December, Thursday 08, 2011

DOW –198 = 11,997
SPX – 26 = 1234
NAS – 52 = 2596
10 YR YLD -.05 = 1.97%
OIL –2.50 = 97.98
GOLD –37.30 = 1706.80
SILV .85 = 31.76
PLAT –30.00 = 1498.00

We start with Europe. The European Central Bank, the ECB, cut interest rates by a quarter percentage point to 1 percent, matching a record low. They also loosened collateral rules so that banks can borrow more from the ECB and announced two unlimited three-year loans. ECB president Mario Draghi said the measures “should ensure enhanced access of the banking sector to liquidity.” Perhaps more important than what was said, was what was not said: The headline event today was that Draghi made it absolutely and explicitly clear that there would be no ECB bond buying bazooka. They’ll stay in the market but will only buy small amounts. It’s governments who’ll have to do the heavy lifting. In a separate speech, German Chancellor Angela Merkel confirmed the outlook by saying there will be no “big-bang” solution coming from the summit, which gets underway in Brussels tonight. 

On the eve of this summit, the ECB started passing out, essentially, free money; making it easier for banks to borrow cash from the ECB. Credit claims such as bank loans will become eligible as collateral and the central bank reduced the rating threshold on asset-backed securities. This is the Euro version of cash for trash.

The ECB also cut in half banks’ reserve ratio, which determines the amount of money they have to deposit with their national central banks every month, to 1 percent of total assets. Leverage up.

Draghi said the new measures should encourage banks to lend to companies and households. There are no reports that anyone laughed in his face when he said that. This will do nothing to improve lending to Main Street Europe; what it does is offer maximum support for the banks, free money for the banks without addressing the root cause the euro crisis. This is straight out of the Federal Reserve Playbook. I talked with (T) today, and he says no they can’t follow the Fed Playbook. Maybe, maybe not. The Euro Crisis is not going well at this point. Today’s moves by the ECB show a central bank struggling to avoid an interbank liquidity lockup.

Speaking of the Federal Reserve Playbook, this is from a panel discussion with Alan Greenspan and Ben Bernanke last November (11-09-2010) Alan Greenspan confirms that the economy cannot recover if fraud is not prosecuted and if the big banks know that government will bail them out every time they get in trouble. Fraud creates very considerable instability in competitive markets." (#1) Greenspan said, "If you cannot trust your counter parties, it would not work."... Greenspan very clearly said there has been illegal, criminal and fraudulent activity committed – and he laments that there has not been enforcement of existing laws. 

So, 3 years after the collapse of Lehman Brothers and one year after Greenspan proclaims there was fraud, there was illegal activity, but no enforcement – where are we today? Apparently Congress has designated the House Agriculture Committee as the top regulator of Wall Street fraud. The Agriculture Committee heard testimony this morning from former MF Global CEO Jon Corzine, who apologized to all those affected by the collapse of the brokerage.  Corzine was asked what happened to the $1.2 billion in missing customer funds and he said: (#2) he didn’t know. He said everything looked good until the very end and then everything got very chaotic and MF Global had to be shut down (#3).

Corzine’s testimony was actually pretty intriguing. He said MF had reduced leverage to around 30-to-1, which would be just a little less than Lehman Brothers before it failed. MF bet on European debt and Corzine called that bet “prudent” and he said: “none of the foreign debt securities" involved in the European debt transactions "has defaulted or been restructured."

Apparently, the big problem, the real reason for the bankruptcy was due to a $119 million write-off of tax benefits that could no longer be classified as assets. Who could’ve known?

Corzine said he just didn’t know what happened to the $1.2 billion in customers’ money. No idea. Can’t explain. Go figure.

After the hearing, police rushed Corzine and pepper sprayed his face, used baton sticks to whack at his legs, pushed his face into the ground, cuffed his hands behind his back and booked him into a Washington DC jail.

No, wait, wait – that wasn’t Corzine. Sixty protesters were arrested on K Street, which is where the lobbyists have their offices. Hundreds of protesters were marching in the streets and traffic was blocked at a couple of intersections and the lobbyists couldn’t deliver their checks to the politicians and it was a threat to national security. After a couple of hours, the police were able to get traffic flowing again.

This is literally what it has come down to: Wall Street CEOs commit illegal acts, fraudulent acts – even Alan Greenspan says it was illegal and fraudulent – Greenspan is incredulous there is no enforcement of existing laws; the banksters can completely disregard Sarbanes-Oxley; they can forge signatures on tens of thousands of mortgages and foreclosure documents; they can bribe elected officials at will; the banksters can create and sell garbage to customers and simultaneously bet against their customers; they can lose billions of customers funds – and we’ll call out the Agriculture Committee to ask some really poignant questions. 

