Germany and China Refuse To Bailout Greece By Taking The Losses

The Germans and the Chinese do not want to buy insolvent nations debt. And who could blame them for that? Only politically driven liars such as Geithner and Trichet could come up with such silly ideas...

Bloomberg News - Sep 13, 2011 — China shouldn’t buy bonds issued by individual euro-area countries because their leaders and the European Central Bank are in disarray, said Yu Yongding, a former adviser to China’s central bank. 

“China has to wait until it can see a clearer road map by euro countries for solving sovereign-debt problems,” Yu, who is based in Beijing, said in e-mailed comments today. The nation is not a lender of last resort for “troubled countries,” he added.

Bloomberg News - Sep 14, 2011— Chinese Premier Wen Jiabao, facing calls to widen support for indebted European countries, signaled that developed nations should cut deficits and open markets rather than rely on China to bail out the world economy. 

“Countries must first put their own houses in order,” Wen said today at the World Economic Forum in the Chinese city of Dalian. “Developed countries must take responsible fiscal and monetary policies. What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.” 

China can best contribute to the global economic recovery by ensuring steady growth at home, Wen said, calling on the European Union and U.S. to allow more Chinese investment in return.

Sept. 17 (Bloomberg) — Germany’s top two finance officials rejected using the European Central Bank to boost the euro-area rescue fund’s firepower, rebuffing a suggestion by U.S. Treasury Secretary Timothy Geithner.[...]
“We don’t think that real economic and social problems can be solved by means of monetary policy,” said German Finance Minister Wolfgang Schaeuble, speaking alongside Weidmann after the meeting of EU finance ministers and central bank governors. “That has never been the European model and it won’t be.” 

Neither German policy maker ruled out leveraging the backstop’s lending capacity, saying the feasibility of the idea depends on how it’s done. It wouldn’t be acceptable to leave the ECB with the risks from such an operation, said Weidmann.

Now the real question is: when will the markets and the politicians finally realize that there will be easy solution, and that Greece will default (first) and many many other sovereigns will follow? The sooner these uncertainties are resolved, the sooner the recovery can start.

Obama's $477 Billion Vote Buying Campaign

This week I was quite well served with a speech of The Bernank — the clueless and idiotic money printer. As usual, he explained how the Fed was helping the economy by stealing from the savers to pay banks and the government.

Then Obama presented his plan — my body is starting to have physical rejection actions when I hear him talk. All the lies, and un purpose political deceits now makes me feel sick every time I hear him talk. Obama is falling from a half-honest incompetent — let's give him the benefit of the doubt — to the abyss of liars and deceivers and everything I cannot stand for. I do not think there was a single sentence in his speech that was not a big fat lie.

Peter Schiff went on record saying the day before the President's Speech On Jobs: "Maybe if (President Obama) made this a resignation speech, that would help." If only!

The next day Geithner was on Bloomberg TV cheerleading the plan as a great one and blablablah.

This trio has a fantastic track record of being completely wrong on any of their statements and forecasts. Why do the media force us to hear what they have to say? This is starting to really bother me.

I won't bother spending time on these guys, and will refer you to Mish's great post on the subject:

• Dissecting the Lies in Obama's $447 Billion "Shock-and-Awe" Reelection Ploy
• Devil at My Doorstep; Obama Buys Votes from Big Labor at Enormous Cost to Nation

To conclude, I will quote Mish: I wish to reiterate "The primary purpose of the 447 billion dollar American Jobs Act is simple: To keep one person (namely President Obama), in his job."

Geithner sees no risk of double dip, reiterates the "strong-dollar" policy

It's amazing the kinds of things politicians are ready to say even on the records...
Geithner is one of the members definitely deserving his job as part of the most arrogant and least honest government the US has ever had. Here are the highlights of his speech at the Council of Foreign Relations:

• A strong dollar policy is what we are pursuing
• The costs of the bailout will be trivially small
• There is no risk of double dip recession.

To find out the truth, do as usual with politicians: just take the exact opposite of their statement at face value.

Treasury Secretary Tim Geithner reiterated and defended the "strong-dollar" policy following a speech Tuesday at the Council on Foreign Relations in New York.

"Our policy has been and will always be, as long, at least, as I'm in this job, that a strong dollar is in our interest as a country," Geithner said in response to a question. "And we will never embrace a strategy of trying to weaken our currency to gain economic advantage at the expense of our trading partners."

President Obama's former chief economic adviser, Christina Romer, recently described here how the administration sees benefits from a weak dollar, but Geithner was having none of it. (See: Christina Romer: A Weaker Dollar Is Good For America)

Unbowed by the dollar's recent weakness — it hit its lowest level since August 2008 Tuesday -- or record-setting gold and silver prices, Geithner reiterated a now familiar theme among policymakers: The dollar's strength during the "darkest moments" of the crisis is "very encouraging," he said, and shows investors "retain fundamental confidence in the ability of the U.S. to manage" its long-term budget issues.
[...]
The Bailouts: The direct cost to the U.S. government will be "trivially small," even when including the expansion of the Fed's balance sheet and the Treasury's exposure to Fannie Mae, Freddie Mac and AIG.
[...]

Source: Yahoo TechTicker

Geithner said that there is no risk of a double dip. This sounds like the 100% confidence that Bernanke has about his ability to both foster growth. He cannot foster economic growth, only credit growth, at which he is failing, and monetary base growth, which he is succeeding.

We Have Now Reached The Perfect Set-Up for Banking Meltdown 2.0

While mark-to-market has still not been reinstated for banks, it looks like these financial institutions are planning to empty the few little real cash they have in their coffers, in order to buy back shares and pay dividends, and all this with the blessing of the Government and the Fed.

