Basically, It's OverA parable about how one nation came to financial ruin.
By Charles MungerUpdated Sunday, Feb. 21, 2010, at 3:30 PM ET
Wall Street.In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."
The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.
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Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.
In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.
The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.
As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.
A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.
Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.
Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.
But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."
The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."
Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.
And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.
How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.
Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.
The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.
The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.
Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.
Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.
As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.
Thursday, February 25, 2010
Friday, January 29, 2010
Why I Hope Gold Falls to $1,000
Why I Hope Gold Falls to $1,000
by Jeff Clark
As a self-professed gold bug, why would I possibly want my favorite investment to fall in value? Have the long hours finally caught up with me?
Au contraire; my near-constant devotion to all things gold has only served to crystallize one of the things I really want out of this. Here's a hint.
I had lunch with a reader at a recent conference, and while talking about one of my favorite subjects - gold stocks - I asked why he was invested so heavily in them. "Greed," he said bluntly and with little hesitation. I appreciated the honesty.
Let's be frank: I'm here to make money, and so are you. And that's why I hope gold falls to $1,000 again.
Let's say Bob has taken our advice and has been storing cash. I'll use $1,000 as an example. If Bob buys Yamana Gold now, he'd get about 93 shares as I write (at $10.73 per share).
Now, let's say gold drops to $1,000, about a 10% fall from here, and due to its leverage, AUY sells off by a 2-to-1 margin, meaning 20%. So with that same $1,000, Frank, who's waited for the downturn, buys 116 shares at around $8.58. Thus, instead of owning 93 shares at $10.73, he owns 116 shares at $8.58.
When Frank sells, he doesn't just make the difference between $8.58 and $10.73 (an extra 25%), he also makes 125% on the extra 23 shares he owns if Yamana doubles in a couple years, which I expect it to. So two years from now, Bob would have $2,000, but Frank would have $2,500 because he bought more shares and at a lower price. Frank makes 25% more than Bob on the same dollar investment simply by buying when gold and gold stocks fall in price.
Got $5,000 saved up? Multiply the profit by 5. And with larger amounts, you can see we're talking serious money.
I don't know if we'll see $1,000 again or not, or if Yamana will fall that low, but I would point out that corrections in the gold price can range as high as 20% (2008 notwithstanding), so a further sell-off in price would not be out of the ordinary. A 20% correction from gold's peak at $1,212.50 on December 2 would equal $970. That's not necessarily a prediction, but it shows you that price is certainly possible.
Don't like my wish? Remember, it's called a bull market for a reason; it's not a cow market or a puppy market. It's going to try and buck you off. But a correction to $1,000 or even lower can give you the chance to buy more, cheaper. Don't view sell-offs as a bad thing but rather as an opportunity.
Bring on $1,000!
Precious metals and energy are two of the hottest markets in 2010 and beyond. Learn all about today's pressing investment topics: America's hidden wells, a potential game changer for natural gas stocks... Predictions for 2010 -- what the 18 most respected investment pros see for gold and the economy... Big Oil's takeover targets and how to profit from them... and much, much more. Right now, get one year of Casey's Gold & Resource Report PLUS one year of Casey's Energy Opportunities for only $39 - a 50% savings. Offer ends January 31; click here for more.
Jeff Clark
Editor of BIG GOLD
Casey Research
by Jeff Clark
As a self-professed gold bug, why would I possibly want my favorite investment to fall in value? Have the long hours finally caught up with me?
Au contraire; my near-constant devotion to all things gold has only served to crystallize one of the things I really want out of this. Here's a hint.
I had lunch with a reader at a recent conference, and while talking about one of my favorite subjects - gold stocks - I asked why he was invested so heavily in them. "Greed," he said bluntly and with little hesitation. I appreciated the honesty.
Let's be frank: I'm here to make money, and so are you. And that's why I hope gold falls to $1,000 again.
Let's say Bob has taken our advice and has been storing cash. I'll use $1,000 as an example. If Bob buys Yamana Gold now, he'd get about 93 shares as I write (at $10.73 per share).
Now, let's say gold drops to $1,000, about a 10% fall from here, and due to its leverage, AUY sells off by a 2-to-1 margin, meaning 20%. So with that same $1,000, Frank, who's waited for the downturn, buys 116 shares at around $8.58. Thus, instead of owning 93 shares at $10.73, he owns 116 shares at $8.58.
