Thursday, April 30, 2009

Fed prepping preemptive bailout of commercial real estate

Voltron says: could cost $2 trillion.

Speculating on residential housing

Voltron says: Robert Schiller's company - Micro Markets - is creating an ETF
that tracks national residential housing prices via his Case-Schiller
housing index. There are already futures and options contracts on
individual housing markets (but the contracts are quite large ~$75k). The
initial public offering will be May 11th. The ETF is triple leveraged based
on CUMULATIVE change in the residential housing index, whereas SRS is double
leveraged based on the DAILY changes in the commercial real estate index.
Even though housing is still 20 percent overvalued vis-à-vis rents,
inflation could cause house prices and/or rents to rise. There are also
issues with the way the index is computed and revised.

More info:

Monday, April 27, 2009

Stress test results

Voltron says: the word on the street is that Citi, BofA and Wells Fargo need to raise money. Strange since they all reported record "profits"

Negative interest rates

Voltron says: The Federal Reserve is losing it's grip on reality

Fed study puts ideal interest rate at -5%

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve's last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.

Fed staff separately estimated what size and type of unconventional operations, including asset purchases, might provide this level of stimulus. They suggested that the Fed should expand its asset purchases by even more than the $1,150bn (€885bn, £788bn) increase policymakers authorised at the last meeting, which included $300bn of Treasury purchases.

Janet Tavacoli (video)

Janet Tavacoli (Author and University of chicago professor of derivatives finance) explains the crisis and lays blame.

Sunday, April 26, 2009

Fannie Mae Creates Housing Mirage

April 24 (Bloomberg) -- Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.

Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.

The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.

The big game of kick the can strikes at a deep-seated fear among many investors -- that banks and others faced with mounting housing losses are finding all manner of dubious ways to push a day of reckoning into the future.

If that’s the case, any improvement in the housing outlook might be a mirage obscuring even greater pressures building in the financial system. That would eventually counter better-than- expected first-quarter results from many banks.

Investor angst was made worse by the knowledge that the government is leaning hard on banks to modify troubled loans any way they can. Prevent foreclosures and worry about the consequences later is the mantra of the day.

In a perverse way, there is some logic to such maneuvers. Today’s troubled borrower may be in better shape if given time to wait for fractured markets to heal. Or, if today’s losses can’t be cured, the company facing them may be better able to deal with them at a less-stressed future date.

...Based on market prices, Fannie said the loans had a value of just $8 million. That’s right, the loans, which are in many cases just months old, were worth 1.7 cents on the dollar.

full article:

Saturday, April 25, 2009



Created by lenders seeking to save millions of dollars on paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. From an office in the Washington suburbs, it played an integral, if unsung, role in the proliferation of mortgage-backed securities that fueled the housing boom. But with the collapse of the housing market, the name of MERS has been popping up on foreclosure notices and on court dockets across the country, raising many questions about the way this controversial but legal process obscures the tortuous paths of mortgage ownership.

full article:

Thursday, April 23, 2009

The government should join GASG

Voltron says: The government's plan to convert the Treasury's holdings of
bank preferred stock to common stock follows a now familiar pattern. It's a
gamble. By swapping senior debt for the lowest rung equity shares, the
government is increasing it's risk instead of just spending a known amount
of money. Why is the government gambling with our money? There is not
political will to say, "hey it's going to take XYZ amount of money/work to
get out from under this" Instead, it's a series of increasingly desperate
gambles. Right now, the debt is a manageable percent of GDP (40% + 45% for
Social Security and Medicare). If we keep going down this path, pretty soon
it won't be. Again, I don't mean to get on a soapbox. I'm just pointing
out that we are going to be forced to inflate away this debt, because no one
is willing to work it off.

P.S.: GASG stands for "Gambling Addiction Support Group" which was the name
of the email list that was the predecessor to this blog.

Wednesday, April 22, 2009

Wells Fargo's margins are thin

Mortgage Fraud

Voltron says: The government has been making a lot of noise about "mortgage scams" advising people not to pay fees and to use only free government approved housing counselors. The government approved housing counselors are not allowed to advise you to default even if it is in your best interest - at least not until ALL of your retirement savings are drained. They exist to protect the banks. The government wants to steer you away from companies like "You Walk Away LLC" that look after your interests. The government is creating a straw man - the fact is most mortgage fraud being investigated by the FBI is perpetrated by well known mortgage servicers. They will intentionally mar your credit rating to prevent you from refinancing while they concoct fees, game the system and force a foreclosure.

If you have a mortgage, you should read this:

More info:

Freddie Mac CFO Commits Suicide

Tuesday, April 21, 2009

Pre-paid tuition

Voltron says: I'm a big fan of pre-paid college tuition plans. They are offered in 19 states and allow you to lock in the current tuition rate and pay with a lump sum or payment plan. This differs from a "529" college savings plan where your returns are dependent on the investments in the plan. The "529" plans have been decimated by the market downturn, but pre-paid tuition plans are guaranteed by the state.

