 Cliff Notes on Financial Maelstrom
Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
Mar 20, 2008
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As the financial markets stare
at the abyss, contemplate the cliff, suffering massive falls
in selective stocks, a review of 'Cliff Notes' might be appropriate.
The financial maelstrom is gathering force and fury. The Bear
Stearns story has a story behind it, as usual in the Grand Manhattan
Den, where violent financial battles give false appearances as
desperate measures are played out behind the scenes. The drama
on Wall Street will make history. These guys are killing each
other, while they cooperate with each other. Like crows, they
killed and devoured one of their own.
BROKERAGE FIRMS REEL
Bear Stearns was fed
to the wolves, an easy correct forecast from last early autumn.
Denials nowadays constitute confirmations, from mere mention.
Their refusal in 1998 during the LongTerm Capital Mgmt bailout
to act like a Wall Street team player was the hidden motive to
carve them into pieces. One must ask why last Friday it traded
around the $30/share price all day long after 10am. The answer
is easy, as they wanted to give insiders a chance to sell most
of the 186 million shares, a gift of $5 billion sure to anger
many. My view is that JPMorgan took its best assets at discount,
tossed much of the damaged assets into their Wall Street garbage
can, which is never emptied, never sees any balance sheet, blessed
by the US Federal Reserve, protected to new security laws. If
Bear Stearns share holders reject the JPM seizure takeover, then
the gem Bear Stearns headquarter building in Manhattan can be
bought by JPM for a song. Actually, JPM might have only started
the bidding process, sure to result in JPM upping their own bid.
BStearns has (or had) 14 thousand workers, most having been paid
in stock share bonuses in recent months. The economy in New York
City is sure to be badly harmed, worse than already. Wall Street
jobs account for 35% of NYCity wages.
The other story not told is
that Bear Stearns was dissolved before the wrecked investment
bank had a chance to take advantage of the Term Security Lending
Facility. It will be made available by the USFed at the end
of March. The sleazy hogs on Wall Street wanted to remove one
player at that window. The other story not told is that a liquidation
of Bear Stearns would inevitably have resulted in a massive credit
derivative meltdown. The consequences cannot be estimated. The
derivative upside down pyramid is mammoth. No precedent exists
for its partial unwind or dissolution. The pyramid holds together
the entire USTreasury complex, attached to interest rate swaps,
attached to credit default swaps of various types, and so on.
This pyramid is leveraged 70 to 1. The talk is funny though,
since the USFed has backstopped only $30 billion in Bear Stearns
securities. What about the other $800 to $1500 billion rancid
bonds floating within striking distance to Wall Street and major
bank balance sheets? In truth, we might later learn that Bear
Stearns helped to bail out JPMorgan, in helping to shore up its
credit derivatives, in providing some emergency collateral, soon
to bust, to prevent a JPMorgan failure!!! JPMorgan owns $7.778
trillion of credit derivatives, two and half times as much as
Citigroup, the same toxic stuff that crippled Citigroup. JPMorgan
skated on this one without publicity.
The other story is that Bear
Stearns CEO Alan Schwartz assured just last week that all was
well, liquidity was adequate, and the company was in good shape.
Enron CEO Ken Lay said the same thing. And lest one forgets,
Enron and Bear Stearns have a common denominator in JPMorgan
being a key player in the operations and agent during the demise
of the two firms. JPM taught Enron everything they knew about
offshore special purpose entity firms, yet they escaped all legal
challenges by losing clients in court. When the USFed frees JPM
from liability on any losses from collateral submitted by Bear
Stearns, one has to giggle since the USFed is JPMorgan. Think
consolidation of the best bond assets in JPMorgan's hands. Think
more damage and consolidation upon the next victim, like Lehman
Brothers. Think building the Fed Reserve bank system. The Mussolini
Fascist Business Model might be opening a new chapter.
The XBD banker broker dealer
stock index had a horrible day on Monday, with some repair on
Tuesday and Wednesday. The XBD stock index fell 11% in a visit
to hell and back, rendering big technical damage to many component
stocks, especially Lehman Brothers. LEH fell by 19% on Monday.
Goldman Sachs was down 10% early in the day, closing down 4%.
Citigroup lost another 7% after being down almost 10%, UBS lost
11%, Morgan Stanley lost 8%, Merrill Lynch lost 4% after being
down 8%. The stock price action tells the wary observer to
expect a challenge or near death experience for Lehman Brothers,
possibly worse. Their portfolio is similar to Bear Stearns,
only larger. The mortgage bond damage will next shift to the
prime adjustable mortgages, so reckless in their innovation.