In addition, the Treasury now believes is the right time to start selling the toxic assets — it's weird for me to believe that they might have the timing right, something's fishy here...

Again, all red flags are now raised, as they after day, confidence in the bubble economy and false recovery is getting higher and higher, and getting wider and wider acceptance.

Here's a lit of what is currently happening, in just about a week:

• Banks have been authorised by the Fed to buy back shares and pay dividends, emptying the little actual cash they are currently holding, against the mountain of toxic mortgages and other debt instruments, and overpriced equities.
• The Treasury Department is planning to sell $10 billion worth of their Fannie and Freddie paper, per month. These toxic debt will most certainly end up on banks balance sheets again.
• Citigroup is putting lipstick on the pig by giving a $0.01 dividend, and doing a reverse stock split in order to move the share price from $3 to $30.
• The Fed has been forced by the Supreme Court to reveal the information about the emergency lending it conducted, hopefully unmasking the most insolvent institutions by doing so — I'll write another post about this.
• Existing Home Sales in U.S. Slump — Prices Drop to Lowest Since April 2002
• Total housing starts were sharply down (-22.5%) from the revised January and barely up from the all time record low in April 2009.

As a side note, it's laughable that people are putting so much trust in the stress tests coming out of the Fed, given the track record of these ignorants and the lack of market-to-market.

March 18 (Bloomberg) -- The Federal Reserve cleared some of the 19 largest U.S. banks to increase dividends, buy back shares or repay government aid after “significant improvement” in their capital and the economy.

The banks, including firms such as Goldman Sachs Group Inc. (GS) and JPMorgan Chase (JPM), have increased common equity by more than $300 billion from the final quarter of 2008 through the end of 2010, the Fed said in a paper released today in Washington on its most recent review of bank capital.

“Overall, both the quantity and quality of capital at many large bank holding companies have improved since the financial crisis,” the Fed said. “The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital.”
[...]
“This is the strongest signal yet that the economy is starting to return to normal,” said Jaret Seiberg, a financial policy analyst for MF Global’s Washington Research Group. “Banks are going to be significantly raising their dividends and engaging in share buybacks in a way that recognizes their return from much more dire financial straits.”

The Fed’s stress tests are part of a move toward higher standards for capital and risk management mandated by U.S. legislators and international regulatory accords. The Fed wants to ensure bank boards make capital-payout decisions while weighing a full range of risks and their capital needs for at least two years.

San Francisco-based Wells Fargo, the nation’s largest home lender, authorized the repurchase of 200 million shares and a special dividend of 7 cents a share, which will raise the first- quarter payout to 12 cents. JPMorgan said it will boost its quarterly dividend to 25 cents a share from 5 cents and authorized a $15-billion stock repurchase.
[...]
The central bank also said that approval of plans would only apply to 2011. Capital distributions in 2012 will be subjected to a future supervisory review.

“In reality, bank holding companies would be expected to reduce distributions under adverse conditions,” the Fed said.

The dividend increases were one of the most carefully screened payouts in U.S. regulatory history, with more than 100 Fed staff working on the analysis. The central bank’s involvement in decisions normally reserved for boards shows how far the Dodd-Frank Act has pushed regulators into corporate governance.

Central bank supervisors asked the banks to test the performance of their loans, securities, and earnings against at least three economic scenarios. Banks devised baseline and adverse scenarios, and Fed supervisors provided a separate adverse scenario involving another recession with unemployment exceeding 11 percent.

“Overall, both the quantity and quality of capital at many large bank holding companies have improved since the financial crisis,” the Fed release said. The 19 companies’ Tier 1 common ratio rose to 9.4 percent in the fourth quarter of 2010 from 5.4 percent two years earlier, the Fed said.
[...]
“The Federal Reserve does not intend to disclose any firm- specific results,” from the test, the report said.

March 19 (Bloomberg) -- U.S. bank investors may be rewarded with an extra $22 billion annually after government tests showed the industry has regained enough strength to boost dividends and share buybacks.

JPMorgan Chase, Wells Fargo and Goldman Sachs Group Inc. were among six lenders that disclosed more than $16.2 billion in share buybacks and $5.4 billion of annualized dividend increases yesterday, according to data compiled by Bloomberg. The banks made their announcements after learning they passed a Federal Reserve review of their financial health.

“This is a real signal by the Federal Reserve to tell the world that the U.S. banking system is back,” said Gerard Cassidy, an analyst at RBC Capital Markets. “We are going to see, in our view, over the next three years, a dramatic increase in the dividends.”

March 21 (Bloomberg) -- Citigroup Inc., the U.S. bank that received the largest taxpayer bailout, said it would reinstate a dividend at 1 cent per share in the second quarter after a planned 1-for-10 reverse split of its common stock.

Citigroup [...] will exchange 1 new share for every 10 of common stock after the close of trading on May 6, the New York-based bank said today in a statement.

“It puts some make-up on the black eye they have,” said David Knutson, a credit analyst with Legal & General Investment Management, which oversees about $85 million of Citigroup bonds. “They’re doing it for the same reason why people put up billboards on the sides of highway. It’s advertising, it’s marketing.”

21 March (Bloomberg) -- The U.S. Treasury Department plans to wind down its $142 billion portfolio of mortgage bonds guaranteed by Fannie Mae and Freddie Mac by selling as much as $10 billion per month.

Sales will start this month and be subject to market conditions, the department said today in a statement. When combined with principal repayments currently ranging between $3 billion and $5 billion a month, the sales may eliminate the portfolio in about one year, the Treasury said.
[...]
The sales will have a limited effect on the $5.2 trillion market for agency mortgage bonds, Anish Lohokare, an analyst New York at BNP Paribas, said in an e-mail.

