From the Greece into the fire

Defiant Greeks reject EU demands as Syriza readies IOU currency, et cetera.

Guambat reckons the EU should not react in haste. Better to call a referendum amongst the EU citizenry in, say, a week's time, seeking a vote whether to bail out Greece.  In the meantime, do nothing.

Average Guamanian annual average income lower than his or her share of government debt

The average Guamanian Per Capita Income for 2010 is $12,864 (see). Assuming 175,000 men, women and children on island, the per capita government debt, before personal and household debt, is $12,933. ($1.08 Billion divided by 175,000). 

Which year of your life, fellow Guamanians, do you want to give up to paying off the government debt?

 Better hurry. Interest is accruing.

What divides America: politics or economy

Putting aside the biggest divide, religious belief and disbelief, Henry Blodgett looks at the big economic divide, which is the result of big money meddling in "both" political isles.

Corporate Profits Just Hit An All-Time High, Wages Just Hit An All-Time Low

1) Corporate profit margins just hit an all-time high.

2) Fewer Americans are working than at any time in the past three decades.

3) Wages as a percent of the economy are at an all-time low.

The problem is our debt: from government to corporates to households. Our stunning economic "growth" has been a mirage, a floating sea of debt hallucination.

As a percent of total employed people in our economy, the number of government workers is actually far lower than it used to be. About 16% of us now work for the government.

State and local governments have actually been firing people in recent years.
The number of Federal government employees has stayed steady for nearly half a century.

we need to understand that there are two kinds of government spending... The first kind is what we normally think of as government spending: Defense, highways, bridges, NASA, government employee salaries, etc.

The second kind of government spending is what is euphemistically called "personal transfers" -- checks handed out to citizens for a variety of social programs, including Social Security, Medicare/Medicaid, and Unemployment Insurance..

Over the past 50 years, social-program spending has exploded as a percentage of the economy..

And don't forget what we're really talking about when we talk about "social programs." It's not unemployment insurance, food stamps, and other handouts that some anti-government people sometimes go insane about. They're small potatoes

The real government budget busters are Social Security, Medicare, and Medicaid.

See his charts at the article link, then see his other 63 charts and graphics starting here.
Any chance the never shy but now retiring boomers will turn off the tap on ss, medicare and medicaid? Not when they feel they've paid for it and it's their due.

Never mind. In 30 years they'll be gone. But there'll be plenty more rorts and schemes to rise to the top of the next great debt crisis.

Pay attention kids. Next time won't be different, either.

The running of the bears

Spanish Banks Said to Be Set for Downgrade by Moody’s Today (Update 1)

Moody’s Investors Service is set to downgrade the credit ratings of Spanish banks later today, said two people with knowledge of the situation.

Fitch Calls For Capital Increase As Run On Spanish Banks Continues

Fitch ratings has called for a huge increase in capital reserves at the world’s biggest banks today as the markets reel from the run on Spain’s banks. The agency recommended banks across the world raise a total of $556 billion an increase of 23 percent over what the banks are currently holding.

Fitch made the recommendations on 29 of the world’s systemically important banks. That list includes Goldman Sachs Group, HSBC Holdings plc, Mizuho Financial Group Inc., Bank of America Corp., Societe General S.A., and JPMorgan Chase & Co. Banco Santander S.A., a Spanish banking giant, is among the list of the most important 29 banks. It is not at as much risk from the current run on deposits in the country but suffers from the aura of the crisis.

The increase in the amount of money banks have to hold and simply sit on meant the firms will not be able to earn money on those reserves and will reduce profitability. The other option is leaving the institutions open to failure. It is this tradeoff that will dominate the institutions for the next several years.

After, and in the midst of, such a unique and deep financial crisis it is probable that regulators will swing too far toward stability leaving less room for growth and innovation. It may be some years before a correct balance is restored to the sector but it seems inevitable that right now government interference is going to grow.

State rescue may be beginning of end for Spain's Bankia

Spain's government plans to clean up, downsize and sell Bankia within three years, but the strategy could be short-lived as the bank's capital gap may be larger than the 15 billion euros ($19.1 billion) so far identified, government and financial sources say.

"The bank faces two options," said a financial source with direct knowledge of the bank's situation. "First, to be wound down. Second, to be wound down. The question is how small it will be at the end."

Bankia, Spain's fourth-biggest lender with more than 10 percent of bank deposits, said its clients can be absolutely calm over the deposits they hold, while Spain's Economy Secretary said there had not been an exit of deposit funds.

The government which nationalized Bankia last week after months of uncertainty over its capacity to weather the financial storm.

Finally, the government is under intense public pressure to reduce the taxpayers' bill by selling the more than 5.4 billion euros worth of stakes the bank holds in major Spanish companies such as Iberdrola and Mapfre.

The Socialist opposition said last week it would back the Bankia takeover on condition public funds would be recovered at some point. Yet public anger at the banks is rising after seven other lenders had to be bailed out by the state at a time when education and health spending are being cut.

The lender's auditor Deloitte identified several gaps in Bankia's accounts and it is still not clear whether its rescue will cost the government more than the 15 billion euros it initially planned to inject.

A senior government source last week estimated the size of the state intervention at up to 10 billion euros.

That would come on top of the conversion of a 4.47 billion euros loan into shares, which will give the state 45 percent of Bankia, with an option to take another 3 percent, and 100 percent of its parent company Banco Financiero y de Ahorros (BFA).

Loaded with bad loans from a decade-long real estate boom, the bank needs to raise about 1.3 billion euros by June to comply with stringent European Banking Authority capital rules.

It also needs to find at least 6 billion euros by the end of the year to comply with two financial reforms presented by Spain's centre-right government in February and last week.

Greeks pull cash out of banks as confidence wanes

Greeks withdrew more than $900 million Monday and another $600 million Tuesday, according to the Greek Central Bank. While deposits have been steadily leaving banks since the start of the country's debt problems in 2009, this week's outpouring of cash reflects a new level of panic, analysts say.

Meanwhile, in Spain, the newspaper El Mundo said customers have withdrawn more than €1 billion ($1.27 billion) since the state took over Bankia, the country's fourth-largest lender, a week ago. Bankia insisted its depositors' money was safe, and the government denied there was a run on the bank.

Austerity or Posterity: Buy now or Pay later

Europe Austerity Leading to ‘Catastrophe,’ French Lawmaker Says

Setback for Merkel as austerity agenda rejected in Germany's biggest state

Greek austerity: Path to recovery, or path to violence?

Irish pose next democratic test for EU austerity


Police clash with anti-austerity protesters in Italy

Spain: Mass Anti-Austerity Protests Sweep Nation

We need a British austerity revolt

Default now or default later?

“I had no idea.”

Unless the rich and poor encounter one another in everyday life, it is hard to think of ourselves as engaged in a common project. At a time when to fix our society we need to do big, hard things together, the marketization of public life becomes one more thing pulling us apart.