They will crater this summer upon rate reset, victims of their
own written time bombs. Thus the deserved name of Exploding ARMs.
Even USFed Chairman Bernanke acknowledged last week that 40%
of all mortgage defaults are prime, not subprime. On two days,
the XBD broker dealers recovered most of the loss. The broker
dealers play a significant role, to manage the execution of official
policy, full of the requisite manipulation and corruption of
markets. See the management of the credit derivative pyramid,
the gold ambushes, the currency interventions, the collusion
with the debt ratings agencies, and even possibly the intimidation
of the monoline bond insurers to serve as the bagholders in the
historically unprecedented international sale of fraudulent mortgage
bonds. Can anyone defend against my claim that the Untied States
upper echelons represent institutionalized and protected dishonesty???
My warning quip to the idealists
among us has been often used lately, when people salivate over
the prospect of chronic conmen suffering deep losses, enduring
insolvency, incapable of shame, yet almost certain to end up
in some form of bankruptcy. My stated line is "Beware
when billionaires face bankruptcy, since they make a phone call
and change the rules. Often those rules conflict with your strategy
and plans." This time the rules might be concerning
gathering wealth from strategies that oppose the defense of a
national financial integrity. This time those attempting to secure
their wealth and protect it from illicit national grabs and seizures
might be labeled as unpatriotic. This time the system has been
virtually broken by decades of destructive inflation, of misspent
funds, of grand theft (see Fannie Mae and military contractors),
of encouraged abandonment of the manufacturing sector, of destructive
emphasis of a war economy footing, of irresponsible Medicare
guarantees, of harmful demographic shifts, and lately of incredibly
deep bond fraud. The bond fraud episode is the crowning finale
of the US banking system, with toxic outlets to most global banking
centers. One might wonder if it were planned.
REMINISCENT OF GREAT DEPRESSION
When Bear Stearns was
dissolved and its assets rescued, the USFed and JPMorgan invoked
a feature of banking policies not used since the Great Depression.
Too many other comparisons can be made to that dreaded era. The
bank insolvency is the biggest commonality. The ability to print
money, shovel printing press output from one room to another
easily, permit phony accounting of balance sheets, hide within
offshore subsidiaries, and extend the risk model to great heights,
these are new & better innovations not available 70 years
ago. Well tragically, these innovations are being unmasked as
thin, flimsy, unable to withstand storms, and possibly even fraudulent.
As the stock market and bond market suffer blow after blow,
fail to stabilize, fail to recover, only to endure more breakdown
in the structure, memories come to the Great Depression, when
recoveries only led to deeper losses as the catastrophe unfolded.
This time around, another catastrophe is expected in a bank system
meltdown, a bond system total seizure, and a risk model system
dissolved.
Amidst all this maelstrom,
one must ask if wisdom prevailed during the Clinton Administration
to repeal the Glass Steagall Law from the Great Depression era.
That law created the Federal Deposit Insurance Corp for insuring
individual banks and depositors, up to $100k per account. The
law also blocked any attempt to merge banks, brokerage firms,
and insurance companies. The legislation intended to protect
a meltdown to spread to all critical structural elements of the
financial system. With the Glass Steagall repeal, one has to
wonder if some destruction was planned, or else a major consolidation
was the ultimate goal. My belief is firm, that powers in Old
Europe and London that control the USFed more than is publicly
known are restoring power back to Switzerland. They have resented
the arrogant and reckless US bankers for two generations.
By the way, the FDIC insures
bank accounts. But the SIPC guarantees participating brokerage
accounts up to a $500k limit, plus $100k on cash accounts. People
might soon hear more about their stock protection if giant financial
conglomerates go bust. Some stock accounts might be frozen, as
the courts sort it all out. When an SIPC member becomes insolvent,
SIPC will ask the court to appoint a trustee to supervise the
liquidation of firm assets and to process investor claims. Coverage
of bank and brokerage accounts will be a popular topic soon.
3 SCARY GRAPHS: BANKS, MONEY &
HOUSEHOLDS
Some have asked in
private emails whether the bigger the bank, the safer their future.