That’s because fewer homeowners have been refinancing loans from the Fed’s pool of mortgage-backed securities, limiting the amount of debt returning to public markets, Lohokare said. The pace at which the Fed’s holdings are being paid down has declined to about $12 billion a month from as much $32 billion last year after home-loan rates rose, he said.

The Fed held about $944 billion of Fannie Mae, Freddie Mac and Ginnie Mae-backed mortgage securities as of March 16, according to central bank data.
[...]

Buffett Says Goldman Deal Was no Bet: the Government had to take their responsibilities and bail them out by socializing the losses

I have already posted many times during the past 3 years about the complete lack of integrity and ethics that Warren Buffett has been showing since the beginning of the financial crisis.

The "Oracle of Omaha", Warren Buffett, known for the stellar performance of his Berkshire Hathaway stock price, has already admitted many times officially: when he makes money, it's for himself, and it's thanks to his talent, but when he's losing money, he expects the government and the government and the people to come to the rescue and bear the burden of the losses, without ever seeing any of the profits. So the talent might be in some other area than "investment management" and might be more located in the "friend making in government entities".

I'm never surprised by corruption at the state level as any Government is always the breading ground for corruption and wealth transfer from the people to the well-connected few. But I am revulsed that Warren Buffett is still enjoying the image of a white knight / angel / savior or someone whose opinion should be sought after in matters of politics or public policies.

Feb. 10 (Bloomberg) — Billionaire Warren Buffett said his $5 billion investment in Goldman Sachs Group Inc. at the depths of the financial crisis was a wager that Federal Reserve Chairman Ben S. Bernanke and then-Treasury Department Secretary Henry Paulson would take on debt to prop up the economy.

“It was a bet essentially on the fact that the government would not really shirk its responsibility at a time like that to leverage up at a time when the rest of the world was trying to deleverage,” Buffett said in an interview released today by the Financial Crisis Inquiry Commission.

Buffett’s Berkshire Hathaway Inc. bought preferred stock in New York-based Goldman Sachs in 2008 after the collapse of rival securities firm Lehman Brothers Holdings Inc. Paulson had left the chairmanship of Goldman Sachs in 2006 to join the administration of President George W. Bush. Bernanke had been an economist at Princeton University.

“I made the fundamental decision that we had the right people, in Bernanke and Paulson, in there with a president that would back them,” Buffett said.

Berkshire gets a 10 percent annual dividend on the investment and received warrants to buy $5 billion in common stock with a strike price of $115 per share. Goldman Sachs traded for more than $165 a share today on the New York Stock Exchange, compared with $84.39 at the end of 2008.

Buffett had said in 2008, when Omaha, Nebraska-based Berkshire announced the investment, that he was betting on an “exceptional institution.”
[...]

Treasury Hid A.I.G. Loss, SIGTARP Report Says

ZeroHedge has an interesting post on the SIGTARP report. The full report is available from this Congress' web link. I will just quote here from ZeroHedge:

Finally, the most specific of TARP's Main Street goals, "preserving homeownership" has so far fallen woefully short, with TARP's portion of the Administration's mortgage modification program yielding only approximately 207,000 ongoing permanent modifications since TARP's inception, a number that stands in stark contrast to the 5.5 million homes receiving foreclosure filings and more than 1.7 million homes that have been lost to foreclosure since January 2009.
[...]
While SIGTARP offers no opinion on the appropriateness or accuracy of the valuation contained in the Retrospective, we believe that the Retrospective fails to meet basic transparency standards by failing to disclose: (1) that the new lower estimate followed a change in the methodology that Treasury previously used to calculate expected losses on its AIG investment; and (2) that Treasury would be required by its auditors to use the older, and presumably less favorable, methodology in the official audited financials statements. To avoid potential confusion, Treasury should have disclosed that it had changed its valuation methodology and should have published a side-by-side comparison of its new numbers with what the projected losses would be under the auditor-approved methodology that Treasury had used previously and will use in the future. This conduct has left the Treasury vulnerable to charges it has manipulated its methodology for calculating losses to present two different numbers depending on its audience: one designed for release in early October as part of a multifaceted publicity campaign touting the positive aspects of TARP and emphasizing the reduction in anticipated losses, and one, audited by the GAO for release in November as part of a larger audited financial statement. Here again, Treasury's unfortunate insensitivity to the values of transparency has led it to engage in conduct that risks further damaging public trust in the Government.
[...]
Increased moral hazard and concentration in the financial industry continue to be a TARP legacy. The biggest banks are bigger than ever, fueled by the Government support and taxpayer-assisted mergers and acquisitions. And the repeated statement that the Government would stand by these banks during the financial crisis has given a significant advantage to the larger "too big to fail" banks, as reflected in their enhanced credit ratings borner from a market perception the Government will still not let these institutions fails, although the impact of this cost may be blunted by recently enacted regulatory reform.
[...]
While it may be true that many homeowners may benefit from temporarily reduced payments even though the modification ultimately fails, Treasury's claim that "every single person" who participated in HAMP gets a "significant benefit" is either hopelessly out of touch with the real harm that has been inflicted on many families or a cynical attempt to define success as failure. Worse, Treasury's apparent belief that all failed trial modifications are successes may preclude it from seeking to make the meaningful changes necessary to provide the "sustainable" mortgage relief for struggling families it first promised. What Treasury deems a universal benefit, many homeowners, members of Congress, and a growing number of commentators describe as "cruel" and offering little more than "false hope."
[...]
At a time when the country was experiencing the worst economic downturn in generations and the Government was asking its taxpayers to support a $787 billion stimulus package designed primarily to preserve jobs, Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of more than 2,000 small businesses, thereby potentially adding tens of thousands of workers to the already lengthy unemployment rolls -all without sufficient consideration of the decisions' broader economic impact...That the automakers have offered reinstatement to hundreds of terminated dealerships in response to Congressional action without any apparent sacrifice of their ongoing viability further demonstrates the possibility that such dramatic and accelerated dealership closings may not have been necessary and underscores the need for Treasury to tread very carefully when considering such decisions in the future.