“The great missing debate in contemporary politics,” Sandel writes, “is about the role and reach of markets.” We should be asking where markets serve the public good, and where they don’t belong, he argues. And we should be asking how to rebuild class-mixing institutions.

“Democracy does not require perfect equality,” he concludes, “but it does require that citizens share in a common life. ... For this is how we learn to negotiate and abide our differences, and how we come to care for the common good.”

Like yelling "Print Money!" in a movie house

US Stocks Tumble As Italy Debt Troubles Escalate

European shares hit as Italian debt risk surges

What's Killing Morgan Stanley Today? Italy

Morgan Stanley‘s bets on Europe are hammering its shares this morning.

What’s hurting Morgan exactly? Well, a quick look at its European debt exposure shows its got loads of Italian debt on its books relative to its exposure in Greece. Morgan’s net exposure to Italy, after its hedged positions, is $1.79 billion, according to its third quarter regulatory filing.

That net exposure includes includes obligations from sovereign governments, corporations, clearinghouses and financial
institutions. Without its hedged positions Morgan’s exposure to Italy is $4.5 billion.

The irony here is that Morgan shares suffered drastic losses in September when there was speculation about its exposure to French banks. In September financial blog ZeroHedge said Morgan’s exposure to French banks was 60% greater than its market cap and more than half its book value. That sent Morgan shares under $13.

The moves in its shares prompted an internal memo from CEO James Gorman who attempted to quell rumors. “In fragile markets, where fear triumphs over common sense, these things are bound to happen,” Gorman wrote. “It is easy to respond to the rumor of the day, but that is not usually productive.”

Italy Bond Attack Breaches Euro Defenses, Contagion Worsens

“The house is on fire,” said Dante Roscini, a lecturer at Harvard Business School and former chief executive officer of Morgan Stanley in Italy.

“The ECB needs to print money and buy Italian bonds, it’s the only way to put the fire out.”

Is Morgan Stanley the next MF Global?

Bankruptcy judge makes MESS of MERS

Guambat has written before about MERS, an uncommon concoction of financial wizardry that simply ignored centuries of the common law of conveyance.

It was a scheme intended to grease the wheels of real estate mortgage securitization, by depriving local governments across the USA of the control (and revenues) of recording title, and along the way, depriving many mortgage debtors of their due process, and, perhaps, some lawyers of their licentious licenses.

In much the same manner that the credit implosion served as a reality check for the mark to model dreamers, a bankruptcy court has thrown a cold bucket of reality on Le MERS.

Merscorp Lacks Right to Transfer Mortgages, Judge Says

Merscorp Inc., operator of the electronic-registration system that contains about half of all U.S. home mortgages, has no right to transfer the mortgages under its membership rules, a judge said.

“MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in a Feb. 10 opinion. “MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal.”

Grossman said Select Portfolio had to show that U.S. Bank owned both the note and the mortgage, and there was no evidence that it held the note. The judge disagreed with Select Portfolio’s argument that U.S. Bank held the note because the note “follows” the mortgage, which it said U.S. Bank owned.

“By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name,” Grossman wrote. “MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths.”

A WSJ real estate blog elaborated:

U.S. Bankruptcy Judge Questions Legal Claims of MERS

At issue was whether U.S. Bank had legal standing to foreclose. The loan was originated by First Franklin in 2006 and MERS became an agent for First Franklin, which ultimately transferred the loan to Aurora Bank and later to U.S. Bank. Both of those banks are members of MERS, which allowed it to also act on behalf of those agents, according to MERS’s lawyers.

“By MERS account, it took no part in the assignment of the Note in this case, but merely provided a database which allowed its members to electronically self-report transfers of the Note,” wrote Judge Grossman. “[T]here is nothing in the record to prove that the Note in this case was transferred according to the process described above other than MERS’s representation that its computer database reflects that the Note was transferred to U.S. Bank.”

“The documentation provided to the Court in this case…is stunningly inconsistent with what the parties define as the fact of this case,” Judge Grossman wrote. The theory that MERS “can act as a ‘common agent’ for undisclosed principals is not support [sic] by the law.”

The opinion also rejected any argument that MERS’s reach was so broad and deep that it should receive favorable treatment from the judiciary:

The Court recognizes that an adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States. However, the Court must resolve the instant matter by applying the laws as they exist today. It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices. MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage recording process. This Court does not accept the argument that because MERS may be involved with 50% of all residential mortgages in the country, that is reason enough for this Court to turn a blind eye to the fact that this process does not comply with the law.

Laurence Platt, a banking industry attorney at K&L Gates in Washington, said the Agard case represented an “outlier that goes against years of decisions by New York courts that find assignments from MERS to be consistent with New York law.”

A spokeswoman for MERS also said that a separate decision on Friday by a U.S. Bankruptcy Court judge in Kansas had affirmed MERS’s ability to foreclose on behalf of Countrywide Financial Corp. In the case, the judge wrote that the court had received “uncontroverted evidence” that MERS was acting as an agent for Countrywide, allowing MERS to act on its behalf.

60% of Fannie/Freddie repurchase requests remain unrescinded

Banks Resisting Fannie, Freddie Demands to Buy Back Mortgages

Fannie Mae and Freddie Mac are facing growing resistance as they attempt to push failed home loans off their books and onto the balance sheets of banks including Bank of America Corp. and JPMorgan Chase & Co.

The two government-owned mortgage companies are enforcing contracts that require lenders to buy back loans that didn’t meet underwriting standards. At the end of September, the companies reported, banks hadn’t responded to $13 billion in buyback requests. A third of those were at least four months old and Freddie Mac has begun to assess penalties for the delays.

Lenders say they are resisting buybacks because McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae are unfairly second-guessing old appraisals, accusing originators of failing to verify income, or pinning failed loans on minor technical errors.

About 40 percent of repurchase requests are rescinded after lenders provide additional paperwork, said John A. Courson, chief executive officer of the Mortgage Bankers Association, a Washington trade group.

“We’re burning a lot of stockholder resources, and clearly a lot of Fannie and Freddie resources, to have 40 percent of these things rescinded,” Courson said in an interview. “It hurts the banks and frankly we’re wasting government resources, too.”

Courson, of the mortgage bankers group, said the industry’s concerns about the buybacks go beyond the volume. “It’s the nature of the requests, where so many try to assert a defect that has no actual bearing on the individual loan’s performance,” he said.

Lenders say that while Fannie Mae and Freddie Mac are asserting that loans went bad because of faulty underwriting, the leading cause of default is actually unemployment.

“If a loan paid for five years, then the client lost their job and somebody goes back and says, ‘You didn’t dot that I or cross that T,’ technically the originator has to buy that loan back,” William C. Emerson, chief executive officer of Detroit- based Quicken Loans, said in an interview. “Loans are being put back for very vague, gray reasons.”