When Frank sells, he doesn't just make the difference between $8.58 and $10.73 (an extra 25%), he also makes 125% on the extra 23 shares he owns if Yamana doubles in a couple years, which I expect it to. So two years from now, Bob would have $2,000, but Frank would have $2,500 because he bought more shares and at a lower price. Frank makes 25% more than Bob on the same dollar investment simply by buying when gold and gold stocks fall in price.
Got $5,000 saved up? Multiply the profit by 5. And with larger amounts, you can see we're talking serious money.
I don't know if we'll see $1,000 again or not, or if Yamana will fall that low, but I would point out that corrections in the gold price can range as high as 20% (2008 notwithstanding), so a further sell-off in price would not be out of the ordinary. A 20% correction from gold's peak at $1,212.50 on December 2 would equal $970. That's not necessarily a prediction, but it shows you that price is certainly possible.
Don't like my wish? Remember, it's called a bull market for a reason; it's not a cow market or a puppy market. It's going to try and buck you off. But a correction to $1,000 or even lower can give you the chance to buy more, cheaper. Don't view sell-offs as a bad thing but rather as an opportunity.
Bring on $1,000!
Precious metals and energy are two of the hottest markets in 2010 and beyond. Learn all about today's pressing investment topics: America's hidden wells, a potential game changer for natural gas stocks... Predictions for 2010 -- what the 18 most respected investment pros see for gold and the economy... Big Oil's takeover targets and how to profit from them... and much, much more. Right now, get one year of Casey's Gold & Resource Report PLUS one year of Casey's Energy Opportunities for only $39 - a 50% savings. Offer ends January 31; click here for more.
Jeff Clark
Editor of BIG GOLD
Casey Research
Wednesday, January 27, 2010
Grantham remarks on Supreme Court
… and the Bad News
Supremely Extreme: Another “Day That Will Live in
Infamy”
Five Supreme Court justices today announced that not only
are corporations people and that their money is free speech
– this is old hat and a very ugly hat at that – but now, there
should be no limit to the money they spend to infl uence
political outcomes. This would be one thing if corporations
really were “democratic associations” of humans that the
Founding Fathers may have wanted to protect. They are,
instead, small oligarchies of top management. Thus, the
top management of major oil and coal companies can
decide what political outcomes they want to promote,
say, unlimited production of carbon dioxide (none of their
CEOs apparently has grandchildren!), utterly without
any approval of their decisions by the millions of actual
owners. The fi nancial power of corporations was already
in danger of overwhelming the democratic process in
Congress and this makes the damage potentially unlimited
and puts the Court’s seal of approval on it. So let’s do it in
style and have a name change. The U.C.A. has a familiar
look: The United Corporations of America!
Supremely Extreme: Another “Day That Will Live in
Infamy”
Five Supreme Court justices today announced that not only
are corporations people and that their money is free speech
– this is old hat and a very ugly hat at that – but now, there
should be no limit to the money they spend to infl uence
political outcomes. This would be one thing if corporations
really were “democratic associations” of humans that the
Founding Fathers may have wanted to protect. They are,
instead, small oligarchies of top management. Thus, the
top management of major oil and coal companies can
decide what political outcomes they want to promote,
say, unlimited production of carbon dioxide (none of their
CEOs apparently has grandchildren!), utterly without
any approval of their decisions by the millions of actual
owners. The fi nancial power of corporations was already
in danger of overwhelming the democratic process in
Congress and this makes the damage potentially unlimited
and puts the Court’s seal of approval on it. So let’s do it in
style and have a name change. The U.C.A. has a familiar
look: The United Corporations of America!
Wednesday, January 13, 2010
Thursday, January 7, 2010
Average Investor Too Bullish
By MarketWatch
ANNANDALE, Va. (MarketWatch) -- Finally, after a nearly 70% rally, a large number of bears are throwing in the towel.
And that's bad news, since it means the wall of worry that the bull market has been climbing is crumbling.
Consider the average recommended equity exposure among the shortest-term stock market timers tracked by the Hulbert Financial Digest. Over the last 24 hours it jumped another 6.5 percentage points to 65.2%.
That's the highest level since late December 2006, more than three years. As recently as early November, the average stood at just 3.2%.
