November, Tuesday 15, 2011

DOW + 17 = 12096
SPX + 6 = 1257
NAS + 28 = 2686
10 YR YLD +.01 = 2.06%
OIL + 1.19 = 99.33 ***
GOLD +.80 = 1782.10
SILV +.33 = 34.67
PLAT unch = 1643.00

One of the headlines today reads: “Stocks advance on Italian Optimism”. Seriously, a 17 point gain in the Dow is a sign of optimism? It actually looks more like a sign of somnambulism.

Italy’s new Prime Minister designate Mario Monti said he is “convinced” the country can overcome the current crisis. The bond market was not convinced. Yields on 10-year Italian bonds climbed back above the 7% threshold that is considered the tipping point for insolvency. Italian 10-year bonds are yielding 7.07%, Spain is at 6.34%. meanwhile the yield on the 2-year bonds are ugly: Spain at 5.31%, Portugal at 17.4%, and Belgium at 3.8%. so now Belgium is looking like it has a few holes in their waffles.

Despite all the optimism, Reuters reports the United States is ramping up attempts to safeguard its financial system from a worsening of Europe's debt crisis, joining nations in Asia, Latin America and elsewhere in trying to build firewalls. Policymakers are digging into the books of American banks to find out how exposed they might be to euro zone creditors and the plunging value of sovereign debt.

The Financial Stability Oversight Council is trying to identify specific firms that could be hit by financial turbulence and then sort out ways that each one can fortify its balance sheet. Direct U.S. bank exposure to Portugal, Ireland and Greece is considered moderate; once the debt of Italy and Spain, plus credit default swaps, and U.S. bank indirect exposure through European banks are added, the potential sum could exceed $4 trillion. Now the entire $4 trilion is not really at risk, because there are hedges and many of the swaps offset others.

Still, U.S. banks had about $180 billion of debt from Greece, Ireland, Italy, Portugal and Spain on their books at the end of June, based on Bank for International Settlements data. Italy accounted for the largest chunk, more than $250 billion. Guarantees and credit derivatives added another $586.6 billion, bringing the total to $767.5 billion.

But wait, there’s more!

There is a secondary level of exposure that is potentially more worrying -- through international banks lending to each other. Here the greatest risk stems from Italy and France. International bank claims on Italy total $939 billion, and French banks account for about 1 ¼ trillion dollars. 

The danger is that a steep drop in sovereign bond prices prompts margin calls at banks that could snowball into a credit freeze.

Federal Reserve Chairman Ben Bernanke was frank last week about the risks: "It is not something that we would be insulated from ... I don't think we would be able to escape the consequences of a blow-up in Europe."

We learned a hard lesson in 2008 how these indirect financial linkages work when imploding credit default swaps nearly lead to the collapse of AIG. Just last week, MF Global's fall gave a taste of how contagion can rip through the financial system.

So the good news, the reason for optimism, is that we’ve traveled down this path before. We know what to expect. We’ve had time to prepare. The question is whether we learned anything.

Meanwhile, Democrats and Republicans on a 12-member "super committee" have less than a week to come up with a plan that would cut $1.2 trillion over 10 years. The panel has not held a full meeting for two weeks, though members have been working in smaller, informal groups. Aides said there was no sign of a deal, but also no sign of a stalemate. A group of more than 100 Republicans and Democrats had planned a rally for Wednesday to urge super committee members to aim higher, though it was postponed due to a scheduling conflict. 

Politicians can’t even put together a decent rally anymore – probably too busy sucking up to the lobbyists, and too busy placing their insider trading deals. By the way, if you haven’t seen the 60 minutes feature from this past Sunday – you really must. Get on your computer and go to cbsnews.com and spend 12 minutes watching how Republicans and Democrats are trading on insider information. Someday we’ll end the legalized bribery. But today was a bad day for a rally.

New York City police pushed into Zuccotti Park early today to remove demonstrators who had been camping there for more than eight weeks. This is part of a wider effort to evict the Occupy Wall Street protesters in other cities, including: Portland, Oakland, Phialdelphia, and Atlanta. There have been lots of arrests over the past few days but no violence.