But if someone blocks traffic in front of a lobbyist’s office, we’ll call out the riot squad, and haul their sorry butts to the hoosegow.

Here’s the headline for tomorrow’s newspapers: Satan Calls Jaywalkers Evil.

What were the protesters doing on K Street in Washington DC? Well, of course we know the protesters have been evicted from parks, and so a bunch of the Occupy Wall Street crowd decided to Occupy DC, and they focused on the K Street Lobbying offices of a few big corporations such as General Electric and Verizon. In the 3 years between 2008 and 2010, GE earned about $10.4 billion in profits – and they paid federal income tax of, well actually they were paid a tax refund of $4.7 billion. And over the same 3-year period, Verizon earned profits of more than $32 billion and they got a tax rebate of $951-million. How did they pull that off? Well, to get the tax rebates they had to pay the K Street lobbyists to bribe the government. GE got $4.7 billion in tax refunds, but they had to pay lobbyist more than $84 million. Verizon had to pay lobbyists $52 million to get a $951 million dollar tax refund. In fact, 30 large corporations ended up paying K Street lobbyists more than $475 million dollars to secure more than $10.6 billion in tax refunds on more than $163 billion in profits.

And so the protesters marched on K Street because they wanted to recognize corporations that can achieve great Return on Investment. Don’t think of it as a protest march, so much as a celebration of superior ROI.

Now I know you were listening closely when I said that information related to “federal income tax”, and now you want to know about state income taxes. Well, a different study looked at the Fortune 500 companies and over the past 3 years, there were 265 that reported profits in each of the 3 years, and of the 265 they paid about half the average statutory state tax rate – and 68 of those profitable companies paid no tax in one of the past 3 years and 20 of those companies had an average state tax rate of zero or less over the 3 year period.

There are many people who claim this economy is not producing new jobs, but clearly the Tax Avoidance Industry is growing by leaps and bounds.

Last week, Bloomberg News reported that they had uncovered some interesting info on the Federal Reserve; after two years of digging and filing suits under the Freedom of information Act, they learned the Fed had doled out more than $7.7 trillion in almost zero-interest rate loans to banks – not the $700 billion dollar bailout figure most often reported in the mainstream media. This week, Fed Chairman Ben Bernanke said the Bloomberg new reports contained egregious errors. Bernanke said the loans weren’t $7.7 trillion, just more like $1.5 trillion at 0.1% interest.

It turns out that both Bernanke and Bloomberg are wrong, and this little brouhaha between the Fed Head and the NYC Mayor has distracted our attention from an even more interesting report.

It turns out that a couple of years ago some unlikely political bedfellows, Ron Paul, Bernie Sanders, and Alan Grayson called for an independent audit of the Federal Reserve. The Government Accounting Office conducted the audit, the first independent audit of the Fed in its 99-year history. I don’t think the audit was 100% complete but the GAO produced a 251-page report. If you want a link to the report, then drop me a email and I’ll send you the link. http://www.gao.gov/new.items/d11696.pdf

Former Congressman Alan Grayson was kind enough to highlight some of his favorite pages in the report, and it clearly documents that Wall Street Bailouts by the Fed that dwarf the $700 billion TARP, and everything else you’ve heard about.

Page 131 - The total lending for the Fed's "broad-based emergency programs" was $16,115,000,000,000. That's right, more than $16 trillion. The four largest recipients, Citigroup, Morgan Stanley, Merrill Lynch and Bank of America, received more than a trillion dollars each. The 5th largest recipient was Barclays PLC. The 8th was the Royal Bank of Scotland Group, PLC. The 9th was Deutsche Bank AG. The 10th was UBS AG. These four institutions each got between a quarter of a trillion and a trillion dollars. None of them is an American bank.

Pages 133 & 137 - Some of these "broad-based emergency program" loans were long-term, and some were short-term. But the "term-adjusted borrowing" was equivalent to a total of $1,139,000,000,000 more than one year. That's more than $1 trillion out the door. Lending for these programs in fact peaked at more than $1 trillion.

Pages 135 & 196 - Sixty percent of the $738 billion "Commercial Paper Funding Facility" went to the subsidiaries of foreign banks. 36% of the $71 billion Term Asset-Backed Securities Loan Facility also went to subsidiaries of foreign banks.

Page 205 - Separate and apart from these "broad-based emergency program" loans were another $10,057,000,000,000 in "currency swaps." In the "currency swaps," the Fed handed dollars to foreign central banks, no strings attached, to fund bailouts in other countries. The Fed's only "collateral" was a corresponding amount of foreign currency, which never left the Fed's books (even to be deposited to earn interest), plus a promise to repay. But the Fed agreed to give back the foreign currency at the original exchange rate, even if the foreign currency appreciated in value during the period of the swap. These currency swaps and the "broad-based emergency program" loans, together, totaled more than $26 trillion. That's almost $100,000 for every man, woman, and child in America. That's an amount equal to more than seven years of federal spending -- on the military, Social Security, Medicare, Medicaid, interest on the debt, and everything else. And around twice American's total GNP.

