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)

http://www.bloomberg.com/apps/news?pid=20601087&sid=avymhMJShuAs

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."

http://www.time.com/time/printout/0,8816,1890380,00.html

China selling treasurys

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

http://www.nytimes.com/2009/04/13/business/global/13yuan.html?hp

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.

http://paulgrignon.netfirms.com/MoneyasDebt/The_Un-payability_of_Interest.html

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)

http://www.youtube.com/watch?v=vVkFb26u9g8

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 . . .

Crisis over?

Voltron : Time magazine declares the crisis over.

http://www.time.com/time/business/article/0,8599,1890560,00.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.”

http://www.ritholtz.com/blog/2009/04/is-that-recovery-we-see/

Obama's promise of government openness and transparency

Voltron: not so much

http://bloomberg.com/apps/news?pid=20601087&sid=aEX9sBcofMYY
http://www.bloomberg.com/apps/news?pid=20601039&sid=aNMQDysdnKRc

Wells Fargo fudging the numbers

Voltron says: Their loan loss estimate (in white) is much lower than their competitor's, and they've bucked the trend by lowering it this quarter (not shown)



http://www.housingwire.com/2009/04/09/credit-cost-smoke-at-mirrors-at-wells-fargo/

this is a trend for them - from October: http://marginalizingmorons.blogspot.com/2008/10/wells-fargo-number-fudging.html

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 Stewart	M - Th 11p / 10c
Nancy Pelosi
thedailyshow.com
Daily Show Full Episodes Economic Crisis Political Humor

Ugly graph!

from WSJ: http://online.wsj.com/article/SB123929216724105401.html

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?

http://www.nakedcapitalism.com/2009/04/quelle-surprise-bank-stress-tests.html

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?

http://zerohedge.blogspot.com/2009/04/california-foreclosures-about-to-soar.html

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?

http://www.nytimes.com/2009/04/09/business/09fund.html?pagewanted=1&_r=1&ref=business

China wins economic war-game

http://www.politico.com/news/stories/0409/21053.html

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!

http://finance.yahoo.com/news/Wells-Fargo-projects-record-3-apf-14890409.html

They have a huge second mortgage exposure that is the most toxic of the toxic assets: http://cfcsux.blogspot.com/2009/04/homeowner-aid-plan-caught-in-second.html

They huge potential losses according to CreditSights. Worse than B of A and Citi!
http://cfcsux.blogspot.com/2009/02/bank-stress-tests.html

Many of Wells Fargo's losses are held off balance-sheet (a la Enron) http://www.minyanville.com/articles/print.php?a=20901

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

Deflation

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.

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: http://cop.senate.gov/documents/cop-040709-report.pdf

Fed only has one bullet left

From http://globaleconomicanalysis.blogspot.com/2009/04/bernankes-deflation-preventing.html

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.

http://www.safehaven.com/article-13033.htm

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: http://www.reuters.com/article/marketsnews/idINN0747118320090407?rpc=33

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.

http://blogs.ft.com/maverecon/2009/04/the-us-treasury-requests-volunteers-for-suicide-any-takers/

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.

http://www.nytimes.com/2009/04/07/business/07sorkin.html?_r=1

http://zerohedge.blogspot.com/2009/04/exposing-utter-hypocrisy-of-fdic-and.html

http://seekingalpha.com/article/128195-new-bailout-packages-an-end-run-around-congress

IMF admits credit losses could reach $4 Trillion

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

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6047929.ece

Ratings agencies rewarded for incompetence

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

http://www.usatoday.com/money/economy/2009-04-06-credit-rating-agencies-bailout-money_N.htm?loc=interstitialskip

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)

http://www.voxeu.org/index.php?q=node/3421

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: http://www.marketwatch.com/news/story/story.aspx?guid=%7BC7AC5229%2DE0FD%2D4C3C%2DBE46%2D74674D749EC8%7D&siteid=rss

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:
http://www.thestreet.com/print/story/10482677.html
http://www.bloomberg.com/apps/news?pid=20601087&sid=a1yCkrhVtOks&refer=worldwide

Soros says U.S. banks "basically insolvent"

http://www.reuters.com/articlePrint?articleId=USTRE53537D20090406

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.

http://www.marketwatch.com/news/story/gold-falls-below-870-possible/story.aspx?guid=%7B134D52C8%2DE108%2D4848%2DBEAE%2D321B7835610F%7D&siteid=yhoof