“This is the first time in history you’ve seen this much pushback against the GSEs,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry trade publication in Bethesda, Maryland. “It’s just the volume of it. It’s bigger numbers. And this time the reasons are a lot grayer.”

Democrats and Republicans alike are pressing for the GSEs to return to solvency and repay taxpayer funds.

“We need to pursue all available legal claims to limit the losses to taxpayers,” said Representative Brad Miller, a North Carolina Democrat who serves on the House Financial Services Committee.

The GSEs should get what they’re owed and leave it to regulators to take action later if buybacks cause problems for banks, said Phillip Swagel, a former assistant Treasury secretary under President George W. Bush

“It’s better to uncover everything and for people to face up to their obligations,” Swagel said.

Fannie Mae and Freddie Mac say the mounting buyback demands are the result of growing delinquencies, not new enforcement.

“There’s no new policy. This is something that’s always been done,” said Freddie Mac spokesman Brad German. “The fact that more defaulted loans are triggering reviews that may lead to repurchase requests, given the volume of defaults, is not entirely surprising.”

Overall, 33 percent to 39 percent of loans questioned by the GSEs are leading to buybacks

Ya feelin' lucky, punk?

John Hussman, PhD, is a good read, from time to time. His writing style is often dry and since he constrains his view of the economy to the big picture, he's not so frenetically following the many distractions of the day that a market trader might, so new themes and ideas develop slowing in his weekly diary. But, from time to time, he is well worth the read.

And this time, it is not only helpful, but he's actually got some life in his prose. Here are a few extracts.

The Recklessness of Quantitative Easing

In the movie Dirty Harry, Clint Eastwood growls his famous line "I know what you're thinking. 'Did he fire six shots, or only five?' Well, to tell you the truth, in all this excitement I kind of lost track myself... You've gotta ask yourself one question. Do I feel lucky? Well, do ya punk?"

Over the past two years, the Fed has emptied what has largely turned out to be a chamber of blanks. Its remaining credibility lies in the belief by the public that Bernanke still has a live round left to fire. Once the Fed engages in QE, a failure of appreciable improvement in U.S. employment and economic activity would result in a substantial loss of public confidence. The Fed would be wise to save whatever ammunition it has left for a crisis point when the U.S. public is in dire need of confidence.

An additional fruit of careless, non-economic thinking on behalf of the Fed is the idea of announcing an increase in the Fed's informal inflation target, in order to reduce expectations regarding real interest rates. The theory here - undoubtedly fished out of a Cracker Jack box - is that lower real interest rates will result in greater eagerness to spend cash balances.

Unfortunately, this belief is simply not supported by historical evidence. If the Fed should know anything, it should know that reductions in nominal interest rates result in a lowering of monetary velocity, while reductions in real interest rates result in a lowering of the velocity of commodities (commonly known as "hoarding").

A second round of QE presumably has two operating targets. One is to directly lower long-term interest rates, possibly driving real interest rates to negative levels in hopes of stimulating loan demand and discouraging saving. The other is to directly increase the supply of lendable reserves in the banking system. The hope is that these changes will advance the ultimate objective of increasing U.S. output and employment.

To assess whether QE is likely to achieve its intended objectives, it would be helpful for the Fed's governors to remember the first rule of constrained optimization - relaxing a constraint only improves an outcome if the constraint is binding. This policy will be ineffective because it will relax constraints that are not binding in the first place.

On the demand side, it is apparent that the U.S. is presently in something of a liquidity trap. Interest rates are already low enough that variations in their level are not the primary drivers of loan demand.

Businesses and consumers now see their debt burdens as too high in relation to their prospective income. The result is a continuing effort to deleverage, in order to improve their long-term financial stability. This is rational behavior. Does the Fed actually believe that the act of reducing interest rates from already low levels, or driving real interest rates to negative levels, will provoke consumers and businesses from acting in their best interests to improve their balance sheets?

On the supply side, the objective of quantitative easing is to increase the amount of lendable reserves in the banking system. Again, however, this is not a constraint that is binding. The liquidity to make new loans is already present.

Despite the probable lack of measureable benefits, further QE poses significant risks. It has already triggered a steep decline in the exchange value of the U.S. dollar, and threatens a destabilization of international economic activity, a loss of confidence, and the creation of a "boom-bust" cycle threatening to choke off any economic recovery that does emerge.

The Fed might like to believe that a cheaper dollar will improve trade by increasing U.S. exports and reducing imports. However, over the past two decades, and particularly in recent years, U.S. imports have been much more elastic in response to fluctuations in the U.S. dollar than exports have been. This suggests that provoking further dollar depreciation is likely to have negative effects on the global economy, owing to a shift away from imports, but with few positive effects for U.S. economic activity. Indeed, a further depreciation would unnecessarily create a negative wealth effect for U.S. consumers facing higher prices for imported goods and services. Any improvement in the trade deficit would be largely offset by downward pressure on U.S. consumption.

As a side note, some observers have suggested that QE represents nothing more than "printing money." While this might be accurate if the Fed never reverses the transactions, the most useful way to think about QE, in my view, is as an attempt to directly lower interest rates by purchasing Treasury securities. This interest rate effect - not any major inflationary outcome - is the cause of the dollar depreciation we are observing here. There is little doubt that the effect of large continuing fiscal deficits is long-run inflationary, but as I've noted repeatedly over the years, there is little correlation between inflation and temporary - even large - variations in the monetary base. Inflation is ultimately a fiscal phenomenon born of unproductive spending, regardless of how that spending is financed.

once the Fed has quadrupled or quintupled the U.S. monetary base from its level of three years ago, how will it reverse its position? Japan was able to successfully reverse its program of QE several years ago without much impact on yields, but unlike the U.S., it had the luxury of an extremely high savings rate. With nearly 95% of its debt held domestically, Japan had no need to resort to foreign capital. In contrast, over half of the U.S. national debt is held by other countries. Without a deep pool of domestic savings, and with no repurchase agreements in place, the Federal Reserve will eventually have to entice domestic and foreign investors to buy the Treasury securities back, pressuring interest rates higher, and virtually ensuring a capital loss.

Better policy options are available on the fiscal menu. Historically, international credit crises have invariably been followed by multi-year periods of deleveraging, but measures can be taken to smooth the adjustment. The key is to focus on the economic constraints that are binding. Presently, these relate to high private debt burdens, uncertainty about income, weak aggregate demand, and the reluctance by U.S. businesses to launch new projects.

Appropriate fiscal responses include extending unemployment benefits, ensuring multi-year predictability of tax policy, expanding productive forms of spending such as public infrastructure, supporting public research activity through mechanisms such as the National Institute of Health, increasing administrative efforts to restructure debt through writedowns and debt-equity swaps, abandoning policies that protect reckless lenders from taking losses, and expanding incentives and tax credits for private capital investment, research and development.

