Thursday, December 31, 2009

Term Deposits at the Fed

Voltron says: so the fed's plan for sopping up all the money they've injected into the system before it causes all kinds of inflation is to offer the banks term deposits of up to one year. Basically selling CDs to the banks so they can earn interest. They have also pledged to keep short term interest rates low, so the banks can borrow money from the fed - basically for free - then give it back to the fed and earn interest. Well, that's one way to keep the banks profitable. The fed issuing debt puts them in direct competition with the Treasury which would raise interest rates. Unless of course, the fed continues to buy treasuries themselves. At the end of a year, the term deposits are returned to the bank (plus interest) so how exactly does this remove the money from the system? It comes back . . . plus interest. So they're just kicking the can down the road (again).

So to recap: The fed is going to lend money overnight at zero interest to banks that will use it to buy one year term deposits from the fed, who will use the money to purchase treasuries from the government to fund the deficit and push long term interest rates low. follow? make sense? no? good. That's because it doesn't make sense. The inmates are running the asylum.

2010: Walking away will gain cachet

Monday, December 28, 2009

Shorting the Economic Recovery


PERHAPS ONE OF THE greatest failings in the run-up to the financial meltdown was a lack of perspective -- an inability by many market participants to see the big picture. Not so with Kevin Duffy and Bill Laggner, principals of the Dallas-based hedge fund Bearing Asset Management. With the help of their proprietary credit-bubble index, developed in 2004, the managers sounded early warnings on housing and credit excesses, and capitalized handsomely on their forecasts by shorting Fannie Mae, Freddie Mac, money-center banks and brokers, builders, mortgage insurers and the like.

Students of the Austrian school of economics, which espouses a free-market philosophy that ascribes business-cycle booms and busts to government meddling with interest rates, the pair is solidly in the contrarian camp, believing that the worst for the markets may be yet to come.

The two established Bearing in June 2002 after running their own money and, before that, a stint by Duffy at Lighthouse Capital Management and by Laggner at Fidelity. Bearing now has about $60 million under management, and they have returned on average an impressive 18.28% annually since setting up shop. They hold refreshingly against-the-grain views on what's ahead.

Voltron says: They are short Goldman Sachs, the S&P500 and US and Japanese bonds and long Gold, consumer staples, discount retailers and pharmaceuticals (GRX and WMT)*http%3A//

Sunday, December 27, 2009

Morgan Stanley: Interest Rates Set To Soar 40% As Bond Vigilantes Make Geithner And Obama Pay For Their Mess


If Morgan Stanley is right, the best sale of U.S. Treasuries for 2010 may be the short sale.

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade

Hat tip to

Friday, December 25, 2009

Fannie and Freddie even worse

Voltron says: The government is removing all limits on bailouts to Fannie Mae and Freddie Mac and pays six million in hush money to the CEOs.

Thursday, December 24, 2009

Gold wins in the the naughty aughties

Goldman, Deutsche, and the Destructive Use of Synthetic CDOs Come Into Focus

Voltron says: A Collateralized Debt Obligation (CDO) is a bundle of mortgages that is sliced up and sold. The problem was that demand for CDOs exceeded the number of mortgages, after all, the "boom" in home ownership was only a few percentage points. In order to satisfy demand without having to go through the trouble of actually selling real mortgages, dealers created a derivative called "synthetic CDOs" where the cashflows of a CDO were mimiced by using Credit Default Swaps. The problem is that the sellers of the Credit Default Swaps were often the dealers themselves, so they would benefit from mortgages going bad. Yves Smith at Calculated Risk spins a more sinister plot, claiming that Synthetic CDOs were created specifically by dealers to short the housing market. She weaves together a New York Times article and the book "The Greatest Trade"

The point is just how gigantic this fraudulent derivatives house of cards has become.

Wednesday, December 23, 2009

Wells Fargo repays government bailout

Voltron says: Just in time to pay themselves big bonuses.

The Modern Dark Ages

If our economy ever truly collapses the consequences will make fifth-century Britain seem like a picnic.

Top hedge funds bet on big rise in yields


The recent rise in long-term US interest rates comes as good news for several leading hedge fund managers, including John Paulson, who have positioned their trading books to benefit from higher yields on US Treasury securities.

Mr Paulson, who made big gains earlier this decade by betting against the subprime mortgage market and whose firm, Paulson & Co, manages $33bn, has said he believes that government stimulus efforts would inevitably lead to higher inflation and a corresponding rise in rates.

Bond prices fall as yields rise, and Mr Paulson told the Financial Times last week that he has been hoping to benefit in the Treasury market by buying options that would become profitable if rates headed higher. TPG-Axon's Dinakar Singh has been making similar options trades, according to a person familiar with the matter."It will be difficult for the government to withdraw the economic stimulus," Mr Paulson said in a speech. "An increase in the monetary base leads to an increase in the money supply, which leads to inflation."