A similar story is being told by the sentiment survey conducted weekly by the American Association of Individual Investors. In that survey, organization members visiting the AAII website are asked to report whether they think the stock market's trend is bullish, bearish, or neutral.
To consolidate those three percentages into a single barometer, researchers often calculate the ratio of the bullish percentage to the total percentage of those that are either bullish or bearish. That ratio currently stands at 68.2%, which is the highest level since February 2007.
Finally, consider the sentiment survey conducted weekly by Investors Intelligence, the latest of which was released this morning. That survey is based on the percentage of monitored newsletters that are bullish, bearish, or neutral.
The ratio of bulls to those either bullish or bearish now stands at 74.1%, which but for slightly higher readings in the last couple of weeks, is the highest since October 2007, the month of the stock market's all-time high.
The bottom line? Market appreciation over the coming weeks therefore will have to come without the sentiment winds blowing in stocks' sails.
ANNANDALE, Va. (MarketWatch) -- Finally, after a nearly 70% rally, a large number of bears are throwing in the towel.
And that's bad news, since it means the wall of worry that the bull market has been climbing is crumbling.
Consider the average recommended equity exposure among the shortest-term stock market timers tracked by the Hulbert Financial Digest. Over the last 24 hours it jumped another 6.5 percentage points to 65.2%.
That's the highest level since late December 2006, more than three years. As recently as early November, the average stood at just 3.2%.
A similar story is being told by the sentiment survey conducted weekly by the American Association of Individual Investors. In that survey, organization members visiting the AAII website are asked to report whether they think the stock market's trend is bullish, bearish, or neutral.
To consolidate those three percentages into a single barometer, researchers often calculate the ratio of the bullish percentage to the total percentage of those that are either bullish or bearish. That ratio currently stands at 68.2%, which is the highest level since February 2007.
Finally, consider the sentiment survey conducted weekly by Investors Intelligence, the latest of which was released this morning. That survey is based on the percentage of monitored newsletters that are bullish, bearish, or neutral.
The ratio of bulls to those either bullish or bearish now stands at 74.1%, which but for slightly higher readings in the last couple of weeks, is the highest since October 2007, the month of the stock market's all-time high.
The bottom line? Market appreciation over the coming weeks therefore will have to come without the sentiment winds blowing in stocks' sails.
Monday, December 28, 2009
Merry Christmas to the Markets
'Twas the day before Christmas, when all through the land
Not a trader was stirring, and isn't that grand;
The markets were recovered from the depths of despair,
In hopes that we'd never revisit that scare;
Hedge fund managers were nestled all snug in their beds,
While visions of met high water marks danced in their heads;
And mutual funds in their performance, and I on the sell side
Had finally settled down after capital raises left us just fried.
In December in the markets there arose such a clatter,
I sprang to my Bloomberg to see what was the matter.
Away to Dubai the news flew like a flash,
Reporting debt extensions, investors feared the next crash.
The moon on the breast of the Palm Island sand
Gave the luster of guarantees from the other Emirates hand,
When, what to my wondering eyes should appear,
But a wine induced flashback of the events of last year,
The year had a poor start, with this deep deep recession,
I felt at that moment we were in a Great Depression.
But more rapid than eagles the Fed programs they came,
And Bernanke whistled, and shouted, and called them by name;
Now, TAF! Now TALF! Now CAP and low rates!
On, MMIF! On AMLF! On SCAP! There’s no time for debates!
To the stress test results! To the capital shortfall!
Now raise away! Raise away! Raise away all!
As dry dollars that before the wild hurricane fly,
When they meet with a bank stock, mount to the sky,
So up to "normalized earnings" the investors they flew,
With a sleigh full of funds for bonds and equities too.
And then in a twinkling I saw in the banks
The lifting and raising as buyers closed up their ranks.
As I drew in my bear claws and was turning around,
Down the stairs all the bankers came with a bound.
They were dressed all in suits from the heads to their feet,
And their clothes were all rumpled and they really looked beat;
Huge bundles of stock they had flung on their backs,
And they looked like peddlers opening their packs.
Investors eyes -- how they twinkled! Their demand it was strong!
Their appetites whetted! They craved to be long!