Throwing a trillion U.S. dollars against the wall to see what sticks is not sound monetary policy. By pursuing a policy that relaxes constraints that are not even binding, depresses the U.S. dollar, threatens to destabilize international economic activity, encourages a "boom-bust" cycle, provokes commodity hoarding, and pops off the Fed's last round of ammunition absent an immediate crisis, the Fed threatens to damage not only the U.S. economy, but its own credibility.

The prospects of a US$ Banana Republic??

Paul Keating has made his inimitable mark on Australian politics, first as Treasurer and later as Prime Minister. He was the self-proclaimed "Placido Domingo of Australian politics". He certainly was (and mostly remains) a man of words.

In 1983, as Treasurer, he did away with the fixed exchange rate mechanism of the Aussie Dollar, allowing it to float. It floated like a rock. Interest rates jumped up to 20%.

As one admiringly critical website explained,

In spite of the lower value of the dollar, many areas of the manufacturing sector were not competitive with more technologically advanced industries in Asia, especially South Korea and Taiwan. Imports continued to rise. By 1986 foreign debt was higher than anticipated.

Treasurer Keating warned that if Australia did not "get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, it would end up being a third-rate economy . . . a banana republic."

His "banana republic" remark, made off the cuff in a radio interview if Guambat's memory doesn't fail (most unlikely), had the same salutary effect as Alan Greenspan's "irrational exuberance" quip.

But it was Keating's banana republic quote that came to mind whilst Guambat was perusing the most recent soothing words from David Stockman, who once advised The Other Great Communicator -- the American one.

Commentary: Trillion-dollar deficits don’t matter

According to CBO’s August update, the two-year, cumulative red ink under current law (FY 2011-2012) will total $1.7 trillion. But that doesn’t count the upcoming lame duck session’s predictable one-more-stimulus bacchanalia.

Juiced up by their election rout, the tax-side Keynesians in the GOP are certain to ram through a two-year extension of the Bush tax cuts for one and all.

In return, the hapless White House will insist this one-half trillion dollar gift to the “still haves” be matched with several hundred billion more in presently unscheduled funding for emergency unemployment benefits and other safety net programs for the “no-longer-haves.”

In combination, these measures — along with more realistic economic assumptions — mean that the FY2011-2012 deficit will be $700 billion higher than current projections, pushing the two-year total to at least $2.5 trillion. Read Minyanville’s “What a Republican Victory Means for Equity Markets.”

These considerations make one thing virtually certain: After the new Congress sinks into rancorous partisan stalemate and does absolutely nothing about this fiscal hemorrhage, the Treasury will be selling at least the $100 billion per month of new government paper for so long as the New York Federal Reserve is open to buy. Stated differently, national policy now amounts to monetizing 100% of the federal deficit.

In the olden times — say three years ago — the idea of 100% debt monetization would have been roundly denounced as banana republic finance. No more. Earlier this week, William Dudley, who occupies the Goldman Sachs permanent seat on the Fed’s Open Market Committee, helpfully clarified that the new-age Fed should be judged by what’s in its heart, not what’s on its balance sheet. He said:

“I am mindful of concerns… that [the Fed’s actions] could be interpreted as a policy of monetizing the federal debt. However, I regard this view to be fundamentally mistaken. It misses the point of what would be motivating the Federal Reserve.”

They may devoutly believe in their hearts (if hopefully not in their minds) that it’s economic milk and honey that they’re bringing to America, but in fact what they’re dispensing is digital greenbacks.

At the moment, the five-year note yields barely 1.0%, and the maturities below that quickly descend toward zero — with the 2-year at 35 basis points and 90-day bills at 12 basis points. Those maturities account for in excess of 90% of the $9 trillion in Treasury debt presently held by the public. So, in the world of ZIRP, the public debt is now essentially non-interest bearing.

Moreover, with a stroke of the “repo” key it can also be turned into cash — that is, legal tender — in a millisecond.

But what emergency motivates today’s greenback experiment?

It would appear to be two self-evidently foolish objectives.

The first is the claim by the Fed’s money printer’s caucus that QE2 in the magnitude being contemplated might lower the 10-year benchmark rate by 50 basis points.

Stunning.

We have a nation drowning in 19 million empty housing units owing to the Fed-engineered housing bubble, households still buried in $13 trillion of debt from the same cause, and idle business capacity on a scale not seen since the 1930s — and we’re supposed to believe that taking down the current all-time low interest rate by another 50 basis points will make a difference?

Worse still, [the other] salutary effect of this dubious proposition, according to chief apothecary Brian Sack, is that risk asset values are likely to be elevated to levels “higher than they would otherwise” reach — thereby encouraging consumers to go back to their former spending ways -- owing to the illusion of higher net worth, as conjured by the Fed.

These are pretty pathetic reasons for issuing massive quantities of digital greenbacks.

Like all other experiments in printing-press finance, its main impact will be to give a destructively erroneous signal to fiscal policymakers on both ends of Pennsylvania Avenue: Namely, that chronic trillion-dollar deficits don’t matter because the Fed is financing them for free.

No rendition for Moody's European unit up to its nexus in fraud-like behaviour

Moody's Investor Services (MIS) was born of an American, John Moody, around the turn of the Nineteenth into the Twentieth Century. And, my, how it has grown.

According to its resume, "Moody's is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets. Moody's Corporation (NYSE: MCO) is the parent company of Moody's Investors Service."

The Securities Exchange Commission regulates American companies, especially credit reporting agencies. Moody's became a nationally recognized statistical rating organization ("NRSRO"), registered with SEC, after the middle of 2007. But just prior to that time, Moody's European operations bad a boo-boo. A not insignificant one.

But one apparently safely separated from the SEC by the Atlantic Ocean. That is the story told by the SEC itself in its Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Moody's Investors Service, Inc. released August 31st:

In the summer of 2006, MIS began developing a methodology for rating notes issued by a newly created CPDO.

The rating committee responsible for the credit ratings of the CPDO notes met in France and the United Kingdom. The CPDO notes were arranged by European banks and marketed in Europe.

Because CPDO notes were new instruments, MIS had no existing model for use in rating them. MIS created a model and in September 2006 gave the notes issued by the newly created CPDO issuer an Aaa credit rating. By the end of 2006, MIS had issued credit ratings for notes issued by an additional eleven CPDO issuers. The notes of all twelve CPDO issuers were marketed in Europe.

In January 2007, an MIS analyst in New York, assisting on a CPDO deal with a United States investment bank, was asked to determine why the MIS CPDO model was not generating the same output as the investment bank's model.

Upon examination, the analyst discovered a coding error in the MIS model. The coding error upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for notes issued by eleven CPDO issuers.

The CPDO notes with affected credit ratings had a combined notional value of just under $1 billion.