Bank Profits Appear Out of Thin Air


Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be presto! better-than-expected numbers.

But in each case, investors spotted the attempts at sleight of hand, and didn’t buy it for a second.

With Goldman Sachs, the disappearing month of December didn’t quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that’s sort of like saying you’re richer because the value of your home has dropped); Citigroup pulled the same trick.

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Wells Fargo: Bulls vs. Bears

Voltron says: The bull case is bullsh!t (hat tip to G-man)

"I've accepted the point of view that if a loan is not in default, it's
worth what it says it's worth. And that means I think the markdowns are
excessive in the sector."

Monday, April 20, 2009

No way out

Voltron says:

The major banks have all reported good earnings last quarter, using every accounting trick in the book, in order to repay the TARP loans to get the government off of their backs so they can continue paying themselves enormous bonuses. The problem is they've slammed the door to further bailouts and put the government in the horns of a dilemma on how to deal with the results of the stress test they conducted. It's a gigantic game of brinksmanship where clearly all the players know the gig is up very soon.

As the banks implode, the Fed will continue to try and fill the enormous balance sheet hole with printed money. Given that the Fed is willing to do anything, legal or illegal, to increase the money supply, I think they will succeed, but there will be no political will reverse gears quickly enough to soak up the excess liquidity afterwards and massive inflation will result.

The only ways this won't happen is if the economy seizes up so thoroughly that the velocity of money goes to zero (people hoard money instead of spending it, regardless of how much excess they have) or if the government comes to it's senses and reverses course, which is vanishingly unlikely (although former Fed Chairman Paul Volker has recommended yanking the Fed's leash (

Saturday, April 18, 2009

Fed officials suggest worst of recession is over

Paul Volcker, a senior economic adviser to the Obama administration and a former Fed chairman himself, said the rate of the economy's decline is set to slow.

Voltron says: That's supposed to inspire confidence? Actually, I'd expect the rate to slow as we settle into the long slow slide like Japan had.

Bank Regulators Clash Over U.S. Stress-Tests Endgame


While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Voltron says: I'm waiting for the results with my baby seal club . . . grinning. I won't wait six seconds.

Wells Fargo is full of it

Voltron says: according to bloomberg, Wells Fargo took Wachovia's reserve for loan losses and applied it to their own losses. They simply assumed that Wachovia would not have any losses. If Wachovia had no impending loan losses, why did they collapse into the arms of Wells Fargo? They also reported $44.2 billion in "other assets". Other accounting shennanegans abound

Shitibank is full of it


Citigroup posted a $2.5 billion gain from accounting rules that allow companies to profit when their own creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit.

Voltron says: Citibank's earnings conference call was mostly jibberish, causing analysts to believe that they are trying to dazzle us with bullsh!t

Friday, April 17, 2009

Have banks hit bottom?

Voltron says: well, now all four major banks have put forth their phony "earnings" by using dubious and newly-legalized "creative accounting". That's it . . . no more "good news"


John Carney from We're still in the dark. We're probably even more in the dark than ever before because the amount of noise coming out of the government is confusing the signals that the market would normally send to us.


Paul Krugman is at it again

Voltron says: Paul Krugman eloquently paints an accurate picture of the current situation - worth reading - but then comes to the wrong conclusions. A path that will ensure inflation.

AIG bailout causing bankruptcies

Voltron says: according to this article, Bondholders who bought Credit Default Swaps as a hedge are less willing to make concessions and more willing to allow a company to go bankrupt, because they're covered by the CDS. Consider GM and General Growth Properties. The irony is that the CDSs sold by AIG would be worthless without the government bailouts. So the bailouts save AIG, but push other companies over the edge. Unintended consequences . . .

Thursday, April 16, 2009

A third of foreclosed homes too damaged to sell

"About a third of all of the foreclosed properties nationwide have been so damaged, either by the previous owners or by criminal gangs coming in after the foreclosure, that they no longer qualify for standard mortgage financing," [researcher] Thomas Popik told CNN. "So there is going to be all kinds of government programs to help, but if they don't qualify for standard mortgage financing, there's no one to buy these properties."

Popik says responses from thousands of real estate agents nationwide to the questionnaires he sends out quarterly indicate that badly damaged foreclosed homes ... are a much bigger element of the national housing picture than officials in Washington have acknowledged.

"In many cases, it costs so much to rehabilitate these houses, it's just not cost-effective," he told CNN. "And the properties are eventually going to be bulldozed."

Full article:

A Quick Bankruptcy for G.M.? Not So Fast


Any hope of a high-speed bankruptcy by General Motors faces a serious obstacle: a judge — not the Obama administration, not G.M. management and not the company’s creditors — would reign in court.

A bankruptcy judge would be required by law to listen to unions, whose members fear for their jobs, benefits and pensions. And the judge would have to pay attention to creditors, including bondholders frustrated by how much they stand to lose if G.M. is broken up into “good” and “bad” companies as the administration is planning. Even a judge sympathetic to the administration — and the administration would look for a sympathetic court — might be reluctant to rubber-stamp that plan.