These droll great big deals were drawn up in great haste,
Since the window was open there was not a moment to waste;
The bulk of these deals were held tight by the street,
And the rally it encircled the globe like a wreath;
Hybrids and credit had a nice round rally,
That extended the move for those keeping a tally.
Things rapidly felt better, a right jolly move,
That shook out the bears who were caught in their groove;
A drop in the VIX and tightening spreads,
Soon gave me to know I had nothing to dread;
Data began to improve as liquidity went straight to work,
And sent markets yet higher, then we got a small jerk,
As Dubai meant sovereign debt widened out,
Markets had a twitched, having a moment of doubt;
The Fed sprang to its sleigh, to low rates have a bow,
And away the fears flew with new highs for the Dow
So with great joy after this year fraught with great fright
I say HAPPY CHRISTMAS TO ALL AND TO ALL A GOOD-NIGHT"
Not a trader was stirring, and isn't that grand;
The markets were recovered from the depths of despair,
In hopes that we'd never revisit that scare;
Hedge fund managers were nestled all snug in their beds,
While visions of met high water marks danced in their heads;
And mutual funds in their performance, and I on the sell side
Had finally settled down after capital raises left us just fried.
In December in the markets there arose such a clatter,
I sprang to my Bloomberg to see what was the matter.
Away to Dubai the news flew like a flash,
Reporting debt extensions, investors feared the next crash.
The moon on the breast of the Palm Island sand
Gave the luster of guarantees from the other Emirates hand,
When, what to my wondering eyes should appear,
But a wine induced flashback of the events of last year,
The year had a poor start, with this deep deep recession,
I felt at that moment we were in a Great Depression.
But more rapid than eagles the Fed programs they came,
And Bernanke whistled, and shouted, and called them by name;
Now, TAF! Now TALF! Now CAP and low rates!
On, MMIF! On AMLF! On SCAP! There’s no time for debates!
To the stress test results! To the capital shortfall!
Now raise away! Raise away! Raise away all!
As dry dollars that before the wild hurricane fly,
When they meet with a bank stock, mount to the sky,
So up to "normalized earnings" the investors they flew,
With a sleigh full of funds for bonds and equities too.
And then in a twinkling I saw in the banks
The lifting and raising as buyers closed up their ranks.
As I drew in my bear claws and was turning around,
Down the stairs all the bankers came with a bound.
They were dressed all in suits from the heads to their feet,
And their clothes were all rumpled and they really looked beat;
Huge bundles of stock they had flung on their backs,
And they looked like peddlers opening their packs.
Investors eyes -- how they twinkled! Their demand it was strong!
Their appetites whetted! They craved to be long!
These droll great big deals were drawn up in great haste,
Since the window was open there was not a moment to waste;
The bulk of these deals were held tight by the street,
And the rally it encircled the globe like a wreath;
Hybrids and credit had a nice round rally,
That extended the move for those keeping a tally.
Things rapidly felt better, a right jolly move,
That shook out the bears who were caught in their groove;
A drop in the VIX and tightening spreads,
Soon gave me to know I had nothing to dread;
Data began to improve as liquidity went straight to work,
And sent markets yet higher, then we got a small jerk,
As Dubai meant sovereign debt widened out,
Markets had a twitched, having a moment of doubt;
The Fed sprang to its sleigh, to low rates have a bow,
And away the fears flew with new highs for the Dow
So with great joy after this year fraught with great fright
I say HAPPY CHRISTMAS TO ALL AND TO ALL A GOOD-NIGHT"
Thursday, December 17, 2009
Thoughts from Wayne Jett
FED PREDICAMENT EASES
Dollar Improves Slightly
By Wayne Jett © December 16, 2009
When America’s dominant elite began purging certain of Wall Street’s big players in 2008, Federal Reserve chairman Ben Bernanke stepped into the breach. He didn’t volunteer. He was taken there by the czar of purges, Treasury secretary and Goldman Sachs ex-CEO Henry Paulson. The experience must have changed his worldview, particularly his idea of the Fed’s place in the pecking order.
What Bernanke saw at the Bear Stearns tactical session was financial sausage-making. Securities & Exchange Commission chairman Christopher Cox was so shocked that he never came to another such session; something about concern on his part that he was supposed to be enforcing the securities laws.