MIS subsequently held several internal rating committee meetings in France and the United Kingdom to address the coding error.

MIS corrected the coding error on February 12, 2007, but made no changes to the outstanding credit ratings for CPDO notes at that time.

Internal e-mails show that committee members were concerned about the impact on MIS's reputation if it revealed an error in the rating model. The committee was comprised of senior level staff, including two Team Managing Directors, two Vice President-Senior Credit Officers, and a Vice President-Senior Analyst.

In declining to downgrade the credit ratings, the committee considered the following inappropriate non-credit related factors:

>(i) that downgrades could negatively affect Moody's reputation in light of ongoing negative media focus in Europe on Moody's Joint Default Analysis;
>(ii) that downgrades could impact investors who relied on the original ratings; and
>(iii) the desire not to validate the criticisms of Moody's ratings of CPDOs that had been made by a competitor and covered in the local media.

The actions of the rating committee that evaluated the affected credit ratings for the CPDO notes did not comply with MIS' own Core Principles.

Members of the rating committee involved in the monitoring of CPDO ratings allowed concerns regarding Moody's reputation and other non-credit related considerations to influence decisions not to downgrade the affected CPDOs.

Further, we conclude that, in early 2007, members of the European rating committee believed they could violate MIS's procedures without detection

[How-ever,] Because of uncertainty regarding a jurisdictional nexus to the United States in this matter, the Commission declined to pursue a fraud enforcement action.

The long train wreck

Trouble with you is the trouble with me,
Got two good eyes but WE still don't see.
Come round the bend, you know it's the end,
The fireman screams and the engine just gleams...

Driving that train, high on cocaine,
Casey Jones YOU BETTER, watch your speed.
Trouble ahead, trouble behind,
And you know that notion just crossed my mind.

-- Casey Jones, by the Grateful Dead
(via sing365.com)

The Great Depression was not all for naught. At least not yet. The social safety nets put in place in the aftermath of that Great Ruction have kept unemployment at half the rates seen then. And the unprecedented bail out of bankers in the last couple of years have kept them in fine fettle, caviar and Housewifes.

It has all conspired to conjure a complacency that is as unwarranted as it is fanciful.

But David Stockman has his hand on the train whistle as the Great Depression redux continues picking up speed. Just a couple of weeks ago he did an Op-Ed for the NYT:

Four Deformations of the Apocalypse

The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice.

In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.

After a short intermission, he's back for round two with more op-ed.

Beware the light at the end of the tunnel (Commentary: It's a debt train about to collide with federal obligations)

The federal deficit is no longer an abstract long-term problem; it's a financially critical freight train hurtling down the track at alarming speed.

Here's a dramatic way to look at it: Nominal GDP is only $100 billion higher than it was back in the third quarter of 2008. That means it has been growing at only $4 billion per month, while new federal debt has been accumulating at around $100 billion per month.

Yes, this period represents the worst of the so-called Great Recession, but never in history has the federal debt grown at a rate of 25 times GDP for two years running!

the federal debt still has grown at two times the rate of GDP during what looks to be the strongest phase of the recovery.

at $52 trillion, credit-market debt today is 3.6 times that of GDP, compared with 1.6 times that of GDP when the original argument of supply-side versus Keynesians opened up back in 1980.

Moreover, this 1980 total economy "leverage ratio" hadn't fluctuated appreciably for 110 years going back to 1870. So I call it the "golden constant," and note that had the total economy-leverage ratio not gone parabolic after 1980, credit-market debt today would be $22 trillion at the 1.6 times ratio.

In short, the economy is freighted down with $30 trillion in excess debt. The process of liquidating the household and business portion of this -- about $24 trillion -- will swamp the normal cyclical recovery mechanisms for years to come. And it's insane to keep adding the mushrooming public-sector portion of the debt or order to artificially juice the GDP numbers for a few more quarters.

Further, if we're in a period of sustained debt deflation, it's extremely likely the GDP deflator will shrink toward zero and real growth will struggle to make 2-3%. Hence, nominal GDP growth is almost certain to be even slower in the quarters ahead

At the same time, there's virtually no chance unemployment will drop much below 10% in the context of a deflationary "recovery," meaning that budget costs for unemployment, food stamps, etc. will remain elevated, not come down by hundreds of billions as currently projected

So we have baked into the cake a rather frightening scenario: monthly federal debt growth upwards of $125 billion, or three times the likely nominal GDP growth of $40 billion per month -- as far as the eye can see.

At least once a day someone on CNBC talks about the $1.5 trillion in corporate cash on the sidelines and how healthy business-sector balance sheets are.

That's pure baloney. If you peruse the flow of funds, and you'll see that corporate-sector cash assets have increased by $279 billion since the December 2007 peak, and now total $1.72 trillion. According to the same data, non-financial, corporate-sector debt has increased by $480 billion and now stands at $7.2 trillion. Corporate debt net of cash has actually increased by $200 billion during the Great Recession.

Stated differently, corporate debt net of cash was $5.3 trillion or 36.7% of GDP at December 2007 and is now $5.5 trillion or 37.6% of GDP. There's been no de-leveraging in the business sector either -- especially when its noted that tangible assets have also declined by 20% on a market basis and are flat on a book basis during the same period.

Every reason of prudence says not to tempt the financial gods of the global bond and currency markets with this freight-train scenario: Do something big to close the deficit, and do it now.

Also, there's no possibility in either this world or the next of obtaining the needed $700 billion to $1 trillion in structural deficit reduction by spending cuts alone. We've had a rolling referendum since the first Reagan budget plan in 1981, and progressively over these three decades the Republican party has exempted every material component of the budget from cuts, including middle-class entitlements, defense, veterans, education, housing, farm subsidies and even Amtrak!

Like Casey, the GOP has been in the anti-spending batter's box for 30 years, and has never stopped whiffing the ball. The final proof is that the one GOP spending cut plan with any integrity -- the "roadmap" of Congressman Paul Ryan -- has the grand sum of 13 co-sponsors, and I dare say half would call in sick if it ever came to a vote. Therefore, tax increases are now needed because it's too late and too urgent for anything else.

That should be a call to arms, fiscally and monetarily. But this is an election year (isn't every year, these days?) and no elected doctor will be prescribing caster oil for the ailing economy. Or, should they, they will add a bucket full of sugar to make it go down -- and out -- before any prophylactic effect.

And what's the Fed to do? Well today, they said this:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.

Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

inflation is likely to be subdued for some time.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

As Rex Nutting summed it up,

The Federal Open Market Committee announced it would reinvest the proceeds of its investments in mortgage-backed securities as they mature into Treasurys.

As economic stimulus goes, this is pretty thin gruel.

What has the Fed accomplished? It avoided a second Great Depression, but large sectors of the economy are still struggling. It's not clear what easier credit conditions can do to ease that suffering.

