that the proper approach is for government to restrict even temporary, fully-collateralized assistance only to those institutions that are clearly solvent, and to promptly restructure the other institutions. What the global economy needs most is not bank bailouts, but to establish and enforce a legal and regulatory structure that allows the streamlined bankruptcy of insolvent institutions(Title II of Dodd-Frank addresses this with a more comprehensive policy than existed in 2008, but it doesn’t read as a “clean” solution in my view – putting too many cooks in the kitchen – particularly the Fed and the Treasury).

Again, again, again, the “failure” of a financial institution only means that the institution fails to pay off its own bondholders. Depositors typically lose nothing. For example, “saving” Bear Stearns meant primarily that Bear Stearns’ bondholders would be made whole. Saving Dexia a few weeks ago meant the same thing for Dexia’s bondholders. The key is not to prevent “failure,” but to prevent disorderly failure and piecemeal liquidation. Washington Mutual was a seamless, and therefore nearly unmemorable “failure.” Lehman was disorderly and jarring. The difference was that there was a legal and regulatory structure to quickly cut away stockholder and bondholder liabilities in the Washington Mutual instance (which was handled by the FDIC), while there was no similar way to restructure non-bank financials like Lehman in 2008.

From my perspective, weak regulation of bank leverage, inadequate capital requirements, and the need for prompt, streamlined restructuring for insolvent banks are among the most urgent problems that the global economy faces. Consider this. The Financial Times reported on Friday that in 2008, Dexia lent 1.5 billion euros of its capital to two institutional investors, who used the cash to buy newly issued shares in … wait for it … Dexia. Remember that as a bank, Dexia operated at leverage of about 50 times its tangible shareholder equity (see last week’s comment ). So Dexia’s maneuver made it possible to meet regulatory capital standards and take on a huge amount of additional leverage, without actually raising any bona-fide capital. As FT noted, “The unorthodox funding move, which roused Belgian regulators’ concern at the time, amounted to Dexia borrowing money from itself to finance a capital increase. This is illegal in most jurisdictions and is now banned in the European Union, but did not break Belgium’s existing laws.”

On a similarly outrageous note, Bloomberg reported last week that ” Bank of America , hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits… The Federal Reserve and the Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by the counterparties. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC is objecting. The bank doesn’t believe regulatory approval is needed.” Well, other than that it goes against Section 23A of the Federal Reserve Act , but then, the Fed can make an exemption whether the FDIC likes it or not . And that’s what we’ve come to – government of the banks, by the banks, and for the banks (because banks are people too) . 

The Bloomberg report continued, “B ank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA [the FDIC insured entity], according to the data, which represent the notional values of the trades. That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives.”

Note that the figures are in trillions, not billions (U.S. GDP is $15 trillion). That said, the vast majority of the “notional value” of derivatives in the financial system represents multiple fully-hedged links in a long chain between final users who actually take the risk, so Bank of America’s true risk is most probably a tiny fraction of that notional amount. Unless those derivatives include unhedged short positions in credit default swaps on Greek debt (which we can’t really rule out), it’s not clear that the derivatives themselves are underwater. The real problem, in my view, is that the transfer is clearly driven by the intent to get around capital adequacy regulations, and runs precisely opposite to the right way to create a good bank and a bad bank . It saddles the good bank – the taxpayer insured one – with the questionable liabilities, while “giving relief” to the holding company. This is really preposterous.

As a final note, it’s worth observing that a number of banks reported positive “earnings surprises” last week. If you look at those results for any of the major banks, it is immediately clear that the bulk of the earnings were of two sources: further reductions in reserves against potential loan losses, and an accounting gain known as a “Credit Valuation Adjustment.” Those two items, for example, were responsible for nearly 90% of Citigroup’s reported “earnings.” The Credit Valuation Adjustment (CVA) works like this: as the bond market has become more concerned about new financial strains, the bonds of U.S. banks have sold off significantly in order to reflect higher default probabilities.   The decline in the market value of their bond liabilities means that the banks could technically “buy their bonds back cheaper.”  Under U.S. accounting rules, banks no longer mark their bonds to market, but happily take the accounting gain.

So the decline in the bonds, despite being due to an increase in investor concerns about bank default, actually gets reported as an addition to earnings! Surprise, surprise.



October 19, 2011

Copyright New York Magazine

New York Magazine (okay they are pretty disgusting, but anyway) polled 50 protestors at OWS about some issues theoretically relevant to the movement.

Here’s hoping those snotty New York Mag reporters purposefully picked the wrong people.

Lessons learned

October 18, 2011

When I read a headline today “Bernanke has learned his lessons from the 2008 crisis” my initial thought was “fuck that bearded ass face.  He is satan himself, hell bent on destruction whom even jesus himself would punch in the neck.”