My answer is simple. The bigger the bank, the more likely they
are to hold a much riskier portfolio, and thus the more likely
their failure. Most big Wall Street banks and broker dealers,
along with a scattering of major US banks are in the same pickle,
from owning too many mortgage bonds and related credit derivatives
leveraged from them, even being saddled with bonds scheduled
for interrupted private equity deals. Bank assets have vanished.
The neighborhood bank with branches of operation only within
a corner of their resident state is probably much more insulated
from the bond market debacle. They likely originated loans, own
some, but might have recycled most of them through Fannie Mae
in order to continue to earn fees on new loans. Some have asked
if the USFed can make unlimited number of bank bailouts, can
refund on unlimited number of mortgage bonds submitted by banks.
Well yes, sure, but the accumulating risk to the USDollar is
being recognized and felt. The US$ decline is not done; it is
going lower.
The US banking system is teetering
at the precipice, the brink of collapse. Almost two years ago,
in the Hat Trick Letter, my forecast was made crystal clear,
that the housing crisis and mortgage debacle would topple and
destroy the US banking system, just like what happened to Japan
in the 1990 decade. The US banking system cannot withstand
insolvency like the stronger Japanese banking system, which survived
temporarily as vampire entities. Weekly events point to wrecked
mechanisms in the US banking system. They will continue to worsen
unfortunately. The financial condition of institutions within
the US banking system has gone critical, with core assets gone
negative. Total deposits held, free of borrowed USFed reserves,
have vanished. US banks have burned through their entire
capital core, melted down from disastrous mortgage portfolios,
their bonds, and related CDO leveraged bond derivatives. They
must now rely upon borrowed reserves from the USFed in order
to continue to function as lending institutions. They have turned
heavily to the USFed Term Auction Facility and now the Term Security
Lending Facility for resupplied capital. That is not injected,
donated, free money. It must be returned, or such is the plan.
With the TSLF, the USFed now extends loans for AAA-rated mortgage
bonds of private vintage, not just Fannie & Freddie type.
They expanded to $200 billion per month and 28 days in duration,
with a lowered 3.25% borrowing rate, and likely renewable feature.
As we know, many AAA bonds are crappy. So banks might be unloading
some rancid meat. The masters who control the USFed cannot be
happy.
The US banks by early December
had about $43 billion in total reserves. The current statement
by the Federal Reserve offers a daily average 'Non-Borrowed Reserves'
at MINUS $20 billion. Worse, the Fed Reserve estimates by
early April that amount will be MINUS $60 billion. The US banks
are living off borrowed money, and time. Be prepared for some
high profile bank failures, a process already begun. Home
loan defaults have combined with falling home collateral valuation
to destroy mortgage bonds and related securities to the extent
that banks have lost their entire capital. The only way to
recover from this situation is for banks to find a way to make
a lot of money really fast. The time has grown urgent to inflate
rapidly, or else face an unstoppable chain reaction of bond failures
followed by bank failures. Big banks do not have adequate loan
loss reserves set aside. Money and wealth will be destroyed either
from falling home portfolios and mortgage bond values, from reckless
lending and much fraud at all levels.
The shocking reality is that
the banking system has gone from a 10% reserve requirement to
a minus 5% requirement. Still too much bank capital is in illiquid
overvalued bonds. The USFed is trying to increase the money supply
faster than banks can write down losses. Keep in mind what New
York University economics professor Nouriel Roubini says, "For
every dollar loss of capital, you reduce lending by ten dollars."
The Shadow Govt Statistics folks do such great work in removing
deceptive games and gimmicks. They report the US$ money supply
is growing at an annual 18.0% rate, March 2007 over March 2007.
The sitting Secy of Inflation Bernanke, when pressed in Congress
recently to comment on the monetary inflation gone haywire, simply
said they monitor the Consumer Price Inflation only. Wow! Talk
about riding a horse while sitting backwards on the saddle! What
a hack! What a lousy cowboy!
Many standing loans involve
homeowners who owe a greater loan balance than the home is worth,
the home equity having evaporated. And home prices are heading
lower. Chronicling the Great American Tragedy, the New
York Times writes, "Not since the Depression
has a larger share of Americans owed more on their homes than
they are worth. With the collapse of the housing boom,
nearly 8.8 million homeowners, or 10.3% of the total are underwater.
That is more than double the percentage just a year
ago." To this date, USFed, Dept Treasury, and USGovt
efforts have not accomplished much toward reversing this trend.