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

http://seekingalpha.com/article/129639-ppip-watch-banks-as-bidders-and-sellers-hmm-remember-enron?source=yahoo

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: http://www.pbs.org/moyers/journal/04032009/transcript1.html
you tube video links: http://optionarmageddon.ml-implode.com/2009/04/04/moyers-interviews-bill-black/

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.

http://finance.yahoo.com/news/ALL-BUSINESS-Bank-creditors-apf-14850712.html

Here it comes

From The UK Observer: http://www.guardian.co.uk/business/2009/apr/05/useconomy-regulators

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: http://www.businessweek.com/print/magazine/content/09_15/b4126020226641.htm

SELLER FINANCING

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.

PUMP AND DUMP

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.

PASSING OFF THE LOSS

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.

PORTFOLIO SWAPPING

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.

LAYERS OF LEVERAGE

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.

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.

transcript: http://www.pbs.org/moyers/journal/04032009/transcript1.html
you tube video links: http://optionarmageddon.ml-implode.com/2009/04/04/moyers-interviews-bill-black/

Homeowner-Aid Plan Caught in Second-Loan Spat - WSJ.com

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

http://online.wsj.com/article/SB123871391215884547.html?ru=yahoo&mod=yahoo_hs

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.

http://www.calculatedriskblog.com/2009/04/inflation-vs-deflation.html

Beware Leveraged ETFs

http://seekingalpha.com/article/129257-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.
   

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:
http://www.ft.com/cms/s/0/358e479a-1fbf-11de-a1df-00144feabdc0.html?referrer_id=yahoofinance&ft_ref=yahoo1&segid=03058

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!

Excerpts:

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
time.

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
collapse."

Full WSJ article:
http://blogs.wsj.com/economics/2009/04/02/what-was-going-on-inside-the-paulson-treasury/

Full source document:
http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/2009_spring_bpea_swagel.pdf

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: http://www.breitbart.com/article.php?id=D97ADJJO0&show_article=1

* Hanky panky in the gold market: http://seekingalpha.com/article/129128-did-the-ecb-save-comex-from-gold-default and http://www.safehaven.com/article-12991.htm

* Fannie and Freddie are forced to accept IOUs from a mortgage insurer: http://www.housingwire.com/2009/04/02/mortgage-insurance-woes-grow-for-fannie-freddie/

* Fed is unable to control treasury rates: http://market-ticker.denninger.net/archives/924-BEN-SOLD-TO-YOU!.html

* In a refreshing blast of honesty, Citigroup advises investors to effectively short citigroup (XLF): http://www.bloomberg.com/apps/news?pid=20601087&sid=a2dV4cMcTXEU

* U.S. Initial Jobless Claims Rose by 12,000 to 669,000: http://www.bloomberg.com/apps/news?pid=20601087&sid=a4zOwIH6psuw

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: http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

Barney Style

From clusterstock.com:

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

http://seekingalpha.com/article/129057-aig-bailout-exceeds-value-of-fort-knox-gold

The Fed is worried about hyperinflation

Voltron says: interesting article about how the Fed is already concerned about the political pressure it will face when it tries to combat inflation that will be caused by all the money they are printing.

http://www.bloomberg.com/apps/news?pid=20670001&refer=&sid=abuPwlNJSeis

The power of positive thinking

Voltron says: Top story on drudge report right now is GOVERNMENT WEBSITE TO WARN OF SADNESS/CRYING OVER ECONOMY. I was sure this was a hoax . . . but it's not. The government's advice is to engage is positive thinking. Voltron's advice is to short Treasurys.

The importance of saving money (video)

Long article, but a good read

From "The Atlantic": The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Full article: http://www.theatlantic.com/doc/print/200905/imf-advice

Big Banks Pull off the Ultimate Bait & Switch

From Nakedcapitalism.com:

We're not quite as healthy as we thought we were. Oops. (WSJ)

J.P. Morgan Chase Chief Executive James Dimon said...that March was a little
tougher than the first two months of the year....Bank of America...CEO Kenneth
Lewis also said that March had been a tougher month for his bank. [Convenient
that they decided to dump this information on Friday afternoon, and at the
close of a very good week].

Readers may recall that a few weeks ago, those two CEOs---along with Citi's
Vikram Pandit---said the first two months of the year had been very good:

Pandit, March 10th: "We are profitable through the first two months of 2009
and are having our best quarter-to-date performance since the third quarter of
2007."