"Conservative" college savings plan lost 38%

Voltron says: This is why you should do the pre-paid tuition plan and not the 529 college savings plan.,0,7275727.story

Tuesday, December 22, 2009

Mint reveals how it lost a fortune in gold

Voltron says: maybe now they will be able to finish their "system upgrades" and begin opening new gold storage accounts through kitco.


OTTAWA — More than $3 million in government gold was unwittingly sold off at a fraction of its value as refinery slag, while $8 million more was miscounted and never left the Royal Canadian Mint, the Crown corporation revealed Monday in a full accounting of how it lost track of a fortune in gold for a year.

A series of miscalculations and blunders in the mint's gold refinery dating back to 2005 were responsible for 17,500 troy ounces — a system of weights for precious metals — of gold going missing from the mint's Ottawa inventory count last October, the mint announced in a 12-page report.

That's the equivalent of almost 44,400-ounce bars, worth more than $20 million in today's prices.

Wednesday, December 16, 2009

Oil supplies shifting to Canada from Saudi Arabia

Target-Date Mutual Funds Take Huge Risks In Junk Bonds

Voltron says: Target Date mutual funds (such as TSP "L" funds) are an easy way to automatically carry out conventional investing practices with your money. They move money over time from what is considered a risky investment (stocks) into what is considered more stable (bonds) as you approach the target date when presumably you will need the money. This doesn't work well if the bonds they choose are risky (junk bonds). Apparently some of these funds are charging quite high fees for funds that really is not much more difficult to manage than an index fund.

Oh Brother!

Tuesday, December 15, 2009

Wells Fargo Gets Special Treatment

Wells Fargo is repaying the government bailout

"Wells is not making money on an operating basis," said Paul Miller, managing director over at FBR Capital Markets (Underperform). "Most of their gains are from trading, and if rates ever go up, they could be in a precarious position."

'Substantial’ Bank Losses Are Needed to Fix Housing

Voltron says: Only principal reductions will stem foreclosure, but banks are unwilling because that would wipe out any second mortgages, such as home equity loans. Banks currently have $855 billion in home equity loans at risk.

Monday, December 14, 2009

Morgan Stanley’s Roach Sees ‘Great Risk’ in Fed Exit Strategy

Dec. 12 (Bloomberg) -- The Federal Reserve may cause another crisis by botching the withdrawal of liquidity from the U.S. economy, Morgan Stanley Asia Chairman Stephen Roach said.

The Fed is the "weak link" among central banks and may fail to tighten monetary policy in time to stop asset bubbles from forming, Roach said at a conference in Berlin today. The Fed helped trigger the boom and then bust of the subprime mortgage market by being "quick to slash, slow to normalize" interest rates, he said.

Greenspan: Bernanke Is Out Of Bullets, Now Inflation Is The Big Risk

Reuters: The U.S. Federal Reserve has done all it can do to reduce unemployment and needs to worry more about the risk of inflation from the stimulus it poured into the economy, former Fed Chairman Alan Greenspan said on Sunday.

"I think the Fed has done an extraordinary job and it's done a huge amount (to bolster employment). There's just so much monetary policy and the central bank can do. And I think they've gone to their limits, at this particular stage," Greenspan said on NBC's "Meet the Press."

Sunday, December 13, 2009

Drug money saved the banks

Voltron says: more evidence that the economy is completely dominated by fraud and criminal activity.

From the U.K. Guardian:
Drugs money worth billions of dollars kept the financial system afloat at the height of the global crisis, the United Nations' drugs and crime tsar has told the Observer.

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were "the only liquid investment capital" available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result.

This will raise questions about crime's influence on the economic system at times of crisis.

Saturday, December 12, 2009

Jim Rogers: Gold not a bubble yet (video)

Matt Taibbi: Obama's Big Sellout

Voltron says: I don't normally get into politics on this board, but I think it's important to understand that no effective reforms will be passed and the government intends to paper over the losses for as many election cycles as our foreign creditors allow. Matt Taibbi at Rolling Stone wrote an accurate article about this in his refreshingly vulgar style. First he explains how immediately after the election, Obama appointed to high office, the very people who caused the financial problems. He then goes on to explain the current state of legislation:

But the real kicker came when Frank's committee took up what is known as "resolution authority" — government-speak for "Who the hell is in charge the next time somebody at AIG or Lehman Brothers decides to vaporize the economy?" What the committee initially introduced bore a striking resemblance to a proposal written by Geithner earlier in the summer. A masterpiece of legislative chicanery, the measure would have given the White House permanent and unlimited authority to execute future bailouts of megaconglomerates like Citigroup and Bear Stearns.