Bankruptcy cases often drag on far longer than anticipated, slowed by unexpected obstacles to reorganization. The auto parts company Delphi, once a unit of G.M. and now a supplier, has languished in bankruptcy proceedings for four years, twice as long as originally planned, for example.

“It’s going to be about the union and the pensions,” said Ms. Mayerson, the bankruptcy lawyer. “And I don’t see any way that this is a quickie bankruptcy. After all, it took them 30 years to get into this mess.”

Full article:

As if it wasn't bad enough, according to the Wall Street Journal: "Steven Rattner, the leader of the Obama administration's auto task force, was one of the executives involved with payments under scrutiny in a probe of an alleged kickback scheme at New York state's pension fund, according to a person familiar with the matter."

Full article:

Willem Buiter ruminations on banking


There is no real money left in the original $700 bn TARP facility - somewhere between $ 100 bn and 150 bn - to do more than stabilize a couple of pawn shops. The Treasury has been playing for time by raiding the resources of the FDIC (which, apart from the meagre insurance premiums it collects, has no resources other than what the Treasury grants it) and of the Fed. The Fed has taken an open position in private credit risk to the tune of many hundreds of billions of dollars. Before this crisis is over, its exposure to private sector default risk could be counted in trillions of dollars.

There is no economic reason for large banks. Therefore banks should be kept small. An obvious mechanism (apart from aggressive anti-trust policy) is to tax bank size. One way to do this is through making regulatory capital requirements increasing in the size of the bank’s activities. For instance, tier one capital as a share of (unweighted) assets could be made an increasing function of the value of the assets.

Full article:

Stiglitz Says White House Ties to Wall Street Doom Bank Rescue


The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”

“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long run solution. It’s a solution that says let’s kick the can down the road a little bit.”

Full article:

Stress tests deepen headache for Obama

Treasury issues emergency recall of all U.S. Dollars

Voltron says: from "the onion" Hat tip to Dex

Treasury Department Issues Emergency Recall Of All US Dollars

Voltron says: I don't have to worry, I don't have any money left after yesterday:

IMF Warns Downturn Will Be Prolonged and Recovery Shallow

Wednesday, April 15, 2009

Crash Course

Voltron says: I recommend watching "the Crash Course" videos by Chris Martenson. It's pretty long but it's split into 20 MTV-generation-attention-span sized clips. For by bros in Iraq: there is a transcript of each section if you can't watch the videos.

It explains how exponential money, a bursting credit bubble, demographics, a failure to save, peak oil, shrinking resources and accelerating biosystem loss are all reaching exponential limits in the near future.

I'd recommend starting with chapters 15, 16, 17a and 18. If you've seen the "Money as Debt" videos, you won't miss much if you skip chapters 3-12.

Brace For Hyper-Inflation

Voltron says: one correction to the article . . . the Fed is not buying the toxic assets - they are accepting them as collateral for loans. The banks will get this crap back someday, and it's not going to smell any better than it does now. The problem is the Fed is treating this as a liquidity problem, when it's an insolvency problem. The banks need cash and all they have is crap so the Fed acts as the pawn shop of last resort. The Fed cannot solve insolvency problems. The U.S. Treasury must go into debt to recapitalize the banks. They are doing this via AIG and the F.D.I.C. to get around Congress.

Tuesday, April 14, 2009

The limit of Keynesian economics

Banks Ramp Up Foreclosures

Excerpts from WSJ:

J.P. Morgan Chase & Co., Wells Fargo & Co., Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures.

The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.

Some of the mortgage companies are themselves receiving funds under the government's financial-sector bailout, which could make their actions politically sensitive.

In California, notices of trustee sales, which are preludes to foreclosure sales, climbed by more than 80% to 33,178 in March, from February, according to data from and the Field Check Group. The increase reflects both the expiration of foreclosure moratoriums and a California law enacted late last year that temporarily delayed default and foreclosure notices

Full Article:

Wells Fargo's B.S.

Dollar’s Fade Won’t Support Stock Rally

The insanity of Keynesian economics

Monday, April 13, 2009

1/3 of foreclosures may be complicated by sloppy paperwork

Voltron says: In many cases transfer fees or taxes should have been paid by the bank when the mortgage was securitized. Oops I guess they forgot to pay. Now the jurisdictions that got ripped off by the banks might get revenge by refusing to enforce the lien in foreclosure.

Wells Fargo may need $50 Billion

Voltron says: By the way, Wells Fargo is the only major bank that does not take questions during an earnings conference call. Arrogance! Given they've lost their AAA credit rating, they should not be able to get away with that. (hat tip to Brewster)

Sunday, April 12, 2009

If the Dollar is supplanted by IMF SDRs...

"we can get away with running a federal deficit that could hit $2 trillion this year only because of the dollar's status as global reserve currency. . . . the dollar would live on in an SDR-dominated world. It would no longer reign supreme, but neither would the yen or the euro or the yuan. Which might be the best long-run outcome the U.S. can hope for.",8816,1890380,00.html

China selling treasurys

Voltron says: I expect China to sell treasurys whenever the market is spooked into buying them.