Dimon, March 11th: "Jamie Dimon, the chief executive of JPMorgan Chase, said
Wednesday that the bank was profitable in January and February..."

Lewis, March 12th: "We have been profitable for the first two months of the
year," Lewis told reporters after a speech in Boston today.
This was possibly the most nakedly self-serving bullshit the big bank CEOs
have offered to date. ("bullshit" being a technical term of course, see Harry
Frankfurt)

By February, it was understood that the big banks are all insolvent, certainly
Citi and BofA. To deal with them, consensus among the cognoscenti was finally
tending to a proper recapitalization: wiping out shareholders and forcing
losses onto creditors via debt-for-equity swaps. Call it nationalization, call
it preprivatization, call it FDIC receivership, it was clear that losses had
to be recognized and by those to whom they properly belong: investors across
the capital structure.

But no one really wanted to do this, not in Congress and certainly not in the
Obama administration, where Timmy Geithner has made clear that his priority
isn't a cleansed banking sector, it's a privately-owned one. For obvious
reasons the banks don't like this solution either. So they offered up their
self-serving b.s. regarding January and February, buying just enough time for
Congress/Bernanke to badger FASB into changing mark-to-market rules and for
Geithner to roll out his private-public partnership plan.

Voltron says: Wait until hedge funds figure out that they can hedge their
meager 6% downside for pure "heads we win, tails taxpayer loses." The
government doesn't care, it's a shell game to intentionally obfuscate the
bank's losses.

Full article here:
http://www.nakedcapitalism.com/2009/03/guest-post-big-banks-pull-off-ultimate.html

South Park explains how Treasury Dept makes decisions (video)

Voltron says: The kazoo is a nice touch

US Treasury auction weak

"I used to think if there was reincarnation, I'd come back as the President or the Pope, but now I want to come back as the bond market. You can intimidate everybody." - James Carville, Political Consultant

Voltron says: The wheels are coming off the cart quickly!

From WSJ:

NEW YORK -- A weak five-year note auction Wednesday afternoon fueled broad-based selling in Treasurys, casting a shadow on the Federal Reserve's actions to tame the rise in bond yields.

Bonds were already down before the $34 billion auction, with selling pressure coming from a failed 40-year U.K. government bond sale, the first failed auction of conventional U.K. government bonds since 1995.

Following the auction at 1 p.m. EDT, prices of Treasurys hit session lows across the curve, with the intermediate and long end of the curve bearing the brunt of the selling.

British Prime Minister slammed in European Parliament

Partial Transcript:

Daniel Hannan: The truth, Prime Minister, is that you have run out of our money. The country as a whole is now in negative equity. Every British child is born owing around £20,000. Servicing the interest on that debt is going to cost more than educating the child.
...We are now running a deficit that touches 10% of GDP, an almost unbelievable figure. More than Pakistan, more than Hungary; countries where the IMF have already been called in. Now, it’s not that you’re not apologising; like everyone else I have long accepted that you’re pathologically incapable of accepting responsibility for these things. It’s that you’re carrying on, wilfully worsening our situation, wantonly spending what little we have left. Last year - in the last twelve months – a hundred thousand private sector jobs have been lost and yet you created thirty thousand public sector jobs.

Full Transcript:
http://www.usnews.com/blogs/capital-commerce/2009/03/25/british-mep-daniel-hannen-transcript-of-his-attack-on-gordon-brown.html

Video:

Geithner "open" to China proposal for global currency

Voltron says: Treasury Secretary jams his foot in his mouth again

http://www.politico.com/blogs/bensmith/0309/Geithner_open_to_China_proposal.
html

Citi, BofA are shameless

Voltron says: They are buying more toxic assets so they can re-sell them at
a higher price to buyers who are using government aid. This is classic
"unjust enrichment". The point is supposed to be to get the toxic assets
off of their books, not encourage them to buy more; but like most government
programs this one will have the exact opposite effect.

http://www.nypost.com/seven/03252009/business/double_dippers_161157.htm

EU President slams US economic policies

http://finance.yahoo.com/news/EU-presidency-US-economic-apf-14737788.html

U.K. bond auction fails due to lack of interest . . . inflation worries

Voltron says: first time since '95. Treasury auctions are less likely to fail because the Fed is going to be printing money and buying treasurys, but on a fixed schedule. If the Fed does not buy enough and a Treasury auction fails, TLT will drop thorough the floor.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQGG.mWeZ4eU

Rolling Stone "Gets It"

http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print

Details on the bailout

Voltron says: Associated Press story on the bailout:

WASHINGTON (AP) - The Obama administration aimed squarely at the crisis clogging the nation's credit system Monday with a plan to take over up to $1 trillion in sour mortgage securities with the help of private investors. For once, Wall Street cheered. The announcement, closely stage-managed throughout the day, filled in crucial blanks in the administration's financial rescue package and formed what President Barack Obama called "one more critical element in our recovery.