Tragically, of mortgages originated from 2006 onward in recent
vintage, 30% are now burdened by negative equity. The ratio of
under-water mortgages, those with negative equity, the 'Upside
Down' loans, for these more recent loans is forecasted to rise
to more than 50%. The mortgages of older vintage are also rising
in their negative equity ratio. They are catching up to the newer
vintage home loans. The national housing foundation is going
underwater. Contrast with falling home values, which might not
stabilize in 2008 as the graph shows. Note two different scales
describe the two series.
The latest data on home foreclosures,
delinquencies, late payments, existing home inventory, new home
inventory, and median home value does not indicate in any manner
whatsoever that the housing market has even remotely stabilized.
More mortgage bond pain and bank writeoffs are to be expected
by anyone not hindered by rose colored glasses, banker public
relations motives, or USGovt mental handicaps. California and
Florida continue to bear more than their share of national foreclosures.
The two states accounted for 30% of mortgages entering the foreclosure
process. Arizona and Nevada are sure to increase sharply in the
next couple quarters. The big new twist is voluntary foreclosures,
abandonment of homes and their loans, in direct response to running
under-water with home equity gone, perhaps negative. People
are choosing not to service debt on a deflating failed asset.
CENTRAL BANK INTERVENTION NEXT
As the USDollar continues
to reel, to decline to low levels never seen before, support
does not exist. Clearly, some form of central bank intervention
is next. However, in order for such extraordinary action to be
effective and not futile, monetary policy must be coordinated
and cooperative. The major central banks must work together to
support the USDollar. They must cut official interest rates in
concert with the USFed. That means the Euro Central Bank must
agree to an official cut in its rigid interest rate. They might
employ an interim rate cut. Even a 25 basis point cut would be
significant. They must publicly state that they are defending
against a rising euro currency, and that price inflation will
be a risk to stomach. The planned goal would be to end the US$
decline. The extra benefit would be seen in the bond market and
banking system, from added liquidity and soon housing price stability.
Without dispute, the underlying problem is the housing crisis
and price declines in collateral.
My attention is squarely focused
on the Euro Central Bank, which has the greatest potential to
quickly change the awful sentiment plaguing the USDollar. The
USFed just cut interest rates again by 75 basis points. The USDollar
had moved down in anticipation of this latest cut. The Bank of
Canada has cut twice its interest rate. The Bank of England has
also cut its official rate, only once, and surely will again.
The Bank of Japan is talking about a rate cut. But the Europeans
are dominated by the Germans, who want no rate cut at all. The
Germans warned of the precise problems seen right now, do not
wish to fix a problem with more of the same actions that produced
the problem, and resent having to foot the bill during the aftermath
of these problems.
The gold price will not stop
at the $1000 milestone. The silver price will not stop at the
$20 milestone, and will vastly outperform gold. The crude oil
price might go below the $100 milestone briefly, but will return
and shoot past the century mark. No no no!!! All are heading
much higher, because the banking problem is not to be soon fixed,
the bond problem is not to be soon fixed, the economy is not
to be soon fixed, household distress is not to be soon fixed.
Maybe none can be fixed, even as money thrown at the problem
accelerates parabolically. The limited power of USFed solutions,
and limited arsenal of devices to treat the problem, will ensure
that monetary inflation will be the main tool. Still, adding
liquidity in rescues, repairs, and bailouts is not seen as the
cause of the problem. It still is seen as the immediate solution.
SUCH IS THE HERESY THAT HAS DESTROYED THE US BANKING SYSTEM.
They operate under an objective to revitalize the housing market,
and stop its price decline. They must enable the bank system
to become solvent. All that administered inflation means much
more gains to gold, silver, and even crude oil. Bigger problems
than rising gold, silver, and crude oil come if Consumer Price
Inflation starts to grow without bounds. The USTreasury Bond
market will suffer heart attacks, the beneficiary being gold,
silver, and crude oil!!!
Remarkably, when the USFed
was about to predictably cut the official interest rate again,
gold mysteriously got hit on Monday. On the day of the rate cut
Tuesday and the following day Wednesday, gold got hit again and
the USDollar rallied. The Boyz were busy. The smackdown of gold
under $950 and of silver under $19 only managed to remove and
cleanse these two important metals markets of their overbought
situation. The Boyz have cleared the path for gold to reach $1100
and for silver to reach $26. Nothing has been solved yet on most
critical battle fronts. The bigger moves up are yet to come!
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Mar 19, 2008
Jim Willie CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
by the limitations of economic credentials. Visit his website
at www.GoldenJackass.com. For personal questions
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