But I settled down and thunk to myself – Everybody deserves a second chance right? Michael Vick, DSK, Roman Polanski, Woody Allen and even Mel Gibson.  If we can overlook puppy killing, maid and adolescent raping Jew haters – we can forgive a simple monetarist, trying to save the world who lost their way…  And he must be truly sorry – particularly for fucking savers and screwing the elderly 3 years running 

Shattered about perpetuating moral hazard as illustrated here
And here 

Somewhat down about allowing banks to screw taxpayers

Regrets single handedly inspiring the OWS and “day of rage” protests by way of pretending banks are not arms of the Govt.

Down and out about leaving the country at risk by lending vs junk collateral and tripling the size of the balance sheet, guaranteeing inflation and/or massive losses which he deems “optimal”

Remorseful about back door (and front door) bailouts

Seeking atonement for smashing capitalism

So here is the moment we’ve all been waiting for.  Without further ado I present the apology:

“Federal Reserve Chairman Ben Bernanke says a key lesson learned from the 2008 financial crisis is that central banks must have a dual goal of maintaining inflation while supporting the banking system. ”

WHAT??? THIS CAN’T be right.. Oh for the love of Pete.

“Bernanke said the steps the Fed took during the crisis proved to be successful.”

Successful. Good God make it stop. Please make it stop.
“Bernanke also noted that the Fed helped calm markets by lowering short-term interest rates to record lows and expanded its portfolio of Treasury and mortgage-backed securities to push long-term rates lower. Bernanke said it’s a trend that will increase in the future.”

Lord help us..

Occupy Wall Street’s Message: Take Money Out of Politics

October 17, 2011

I started out tickled pink that those enterprising souls set up camp down in the financial district. As a matter of fact, it took a wifely admonition to keep me from checking it out in person. (The jury is still out on this.)

Over time though, I’ve grown more and more unimpressed and in fact somewhat annoyed by the whole endeavor, mainly due to the movement’s severe and delusional case of self-congratulationitis and its lack of a real message / organized apparatus for political action.

To summarize, I’ll let laziness rule the day as I quote a comment I made on another post regarding the related riots in Italy:

Violence abroad is far less damning to me than the lack of real action on the part of the “movement”.

Between Obama’s election and the 2010 election, the Tea Party was born, organized, became politically active and got people elected. Next thing you know, those elected to the House of Representatives are holding the debt ceiling increase hostage and affecting things on a global scale. Douchey, childish and dangerous? Yes. Effective? Absolutely.

I love a good protest but OWS is getting old, fast. They need to engage the system and actually do something.

Oh and stop comparing yourselves to the middle east uprisings. Those people were/are getting killed, tortured, beat up trying to acquire the basic rights which so many in the US including I’m sure many protesters take for granted and/or don’t exercise.

Ah it feels good to let it out.

Anyway, I did a little research, a sad necessity due to OWS’s poor communication (or perhaps the mainstream media’s deliberate smudging of the message??) and found what I think is the initial communique in the OWS protests. And within that statement lies this brilliant nugget:

… we zero in on what our one demand will be, a demand that awakens the imagination and, if achieved, would propel us toward the radical democracy of the future …

… we demand that Barack Obama ordain a Presidential Commission tasked with ending the influence money has over our representatives in Washington. It’s time for DEMOCRACY NOT CORPORATOCRACY, we’re doomed without it.

BOOM! Hey fellas! Hey ladies! Can we get going on this? Whatever the cause, this terrific, very worthwhile demand, has somehow gotten lost in the shuffle. Is it due to the protesters themselves, tripping each other up with too many messages, or too much emphasis on the romantic notion of protest? Is it due to the media, purposefully presenting a – to put it kindly – mosaic of issues? I don’t know, and at this point I don’t care.

Occupy Wall Street should regroup and rally around this ONE CAUSE, as initially prescribed by Adbusters (an organization, for what it’s worth, that I do not endorse, necessarily).

Now I realize this may not quite be dramatic enough for some people but there is legislation in Congress (boooo! yeah yeah I know) called the Fair Elections Act that is a start – a start! – at least. (I found out about this by Googling “campaign finance reform” and ended up at

But it needs support and for constituents to stay on top of their congress-people. It goes without saying if US citizens actually participated in this flawed but functional representative democracy, we might not be in this pickle. But it’s not too late to start. Protesting is all well and good but I’d like to see this movement take advantage of the system and flex some muscle in a way that the Tea Party did.

Rome and the OWS

October 16, 2011

A random comment I deleted from Facebook in response to a post about the recent violence in Rome. Call it cowardly, but I don’t have the energy to continually be “(eye roll) that guy”.