At least these documents are available publicly. Are there going to be any prosecutions, Mr Attorney General?

NYTimes also published a report about the SIGTARP report: Treasury Hid A.I.G. Loss, Report Says.

Bloomberg exposes Geithner yet again (and hence Obama)

It's been about 18 months since I wrote this post: Bloomberg exposes Geithner (and hence Obama). Here we are again, with corruption blocked at peak levels in the US.

Mark Pittman was a real patriot.

RIP Mark Pittman.

Oct. 25 (Bloomberg) -- The late Bloomberg News reporter Mark Pittman asked the U.S. Treasury in January 2009 to identify $301 billion of securities owned by Citigroup Inc. that the government had agreed to guarantee. He made the request on the grounds that taxpayers ought to know how their money was being used.

More than 20 months later, after saying at least five times that a response was imminent, Treasury officials responded with 560 pages of printed-out e-mails -- none of which Pittman requested. They were so heavily redacted that most of what’s left are everyday messages such as “Did you just try to call me?” and “Monday will be a busy day!”

None of the documents answers Pittman’s request for “records sufficient to show the names of the relevant securities” or the dates and terms of the guarantees. Even so, the U.S. government considers the collection of e-mails a partial response to an official request under the federal Freedom of Information Act, or FOIA. The Justice Department in July cited an increase in such responses as evidence that “more information is being released” under the law.

President Barack Obama vowed to usher in a new era of open government. On Jan. 21, 2009, the day after his inauguration and a week before Pittman submitted his FOIA request, Obama directed agencies to “adopt a presumption in favor of disclosure, in order to renew their commitment to the principles embodied in FOIA.”

The saga of Pittman’s request shows that the promise of transparency has its limits when it comes to the government’s intervention in the financial industry, which at its peak reached $12.8 trillion in commitments. From the 2008 Bear Stearns Cos. rescue to the Federal Reserve’s policy of quantitative easing in 2010, the Obama administration has delayed disclosures and defended its right to secrecy in court, said Tom Fitton, president of Judicial Watch Inc., which describes itself as a conservative foundation.
[...]
The department held back 866 more pages, saying each was exempt from disclosure on one of four grounds: trade secrets, personnel rules and practices, memos subject to attorney-client privilege and violations of personal privacy.

Treasury also cited the trade-secrets exemption in responding to a separate, similar FOIA request by Bloomberg News for details about Citigroup’s segregated bad assets. In that response, 73 of 104 pages were completely blacked out except for headings. Only six pages -- the cover, contents, a boilerplate list of legal disclosures and a paragraph titled “FOIA Request for Confidential Treatment” -- were free of redactions.
[...]
Bloomberg LP, the parent company of Bloomberg News, sued the Fed over another Pittman FOIA request that sought the names of banks that took emergency loans from the central bank. The company has prevailed in U.S. District Court and on appeal. The Fed, which has not released the information, has until tomorrow to decide whether to ask the U.S. Supreme Court to consider the case.

Like the Treasury Department, the central bank cited the exemption for trade secrets, known as exemption 4, in withholding details about borrowers.
[...]
Pittman’s request for the Treasury Department records spent months in limbo, according to discussions with the agency’s employees. He had waited about 10 months for a response when he died on Nov. 25, 2009. Shortly afterward, Michael Galleher, an attorney working on contract for the Treasury Department, called Bloomberg News, asking where he could send the responsive documents. Attempts to return Galleher’s call failed; he couldn’t be found at the agency.

Germany Says Fed Is Headed ‘Wrong Way’ and is an exchange rate manipulator

The German know something when it comes to money printing. They also know how to create a strong, industrial economy, and have been among the very rare countries no to experience a credit binge and a housing bubble in the past 10 years while the others have had a credit orgy... So maybe it might worth listening to them, would you think, right? But Bernanke knows far too well that printing money will save us all...

Oct. 24 (Bloomberg) -- The Federal Reserve’s push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said.
[...]
“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters yesterday, saying that emerging-market officials were among the critics. Bruederle, a member of the Free Democratic Party, the junior partner in Chancellor Angela Merkel’s government, stepped in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting.
[...]
“Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate,” Bruederle said. The minister has taken a pro-market stance in his first year in office, criticizing state intervention in cases such as providing aid for General Motors Co.’s German Opel unit.

And Bruederle is 100% right, even though he's too soft. Any money creation is a manipulation of exchange rates. Nothing less.

U.S. Treasury Secretary Timothy F. Geithner dismissed prospects of mounting criticism of the Fed’s approach in his press conference after the G-20 meeting yesterday. When asked whether he expected Germany’s criticisms to gain steam, he replied: “I do not.”

Given that Geithner is always wrong and hence is a compass pointing to the south pole, you can be 100% sure that Germany's criticisms will gain steam. And this is a good thing.

“We are going to continue to try to strengthen the recovery under way so we can dig out of this as quickly as we can,” Geithner said.

Which recovery again?

History shows that oversold markets usually fall even more

Hussman wrote a couple weeks days ago about this counter-intuitive yet extremely important fact: oversold markets can get even more oversold, and usually actually do so! This conclusion is based on historical data and is empirical:

Historically, we can identify 19 instances in the past 50 years where the weekly data featured broadly negative internals, coupled with at least 3-to-1 negative breadth, and a leadership reversal. On average, the S&P 500 lost another 7% within the next 12 weeks (based on weekly closing data), widening to an average loss of nearly 20% within the next 12 months - often substantially more when the Aunt Minnie occurred with rich valuations and elevated bullish sentiment.