Page 201 - Here again, these "swaps" were of varying length, but on Dec. 4, 2008, there were $588,000,000,000 outstanding. That's almost $2,000 for every American. All sent to foreign countries. That's more than twenty times as much as our foreign aid budget.

Page 129 - In October 2008, the Fed gave $60,000,000,000 to the Swiss National Bank with the specific understanding that the money would be used to bail out UBS, a Swiss bank. Not an American bank. A Swiss bank.

Pages 3 & 4 - In addition to the "broad-based programs," and in addition to the "currency swaps," there have been hundreds of billions of dollars in Fed loans called "assistance to individual institutions." This has included Bear Stearns, AIG, Citigroup, Bank of America, and "some primary dealers." The Fed decided unilaterally who received this "assistance," and who didn't.

Pages 101 & 173 - You may have heard somewhere that these were riskless transactions, where the Fed always had enough collateral to avoid losses. Not true. The "Maiden Lane I" bailout fund was in the hole for almost two years.

Page 4 - You also may have heard somewhere that all this money was paid back. Not true. The GAO lists five Fed bailout programs that still have amounts outstanding, including $909,000,000,000 (just under a trillion dollars) for the Fed's Agency Mortgage-Backed Securities Purchase Program alone. That's almost $3,000 for every American.

Page 126 - In contemporaneous documents, the Fed apparently did not even take a stab at explaining why it helped some banks (like Goldman Sachs and Morgan Stanley) and not others. After the fact, the Fed referred vaguely to "strains in the financial markets," "transitional credit," and the Fed's all-time favorite rationale for everything it does, "increasing liquidity."

81 different places in the GAO report - The Fed applied nothing even resembling a consistent policy toward valuing the assets that it acquired. Sometimes it asked its counterparty to take a "haircut" (discount), sometimes it didn't. Having read the whole report, I see no rhyme or reason to those decisions, with billions upon billions of dollars at stake.

Page 2 - As massive as these enumerated Fed bailouts were, there were yet more. The GAO did not even endeavor to analyze the Fed's discount window lending, or its single-tranche term repurchase agreements.

Pages 13 & 14 - And the Fed wasn't the only one bailing out Wall Street, of course. On top of what the Fed did, there was the $700,000,000,000 TARP program authorized by Congress. The Federal Deposit Insurance Corp. (FDIC) also provided a federal guarantee for $600,000,000,000 in bonds issued by Wall Street.

There is one thing that I'd like to add to this, which isn't in the GAO's report. All this is something new, very new. For the first 96 years of the Fed's existence, the Fed's primary market activities were to buy or sell U.S. Treasury bonds (to change the money supply), and to lend at the "discount window." Neither of these activities permitted the Fed to play favorites. But the programs that the GAO audited are fundamentally different. They allowed the Fed to choose winners and losers.

So what does all this mean? Here are some short observations:

(1) In the case of TARP, at least The People's representatives got a vote. In the case of the Fed's bailouts, which were roughly 20 times as substantial, there was never any vote. Un-elected functionaries, with all sorts of ties to Wall Street, handed out trillions of dollars to Wall Street. That's not how a democracy should function, or even can function.

(2) The notion that this was all without risk, just because the Fed can keep printing money, is both laughable and cryable (if that were a word). Leaving aside the example of Germany's hyperinflation in 1923, we have the more recent examples of Iceland (75% of GNP gone when the central bank took over three failed banks) and Ireland (100% of GNP gone when the central bank tried to rescue property firms).

(3) In the same way that American troops cannot act as police officers for the world, our central bank cannot act as piggy bank for the world. If the European Central Bank wants to bail out UBS, fine. But there is no reason why our money should be involved in that.

(4) For the Fed to pick and choose among aid recipients, and then pick and choose who takes a "haircut" and who doesn't, is both corporate welfare and socialism. The Fed is a central bank, not a barber shop.

(5) The main, if not the sole, qualification for getting help from the Fed was to have lost huge amounts of money. The Fed bailouts rewarded failure, and penalized success. (If you don't believe me, ask Jamie Dimon at JP Morgan.) The Fed helped the losers to squander and destroy even more capital.

(6) During all the time that the Fed was stuffing money into the pockets of failed banks, many Americans couldn't borrow a dime for a home, a car, or anything else. If the Fed had extended $26 trillion in credit to the American people instead of Wall Street, would there be 24 million Americans today who can't find a full-time job?

Yes, this did happen. Yes, it can happen again. The GAO report is an autopsy of a bailout. But it's an autopsy of the undead.