A New York judge has upheld the city's dismantling of the Occupy Wall Street encampment, saying that the protesters' first amendment rights don't entitle them to camp out indefinitely in the plaza. Big banks writing predatory loans – no problem; big banks bundling these loans into securities and dumping them on pension funds while simultaneously betting against the securities – no problem; big banks forging foreclosure documents and using robo-signers – no problem; big banks privatizing profits and socializing losses – no problem. Squatting in the park – Problem. It’s a little bit like Satan calling a jaywalker evil.

Despite the judge's ruling, the park will be opened at some point and everyone will be allowed back in, just not with the supplies they need for an extended stay. When the barricades do part, it will be interesting to watch the interaction between police and protesters.

Occupy Wall Street protesters are planning an attempt to shut down the New York Stock Exchange on Thursday, Nov. 17, as part of a series of actions to mark the movement's two-month birthday

Deutsche Bank and Citigroup have agreed to pay $165.5 million to resolve regulatory claims over sales of mortgage-backed securities to credit unions that later failed. In other words they sold the credit unions garbage and they knew they were selling garbage. These were essentially predatory loans; the banks knew they were likely to fail; they wrote the loans because they knew they could sell them off without disclosing the risks.

And there is a pattern; not that big banks sold toxic assets and tried to dupe their own customers – that is not the developing pattern – that’s an old story – that is the story of the past 10 years; these shady deals were ubiquitous.

In August, the National Credit Union Administration sued Goldman Sachs seeking $491 million to recover losses on mortgage-backed securities. That complaint, filed in Los Angeles, was the fourth in a series of suits aimed at recovering almost $2 billion from “sellers and underwriters of questionable securities.”  The NCUA has also sued Royal Bank of Scotland and JPMorgan Chase and they expect to file five to 10 more suits.

After the 5 credit unions failed in 2009 and 2010, the National Credit Union Administration imposed charges totaling $3.3 billion on the 7,000 or so credit unions nationwide to cover the losses from those failures. 

The truly disturbing pattern is that the banks make fairly small settlements and they don’t have to admit or deny wrongdoing. This is a standard ploy when reaching a settlement. The problem is that this case now can’t be used as precedent. If these banks go out and commit the very same violations, there is no pattern of multiple violations. Many states have a get-tough policy; you’ve probably heard of the “3 strikes and you’re out” approach to deter repeat offenders. For the big banks the policy has been “no strikes, no worries, and nothing changes.”

In economic theory, moral hazard is a situation in which a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk.

Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.

By allowing the banks to reach settlements without admitting or denying guilt, we are encouraging risky behavior. Tomorrow I’ll tell you about a judge who is trying to hold the banks accountable – at least in part. And believe me, this is one of the few judges willing to take a stand.

http://finance.yahoo.com/blogs/daily-ticker/41-people-american-dream-lost-63-economy-getting-144604132.html

A new survey by Yahoo! Finance shows Americans have a disturbing lack of hope and a frightening lack of retirement planning.

Among the highlights of the poll:

-- 41% of Americans say the 'American Dream' has been lost.

-- 37% of adults have NO retirement savings and 38% plan to live off Social Security.

-- 63% of Americans believe the economy is getting worse, including 72% of those over the age of 55.

These findings are consistent with broader trends The Daily Ticker has reported on in the past year: Despite macro data showing the economy has technically recovered from the 'Great Recession', the majority of Americans just aren't feeling it. Considering 49 million Americans are living in poverty, the "real" unemployment rate is 16% and millions of Americans are facing foreclosure, it's no wonder many believe the recession never ended.

Consistent with that sentiment, the survey shows a plurality of Americans are less willing to take on debt, feel less confident about buying at house, and are spending less yet have lower savings vs. 1- and 3-years ago.

Dan Gross and I discuss the survey in the accompanying video. As is his wont, Dan focused on the glass half-full findings in the survey, including:

-- 53% of Americans ages 18-34 still see America as the land of opportunity.

-- 45% of parents believe their kids will be better off than they are.

-- 68% of Americans say their currency financial situation is either "excellent" or "satisfactory."

Here too, the survey is consistent with trends we've reported on: In an era of rising income inequality, those doing well in America today are doing quite well, indeed.

Conducted in September, the survey polled 1500 Americans between the ages of 18 to 64. Yahoo! Finance partnered with Ipsos OTX MediaCT to conduct the survey. It's less scientific but, as always, we welcome your feedback: Let us know what you think.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com