The most recent instance was November 9, 2007, which was followed by a market loss of more than 50%, but the instances also include September 22, 2000, prior to a nearly two-year bear market decline; July 14, 1998 prior to the "Asian-crisis" mini-crash; July 27, 1990, at the beginning of the pre-Gulf War plunge; October 9, 1987, just prior to that market crash; July 2, 1981 at the beginning of the 1981-82 bear market and again in May 21, 1982, following a strong rally during that bear market, leading into a steep decline to the final lows; November 9, 1973 (just after a swift rally during the 1973-74 bear market, and leading into the main portion of that loss); and November 21, 1969, at the beginning of the 1969-70 bear market.

Given my aversion to market "forecasts," I hesitate to interpret this record as a hard prediction of what will occur in this particular instance. This is particularly true because in a handful of instances (2/9/68, 9/12/75, 10/20/78 and 4/30/04), the outcomes were fairly benign. Still, the average outcome has been awful.

On a side note, he wrote about Geithner's trip to Europe, and the least we can say is that he's been spot on (read Mish's Europe Politely tells Geitner where to go):

Treasury Secretary Eddie Haskell Timothy Geithner has scheduled a trip to Europe this week to urge European leaders "to pay better attention to potential market reactions to policy moves, and to accelerate the European rescue program." This promises to be a fiasco. What could European leaders possibly find more arrogant than to be lectured on bailout policy - not simply by the U.S., but specifically by a one-trick pony bureaucrat whose chief trick is the ability to smoothly talk the language of prudence while simultaneously prostituting the fiscal stability of an entire nation for the benefit of bondholders who made bad loans

It's Time to Indict Geithner!

I'm just copy-pasting from Mish, in order to spread the word here.

Please consider the American Thinker article Secretary Geithner's Got Some Explaining to Do.

While everyone, including Congress, the media, and the public, have focused on AIG's $100-million bonus payments to key employees, and most recently on AIG's stealth payments to counterparties like Chase and the French giant Société Générale -- the latter made worse by the fact that it was the Federal Reserve (FED) that wanted to keep these payments hidden from public view -- the problem with the AIG bailout is much deeper and more fundamental.

Just about everyone has had something to say about this bailout -- mostly that it was an ugly but necessary step to stave off a domino effect that would have brought the world's financial system to its knees. But what we have not yet heard is just how Treasury Secretary Geithner, as then-head of the NY FED, got away with taking ownership of 77.9% of AIG's equity and voting rights in clear violation of the law.

The question we are left with is: Why? What motivated this illegal grab of AIG's equity and voting rights? Was it desperation in the face of the largest potential collapse in the history of modern finance? Was it unbridled power combined with supreme hubris? Or was it just criminal? The answer to this query resides in the as-yet-hidden files of the Federal Reserve Bank of New York, now subject to a subpoena issued by my office in the federal lawsuit Murray v. Geithner, pending in the Eastern District of Michigan.

In the course of discovery, resisted by the government at every turn, we have learned that the deal Geithner put together as the NY Fed's president was illegal on its face.

The Deal

Specifically, the deal Geithner put together in September 2008 was for the NY FED to pour up to $85 billion of debt funding into AIG to solve its liquidity crisis as the Credit Default Swap counterparties, the banks which had insured themselves against the sub-prime mortgage meltdown, demanded payments under their AIG insurance policies. AIG ended up drawing down $60 billion almost overnight.

But Geithner was not content with a straight debt deal where AIG promised to pay back principal and interest and handed over almost all of its assets as collateral. Geithner wanted real ownership and control (77.9%, to be exact) of AIG's equity and the voting rights to go along with that.

The problem Geithner knew he had to confront, however, was that the FED was not authorized to take ownership in AIG or any other financial institution. The law authorized the FED only to loan money and take collateral. While the FED might end up with ownership after a default and foreclosure on the collateral, the Federal Reserve Act does not authorize the NY Fed to structure the debt deal with an equity piece.

The Criminal Artifice

So what did Geithner do? He took equity, but he used a fictitious "Trust" to accomplish that which he could not do legally. The AIG Credit Facility Trust has three so-called independent, non-governmental trustees owning the 77.9% of the legal interests of AIG, and the Trust agreement assigns the U.S. Treasury the beneficial interests in the 77.9%. The highly-touted "independence" of the trustees is quite obviously critical to save the Trust from the claim that it is merely a ruse for FED ownership and control.

But there is only one problem with this Trust structure: It is invalid and illegal for two important reasons, not the least of which is that its independence is nonexistent.

Geithner's deal was all about acquiring not just voting rights, but super-majority control. Unfortunately, there was no legal authority at the time to do so.

The brute fact that now standing exposed before us is the use of an invalid Trust structure to conceal the unlawful ownership and control over 77.9% of AIG's equity and voting rights by the FED. If Geithner knew he was breaking the law, then this just happens to be the definition of criminal money-laundering under Title 18, Section 1956.

Secretary Geithner has some explaining to do to AIG's public shareholders. We suggest that he seek legal advice first -- but this time, from lawyers who actually know what they are doing.

Did Tim Geithner Get Fired Yesterday?

This is an interesting analysis published by Business Insider today:

Judging by yesterday's Get-Tough-On-Banks press conference, it seems like Geithner is on his way out the door.

Recall the opening words of Obama's short speech:

Good morning, everybody. I just had a very productive meeting with two members of my Economic Recovery Advisory Board: Paul Volcker, who is the former chair of the Federal Reserve Board, and Bill Donaldson, previously the head of the SEC. And I deeply appreciate the counsel of these two leaders and the board, that they’ve offered as we have dealt with a broad array of very difficult economic challenges.Note the immediate shout-out to Paul Volcker and Bill Donaldson.

