Monday, February 13, 2012

February, Monday 13, 2012

DOW +72 = 12,874
SPX + 9 = 1351
NAS +27 = 2931
10 YR YLD +.02 = 1.99%
OIL +2.33 = 101.00
GOLD -.20 = 1722.90
SILV +.13 = 33.82
PLAT – 1.00 = 1655.00

Last week we heard about the $25 billion dollar mortgage fraud settlement. President Obama has vowed to follow it up with an expanded inquiry that is supposed to produce broader accountability and a far larger payout.
At best, this round of relief will reach about two million former and current homeowners. Under the agreement, banks will grant some $10 billion worth of principal reduction, $3 billion in refi's and $7 billion in other mortgage relief, like forbearance for unemployed borrowers, covering roughly one million borrowers in total. Another $1.5 billion will be cash payments of about $2,000 to some 750,000 borrowers who were treated unfairly in foreclosures from 2008 through 2011.
And $3.5 billion will go to state and federal governments for what has been described as resources for legal aid and other counseling for borrowers facing foreclosure. Such aid is vitally important, but it appears that the earmarked money also could be used to plug state budget holes, rather than empower homeowners in their fights against the banks. 
The banks did not get the blanket release they originally sought from legal liability for all manner of mortgage misconduct. But the settlement still shields them from state and federal civil lawsuits for most foreclosure abuses, including the wrongful denial of loan mods, excessive late fees that enriched the banks but could make it impossible for borrowers to catch up on late payments, and conflicts of interest that led banks to favor foreclosures over modifications. 
Which brings us back to the question of whether a new investigation will indeed get off the ground. 

Wasting no time, today President Obama presented his annual budget plan.  What about the criminal investigations into the mortgage fraud problems? Well, let's just move on to a new waste of perfectly good paper.

Depending on how you want to look at it, the budget would add well over $6 trillion to the national debt over 10 years, or for the first time, the budget projects a deficit below $1 trillion and foresees the federal shortfall declining to sustainable levels by 2017.

Households making more than $1 million a year would face a minimum tax rate of 30 percent, and the 2001 and 2003 tax cuts would expire for the highest earners. Obama would spend $300 billion in one year on job-creation measures like road construction, teacher salaries and tax breaks to spur hiring.

He would cut military spending by $487 billion over 10 years, and cut $360 billion from the Medicare and Medicaid health programs for the elderly and the poor. He would cut another $278 billion from programs including farm subsidies and federal employee pensions. Later this month, the administration will propose an overhaul of the corporate tax code to root out many tax breaks and lower the 35 percent rate.
It's a big budget, when it's printed out,  it's about the size of a phone book. All we can say with certainty is that it's a waste of trees. The budget will not be passed by Congress. And this failure to pass a budget, any budget, speaks to the dysfunction of Congress. We can argue to the moon whether the budget cuts enough or too much, whether the budget is anything more than political posturing, whether it is a skirmish in class warfare. Ultimately, it is nothing more than an exercise in polemics.
President Obama discusses the fact that budget cuts can't restore economic growth and House Speaker Boehner says the Budget Plan is 'bad for job creation'. The Republicans point to the fact that Obama pledged to cut the deficit in half by the end of his first term. Obama can point to the fact  that the previous administration turned a surplus into a deficit.
Maybe the lesson to be gleaned is that the country is able to continue on without an actual  budget; which raises the question about the value of services provided by Congress. Maybe we'd all be better off just sending the whole group on vacation.  And the only thing they can agree on is that the whole mess isn't as bad as Greece, at least not today.

Greece is on fire. The debt crisis has not yet been resolved. The Greek government voted to approve an orderly restructuring of Greek debt in exchange for a Euro-zone bailout, but the rest of Europe isn't buying the deal. The skepticism centers around the Greek pledge to impose harsh austerity measures. The Germans want certainty that discipline will be imposed. Greek political leaders have until Wednesday to provide a written commitment to terms of the deal. The Greek parliament has expelled 43 members who voted against the deal. Greek citizens were rioting in opposition to the cutbacks; there are some estimates of more than 80,000 in the streets of Athens. The rioters are in the minority but they speak to widespread discontent, and they're burning buildings. So, it seems there is no resolution to the Greek debt problem.

This Greek debt mess has been dragged out for almost 4 years. In 2008, the Greek debt was 260 billion euro. The first bailout was for 110 billion euro. If the Greek government gets a second bailout in the next couple of weeks, it will be an additional 130 billion euro. The orderly restructuring of Greek debt calls for private sector investors to renounce another 100 billion euro in bond debt. Yea, I know. If you do the math, then Greece should be getting an 80 billion euro refund. So, why don't the numbers add up? Why are they rioting in the streets? And the answer is obvious. Someone has take a little out of the kitty.