Money as debt II

Voltron says:

Paul Grignon explains our current monetary system in his video "Money as debt" in which most money comes into existence as the principal of debt. The punch line is that the money to pay the interest does not exist and can only be created as new debt, which means the money supply (and therefore the economy) must continually expand. This is why the Fed is so terrified of a credit crunch.

In this 7 min video clip from "Money as Debt II" he explains that it is possible that if the banks spend the interest they collect, and don't hoard or re-loan it at interest, and it becomes available to the debtors to repay interest, it's possible to pay all debts with the existing money supply.

If you have not seen the original 45 minute presentation, I cannot recommend it enough. It's available on YouTube in five parts (there are 15 seconds of dead space at the beginning for some reason)

Treasury's confidence game

The bank stress tests currently underway are “a complete sham,” says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri - Kansas City. “It’s a Potemkin model. Built to fool people.” Like many others, Black believes the “worst case scenario” used in the stress test don’t go far enough.

He detailed these and related concerns in a recent interview with Naked Capitalism. But Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis, says the program's failings go way beyond such technical issues. “There is no real purpose [of the stress test] other than to fool us. To make us chumps,” Black says. Noting policymakers have long stated the problem is a lack of confidence, Black says Treasury Secretary Tim Geithner is now essentially saying: “’If we lie and they believe us, all will be well.’ It’s Orwellian."

Voltron says: From a Baron's article:

Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud.

Voltron says:probably more like $4 trillion . . .

Saturday, April 11, 2009

Crisis over?

Voltron : Time magazine declares the crisis over.,8599,1890560,00.html

Social Security deficit next year?

social security may start running a deficit next year:

Chris Martenson writes “In the projections for the table above, the CBO has assumed no cost of living adjustments (COLAs) in 2010, 2011, or 2012 and a return to economic growth next year. If either of those assumptions proves wrong, the table above gets smoked to the downside.”

Friday, April 10, 2009

Thursday, April 9, 2009

Nancy Palosi on the Daily Show

Voltron says: Gotta hand it to Jon Stewart, he doesn't lob softballs. Too bad she didn't actually answer any of the questions.

The Daily Show With Jon StewartM - Th 11p / 10c
Nancy Pelosi
Daily Show
Full Episodes
Economic CrisisPolitical Humor

Ugly graph!

from WSJ:

New research shows corporate bonds have been far better at predicting where the economy is headed than anyone thought. Unfortunately, that suggests the economy is going to get much worse.

In the fall of 2007, before the economy began to falter, corporate-bond prices were signaling all was not well. The spread between corporate-bond yields and Treasury yields, which had begun to widen amid that summer's mortgage woes, showed little improvement even as the Dow Jones Industrial Average clocked record highs.

In a forthcoming paper in the Journal of Monetary Economics they show that spreads on low- to medium-risk corporate bonds, particularly those with 15 or more years until maturity, predicted changes in the economy phenomenally well, forecasting the ups and downs in both hiring and production a year before they occurred. Since writing the paper, they extended their analysis back to 1973 and found bonds' predictive ability still held.

It would be better for everyone if it doesn't hold in the future. With the massive widening in corporate-bond spreads last fall, the economists' model predicts industrial production will fall another 17% by the end of the year, and the economy will lose another 7.8 million jobs on top of the 5.1 million it has shed since the recession began. Ouch.

Riddle me this . . .

Voltron asks: If Wells Fargo is doing so great ($3 billion profit), why did they need $25 Billion from the government?  Are they going to pay it back now?  How much government money did they get via AIG?

Quelle Surprise! Bank Stress Tests Producing Expected Results!

Voltron says: If the results are good, why did the Treasury ominously want to delay them to avoid the banks earnings season?

Foreclosure tsunami in April?

Voltron says:  Due to the expiration of California's foreclosure moratorium.  How much longer can they put it off? Has the situation improved since the first time they stalled?

Bailout Bonds. . . For the little people

Voltron says: First the Treasury put such large restrictions on who could participate in the government subsidized Public-Private Investment Fund (PPIF) that only BlackRock, Pimco and the holders of toxic assets themselves could participate.   Evoking wartime Liberty Bonds they now want to create bonds to give "mom and pop" and opportunity to "participate in the recovery"  Voltron asks: is there a way to short this?

China wins economic war-game

The market is up due to Wells-Fargo (lying as usual)

Voltron says: Wells Fargo has reported a $3 Billion profit which happens to be exactly how much they reduced their loan loss reserve. They got $25 Billion in TARP money, is it a shock they were able to conjure up a $3 Billion profit? I'm short again, baby!

They have a huge second mortgage exposure that is the most toxic of the toxic assets:

They huge potential losses according to CreditSights. Worse than B of A and Citi!