Trouble ahead, Lady in red,
Take my advice you'd be better off dead.
Switchman's sleeping, train hundred and two is
On the wrong track and headed for you.

Driving that train, high on cocaine,
Casey Jones YOU BETTER, watch your speed.
Trouble ahead, YOU KNOW, trouble behind,
And you know that notion just crossed my mind.

-- id.

Hankering for a rewrite of the credit meltdown

Barry Ritholtz turned his loving eye on a piece written by Hank Paulson in WaPo today, in which Paulson blames housing policy for the credit bubble and bust.

Here's a taste of what Hank said in his article:

we must have the fortitude to create a more level playing field between housing and other productive investments.

Fannie Mae and Freddie Mac should not be allowed to revert to their old form, crowding out private competition and putting taxpayers on the hook for failure while shareholders benefit from success. Reform should address the systemic risk they pose and should wean our mortgage finance system from its dependence on these institutions.

Placing Fannie and Freddie in conservatorship was, in my view, the most effective of the stimulus efforts undertaken in the past two years. This stimulus was aimed squarely at the driver of our financial and economic crisis: the decline of home prices.

Barry takes it apart, as usual, so much better than Guambat could ever, so his post is where you should be headed. But before you go, remember that it was Paulson who put Fannie and Freddie into conservertorship, and note these blasts from the past.

Risque business March 16, 2006 (channeling GAMBLIN' GOLDMAN'S PROFIT HITS WALL ST. RECORD $2.48B By RODDY BOYD in the NY Post)

Riding a wave of wild trading, a frenzied merger market and some savvy investments, Goldman Sachs rolled over investor expectations to rack up almost $2.5 billion in profits, the most lucrative quarter in Wall Street history.

Goldman's $2.48 billion in net income, or $5.08 a share, was a 64 percent increase over the previous quarter

Surging income in proprietary trading and at the merchant banking unit - where Goldman bet its own money on deals - led the profit rise, but all of the firm's units reported at least double-digit growth.

The story behind Goldman's incredible gains appears to have been a willingness to take more risk - a lot more risk.

"Goldman is ramping up risk appetite to almost uncharted waters," said CreditSight's David Hendler.

Goldman's results are a strong boost for its boss, Hank Paulson, who raked in more than $38 million in total compensation last year.

Hendler said the profits may be coming from aggressive trading in sophisticated financial instruments devised by Goldman's own staff, including what he termed "new age" derivatives and complex "black box" structured products.

Up to 40 percent of Goldman's net income is currently at risk, up from an average of 30 percent last year, wrote Hendler in a recent report.

Ratings agency Standard & Poor's said this stellar performance came as all of Goldman's broader risk measurements - the so called VaR, or value at risk - increased.

What's in Santa's Sachs of gifts? Goldman? December 04, 2007

David Gaffen of the WSJ MarketBeat blog has begun the process of shaking the boxes in anticipation of what's under the tree. The tree in this case being the Big Freeze that Hank Paulson, now US Treasury Secretary, recently top Goldman Sachs guru, has been hoping to use to chill out the credit markets.

Ostensibly, the Big Freeze (Matrix, as Gaffen calls it) is meant to help out the poor small schmucks who got teased into ARM breaking mortgage deals. But more sensibly, as Gaffen notes, it is the really big boys, who stand to loose the only leg they have to stand on whilst the little guys only loose an ARM, that are the real intended beneficiaries of Santa's Sachs of goodies.

Gaffen blogs,

"commenters are wondering whether the Treasury’s plan isn’t so much about those on the bottom rungs with subprime loans as those who are leveraged to those loans in the first place.

Marc Chandler, chief currency strategist at Brown Brothers Harriman points out ... “We suspect the subprime problem has been exaggerated to obfuscate the real issue and the real threat to the capital markets,” he writes. “It is the old nemesis – leveraging.

“If we make the payment structure better, who wins? A few people that will eventually default anyways? Nope,” he writes. “The folks that sit on the bulk of the sub-prime related paper, those ‘so far’ untouched from the sub-prime crises. Yep. Goldman Sachs and their pals.”

Fannie Mae's Demise Rooted in the Swinging '60s: Amity Shlaes Sep 10, 2008

This week the news coverage focuses on identifying the implosion's [of Fannie and Freddie] possible catalysts.

One may be all the cash foreign governments had placed in so-called agency debt, the category that includes Fannie and Freddie bonds. My Council on Foreign Relations colleague Brad Setser notes that Treasury Secretary Henry Paulson probably acted with an eye to foreign markets when he announced the government takeover.

Another analysis says that Fannie and Freddie's failure is the result of crony capitalism. This is doubtless also legitimate: aside from Richard Baker, the Fannie critic who served in Congress representing Louisiana until this year, it's been hard to find a lawmaker not intimidated by the GSE arm- twisters.

Yet a third view is that Fannie and Freddie matter because they tell us that recent growth has been more illusory than real.

As Barry wraps up his post:

Paulson oversaw the greatest transfer of wealth in the history of mankind — from taxpayers to insolvent banks and their bondholders. His commentary is thinly veiled attempt to rewrite what actually occurred, and to shift his own sad role from conductor of the theft, to hapless victim of long standing government policy.

If this exercise wasn’t such a transparent attempt at self-exoneration, it would be amusing, Instead, it is merely pathetic.

More hush money

It's not been long since we looked at the hush money paid by Dell ($100 million plus whatever executives had to pay) and Goldman Sachs ($550 million) -- in fact just a week ago -- and now Citigroup is upping the total by another ($75 million plus whatever executives have to pay).

Citigroup Said to Pay $75 Million to Settle SEC Subprime Case

The company made misstatements on earnings calls and in financial filings in 2007 about assets tied to subprime loans, the Securities and Exchange Commission said in a federal lawsuit yesterday in Washington.

“Even in late 2007, as the mortgage market was rapidly deteriorating, Citigroup boasted of superior risk-management skills in reducing its subprime exposure,” SEC Enforcement Director Robert Khuzami said in a statement. “The rules of financial disclosure are simple. If you choose to speak, speak in full and not half truths.”

Citigroup Inc. will pay $75 million to settle U.S. regulatory claims that it misled investors by failing to disclose billions of dollars in holdings tied to subprime mortgages while the housing crisis unfolded.

Citigroup’s former chief financial officer and head of investor relations agreed to pay a total of $180,000 for failing to disclose the risk.

Former CFO Gary Crittenden, who left Citigroup last year, agreed to pay $100,000 to settle claims he didn’t disclose the risk after getting internal briefings.

Arthur Tildesley, Citigroup’s former head of investor relations, will pay $80,000 to settle claims that he helped draft disclosures that misled investors, the SEC said. Tildesley now heads cross-marketing at Citigroup, according to the agency.

Citigroup, Crittenden and Tildesley agreed to settle the case without admitting or denying the SEC’s allegations.