Voltron says: "Wall Street cheered" Really?!? Who? Other than stock prices going up, I haven't heard much positive commentary other than from hedge fund managers awaiting the handout (although admittedly, I did not watch CNBC today). If the the announcement was "closely stage-managed" was the stock market also managed? Why take chances. I'm not bitter at all, I don't have any short positions, and I'm expecting stock prices to rise due to inflation, it's just the timing seems . . . convenient . . . and has not been been accompanied by enthusiastic comments from market participants.

The coordinated effort by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. relies on a mix of government and private money - mostly from institutional investors such as hedge funds - to help banks rid their balance sheets of real-estate related securities that are now extremely difficult to value.

The goal, said Obama, is to get banks lending again, so "families can get basic consumer loans, auto loans, student loans, (and so) that small businesses are able to finance themselves, and we can start getting this economy moving again."

Voltron says: same misguided "credit is the lifeblood of the economy" mantra.

It was a huge gambit and one that came like a tonic to Wall Street, which had panned an earlier outline of the program that lacked detail.

Stocks soared, the Dow Jones industrial average shooting up nearly 500 points, thanks to the bank-assets plan and a report showing an unexpected jump in home sales.

The introduction of the plan was closely choreographed so that the president - rather than Geithner - would be the first administration official to appear on camera at midday to discuss it. Geithner met earlier in the day, before markets opened, with a group of reporters at the Treasury Department to go over specifics. But cameras and broadcast-quality audio recorders were barred.

It was the reverse of what happened Feb. 10. Then, after Obama had helped raise expectations toward Geithner and the plan, the treasury secretary went before cameras and bombed. The Dow plunged about 300 points amid investor confusion about details.

Voltron says: hmmmm, not suspicious at all . . .

The fleshed-out plan is designed to help fix a value on damaged mortgage loans and other toxic securities.

If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the government and private investors would incur losses.

"This will help banks clean up their balance sheets and make it easier for them to raise capital," Geithner said.

The plan will take $75 billion to $100 billion from the government's existing $700 billion Troubled Asset Relief Program. The government will pair this with private investments and loans from the FDIC and the Fed to generate $500 billion in purchasing power.

Geithner said purchases eventually could grow to $1 trillion - roughly half of the estimated $2 trillion of toxic assets on bank books now.

Voltron says: good because we wouldn't want anymore half measures Why exactly are people enthusiastic about this?

On the hot seat, Geithner has a lot personally tied to the success of the new program. His performance in the Cabinet, including his slowness in learning about multimillion dollar executive bonuses paid by insurance giant AIG after taking bailout money, has been severely criticized by some in Congress.

Geithner testifies on Tuesday before the House Financial Services Committee.

Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan.

The plan was introduced ahead of a summit next week in London of 20 major and developing economies struggling with the global recession.

Obama is trying to get other wealthy countries to do more to stimulate their economies with government spending, as the United States has done. However, other countries, particularly ones in Europe, are resisting U.S. calls for more stimulus and would prefer to see more internationally coordinated bank regulation.

The administration was expected to outline its plan for financial regulation overhaul later this week.

Federal Deposit Insurance Corp. Chairman Sheila Bair said she expects her agency will finance as much as $500 billion in purchases of residential and commercial real estate loans.

Bair said the program should help banks clean up their balance sheets and raise fresh capital, though she added that "there may be some banks beyond help." The agency has said before it expects more bank failures, she said.

Voltron says: . . . but not really big banks, or banks that make large campaign contributions.

A joint statement by the Federal Reserve and Treasury Department said the Fed should play a "central role" in preventing future financial crises. That implied a wish that Congress expand the Fed's authority in regulating all financial institutions, not just banks.

Geithner said taxpayers still could lose money on the deal to soak up bad assets but there was no fixing the system without risk.