Many of Wells Fargo's losses are held off balance-sheet (a la Enron)

I've covered Wells Fargo extensively on this blog - type "Wells Fargo" in the search box at the top of the page to see all my previous articles


Voltron says: We have not had deflation. The deleveraging we had was similar enough for the Fed to confuse it with deflation and they have attempted to fight it using inflation. This visual guide to deflation explains what the Fed is worried about.

Wednesday, April 8, 2009

Bailouts probably a waste of time and money

Voltron's Executive Summary: The TARP watchdog, Harvard Law Professor Elizabeth Warren, issued a tough six month assessment.  Treasury has spent $590 billion of the original $700 billion, but has used "no cost guarantees" and the FED's balance sheet to leverage up to over $4 trillion without additional approval, and they still have not put a dent in the problem.  The Treasury's approach might work if the problem is just a lack of credit but if the banks are actually insolvent (they are), it's just a big waste of time and money, which will limit our options in the future.

Full report:

Fed only has one bullet left


In case no one is keeping track, Bernanke has now fired every bullet from his 2002 “helicopter drop” speech Deflation: Making Sure "It" Doesn't Happen Here.

Bernanke's Scorecard

Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work...
2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work...
3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work...

4. Make low-interest-rate loans to banks. Check. That didn’t work...
5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work...
6. Lower rates further out along the Treasury term structure. Check. That didn’t work…  Voltron says: expect much more of this - still won't work any better.

7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work...
8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work…  Voltron says: so far the treasury debt purchases has been of a pre-announced amount ($200 billion), so you can expect that to ramp up to "unlimited" at which point hyper-inflation is guaranteed.

9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work…  Voltron says: There is no explicit cap yet.

10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work...

11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work...

12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work...

13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work…

Voltron says: so the only bullets left are more buying of treasuries with printed money to attempt to cap the long treasury yields.  This is guaranteed to cause hyperinflation and cause treasurys - the final bubble - to crash.

IMF gold sales

Voltron says: The central banks and IMF will empty their vaults of gold to keep the price down and mask inflation.  Consider this: British Prime Minister Gordon Brown, when he was chancellor of the Exchequer (equivalent of US Treasury Secretary) sold 400 tons (60%) of his country's gold reserve between 1999 and 2002 for an average price of $275 per ounce!  At the last G-20 meeting he was pushing the IMF to sell more gold.

Fed committed to buying treasurys

From the March Fed meeting minutes:

In the discussion of monetary policy for the intermeeting period, Committee members agreed that substantial additional purchases of longer-term assets eligible for open market operations would be appropriate. Such purchases would provide further monetary stimulus to help address the very weak economic outlook and reduce the risk that inflation could persist for a time below rates that best foster longer-term economic growth and price stability.

Treasury knows and is scared

...officials are worried about how the market will react to the stress test results if there is not a clear recovery path for a bank that is deemed to have a large capital need.

The last thing Treasury wants to do is set off a panic, the source said.

full article:

Tuesday, April 7, 2009

Treasury gives banks cash, CEOs a pistol with one round.

According to the Financial Times, “Tim Geithner warned on Sunday that the US government would consider ousting board members at American banks as a condition for giving the institutions “exceptional” assistance in the future.”

When a bank is undercapitalized and new lending and borrowing are encumbered by an overhang of bad, dodgy or toxic assets, the one thing you should not do is offer public financial support to rectify this situation on terms that are very painful for the key decision makers in the banks, painful that is, for those who decide on whether to accept the state’s financial aid.

Why is the FDIC involved in the PPIF?

Voltron says: because it's a quasi-legal end-run around an irate congress.  The government always likes to cast it's bailouts as "insurance" because they can claim that it won't cost anything if they never have to pay out.  With one hand the FDIC is assuming that they will not lose any money on the loans they will insure, but with the other hand, they are selling loans at 50 cents on the dollar.  If genius is the ability to hold two contradictory thoughts in your mind at the same time, the FDIC chairman is clearly a genius.

IMF admits credit losses could reach $4 Trillion

Voltron says: I mentioned that number back in September. (pats self on back)

Ratings agencies rewarded for incompetence

Voltron says: I'm no longer short moody's (or any other stock). I was expecting this:

Monday, April 6, 2009

Now vs then

Voltron says:

There's only been one great depression, so economists comparing today to the great depression is like a doctor who has only ever seen one really sick person. When presented with another sick person, the doctor is either going to think that this person has the same illness, which is probably incorrect, or the doctor is going to admit he has no idea what is wrong with the patient, which is unlikely.

My other favorite analogy is that studying economics to make money is like studying gynecology to get p****. It doesn't work that way!

Maybe after 30,000 years when we've had 1,000 depressions, I'll trust economists.

I think comparisons to the Japanese "lost decade" are more apt, but for what it's worth, the link below contains so charts of how we are tracking compared to the great depression (worse) and how governments have responded (more aggressively)

Is the Fed losing it's nerve?