The Purges of 2008
Bernanke was not expendable, as Cox was. Paulson needed the Federal Reserve to pump $25 billion in cash into Bear and guarantee another $29 billion or so of its financial assets before all of it was given to J. P. Morgan Chase, essentially for a big kiss. Did anyone mention that Morgan Chase is the giant international bank historically controlled by Rockefellers and Rothschilds?
Morgan Chase got fat on Bear, and Bear’s shareholders got skinned while Paulson held them upside down by their feet. Then the purge czar struck again, and again. Fannie Mae, Freddie Mac, Lehman Bros., AIG, National City (Ohio’s biggest bank), Merrill Lynch, Wachovia, Washington Mutual – each fell to his ax. The shareholders of these financial giants ate dirt as hundreds of billions of their invested capital poured into the pockets of fraudulent traders, thanks largely to “innovative” derivatives trading which counterfeited and “watered” their capital stock.
Chairman Bernanke dutifully waded from one slaughter to the next, doing as he was told, which meant providing financial backing for whatever terms the purge czar set for gifts to intended beneficiaries. Morgan Chase alone got both Bear Stearns and Washington Mutual, the Seattle-based national home mortgage lender. Morgan Chase’s CEO subsequently told his shareholders 2008 was the bank’s best year ever.
WaMu’s takedown emitted just as much stench of the purge czar as the other deals mentioned, even at the time. Recent reporting from Seattle investigators reveals FDIC’s Sheila Bair served as spearhead for the move against WaMu, which was seized when the firm had $29 billion in net liquidity, almost twice the five percent liquidity required. Subpoenas issued in bankruptcy proceedings are going after emails of others involved, including Morgan Chase and Goldman Sachs. Even without subpoena power applied by any criminal law enforcement agency, seizure of WaMu has all the earmarks of federal complicity in destruction of one private company for benefit of another.
The Fed’s Balance Sheet
As these financial purges were orchestrated, Chairman Bernanke found the Federal Reserve with a much enlarged balance sheet showing assets of an unprecedented nature. On his signature, the Fed advanced over $1.3 trillion for securities of varying nature, when the Fed’s total assets previously were $850 billion. Bernanke has been unwilling to say who sold him the securities, what prices were paid, or how prices were determined.
If the Fed were just another private bank, perhaps keeping confidences would seem acceptable. But the Fed, unlike other banks, prints the money it spends under license of the U. S. government. Every dollar issued by the Fed makes every other dollar held by Americans (not to mention people around the world) worth less than would be the case if the new dollar didn’t exist. This explains why some, even in Congress, want Bernanke to detail what he did with the $1.3 trillion before he is confirmed by the Senate for another term as Fed chairman.
When Bernanke was spending the money, he said he had no choice but to do it. Clearly someone made choices, because some banks were saved and some were slaughtered. As in Animal Farm, some banks are more equal than others, and the differences are not always apparent on their financial statements.
“De Plan, De Plan”
Bernanke also indicated he had a plan for extracting the new liquidity from the economy before the dollar’s value is swamped by it. But in a Senate hearing last week, Senator Jim Bunning revealed Bernanke told him by letter he has no such plan. Perhaps, again, the Fed chairman just doesn’t wish to talk about it.
In order to drain the $1.3 trillion in new liquidity, the Fed must dispose of the acquired assets at prices at least as high as were paid for them. If the assets were to prove worthless, the Fed simply could not drain the liquidity because it would have nothing to sell for it.
As previously reported here, the Fed bought those assets because their prices were being fraudulently manipulated lower by various maneuvers which created “toxic” images for them. The banks which owned the “toxic assets” were endangered by manipulation of their own share prices. The Fed bought in order to shield the assets and the banks from further attack, because the Fed itself was immune for naked short selling of its shares.
As previously warned, too, any sale of these “toxic assets” by the Fed might restart the bear attacks on their value and on the banks. In order for the Fed to proceed with confidence to market the assets and withdraw so much excess liquidity, fraudulent trading practices must be stopped. On this point a modicum of good news appears as a light in a tunnel.
Positive Developments
Bloomberg News reports leveraged loans rated below BBB- by S&P or below Baa3 by Moody’s have risen 49.3% in value this year, after falling 28.2% in 2008. BBB rated loans are said to be priced presently at about 55 cents on the dollar. Higher rated loans fell less, and have also recovered, rising from 69 cents to 89 cents on the dollar.