Voltron says: again . . . why "risk"? Why not "there is no fixing the system without cost" or "without effort" or "without sacrifice"? "Risk" implies that we can get out of this without cost or even profit. In reality it's a doubling down that will end in tears. What happed to LEADERSHIP: "I have nothing to offer but blood, toil, tears, and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many months of struggle and suffering." -Winston Churchill. I don't mean to get all "soap boxy". I'm just trying to point out patterns, so that we can better predict the future. Specifically, lack of leadership, lack of political will, lack of transparency, and a fundamental misunderstanding of the crisis.

Other options, such as having the government purchase the securities outright or letting them languish on bank balance sheets, would pose even greater vulnerabilities, he said, and it was important to find the right blend of risk versus reward.

"I am very confident this scheme dominates all the alternatives for trying to find that balance," he said.

The sentiment was echoed by congressional Democrats, who said risk seemed inevitable with any plan big enough to work.

But House Republican Whip Eric Cantor of Virginia called Obama's plan a "shell game" that hid the true cost.

He said he hoped the administration would consider instead an earlier Republican proposal to set up a government-sponsored insurance program for mortgage-related securities.

The administration plan "seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," Cantor said in a statement.

The new program marks a return by the government to a strategy of acquiring toxic securities. Henry Paulson, who was treasury secretary in the final days of the Bush administration, abandoned plans to purchase these securities, largely because they were impossible to price.

Voltron says: They aren't impossible to price. Just assume mortgages are only worth the rental income they could produce. The problem is that if you value all mortgages using that reasonable method, all of the major banks are insolvent. The government wants desperately for there to be a different answer.

The plan builds on earlier programs to pump money into banks, help some homeowners repay their mortgages and stimulate college, small business and other forms of lending.

"There's still great fragility in the financial systems, but we think that we are moving in the right direction," Obama said after meeting Geithner and Fed Chairman Ben Bernanke.

Obama said the plan will allow taxpayers to "share in the upside as well as the downside."

Voltron says: bullshit

Treasury officials had no firm forecast on when the government would begin making the asset purchases although market expectations were that the process could begin within weeks.

Voltron says: original story here: http://apnews.myway.com/article/20090323/D97420DG0.html

Why no inflation (yet)

Voltron says: As I mentioned back in September, the banks have a $4 Trillion dollar hole to fill. All the Trillions the Fed a printing are currently filling that hole. When it overflows, that's when the symptoms of inflation will become evident. Given the lack of political backbone shown so far, they won't have the willpower to turn off the spigot "just as things are starting to look up." I'm not ruling out the possibility that the stock market may crash again if the market is unable or unwilling to deploy the Fed's money quickly enough; however, I'm preparing to ride out the volatility until the dollar inevitable collapses.

UPDATE: BEIJING TO PITCH NEW GLOBAL CURRENCY; DUMP DOLLAR

Voltron says: Top story on drudereport.com right now: http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html

China wants the new currency to be "based on" a basket of commodities: http://www.pbc.gov.cn/english/detail.asp?col=6500&id=168

Another Trillion down the drain

Voltron says: Treasury Secretary's new plan is a waste of another Trillion and a waste of time. Heck if Obama can't get Paul Krugman to cheerlead for him . . . who will? The only beneficiaries seem to be hedge funds that get a put option at taxpayer expense with 33 times leverage and 3% maximum downside risk that they can probably hedge. Sign me up! Won't fix anything though.

http://www.nakedcapitalism.com/2009/03/private-public-partnership-details.html
http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/

Updated Forecast

My thesis has been that prices would decline due to deleveraging but the government's inflationary policies would eventually cause nominal prices to rise. It's difficult to time a zig zag of prices going down then up, but it looks like we're turning the corner. The Fed's announcement that they are going to print a Trillion dollars and use it to buy debt is the proverbial "crossing of the Rubicon" The US Dollar is toast. I think the trigger will be some of the smaller holders of Treasurys (Singapore, for example) trying to dump their holdings before China does. This will cause a panic stampede out of Treasurys which will destroy the dollar.

Do not abuse leverage. The Fed is going to spend limitless amounts of money to pound interest rates and Gold prices into appearing "normal" when in fact they are on the verge of exploding. The tremendous volatility will shake out leveraged players.