Note the glaring omission of Tim Geithner and Larry Summers. What Obama was telling America was "I just had a meeting with two new advisors, and, based on what they said, I'm launching a new policy."

Let's hope this is true.

Congressman Kevin Brady asks Treasury Secretary Timothy Geithner to step down

This is a fantastic video that shows how much politicians lack any sense of honor and integrity.

Tim Geithner, who has been the previous Chairman of the Federal Reserve Bank of New York proclaims that the crisis has had nothing to do with his actions (or inactions, incompetence, lack of understanding of how the real world works) but that him and Obama managed to save the US economy.

As usual, if something goes wrong, it's not their fault, if something goes well, it's thanks to their skills and talent. Kind of revolting and disgusting.

Wasn't Geithner aware of his responsibilities and duties? Let's see what they were:

Wikipedia on the Fed: Its duties today, according to official Federal Reserve documentation, fall into four general areas:

1. Conducting the nation's monetary policy by influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system, and protect the credit rights of consumers
3. Maintaining stability of the financial system and containing systemic risk that may arise in financial markets
4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

Link to the YouTube video.

Voice of Wisdom: Jeremy Grantham - pt3

Precisely 3 months ago, I made the second post about Jeremy Grantham and I think we'll make it a quarterly post, after each of this quarterly investment outlook letter.

Note: Jeremy Grantham is one of the very few Keynesians who can still think straight in many areas (along with Roubini and Stiglitz when it comes to spotting the problems). He even is against bailouts and stimulus packages to the extent where one might ask : why is Keynes his hero?

Here are some more words of wisdom from his Q3 newsletter:

Bernanke, the most passionate cheerleader of Greenspan’s follies, is picked as his replacement, partly, it seems, for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just refl ected the unusual
strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year) event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices, new opaque fi nancial instruments, heroically increased mortgages, lower lending standards, and internationally networked distribution. For these accumulated benefi ts to society, he was reappointed!

Larry Summers, with a Financial Times bully pulpit, had done little bullying and blown no warning whistles of impending doom back in 2006 and 2007. And, famously, in earlier years as Treasury Secretary he had encouraged (I hope inadvertently) wild and reckless fi nancial behavior by helping to beat back attempts to regulate some of the new and most dangerous instruments. Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks.
[...]
The more misguided or reckless the borrowers, the more determined the efforts to help them out, it appears, although it must be admitted these efforts had limited effect. In comparison, those who showed restraint and either under housed themselves or rented received not even a hint of help. Quite the reverse: the money the more prudent potential buyers held back from housing received an artificially low rate. In effect, the prudent are subsidizing the very same banks that insisted on dancing off the cliff [...]
we have decided to encourage even more home building by giving new house buyers $8,000 each. This cash comes partly from the pockets of prudent renters once again.
[...]
To celebrate the overwhelming consensus among economists that U.S. individuals have been dangerously overconsuming for the last 15 years, we have decided to encourage consumption and penalize savers.
[...]
Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860.
[...]
I believe we are well on the way to my “emerging emergingbubble” described 18 months ago (1Q 2008 Quarterly Letter). I would recommend to institutional investors, including my colleagues, to give emerging equities the benefi t of value doubts when you can.
[...]
I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well informed
guess, I hope) that before next year is out, the market will drop painfully from current levels. “Painfully” is arbitrarily deemed by me to start at -15%. My guess,
though, is that the U.S. market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1098 on October 19).

And much much more. Please have a read at the full letter, it's definitely worth it.

Marc Faber identifies the rotten apples in the system

Sometimes, I like to go back in time, and listen to what was said now with the benefit of hindsight. For this exercise, Marc Faber is a fantastic use case.

On an interview, on the 7th of April 2009, at around 7min20 (YouTube link), he mentioned the market rebound, then a small 5 to 10% decline, followed by another rally upleg.

As an anecdote, this quote is fantastic:
[...] Tim Geithner wants to identify the bad and rotten apples in the system. Well, he should buy a mirror and stand in front the mirror himself with Mr Ben Bernanke and Mr Larry Summers. There you have the rotten apples.

China is waking up to the US foolish and reckless behaviour

A couple of very interesting articles regarding the lies of Geithner and Bernanke and the wake of China who seem be slow but real:

June 1 (Bloomberg) -- Another global financial crisis triggered by a loss of confidence in the dollar may be inevitable unless the U.S. saves more, said Yu Yongding, a former Chinese central bank adviser.

It’s “very natural” for the world to be concerned about the U.S. government’s spending and planned record fiscal deficit, Yu said in e-mailed comments yesterday relating to a visit to Beijing by U.S. Treasury Secretary Timothy Geithner. [...]

It may be helpful if “Geithner can show us some arithmetic,” said Yu. “We need to know how the U.S. government can achieve this objective.”

[...] The U.S. needs a higher savings rate and a smaller deficit on the current account, which is the broadest measure of trade, or “another financial crisis triggered by a dollar crisis could be inevitable,” the Chinese academic said.[...]

China is the biggest foreign holder of U.S. Treasuries with $768 billion as of March. Premier Wen Jiabao called in March for the U.S. “to guarantee the safety of China’s assets.” Central bank Governor Zhou Xiaochuan has proposed a new global currency to reduce reliance on the dollar.
[My Comment: $768 billion - a huge amount just a year ago - now seem to be just a drop in the ocean of USD printed by the Fed and planned borrowing by Obama]

[...] Referring to the Federal Reserve “as the world’s biggest junk investor,” and to Chairman Ben S. Bernanke as “helicopter Ben,” Yu said the Fed has dropped “tons of money from the sky since the subprime crisis.” “The balance sheet of the Federal Reserve not only has expanded like mad but is also ridden with ‘rubbish’ assets,” he said.
[My Comment: Wow. The raw truth!]