Trying to keep this short. I agree the violence is detracting from the cause, but I also hope there is an asterisk in the media coverage that points out this was an Italian “Black Block” highjacking of a peaceful protest of thousands taken over by a hundred. Not that it’s covered much here, but Italian politics tend to be volatile, ephemeral, polarized, violent, and short lived, marginal pluralities. The anarchists are protesting Italy’s “conservative” billionaire Prime Minister Berlusconi who just survived a close no-contest vote. Berlusconi is an Italian version of Murdoch, he controls a ton of Italian media companies, so he in essence reports on himself. (Italy just passes a bunch of national internet censorship laws to boot, haha, Italy to boot.) He also has had/has 23 criminal cases against him from embezzlement, tax dodging, bribery, mafia collusion, et alia . His latest scandal which triggered the near no-confidence vote is that his preference for his oft hired prostitutes, are underaged girls. To further muddy things up; the “Black Block” anarchists in the Toronto WTO protests are widely believed to have been badly disguised policemen. The Toronto “Black Block” agitation was cited for the Pittsburgh G20 meeting’s denial of nearly all protesters and the heavy presence of riot police and the use of LRAD devices on protesters. This is getting too long. The Roman violence is detracting because instead of mentioning the crap I just typed, odds are the headlines will be something to the effect of, “The Occupy Wall Street movement turns violent”.

The name of the game is Bailout.

October 15, 2011

Global markets rallied nicely recently. Wonder why..

“European policy makers have put out some very positive and optimistic messages”.

Hmm, some positive economic data?

“European officials are outlining a rescue plan that may include increased firepower for bailouts”

Oh right, more bail outs. Yay.

BBG- “The bank-aid model under discussion is to set up a European-level backstop capitalized by the 440 billion-euro ($609 billion) EFSF rescue fund, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities.”

Feeding time boys! Everybody line up. “Sorry sir, this line is for Banks ONLY. The unemployment line is across the street. Oh, and keep paying your taxes. We are counting on you to foot the bill.”
Bondholders and stockholders need not be held accountable for their foolish investments.

“Forcing investors to take losses in bailouts will have direct negative effects on banks”.
European Central Bank

Too big to fail

October 10, 2011

One of the biggest qualms against the folks down at zucotti park is they lack a central theme/cause. I’m all for signs and slogans that read “End moral hazard”, “fight inequality”, “Bankers suck”. Folks need a tangible/attainable goal. At the end of it all what can make people look back and say – we achieved something?

Some regulators acknowledged how totally ass backwards things were in 2008 as private institutions were bailed out while the rest of the economy ate fried dog shit. The Dodd Frank bill was intended to address many of these issues – the bill was signed into law – but not many of us are aware that many aspects of the bill are still being debated. Some Republicans are attempting to repeal or water down many aspects of the bill. Banks are spending millions (if not billions) on lobbyists to argue against the “costs of regulation”. Banks argue that any attempt to reign them in will hurt the economy and the fragile recovery. Jamie Dimon went so far as to say the regulators are un-American.

Now I’m all for free markets and less Govt – but the line between banking and govt is so blurred nowadays it’s hard to tell between the Central bank and the bank of America.

As I’ve mentioned before – if banks are so damn important and critical – then they should be regulated as a utility.

One of the most important issues in regulatory reform is the notion of systemically important financial institutions. This framework is designed to remove the advantages banks derive from being too big to fail. Under the Dodd-Frank Act (DFA), the Financial Stability Oversight Council (FSOC) has the authority to designate a financial institution as systemically important. If designated, such institutions will be subject to tighter liquidity and capital standards as well as closer supervision.

I would not have used the term “important” which implies these institutions will be given preferential treatment. The name should be systemically obese banks or “SOB”. The designation should be a “scarlet letter,” a sign that their profits would be reduced due to higher capital and liquidity requirements.

The rules should be adapted so these institutions have incentive to shrink.

We need to ensure the list of institutions that make this list is significant. Here is a bit of a problem because the entire industry is over-leveraged. 10-1 is excessive – some banks are currently leveraged as much as 40-1!! Thats what makes these institutions susceptible to failure. Either way, the more institutions included on the list the better.
Currently, there is a split among regulators. The Federal Reserve and the Treasury want to designate only a few (less than 10). On the other hand, the Federal Deposit Insurance Corporation (FDIC), in charge of winding down systemically important financial institutions, prefers to designate about 30 to 40.

Every bank holding company with over $50 billion in assets should be automatically included in the list. The Basel Committee on Banking Supervision (BCBS) needs to understand that people are serious about ending TBTF. These regulators must set the additional required capital at levels sufficient to provide a disincentive for banks facing the highest charge to remain too big to fail.