I'm out of SRS

Voltron says: Well, the FED pulled the trigger. They announced they are buying treasuries which will be inflationary.

http://finance.yahoo.com/news/Fed-to-buy-up-to-300B-apf-14679757.html

I'm reversing my position, getting out of all short positions including SRS, deleveraging and shorting treasuries.

Voltron rants

Voltron says:  The furor over AIG bonuses masks the true crime.  The bonuses represent 1/10th of 1% of the $150 billion (and counting) of government "loans" that AIG has no chance of paying back.  All of the money going to AIG is going straight out the door to pay off bad Credit Default Swap bets made with Goldman Sachs, hedge fund speculators, and foreign banks such as Barclay's, UBS (Swiss Bank) and Societe General.  The administration keeps saying that "credit is the life blood of the economy" but China's philosophy is "production is the life blood of the economy".  Who do you think is going to win that debate?  If you borrow money to invest in production, you can pay it back with interest and perhaps turn a profit.  If you squander the money of flat screen TVs, vacations, and overpriced houses, there is no way you can pay it back.  Since T-Bills are just claims of future taxes, by extension, there is no way that will get paid back either.  Sure the government will pay back the notional amounts due, but the dollars will be practically worthless.  It sounds nuts, but we've had a new currency regime every thirty years or so since the country was founded.  Why would you think the current paper money regime with no collateral backing it would be the final regime for the ages.  It's absurd to think that.  The correct play is to short stocks and buy gold for now and be prepared to short treasuries in earnest.  The Fed is not going to make this easy, they are going to try to shake out the short sellers, depress the price of gold and prop up Treasuries.  Don't be afraid to "fight the Fed" and don't feel foolish when they move the market against you.  Take advantage of these moves to accumulate more BUT DO NOT USE LEVERAGE OR YOU WILL BE SQUEEZED OUT.

Competitive Devaluation

Voltron says: From the Financial Times:

If the world is really following the script of the 1930s, then we are due for competitive devaluations, as nations attempt to make [exports] more competitive at the expense of everyone else.

So the Swiss National Bank’s announcement that it is intervening to push down the Swiss franc sounds alarming. The speed with which the franc responded, dropping 3 per cent against the euro in a matter of minutes, also shows that if a central bank wants its currency to fall, it can deliver.

The problem is that not everyone can devalue at once . . .

Full article: http://www.ft.com/cms/s/0/f0b9ae7e-0f2a-11de-ba10-0000779fd2ac.html

Hedge fund investors turn to gold

http://www.ft.com/cms/s/0/37fcba70-0c0a-11de-b87d-0000779fd2ac.html?nclick_check=1

Buffett says U.S. Treasury bubble one for the ages

Voltron says: I've done well shorting Warren Buffett stocks such as Wells Fargo and Moody's; however, I think he has the right idea about Treasuries.

NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc sits on $25.54 billion of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.

In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.

But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors.

"The investment world has gone from underpricing risk to overpricing it," Buffett wrote. "Cash is earning close to nothing and will surely find its purchasing power eroded over time."

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

....

He also cautioned Treasury investors not to feel "smug" when they see commentators endorsing their investments.

"Beware the investment activity that produces applause," Buffett wrote, "the great moves are usually greeted by yawns."

Full article: http://www.reuters.com/article/newsOne/idUSTRE51R1PU20090228

Good News and Bad News for SRS

It should be good news for commercial real estate.

The Federal Reserve and the Treasury announced Tuesday the launch of the long-anticipated Term Asset-Backed Securities Loan Facility. Eventually, it is expected to cover securitized loans tied to commercial properties such as buildings, hotels and apartments.

But some are worried the TALF program may not be enough to attract investors to the commercial-property sector in its current form.

There is a mismatch between the terms of the TALF funds -- which are three years -- and most commercial mortgages that are packaged into bonds, which typically run for seven or 10 years, with balloon payments at the end.

An investor using TALF funds to buy commercial mortgage-backed securities would have to line up alternative funding sources or plan to sell the assets to repay the TALF loan when it expires after three years.

"Purchasing long-term assets with shorter-term financing is a recipe for disaster," says Andy Solomon, a managing director in charge of commercial property debt investments at Angelo Gordon & Co.

ETFs (video)

Voltron says: I still have my SRS position, but I'm not adding any more Ultra Short ETFs to my long term portfolio. Jeff Macke makes an interesting analogy for Ultra Short ETFs in the video embedded below at around the 5 minute mark.