June 1 (Reuters) - U.S. Treasury Secretary Timothy Geithner on Monday reassured the Chinese government that its huge holdings of dollar assets are safe and reaffirmed his faith in a strong U.S. currency.
[My Comment: Wow. The blatant lie!]

A major goal of Geithner's maiden visit to China as Treasury chief is to allay concerns that Washington's bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and U.S. bonds.

China is the biggest foreign owner of U.S. Treasury bonds. U.S. data shows that it held $768 billion in Treasuries as of March, but some analysts believe China's total U.S. dollar-denominated investments could be twice as high.

[My Comment: $768 billion - a huge amount just a year ago - now seem to be just a drop in the ocean of USD printed by the Fed and planned borrowing by Obama]

"Chinese assets are very safe," Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

[My Comment: Wow. The blatant lie!]

His answer drew loud laughter from his student audience, reflecting scepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.[My Comment: He's not fooling anyone anymore...]

[...] "We have the deepest and most liquid markets for risk-free assets in the world. We're committed to bring our fiscal deficits down over time to a sustainable level.

[My Comment: Risk free? Wow. The blatant lie!]

"We believe in a strong dollar ... and we're going to make sure that we repair and reform the financial system so that we sustain confidence," he said.

[My Comment: Strong dollar? Wow. The blatant lie!]

[...] Geithner said he was hopeful that General Motors Corp and Chrysler would be able to stand on their own feet once they emerge from bankruptcy. [...]

"We want a quick, clean exit as soon as conditions permit," Geithner said. "We're very optimistic these firms will emerge (from restructuring) without further government assistance."

For previous related posts, please read:

• 2009-04-24 At last, China announces it's been buying Gold
• 2009-03-24 The US find some hope in China's cluelessness
• 2009-03-13 China warns the US - 1st official warning
• China warns the US - 2nd semi-official warning?
• China warns the US - 1st semi-official warning?

Geithner set to shortchange taxpayers by $10 billion

Yet again, I'm amazed by the work accomplished by Bloomberg. They are doing true investigative journalism and not just news reporting by spreading the information they are handed by the officials and other representatives...

Anyway, here's the deal: Geithner is undervaluing the warrants the US Gov holds in banks and accepting to sell them with a massive 80% discount to fair valuation. According to Bloomberg, if this goes on until all the warrants are sold back to the originator, the tax-payer will lose $10 billion. These losses to the tax-payers are obviously gains for banks and this hence nothing but yet another wealth transfer from the people to the banks.

Just to be able to have comparison ground: a $10 billion gift to the banks is also the price of 50,000 houses priced at $200,000 or 500,000 cars priced at $20,000.

This is what I have been calling the reverse Robin Hood scheme in the following posts:

• 2009-03-01 Explosive cocktail of fraud, lies and theft in the US
• 2009-03-01 Warren Buffett's Berkshire Hathaway hits the wall of reality
• 2008-09-23 The conmen take over the US

May 22 (Bloomberg) -- Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.

While 17 financial institutions have repaid TARP funds, two have come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. The first was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million last week for warrants that may have been worth $5.81 million, according to the data.

If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of the profits taxpayers might have claimed. [...]

Under the Old National warrants formula, Bank of America Corp. would save $2.03 billion, followed by Wells Fargo & Co. at $1.48 billion and JPMorgan Chase & Co. at $1.46 billion. Morgan Stanley’s benefit would be $983 million, Citigroup Inc.’s would come in at $965 million and Goldman Sachs Group Inc. would have $693 million, according to the data compiled by Bloomberg.

For the 20 largest TARP recipients, the total savings would be $9.985 billion, the data show.[...]

On May 11, the day the U.S. announced the sale, the stock’s option-implied volatility, derived from market prices of stock options that are traded daily, was 61 percent, according to data compiled by Bloomberg. The risk-free rate of return, or the yield of government debt, was 3.47 percent that day.

Based on that volatility and that rate, the Black-Scholes options valuation tool appraised one Old National warrant at $7.18. The bank paid the U.S. $1.48 for each.

“We were able to reach a deal that was good for our shareholders and Treasury felt was good for taxpayers,” said Old National Chief Executive Officer Bob Jones.

The second TARP recipient to reclaim stock-purchase rights was Iberiabank Corp., a Lafayette, Louisiana-based lender with $5.6 billion in assets that took $90 million in TARP assistance.

Iberiabank paid $1.2 million to buy 138,490 warrants at $8.66 a share, according to a May 20 filing. They may have been worth $19.78 each, or a total of $2.74 million, according to data compiled by Bloomberg and modeled by Black-Scholes.

[...] A risk management device, Black-Scholes was developed in 1973 by Fischer Black and Myron Scholes to estimate the fair market value of stock-option contracts. Williams, the Treasury spokesman, declined to say whether Black-Scholes is one of the two models the department employs.[...]

Buffett received 43.5 million warrants valued by Black- Scholes at $3.6 billion, or $82.18 each, on the date of the transaction, data compiled by Bloomberg shows. Taxpayers injected twice as much into Goldman Sachs and got 12.2 million warrants worth $882 million, or $72.33 each.

Has it* started? — *the meltdown

The big question that I am asking myself today is: Has it finally started? And by it, I mean the total meltdown of the US paper market: the USD, the USD government's debt, USD denominated debt, and to some extent, the US stocks as well.