This is good news for Bernanke and the Fed, which might even sell the formerly toxic assets at a significant profit. If that were to happen, the Fed could actually strengthen the dollar by draining more dollars than it created to buy the assets. In reality, the Fed probably would not destroy those dollars, since its practice is to give excess “earnings” to the Treasury to spend. The markets noticed, of course, as the dollar recovered somewhat from above $1,200/oz gold.
The strong price recovery of collateralized debt obligations can be traced to incremental changes in market conditions which enabled their prices to be beaten down. By demand of Congress, the FASB modified or clarified its Rule 157, which had required “mark-to-market” accounting the value of these assets. The ABX.HE index was outed somewhat as an unreliable indicator of real market value of such assets. The SEC repealed its “Madoff exception” regulation which so importantly assisted bear attacks on financial shares, as it permitted market makers in credit default swaps and options to hedge by selling shares short without borrowing or delivering the shares sold within a definite time limit.
Reforms Left Undone
Each of these reforms was absolutely essential to achieve the meager amount of recovery, or slowing of the drop, seen in 2009. But so much more remains undone. Reform of oil price manipulation passed the House, but only in a larger bill containing more bad than good. By past performance of Wall Street and Congress, all of the good is likely to be stripped from the bill, assuming the Senate acts and legislation actually makes it to conference. Meanwhile, the SEC still has done nothing to stop High Frequency Trading (front-running all trades) or to restore the Uptick Rule, and is unlikely to act unless Congress requires it by statute.
Confirmation of Bernanke’s re-nomination as Fed chairman is due to be considered by the Senate on December 17, but may be delayed by request of an individual senator. A rumor is out that he may withdraw his name. Even with the positive development reported above, what he learned the past 22 months may lead him to think the predators are not finished. ~
Dollar Improves Slightly
By Wayne Jett © December 16, 2009
When America’s dominant elite began purging certain of Wall Street’s big players in 2008, Federal Reserve chairman Ben Bernanke stepped into the breach. He didn’t volunteer. He was taken there by the czar of purges, Treasury secretary and Goldman Sachs ex-CEO Henry Paulson. The experience must have changed his worldview, particularly his idea of the Fed’s place in the pecking order.
What Bernanke saw at the Bear Stearns tactical session was financial sausage-making. Securities & Exchange Commission chairman Christopher Cox was so shocked that he never came to another such session; something about concern on his part that he was supposed to be enforcing the securities laws.
The Purges of 2008
Bernanke was not expendable, as Cox was. Paulson needed the Federal Reserve to pump $25 billion in cash into Bear and guarantee another $29 billion or so of its financial assets before all of it was given to J. P. Morgan Chase, essentially for a big kiss. Did anyone mention that Morgan Chase is the giant international bank historically controlled by Rockefellers and Rothschilds?
Morgan Chase got fat on Bear, and Bear’s shareholders got skinned while Paulson held them upside down by their feet. Then the purge czar struck again, and again. Fannie Mae, Freddie Mac, Lehman Bros., AIG, National City (Ohio’s biggest bank), Merrill Lynch, Wachovia, Washington Mutual – each fell to his ax. The shareholders of these financial giants ate dirt as hundreds of billions of their invested capital poured into the pockets of fraudulent traders, thanks largely to “innovative” derivatives trading which counterfeited and “watered” their capital stock.
Chairman Bernanke dutifully waded from one slaughter to the next, doing as he was told, which meant providing financial backing for whatever terms the purge czar set for gifts to intended beneficiaries. Morgan Chase alone got both Bear Stearns and Washington Mutual, the Seattle-based national home mortgage lender. Morgan Chase’s CEO subsequently told his shareholders 2008 was the bank’s best year ever.
WaMu’s takedown emitted just as much stench of the purge czar as the other deals mentioned, even at the time. Recent reporting from Seattle investigators reveals FDIC’s Sheila Bair served as spearhead for the move against WaMu, which was seized when the firm had $29 billion in net liquidity, almost twice the five percent liquidity required. Subpoenas issued in bankruptcy proceedings are going after emails of others involved, including Morgan Chase and Goldman Sachs. Even without subpoena power applied by any criminal law enforcement agency, seizure of WaMu has all the earmarks of federal complicity in destruction of one private company for benefit of another.