“Mr. Crittenden is pleased to have resolved this matter,” said John Carroll, an attorney for Crittenden at law firm Skadden, Arps, Slate, Meagher & Flom LLP in New York.

Citigroup is pleased to “put this matter concerning certain 2007 disclosures behind us,” the company said.

All these companies were doing their version of Gods work, making money, rolling along, without anything but lip service to the "rules of financial disclosure", as was put above.


And now they take a slap on the wrist and walk away saying, "SEC and Investors, get thee behind me!"


Tracy Alloway provides quite an exposing run down on the kinds of non-disclosing disclosures Citigroup made in 2007 in FT Alphaville: Citi’s super senior subprime SEC slip

Banks: Europe not too stressed, seventh in heaven in one day in US

Euro Falls as Stress Test Results Fail to Alleviate Banking Risk Concern

stress tests of European Union banks failed to identify sources of weakness that would aggravate the region’s debt crisis. Tests show that only seven banks flunked the EU’s crisis scenario.

EU regulators scrutinized 91 of the bloc’s banks to assess whether they have enough capital to withstand a recession and sovereign-debt crisis, with a Tier 1 capital ratio of 6 percent as a floor. Governments are seeking to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal.

The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding to maturity, according to CEBS. That means the tests are set to ignore the majority of banks’ holdings of sovereign debt, investors said.

“There’s a lack of credibility,” said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “They don’t think the scenarios were stressful enough.”

Europe's sovereign-debt crisis, April 29, 2010

Greece sounds three warnings that reach far beyond its borders.

The first is economic. Greece has become a symbol of government indebtedness. This crisis began last October when its new government admitted that its predecessor had falsified the national accounts.

[Guambat has just started reading the Reinhart & Rogoff treatis, This Time is Different, wherein they observe "we view the difficulties one experiences in finding data on government debt as just one facet of the general low level of transparency with which most governments maintain their books. ... Lack of transparency is endemic in government debt, but the difficulty of finding basic historical data on central government debt is almost comical."]

The second lesson is political. Playing for time has backfired. Now the mooted rescue plan has climbed above €100 billion because no private money is available. The longer euro-zone governments dither, the more lenders doubt whether their promises to save Greece are worth anything. Each time politicians blame “speculators” (see article), investors wonder if they understand how bad things are (or indeed that investors have a choice). Euro-zone leaders initially refused to seek IMF help because it would be humiliating. Their ineptitude has done far more than their eventual decision to call in the IMF to damage the euro.

This political and economic failure leads to the third Greek warning: that contagion can spread through a large number of routes.

Is a Sovereign Debt Crisis Looming?

February 2010 As the dust settles from the great financial crisis, skyrocketing government debt in advanced countries presents a new risk and is prompting calls for stimulus withdrawal. However, falling output, not stimulus spending, is by far the main cause of wider fiscal deficits. Accordingly, sustaining growth—not withdrawing stimulus—should remain most countries’ top priority if they are to break the debt spiral. Crucially, markets must remain confident in the major economies’ capacity to handle their fiscal affairs, hence the need for persuasive long-term fiscal consolidation plans.

Though markets are nervous about holding the sovereign debt of the smaller Euro area members, these countries’ problems should prove manageable—assuming the European economy continues to recover and neighbors help. Among the major economies, Japan offers the greatest source for worry in the medium term.

Since 2007, debt in seven out of the nine advanced G20 countries increased by more than 10 percent of GDP. By contrast, debt-to-GDP ratios declined or are little changed in eight of the ten emerging economies in the G20.

The bigger story is the effect of the recession on tax receipts and the automatic increase of spending on unemployment and other safety nets. Total expenditures in the United States grew from a historical average of 20.7 percent of GDP to 24.7 percent in 2009, while tax receipts are expected to fall to 14.8 percent of GDP in 2009 from an average of 18.1 percent. EU tax revenue is predicted to decline to 29.2 percent of GDP, down from 30.9 percent in 2008. Reflecting GDP decline, U.S. tax revenues fell by a remarkable 17 percent over the last year, while EU revenue likely declined by 8 percent.

With only a modest economic recovery predicted in advanced countries in 2010, government debt will continue to rise as a share of GDP.

If You Think Sovereign Debt Is Just A Greek Problem, Get Ready For It To Hit Home Soon May 7, 2010

Though the U.S. is considered to be the highest order of "prime" borrower, based on historic precedent, our debt to GDP levels are at crisis levels, and are not that much lower than Portugal or Spain. When off-budget and contingency liabilities are properly accounted for, one could argue that we are already in worse financial shape than Greece.

As Americans observe the chaos in Greece, most assume that the strength of our currency, the credit worthiness of our government, and the vast expanse of two oceans, will prevent a similar scene from playing out in our streets. I believe these protections to be illusory.

Once again the vast majority fails to see a crisis in the making, even as it stares at them from close range.

Read more: http://www.businessinsider.com/peter-schiff-sovereign-debt-2010-5#ixzz0uefPWern

Reinhart and Rogoff also make the point,

"Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crisis is that when an accident is waiting to happen, it eventually does."

And Guambat is only up to page 11.


Meanwhile, in the real world of stress testing,

Seven more US banks collapse on day of Europe's stress tests

More than 100 banks in the US have now collapsed so far this year after another seven were taken over by regulators late on Friday – the same day that seven European banks failed a financial health check.

With rising bad debts tied to commercial and residential mortgages, the number of US bank failures this year is expected to exceed last year's figure of 140. In all, the seven failed banks had total assets of $2bn.

Not to worry: global warming will shrink it anyway

Iceland Loan Ruling Is Likely to Derail Bank Recovery, Fitch Ratings Says

Iceland’s financial crisis was exacerbated by banks that borrowed in currencies such as Japanese yen and Swiss francs to take advantage of lower interest rates, then repackaged them as kronur loans for clients. The krona has lost 39 percent against the yen and 30 percent against the franc since Sept. 15, 2008.

Iceland, the fifth- richest nation per capita as recently as 2007, faces litigation from creditors in the island’s banks, who sought to limit their losses last year by becoming shareholders

Iceland’s efforts to restore financial stability and scale back capital controls are at risk after a ruling last month made banks liable for foreign currency losses on some retail and corporate loans, Fitch Ratings said.

The June 16 decision by Iceland’s Supreme Court, which banned loans indexed to foreign exchange rates, may cost lenders as much as $4.3 billion, equivalent to one third of Iceland’s 2009 economic production, Finance Minister Steingrimur Sigfusson said earlier this month.

The ruling may force some banks to close as losses push capital adequacy ratios below the regulator’s 16 percent minimum requirement, said Financial Supervisory Authority Director Gunnar Andersen, in a July 9 interview.

The government, which is relying on a $4.6 billion IMF-led loan, says a second bank bailout would be a “severe blow” to its finances. Creditors, including Royal Bank of Scotland Group Plc and Credit Agricole Vita SpA, became shareholders in the banks after a state takeover in 2008.