"The Fed's problem is that the market realizes that $300 billion in Treasury buybacks is just a drop in the bucket compared to $2.5 trillion in estimated net Treasury issuance this fiscal year," said strategists at UBS Securities.

Voltron says: will the Fed raise or fold?  I'm betting they are going all in.

Full article:

7 deadly sins of banking

Voltron says: Loan losses of 3.5% may  not seem like much, but when you are leveraged 30:1, you're wiped out.

"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators," according to the author, Mike Mayo of CLSA.

Full story:

Soros says U.S. banks "basically insolvent"

IMF dumping Gold

Voltron says: As I predicted the IMF and central banks are dumping gold to mask inflation.  If you buy gold, don't use leverage or you will get squeezed out.

Are CEO bonuses "Hush Money"?

Voltron says: From the Moyers/Black interview

"...we don't want to change the bankers, because if we do, if we put honest
people in, who didn't cause the problem, their first job would be to find
the scope of the problem. And that would destroy the cover up ... as long as
I keep the old CEO who caused the problems, is he going to go vigorously
around finding the problems? Finding the frauds?"

PPIF is a page out of ENRON's playbook

Must Read!! Excerpts from William Black interview

Voltron says: Bill Black, who ushered us through the S&L crisis 20 years ago, certainly no kook, makes blockbuster allegations of fraud and cover up against high level government officials.

regarding "liar's loans": When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

on AIG as a conduit for bailing out UBS, Goldman: Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?

. .. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

on bank solvency: Geithner ... is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine. These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed . . .

on investigation: What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.

on CEO hush money: "...we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up ... as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?"

the conclusion:

WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent.

full transcript:
you tube video links:

Sunday, April 5, 2009

Some Charts

Voltron says:

For those of you just tuning in, this chart shows that the mortgage implosion will not peak until 2011:

The trough in 2009 may not happen due to mortgages recasting before they reset

The following chart of commercial real estate loans maturing (by year loan was made, a.k.a. "the vintage") shows that the commercial real estate problem may not peak until 2017!

The Fed is printing money and leveraging up it's balance sheet with junk to try and paper over the mess with an alphabet soup of bailout programs. I'm not comfortable shorting stocks in the face of that.

Bondholders getting bailed out

Voltron says: no doubt due to regulatory "capture" and pension fund extortion by Bill Gross at Pimco.

Here it comes

From The UK Observer:

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.

5 more ways to scam the bailout

Voltron says: what a great time to be a bankster! But now that mark to market accounting has been thrown out the window, the banks have no incentive to participate in any of these bailout programs.

From Businessweek:


Banks may be able to finance the sale of their own troubled loans, lending money to the public-private partnerships that buy the assets. A bank's loan to the partnership would be buttressed by an FDIC guarantee. Administration officials confirm that the Treasury may allow such seller financing. The move essentially replaces junky mortgages on the bank's books with an FDIC-guaranteed loan. With its risks so limited, the bank has every reason to pass off its weakest assets as better than they are, argues Fuqua School of Business finance professor Campbell R. Harvey. "They will want to unload the worst possible things at the highest possible price," he says. "And if they're doing the financing, it's even more likely that they will be able to do that." Government officials say they will charge more for loans used to buy the riskiest assets.


Say a private investor in one of the partnerships owns big stockholdings in a bank putting assets out to auction. By overbidding for the bank's sludge loans, the investor could help drive up the banks' shares and make a tidy profit. His stake in the partnership might take a hit if the assets eventually aren't worth what the auction price suggests. But the government would shoulder most of any big losses. As long as the private investor's stock market gains exceed his loss in the partnership, the deal's a winner.

Government officials see this ploy as too risky for most investors to try. But the Treasury would be hard-pressed to prevent such maneuvers, short of barring a slew of hedge funds and other big bank investors from bidding in the auctions at all. Besides, it's impossible to disentangle all the connections between banks and money managers. "How do you find a private money manager that doesn't have a relationship with a bank?" asks Albert "Pete" Kyle, a University of Maryland finance professor.


In the public-private partnerships, the private partners are supposed to figure out how much to bid for assets, keeping the government well away from the business of pricing deals. But the way the deals are structured, the FDIC and Treasury will absorb as much as 93% of any losses, while getting to keep just half of any profits. "The government's going to be on the hook for the [deals] that are bad," says Brookings' Young. With their own downside so limited, the private partners are likely to be drawn to the riskiest deals, which offer the highest potential payoffs—and the government the biggest potential losses. One option under consideration is including multiple private partners in each partnership as a check on one another's excesses.


For all the talk of toxic assets, some banks may want to hold on to their suspect loans in the belief that they will eventually pay off. The Treasury and the Fed, however, are breathing down the banks' necks to unload problem debts.

What to do? A bank could effectively swap its existing portfolio of junky loans for another one very similar—only this time limiting the downside by using government loans and guarantees. The bank would auction off its loans to a public-private partnership. Then, using a portion of the auction proceeds, it would set up a different public-private partnership that would of course have access to government loan guarantees and matching funds. The bank would use the new partnership to buy a portfolio of similar problem assets twice the size of its old portfolio. The bank would then split any gains from the new portfolio 50-50 with the feds—but risk no more than the sliver of equity it contributed to the deal. The Administration may seek to block such maneuvers.