UPDATED: Voltron's New Strategy

Voltron says: Suppose you believe (as I do) that commercial real estate is going to collapse. Let's explore some different ways to profit from that thesis (in order of complexity) and discuss some of the pros and cons of each strategy.

Short Real Estate Index (IYR): Like all short positions, you have theoretically unlimited liability (suppose IYR goes to the moon) and limited profit potential (IYR cannot go below zero). For every dollar of capital you have, you'll most likely be able to short two dollars worth of IYR so your maximum leverage is 2 to 1.

Buy Put Option on Real Estate Index (IYR): Now you have limited liability (the option cost) and limited potential (again, IYR cannot go below zero). Leverage ratios are typically 4 or 5 to 1. Options expire, so you need to be right on the direction AND the timing. This property of all options is called "Time Dependence".

Buy UltraShort Real Estate Index (SRS): If you are unsure of the timing, the ultra short ETF may seem to be just the ticket. You have limited liability (because you simply buy the ETF), and potentially unlimited profit potential (assuming the price asymptotically approaches zero). You also get two times leverage. The problems with SRS, however, are manyfold. Suppose the you've made a lot of money in the ETF and then suddenly the IYR moves up 49% in one day - SRS would be down double: 98%. You would be unlikely to recover from this loss no matter low the IYR goes subsequently. This property is called "path dependence" and it also makes it difficult to derive a target price for SRS based on a target for IYR. For a more detailed explanation read this.

If you chart the Ultra Short Real Estate ETF (SRS) and it's evil twin, the Ultra Real Estate ETF (URE), you'll see that actually both drift down together and are both negative at times. This is due to the path dependence discussed above and is called "Volatility Drag".



you therefore may reasonably consider the following trade to make the volatility drag work in your favor:

Short Ultra Real Estate Index (URE): You're now taking advantage of the volatility drag; however, since it's a short position, you have unlimited liability.

Buy URE Put Option on Ultra Real Estate Index (URE): You're stll taking advantage of the volatility drag and since it's an option, you have limited liability. Hindsight being 20/20 buying a URE put would have been the optimum strategy. URE puts are currently too expensive to make this worthwhile; however, I am currently implementing this strategy for Oil (up), Gold (up) and S&P500 (down).

Here's a chart summarizing the strategies:

	Risk	Reward	Leverage	Time Dependence	Path Dependence	Volatility Drag
Short IYR	Unlimited	Limited	Up to Double	No	No	None
Buy IYR Put	Limited	Limited	High	Yes	No	None
Buy SRS	Limited	Unlimited	Double	No	Yes	Bad
Short URE	Unlimited	Limited	Double	No	Yes	Good
Buy SRS Call	Limited	Unlimited	Very High	Yes	Yes	Bad
Buy URE Put	Limited	Limited	Very High	Yes	Yes	Good

Optimism is one thing, but this is ridiculous

Voltron says: the worst case scenario that the FDIC will use for the bank stress tests is for housing prices to fall to historical norms, with no overshooting and the average unemployment rate next year to be 10.3 percent, basically in-line with forecasts.

http://krugman.blogs.nytimes.com/2009/02/25/not-much-stress/

The Formula That Killed Wall Street

Voltron says: A well written, readable, article in Wired magazine explains how a mathematical abstraction became the basis for the explosion in credit derivatives.  This particular formulation came about after I left Wall Street, but it falls into many common pitfalls.  One of them is that correlation between two assets is not constant and in a market panic, all assets become completely correlated.  Most books on "quantitative finance" only devote a few pages, at the end, on the model's weaknesses.  In reality, that should be the subject of most of the book, because that's what good traders need to worry about.  When I would interview job candidates, I would never ask them to "derive the model" . . . I'd ask them to list the assumptions of the model and then debate how realistic, risky and problematic those assumptions are.

http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all

Fed is committed to propping up banks

Voltron says: looks like the government intends to repeat the mistakes of Japan in the 90s.  "Lost Decade" here we come.

http://globaleconomicanalysis.blogspot.com/2009/02/bernanke-admits-fed-is-clueless-and.html
http://krugman.blogs.nytimes.com/2009/02/25/all-the-presidents-zombies/
http://www.bloomberg.com/apps/news?pid=20601087&sid=aF55puGwJuS0&refer=worldwide

Will The Fed's "Stress Test" Be Stressful Enough?

http://www.businessinsider.com/krugman-will-the-feds-stress-test-be-stressful-enough-2009-2