In December, the European Central Bank invited banks to borrow money at the benchmark interest rate of 1 percent for three years, compared with a previous maximum maturity of one year. Banks could borrow as much as they wanted provided they posted collateral. results: 523 banks borrowed about $650 billion.
The central bank will offer another round of three-year loans at the end of this month, and they have loosened collateral rules to encourage smaller banks to join in.  The ECB is encouraging the banks to take the money. And with all that cash floating around, it might provide stimulus for the Euro-zone economy, or it might allow some banks to use the cash to cover up mismanagement and all the bad assets they have on their books.
These  banks with toxic assets on their books are essentially insolvent, and thanks to all the cheap money being thrown at them by the ECB, these faltering banks now face less pressure to confront their problems — to clean out bad loans and other impaired assets, or even wind down operations if there is no hope of a turnaround. The European Central Bank, they say, could inadvertently spawn a cohort of “zombie banks,” burdened by nonperforming loans and assets that remain on the books, like the ones that helped make the 1990s a lost decade for Japan.

What are these zombie banks actually doing with all this cash that is being thrown at them? Well, remember that we've been saying for some time that the Euro response to the debt crisis was to follow the Federal Reserve playbook from 2008. It turns out that many of the Euro-banks are using the cash to buy government bonds. That would explain why interest rates on Spanish and Italian bonds have plunged in recent weeks. They may even  load up on high-yielding debt from Portugal, when they should be reducing their exposure to government bonds.
Borrowing from the central bank at 1 percent and using the money to buy bonds paying many percentage points more is a nice trade for the banks — as long as the issuers remain solvent. And it raises the chances that Italy or Spain will be able to continue servicing their debt, by holding down their interest payments.
I hope this has helped explain the situation in Europe; the banks get free money; the banks get rewarded for mismanagement; the banks get paid for parking money on the sidelines; the Greeks lose their democracy; the Greeks are indentured to a generation of debt; the Greeks lose their jobs; and Greece is on fire; and the Euro-powers-that-be are threatening that if the Greeks don't submit to demands, things will get really bad.

Once upon a time Germany faced its own debt crisis. The London Debt Agreement of 1953 gave the Germans 70% relief of bond debt, and 5 years moratorium on interest payments. The idea was to give Germany enough oxygen ot rebuild its economy.

There is no budget in the US. Europe is in even worse shape. And what happens on Wall Street? A rally. Go figure. The S&P 500 moves above 1350. Over the past 13 years, the S&P has pushed up to 1350 on 6 different occasions, so this is a fairly strong level of resistance.
There are a couple of areas of concern: the optimism is typically a contrary indicator. Just when you see headlines about the race to all time highs, that's when the bottom falls out, and the enthusiasm isn't shared on the corporate level. Insiders have sold $2.3 billion in shares for February, more than 15 times the $145 million they've bought. That trend also has been reflected in share buybacks, which have dropped off as well to $1.7 billion a day, the lowest level in a year and a half. And then there is the biggest reason behind the rally, which is the prospect of central bank intervention; the prospect of QE3. Because one thing we know, the markets love it when Chairman Bernanke cranks up the printing press.

An update on MF Global.  Back in October, MF Global disclosed to regulators that customer money had disappeared from the firm. The disappearance is now the subject of a wide-ranging federal investigation, with prosecutors in New York and Chicago exploring potential wrongdoing and regulators searching for the missing money.
So far, the investigators haven't found evidence of criminal intent; there has been no criminal conspiracy unraveled from company emails, no former or current employees have sought to cut a deal to provide testimony about potential wrongdoing and seasoned defense lawyers say they are not seeing the tell-tale signs of a hot criminal investigation.
The Commodity Futures Trading Commission, the regulator leading the hunt for the money, has estimated the shortfall at $680 million. And the trustee in charge of finding the money and returning the money to customers  previously pegged the total at $1.2 billion. And now they are guessing that the total might top $1.6 billion. Customers who traded in the United States have received about 70 percent of their cash back. But customers who traded overseas have yet to see a penny.  And the numbers are subject to change, and they don't know where the money is, and nothing criminal happened. Puff, vaporized, puff. I think I know what happened. It's a miracle. The miracle of the rehypothecated accounts. Jon Corzine will be beatified. Poof, vaporized, halllelujah.
Harris Interactive is a consulting firm that tracks the reputations of major companies. Positive impressions of the financial services industry slid to 17 percent this year. That is lower than the 22 percent of survey participants who had favorable opinions last year, and ranks Wall Street third from last in popularity among all industries surveyed, above only above only tobacco and government.
Harris Interactive uses a scorecard, and anything under 50 is a really lousy score. Bank of America, Goldman Sachs, and AIG scored under 50 in the recent survey; basically putting them in a category with Enron, WorldCom, Fannie Mae and Freddie Mac. Only 12 companies have dropped below the 50 -point line and 10 of the 12 are out of business or in some sort of government receivership.

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