Democrats pushed the move as politically uncontroversial, claiming that the bill will force Wall Street to pay for any future bailouts and "doesn't use taxpayer money." In reality, that was complete bullshit. The way the bill was written, the FDIC would basically borrow money from the Treasury — i.e., from ordinary taxpayers — to bail out any of the nation's two dozen or so largest financial companies that the president deems in need of government assistance. After the bailout is executed, the president would then levy a tax on financial firms with assets of more than $10 billion to repay the Treasury within 60 months — unless, that is, the president decides he doesn't want to! "They can wait indefinitely to repay," says Rep. Brad Sherman of California, who dubbed the early version of the bill "TARP on steroids."

The new bailout authority also mandated that future bailouts would not include an exchange of equity "in any form" — meaning that taxpayers would get nothing in return for underwriting Wall Street's mistakes. Even more outrageous, it specifically prohibited Congress from rejecting tax giveaways to Wall Street, as it did last year, by removing all congressional oversight of future bailouts. In fact, the resolution authority proposed by Frank was such a slurpingly obvious blow job of Wall Street that it provoked a revolt among his own committee members, with junior Democrats waging a spirited fight that restored congressional oversight to future bailouts, requires equity for taxpayer money and caps assistance to troubled firms at $150 billion. Another amendment to force companies with more than $50 billion in assets to pay into a rainy-day fund for bailouts passed by a resounding vote of 52 to 17 — with the "Nays" all coming from Frank and other senior Democrats loyal to the administration.

Even as amended, however, resolution authority still has the potential to be truly revolutionary legislation. The Senate version still grants the president unlimited power over equity-free bailouts, and the amended House bill still institutionalizes a system of taxpayer support for the 20 to 25 biggest banks in the country. It would essentially grant economic immortality to those top few megafirms, who will continually gobble up greater and greater slices of market share as money becomes cheaper and cheaper for them to borrow (after all, who wouldn't lend to a company permanently backstopped by the federal government?). It would also formalize the government's role in the global economy and turn the presidential-appointment process into an important part of every big firm's business strategy. "If this passes, the very first thing these companies are going to do in the future is ask themselves, 'How do we make sure that one of our executives becomes assistant Treasury secretary?'" says Sherman.

Voltron says: I think that Obama appointed people he knew from his 12 years as a law professor at University of Chicago where an "efficient market" religion developed, so radical that devotees believed that fraud did not have to be regulated because an efficient market would automatically weed it out without any intervention. This is laughable. Also, I think many people assume that since Republicans support free-markets, that most Wall Street tycoons are Republican when in fact they are almost all "Limousine Democrats" and the Democratic party is enamored with anyone who is somehow able to become rich, because they need money to win elections and most of them cannot fathom how to make money themselves.

Full article:

Tuesday, December 8, 2009

Meredith Whitney: Government 'Out of Bullets'; Consumers in Trouble (video)

Moody's: USofA leads the way out of AAA


Moody’s, meanwhile, indicates that a number of sovereign borrowers are moving out of AAA territory by the simple measure of interest payments as a percentage of GDP:

Under US government projections, debt service will exceed 10% of GDP by 2013, which means that by one measure the US will move out of AAA territory. But the UK, Germany and France will be headed in the same direction.

If I am correct that economic weakness continues unabated through the next couple of years, the situation will be considerable worse than the Moody’s graph suggests, and governments will have difficulty funding themselves at today’s extremely low interest rates.

Sunday, December 6, 2009

Geithner: “none…would have survived”


Secretary Geithner acknowledges what most doomsdayers were saying last fall, that without the government’s extraordinary rescue measures, the entire financial system was on the verge of collapse. (Miller/Harper, Bloomberg)

“None of [the big Wall Street insitutions] would have survived” had the government stood aside and let the crisis run its course, he said. “The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run.”

Some have said this recent financial crisis wasn’t as bad as the 1930s’. I disagree, and have posted the following chart to make the point.

Voltron says: Of course, the Feds didn't actually fix anything so the collapse is still coming.

Saturday, December 5, 2009

Why Many Home Loan Modifications Fail

Voltron says: to get a permanent mod, you must prove yout income so all the people with "liar" (i.e. stated income) loans won't qualify. The applicant's income and appraised house value must be "goldilocks" (not too low, not too high).

Wednesday, December 2, 2009

Credit Default Swaps will be exchage traded

Voltron says: this is supposed to prevent another AIG situation because the exhange will require collateral to be settled daily. My first thought was "wow, I can buy Credit default swaps on wells fargo now". I'm sure they will make the contract size large to discourage Joe six-pack from buying them, but it's sure to cause CDS volumes to rise. If there are no contract limits, nothing stops the people from buying up more CDS than the company is worth, then blowing up the company.

Tuesday, December 1, 2009

Wells Fargo will go bust

Voltron: This article suggests that Wachovia will bring down Wells
Fargo, but their home equity loans exposure is at least twice as
large, so they were screwed anyway.