“Banking crises are invariably protracted affairs that have the potential to inflict extensive damage on the sovereign’s balance sheet,” Fitch Senior Director Paul Rawkins said. “Iceland is proving no different from previous sovereign crises in this respect.”

Cold comfort?

Can we blame Goldman for Government's largesse?

Guambat needs to keep things simple lest his head blow up. This story is certainly bound to end up more complex, but to Guambat, the latest government inquest about the AIG debacle has only revealed that Goldman was a very good debt collector, protecting its interests.

So far, to Guambat's usually cynical eyes, he has seen nothing that implicates Goldman in any nefarious dealings to get the government to pay out 100 cents on the dollar that AIG owed Goldman.

Mind you, given Goldman's Godfather touch, you might reasonably suspect something, but suspicion alone is of dubious utility for anything other than casting aspersions. And Guambat has cast a few of those Goldman's way.

That being said, somebody somewhere needs to answer the question,

what in God's name was the government (Hank Paulson and Tim Giethner, etc.) thinking when they paid Goldman full value for debt worth maybe half that?

And it's fair enough to ask that question of Goldman and anyone else.

Goldman executives defend pursuit of payments from bailed-out AIG

Goldman and AIG sparred over the value of mortgage bonds behind complex financial derivatives for more than a year before the government rescued AIG in September 2008, executives from the two companies told the Financial Crisis Inquiry Commission.

As part of the bailout, the government took an 80 percent ownership stake in AIG. After the rescue, federal officials decided to pay Goldman the entire $13 billion it was owed by AIG on credit default swaps. At the time, the swaps were worth about half their face value, said Bill Thomas, the Financial Crisis Inquiry Commission's vice chairman.

But Goldman Chief Financial Officer David Viniar said the company was not trying to gouge taxpayers. "All we were paid was what we were due under a contract," Viniar said.

Goldman had insurance for the money owed by AIG and would have received all it was owed had the government decided not to pay off AIG's debts, he said.

A representative from the Federal Reserve Bank of New York, a key player in the AIG bailout, called Goldman at one point to ask whether top executives would think about taking less than all that was owed, but there were no other conversations, Viniar said.

Federal officials, including former Treasury Secretary Henry M. Paulson - a onetime Goldman chief executive - and current Treasury Secretary Timothy F. Geithner, who was head of the Federal Reserve Bank of New York, have been strongly criticized for not forcing Goldman and other large financial firms to take reduced payments to save taxpayers some money.

Guambat remains keen to see if the Commission asks the hard questions of Paulson, Geithner and others who were supposed to be representing the taxpayers' interests.

A boatload of sugar helped the poison go down

AIG’s Government Rescue Had ‘Poisonous’ Effect, U.S. Panel Says

“The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace,” said the Congressional Oversight Panel panel, led by Harvard University law professor Elizabeth Warren.

“The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them.”

American International Group Inc.’s bailout had a “poisonous” effect on the U.S. financial system because it demonstrated the government would protect firms from their own risk-taking.

Treasury Secretary Timothy F. Geithner said in January. Geithner, 48, executed the bailout while he led the Federal Reserve Bank of New York in 2008.

AIG leaders allowed the firm to accumulate “staggering amounts of risk” in derivatives and other areas, the panel said.

The breadth of operations weren’t “matched by a coherent regulatory structure to oversee its business.” The Office of Thrift Supervision had oversight of the parent company and failed to limit risks from swaps, the panel said.

Regulators have said that they were forced to save AIG to prevent a wave of failures that a collapse would have sparked.

The report “overlooks the basic fact that the global economy was on the brink of collapse and there were only hours in which to make critical decisions,” Andrew Williams, a Treasury spokesman, said in an e-mailed statement.

“We have learned from that experience and have been fighting for more than a year to give the government authority to put firms, like AIG, out of existence when their failure poses a danger to our economic system.”

If Congress truly has learned anything from the experience, they should be passing rock solid and loop-hole free financial reforms, including the Volker Rule, rather than continue to pander to the banking lobbyists as has been their habit.

Write your Senator, write your Congresswoman, and insist on the Volker Rule. Guambat would, but being a dual Guamanian/Australian doesn't give him any such representation.

Congressional watchdog criticizes rescue of AIG

The firm was nearly wiped out by credit default swaps, which amount to insurance [sic: in reality, bets] against the risk that mortgages and other debts will go bad. Treasury and the Fed pulled AIG back from the brink in September 2008.

When the housing market collapsed, AIG couldn't meet its obligations to its counterparties, including Goldman Sachs and JPMorgan Chase. In the bailout, the Fed paid the counterparties 100 cents on the dollar.

The government relied only on Goldman Sachs and JPMorgan to arrange a private rescue of AIG, a conflict of interest because, as AIG counterparties, "They would have been among the largest beneficiaries of a taxpayer rescue."

Rating credit agencies rate right up there

Wall Street got away with the bonus bucks and bail out because of its influence in Washington and on credit ratings agencies. Had either of those two other institutions failed to play ball, Wall Street would never have got to first base with its credit shenanigans.

This post is (again) about the agencies.

How credit watchdogs fueled the financial crisis

Lawmakers are now asserting that credit rating agencies (CRAs) like Moody's Investors Service and Standard and Poor's Ratings Services failed to expose the lurking dangers.

"Rating agencies continue to create an even bigger monster - the CDO Market," wrote one S&P employee in an internal e-mail in December of 2006. "Let's hope we are all wealthy and retired by the time this house of cards falters. :o)."

The Subcommittee is accusing the credit agencies of contributing to the crisis in several major ways: By using ineffective models to measure risk, by inflating ratings because of pressure from banks, by ignoring early warning signs and by failing to quickly disclose the risk on existing products once it was discovered.

In his testimony, Richard Michalek, former vice president of the Structured Derivative Products Group at Moody's admitted that he felt constant pressure to accept deals, even if they looked risky.

The Congressional watchdogs, of course, bear as much blame, what with their setting the so-called "investment" bank dogs off the regulatory leash and allowing "mark-to-bark" accounting gimmicks. But Guambat digresses.

Another ratings agency failure is suggested in the following article: the failure to have enough knowledge of what they were dealing with to properly to dig deep enough to even ask the right questions.

UPDATE 1-Ex-Moody's exec didn't know Paulson shorted Abacus

A former senior official at Moody's Corp said he would have liked to have known that hedge fund manager John Paulson was shorting a Goldman Sachs Group Inc derivatives product when Moody's was rating it.

"I did not know that. I'm fairly sure that my staff did not know either" about Paulson's involvement, said Eric Kolchinsky

Once upon a time in LaLa Land

"Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings agencies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he'd just done. That just changed."

A Message to Wall Street's Fabulous Fabs. Read the whole fable.