The Fed’s Balance Sheet
As these financial purges were orchestrated, Chairman Bernanke found the Federal Reserve with a much enlarged balance sheet showing assets of an unprecedented nature. On his signature, the Fed advanced over $1.3 trillion for securities of varying nature, when the Fed’s total assets previously were $850 billion. Bernanke has been unwilling to say who sold him the securities, what prices were paid, or how prices were determined.
If the Fed were just another private bank, perhaps keeping confidences would seem acceptable. But the Fed, unlike other banks, prints the money it spends under license of the U. S. government. Every dollar issued by the Fed makes every other dollar held by Americans (not to mention people around the world) worth less than would be the case if the new dollar didn’t exist. This explains why some, even in Congress, want Bernanke to detail what he did with the $1.3 trillion before he is confirmed by the Senate for another term as Fed chairman.
When Bernanke was spending the money, he said he had no choice but to do it. Clearly someone made choices, because some banks were saved and some were slaughtered. As in Animal Farm, some banks are more equal than others, and the differences are not always apparent on their financial statements.
“De Plan, De Plan”
Bernanke also indicated he had a plan for extracting the new liquidity from the economy before the dollar’s value is swamped by it. But in a Senate hearing last week, Senator Jim Bunning revealed Bernanke told him by letter he has no such plan. Perhaps, again, the Fed chairman just doesn’t wish to talk about it.
In order to drain the $1.3 trillion in new liquidity, the Fed must dispose of the acquired assets at prices at least as high as were paid for them. If the assets were to prove worthless, the Fed simply could not drain the liquidity because it would have nothing to sell for it.
As previously reported here, the Fed bought those assets because their prices were being fraudulently manipulated lower by various maneuvers which created “toxic” images for them. The banks which owned the “toxic assets” were endangered by manipulation of their own share prices. The Fed bought in order to shield the assets and the banks from further attack, because the Fed itself was immune for naked short selling of its shares.
As previously warned, too, any sale of these “toxic assets” by the Fed might restart the bear attacks on their value and on the banks. In order for the Fed to proceed with confidence to market the assets and withdraw so much excess liquidity, fraudulent trading practices must be stopped. On this point a modicum of good news appears as a light in a tunnel.
Positive Developments
Bloomberg News reports leveraged loans rated below BBB- by S&P or below Baa3 by Moody’s have risen 49.3% in value this year, after falling 28.2% in 2008. BBB rated loans are said to be priced presently at about 55 cents on the dollar. Higher rated loans fell less, and have also recovered, rising from 69 cents to 89 cents on the dollar.
This is good news for Bernanke and the Fed, which might even sell the formerly toxic assets at a significant profit. If that were to happen, the Fed could actually strengthen the dollar by draining more dollars than it created to buy the assets. In reality, the Fed probably would not destroy those dollars, since its practice is to give excess “earnings” to the Treasury to spend. The markets noticed, of course, as the dollar recovered somewhat from above $1,200/oz gold.
The strong price recovery of collateralized debt obligations can be traced to incremental changes in market conditions which enabled their prices to be beaten down. By demand of Congress, the FASB modified or clarified its Rule 157, which had required “mark-to-market” accounting the value of these assets. The ABX.HE index was outed somewhat as an unreliable indicator of real market value of such assets. The SEC repealed its “Madoff exception” regulation which so importantly assisted bear attacks on financial shares, as it permitted market makers in credit default swaps and options to hedge by selling shares short without borrowing or delivering the shares sold within a definite time limit.
Reforms Left Undone
Each of these reforms was absolutely essential to achieve the meager amount of recovery, or slowing of the drop, seen in 2009. But so much more remains undone. Reform of oil price manipulation passed the House, but only in a larger bill containing more bad than good. By past performance of Wall Street and Congress, all of the good is likely to be stripped from the bill, assuming the Senate acts and legislation actually makes it to conference. Meanwhile, the SEC still has done nothing to stop High Frequency Trading (front-running all trades) or to restore the Uptick Rule, and is unlikely to act unless Congress requires it by statute.
Confirmation of Bernanke’s re-nomination as Fed chairman is due to be considered by the Senate on December 17, but may be delayed by request of an individual senator. A rumor is out that he may withdraw his name. Even with the positive development reported above, what he learned the past 22 months may lead him to think the predators are not finished. ~
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