Perhaps the most intricate maneuvers will likely stem from "layering" the government's many programs of the last six months. Starting with some of the capital infusion received last fall from the Treasury, a bank could invest in a private partnership that buys toxic assets using a loan guaranteed by the FDIC. Those assets could then be chopped up and sold as securities to other investors—who put together the financing for the deal by availing themselves of another program of low-risk loans from the Federal Reserve. Thus the original bank's capital at risk in this web of deals would be almost nil. "[This] is going right back to the practices that got us into this problem—except using government leverage," Young says. "It might lead to an even wilder party than we saw before."

How much leverage could investors or banks pile up? "As much as you can get away with, of course," says the bank analyst at one investment management firm. He thinks the recent outcry over bonuses at American International Group (AIG) may promote some self-restraint. "You're going to get caned in public these days, rather than getting caned in private," the analyst says. "There's not much appetite for that."

One government planner counters that if each program's safeguards are good, layering "shouldn't be a problem." Final rules are expected in the next several weeks. Banks and investors, meanwhile, will keep trying to get the most out of Washington.

Saturday, April 4, 2009

Absolute must see/read!

Voltron says: Bill Black, who ushered us through the S&L crisis 20 years ago, certainly no kook, makes blockbuster allegations of fraud and cover up against high level government officials.

you tube video links:

Homeowner-Aid Plan Caught in Second-Loan Spat -

Voltron says: Wells Fargo has a disproportionate amount of second lien
home equity loans

Inflation vs Deflation

Voltron says: This article suggests that the Fed increasing money supply will only have an effect if it is perceived to be permanent, yet the Fed Chairman has repeatedly stated that he intends to decrease the money supply once the economy recovers. As the fed creates more an more money, spinning it's wheels in a "liquidity trap" - because the market thinks it temporary - it is creating a larger and larger money bubble that will burst when they finally cave-in and decide to make the inflation permanent.

Friday, April 3, 2009

Beware Leveraged ETFs

5 Ways To Scam The New Bailout

  1. Overpay for trash assets, after getting a secret agreement from the bank that the bank will make it worth their while. The hedge funds mmediately write the assets down, destroying their equity and the taxpayer. Then they sell them back for peanuts to the banks, but the bank pays the hedge fund a "fee" that would compensate for the lost equity. (It wouldn't be explicit, of course. But given the amount of money that flows back and forth between the big banks and hedge funds, it won't be hard to hide.) The hedge fund profits. The bank profits and the taxpayer is scammed.
  2. Make hundreds of long-shot bets, structuring each individual asset purchase as a separate entity. Most of these entities will lose money, but so what? You can just write them off and keep the money from the winners.
  3. Set up an investment firm to buy your trash assets from you and fund the firm's equity with crap assets. This investment firm, which you control, will then intentionally overpay for your remaining tax assets with borrowed taxpayer money. It's legal money laundering!
  4. Front run the government. If you're a bank, buy toxic assets now on the secondary market and sell them once the plan ramps up. Some banks are already doing this now.
  5. Use the program to hedge your bond exposure. If you're PIMCO or Blackrock, and you have big bond exposure to the banks, you participate merely for the purpose of propping up your borrowers with other people's money.

Thursday, April 2, 2009

Bailed-out banks eye toxic asset buys

Voltron says: The treasury department's criteria for participation in the PPIF are so exclusive that only the failing too-big-to-fail institutions will be buying and selling legacy (toxic) assets from each other! Re-arranging the deck chairs on the Titanic.

Excepts FT:

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn (£680bn) plan to revive the financial system.

The plans proved controversial, with critics charging that the government's public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans.

Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions "gaming the system to reap taxpayer-subsidised windfalls".

Mr Bachus added it would mark "a new level of absurdity" if financial institutions were "colluding to swap assets at inflated prices using taxpayers' dollars."

Full article:

What Was Going on Inside the Paulson Treasury?

Voltron says: WSJ on how the previous administration's Treasury Dept was
extremely conflicted and in one case, based decisions on data that was three
years old!


The Treasury predicted in May 2007 that "we were nearing the worst of it in
terms of foreclosure starts" and the problem would subside after a peak in
2008. "What we missed is that the regressions didn't use information on the
quality of the underwriting of subprime mortgages in 2005, 2006 and 2007,"
Swagel said - Federal Deposit Insurance Corp. staff pointed that out at the

The ill-fated 2007 Treasury proposal to create a privately funded entity -
called MLEC, or Master Liquidity Enhancement Conduit - to buy up toxic
assets from the banks was developed by the Treasury's Office of Domestic
Finance and shared with market participants without involvement from other
Treasury senior staff. "The MLEC episode looked to the world and to many
within Treasury like a basketball player going up in the air to pass without
an open teammate in mind - a rough and awkward situation," he said. He
notes, though, that some elements of MLEC are present in the Obama
administration's Public Private Investment Partnership plan to joint venture
with big money investors to buy loans and securities "though with the (huge)
advantage of being able to fund the purchases through low cost government
financing and with taxpayers assuming much of the downside risk."