Indeed, for the past couple of days, the markets have dropped a bit, but contrary to what happened in October-November 2008 and Feb-March 2009, the last couple of days, the USD dropped along with the stock market and the US treasury bonds: the USD has fallen to its lowest level against the EUR since January, bonds have fallen to almost their worst levels since Jan as well, stock have declined a few percentage points and commodities, specially precious metals have rallied. And the drop of the USD has been violent enough to catch me by surprise (Disclosure: I am quite massively short the USD, as well as the US long bonds and long the precious metals):

So, has it started? Difficult to say. And I am being really careful about what I wish for. Because even if this collapse would be highly profitable for my portfolio, it would also probably mean that chaos will be spreading around the world. So let's be clear about that: I am not hoping for it to happen. I am actually quite frightened by it for dreaming that it would never happen, even if it seems more and more inevitable...

Here are some news:

Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone: Mark Gilbert :

“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,” Lee Quaintance and Paul Brodsky of QB Asset Management said in a research note earlier this month. “In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”

The only thing holding the current value of the US debt is the Fed printing. But as soon as they will stop, the bonds should collapse:

May 21 (Bloomberg) -- Treasuries fell, pushing yields on 10-year notes up by the most in two weeks, after the Federal Reserve bought a smaller amount of debt than some investors expected and the U.S. said it will sell $162 billion of notes and bills next week to finance the budget deficit.
[...]
“The Fed buybacks are over and it’s taken the market down,” said Michael Franzese, head of government bond trading for Standard Chartered in New York. “We thought the Fed would have bought more. Supply is carrying a heavy amount of weight. Supply keeps coming and there’s no end in sight.”

Even the incompetents and market cheerleaders at the Fed seem to be opening their eyes:

May 21 (Bloomberg) -- Federal Reserve officials, who see possible signs of “stabilization” in the U.S. economy, signaled they’re not convinced those improvements will persist.

Policy makers, meeting April 28-29 in Washington, saw “significant downside risks” to the outlook for the economy, with the global financial system still “vulnerable to further shocks,” minutes of the session released yesterday said.

And of course, and unfortunately, the unemployment rate is soaring:

May 21 (Bloomberg) -- More Americans than forecast filed claims for unemployment insurance last week, and the total number of workers receiving benefits rose to a record, signs the job market continues to weaken even as the economic slump eases.
[...]
The total number of people collecting benefits rose to 6.66 million, a record reading for a 16th straight week, and a sign companies are still not hiring.

Finally, since there are a lot of concerns about Obama/Geithner/Bernanke spending and printing until they run out of paper, they are now playing their favorite game: talking up the USD, and saying one thing to just do the exact opposite.

May 21 (Bloomberg) -- Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television.

The dollar, Treasuries and American stocks slumped today on concern about the U.S. government’s debt rating. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade. [My Comment: even Bill Gross, who profited quite substantially from Henry Paulson's and Tim Geithner's policies seems to worry a bit?]

Even Alan Greenspan left his grave to come out and contribute to the bad news stream and try to act as if anybody cared about him. So I just won't quote him, it simply isn't worth the 2min you'd spend reading him!

Is TARP a criminal enterprise?

TARP, The Criminal Enterprise? The question asked by Larry Kudlow.

As Don Luskin (with which I happen to disagree 99% of time) puts it: You can be sure that the $700 billion to $3 trillion dollars is enough to corrupt all the politicians and private enterprises who will be on the way.

Is the whole TARP plan a criminal enterprise? Sounds farfetched, I suppose. But after reading about Special Inspector General Neil Barofsky’s report, it may well be that TARP is just one big criminal problem.

Listen to this: Barofsky’s investigators reported Monday that they have opened 20 criminal probes into possible securities fraud, tax-law violations, insider-trading, and mortgage-modification fraud related to TARP. Yup, those are criminal probes. Barofsky is the special IG overseeing the bailout program. And for some reason the mainstream media refuses to report this on the front pages where it belongs.

Barofsky’s report spans 247 pages. And it says that the very character of the bailout program makes it “inherently vulnerable to fraud, waste and abuse, including significant issues related to conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering.”

YouTube video part 1


YouTube video part 2 (please follow the link as it cannot be embedded).

Fannie Mae CEO to Run Treasury’s TARP

Should you need any more prove of the complete blindness, corruption and incompetence of Geithner and Obama, here's quite an amazing piece of news:

April 18 (Bloomberg) -- President Barack Obama nominated Fannie Mae Chief Executive Officer Herb Allison to run the Treasury office overseeing the $700 billion bank rescue.

Allison, 65, a former Merrill Lynch & Co. president, would replace Neel Kashkari, a holdover from the Bush administration, as assistant secretary for financial stability. If confirmed by the Senate, the choice gives Treasury Secretary Timothy Geithner the counsel of a Wall Street veteran as he confronts the biggest financial crisis since the Great Depression.
[...]
Allison, who was tapped in September to head Fannie when it was seized by federal regulators, may face some tough questions in Congress on his defense of $112 million in retention bonuses awarded to Fannie employees last year.

Fannie and Freddie, which own or guarantee 56 percent of all residential home loans in the U.S., lost more than $108 billion last year and were placed into conservatorship in September.

Just in case you forgot already, Allison drove Fannie against the wall, with hundreds of billions of USD of losses and the Bush administration had to not only inject those hundreds of billions of dollars in the company, but also had to guarantee several trillions of USD of the securities they sold, on the back of the US-taxpayer and the USD-holder.

Geithner, Bernanke and Summers are the rotten apples, says Marc Faber

Marc Faber during this interview on Bloomberg TV was asked how he would see the end game for the zombie banks and he replied very straightforwardly, as usual: "Tim Geithner who wants to identify the bad and the rotten apples in the system. Well, he should buy a mirror and stand in front of the mirror himself with Mr Ben Bernanke and Mr Larry Summers. There you have the rotten apples." (set the cursor to 7 min 10s).