On the housing front, the Paulson Treasury staff did develop, though it
never proposed, a plan to offer a federal subsidy to lenders willing to
lower interest rates to reduce monthly payments for at-risk borrowers. A
similar plan eventually was embraced by the Obama administration. Federal
Reserve staff wanted to do more than the Paulson Treasury to aid homeowners
who were underwater - that is, with mortgages greater than the value of
their homes. "Among the White House staff in particular, but also within
Treasury. there was no desire to put public money on the line to prevent
additional foreclosures," Swagel said. "The cynical way of putting this was
that spending public money on foreclosure avoidance would be asking
taxpayers to subsidize people living in McMansions they could not afford
with flat screen televisions paid out of their home equity line of credit."
Swagel argued that - at least in late 2007 and early 2008 - there wasn't
much congressional interest in voting to spend money on foreclosures. "There
were constant calls for Treasury and the administration to do more on
foreclosure prevention, but this was just rhetoric." Housing policy, he
added, was "essentially static" until Congress passed the $700-billion
Troubled Asset Relief Program, and the FDIC offered ways to tap that fund to
avoid foreclosures, proposals that the Treasury considered badly flawed.

Treasury staff had "distinctly mixed feelings" about Secretary Paulson's
move towards "hardening the heretofore-implicit" government guarantee of
Fannie Mae and Freddie Mac's debt in July 2007. "Treasury Departments across
administrations had sought to remove the implicit guarantee, not to harden
it..[M] any people expressed to me their misgivings about what looked like a
bailout in which GSE bondholders and shareholders won and taxpayers . It was
hard to disagree," he said. Paulson soon shared those misgivings and
immediately set Treasury staff to work on the next step, the August move to
put the companies in conservatorship.

The surprises to the Treasury on Monday, September 15, after Lehman Brothers
filed for bankruptcy, were two-fold: "the breaking of the buck by the
Reserve Fund [a money market fund] and the reaction of foreign investors to
the failure of Lehman." Swagel says it was impossible for the Treasury to
anticipate that the Reserve Fund had so much Lehman paper, but, "We could
have known better that foreign investors were not prepared for Lehman to

Full WSJ article:

Full source document:

Market Recap

* DOW closes just shy of 8,000

* Top story on Drudge Report: G-20 promises to send $1 Trillion to the IMF and World Bank:

* Hanky panky in the gold market: and

* Fannie and Freddie are forced to accept IOUs from a mortgage insurer:

* Fed is unable to control treasury rates:!.html

* In a refreshing blast of honesty, Citigroup advises investors to effectively short citigroup (XLF):

* U.S. Initial Jobless Claims Rose by 12,000 to 669,000:

AIG has been a ponzi scheme since 2001

Voltron says: A shocking amount of fraud is being uncovered. From Institutional Risk Analytics:

...Our investigation suggests that by the time AIG had entered the [Credit Default Swap] fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are "valid legal contracts" is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering.

Full article:

Barney Style


You have two cows.

You paid $100 for each cow. You write that down.

Lightning strikes one of your cows, an unlikely event that should only happen once every 10,000 years.

Lightning strikes the other cow.

You notice the cows are on fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the fire.

Your cows are dead from fire.

Your paper still says $100.

Fortunately, mark to market has been suspended so you don't have to pay attention to the dead cows.

You notice that you aren't getting as much milk as expected, so you adjust the model and mark the cows down to $98. You are confident, however, that the dislocated stream of milk revenue will quickly revert to expectations.

You need to borrow some money so you ask investors for a loan against the cows. The investors tell you the cows are dead, and you already owe them $200 dollars you borrowed to buy them in the first place. You show them the paper that says the cows are worth $98 each.

They light your paper on fire.

You ask the government to buy the dead cows at $98 each.

Tim Geithner tells you about the public-private investment partnership, which will encourage BlackRock and Pimco to buy the dead cows. Pimco puts in $10 and the Treasury puts in $10, and the FDIC lends $120 to a new entity called Pimcows, LLC. They buy the dead cows for $70 each. Tim whispers that he expects you'll buy two new cows with the $140.

You have $140 in cash and $200 in debt to your original investors. You have no plans to buy new cows.

Nassim "Black Swan" Taleb Disses Geithner Plan: It Will Fail (video)

Voltron says: Nassim advocates removing all risk from banks, essentially running them as a "Utility" like the Postal Savings System used as the primary means of savings in Japan and which used to exist in the United States. Risky activities would be conducted by hedge funds which would be allowed to fail.

Visual Guide to Inflation

Voltron says: Inflation is good for debtors. The US Government is a debtor and they control inflation . . . hmmmm

AIG Bailout Exceeds Value of Fort Knox Gold