Tag: banks

Bankocracy and the consequences of moral hazard

I strongly suspect that this widespread fury and total disrespect for the ruling bankocracy that passes for “law” is on its way to America. And it will probably be much sooner than anyone imagines:

The country is sliding into psychological despair within a cocoon of unrequited desires that have been inflamed and legitimized over the years. Anger is rampant. Yesterday on the bus a student gave his ticket to a lady, telling her that she should use his ticket because he was getting off. Someone called out that this was shameful “thievery” to which the youngster responded: “I am stealing 50 cents but the government and the banks have stolen 50 billion!” Many nodded in approval.

Prime Minister Papandreou was on television last night, white as a ghost. He was telling the Greek press that he was thankful that the IMF was “offering” their technical expertise (technognosia) to Greece. Yes money is not coming, but how sweet of the IMF to be sending its experts to dictate terms over the next few weeks. It seems that someone in Europe gave him the unexpected news that the party is over. This reality has not yet even remotely begun to set in here. The media are giving the message that “the Europeans can’t afford to let Greece go under….that Europe stands to lose too much….that Merkel and those stuffy Northerners will have to come to Greece’s aid.”

When the reality does start seeping in—hold on to your hats….

The unmitigated evil of TARP, the nationalization of Fannie and Freddie, and the banking bailouts really cannot be exaggerated. The total fiction of the necessity to guarantee bank profits, the total disregard for the rule of law involved in the sorcerous transmutation of Goldman Sachs and Morgan Stanley from leaden insolvent investment banks into golden government-backed bank holding companies, and the utter contempt for the will of the American people has planted the seed for a number of extraordinarily negative consequences that will far outweigh the costs of a few big banks going out of business and a few thousand banksters losing their jobs.

I always wondered why the peasants didn’t recognize that the medieval aristocracy was shamelessly feeding off them without offering them anything substantial in return. That historical mystery is much easier to understand now, as people are losing their jobs, losing their homes, struggling to feed their children, and facing an increasingly bleak future while banksters are paying themselves literal billions for successfully defrauding the government, the politicians, the taxpayers through selling the myth of their societal necessity. This is not the result of the free market, this is not capitalism, and this is most certainly not human liberty, this is nothing more than bankocracy every bit as oligarchic, dishonest, and terminally short-sighted as the nominally socialist Soviet nomenklatura system.

And it will fail, as such systems always fail, because the final generations of the ruling aristocracy are so much more short-sighted and greedy than their fathers. They are too blinded by their misguided belief in their own importance to realize that the system will only work so long as the workers, the middle class, and the entrepeneurs receive a sufficient share of the wealth to play along with the game. Once the productive masses of society realize that the deck is stacked so heavily against them, they’ll not only quit playing, they will begin imitating their betters and turning to theft in the place of hard work and fraud in the place of frugality. Naturally, the praetorian authorities will crack down hard; witness how the bureaucratic leeches in the UK have blatantly – and suicidally – ignored UK law in order to attempt expanding their tax reach while simultaneously attempting to hide from the public how much they are paid.

But such efforts are always doomed to failure and the mere fact that governments are engaging in them is a strong indicator of a coming structural collapse. And the harder that they try to grip, the more people will slip out of their control by the mechanism of simply abandoning their roles as honest, productive members of society. After all, how can one possibly object to those who steal cents when the bankocracy is stealing billions?

The tide rolls out

The pace of credit contraction continued to increase according to the first February report.  Nearly $100 billion in bank loans were paid off, pulled, or defaulted in January.  At 1.42% of the total, this increases the estimated 2010 contraction from 10% to 15%, more than twice as much as the 2009 record.  This is a new chart going back to 1947, in order to better show the unprecedented nature of the ongoing loan shrinkage.  Keen observers may note that on this larger chart, 1975 does not show up as a negative credit year as it did in the previously displayed 1973-present graphs.  This is because the 1973+ numbers are weekly, while the 1947+ numbers are monthly.  This was enough to change what was a 0.9% contraction into 0.2% growth.  If you’re interested in understanding more about the significance of these credit statistics, The Vulture Lurks has a new review of RGD up:

The book is eminently readable, even for those lacking economics training. Vox was able to describe the economic mess in which we find ourselves, the steps that got us into that mess in the first place, and the likelihood that the steps currently being taken by our ruling class will exacerbate the situation, in terminology that wasn’t overwhelming. This book is understandable by ANYONE, regardless of economic background, prior study, or existing expertise. I consider this to be quite an accomplishment on Vox’s part.

Also, in what would appear to be the first review from Malaysia, GKE has a recommendation up on Amazon:  “I recommend this book for anyone interesting in a non-simplistic, but readable analysis of the current economic situation. I should also mention that I bought this book for Kindle and the price was perfect for a digital book.”

Goldman Sachs: destroyer of economies

The Vampire Squid is draining the global economy, one nation after another:

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.

Is anyone going to be surprised when the next time there are reports that a bank has been involved in some suicidally destructive financial shenanigans that have its victimpartner on the verge of bankruptcy, it will turn out to be Goldman again?

They’re going to need a bigger bar

I tend to suspect that the Fed’s recession bar on the TOTLL graph shown below is going to need to be widened in the relatively near future. As is clear from the graph, total bank loans are falling at an increasing rate; the January 27th report is down 9.25% from the October 2008 peak and in the first month of 2010, deleveraging is occurring at a pace that would lead to the first double-digit credit contraction since the Fed began keeping records in 1947. Keep in mind that this does not take into account all of the loans that have effectively defaulted already but have not yet been recognized as doing so.

If the default situation is as grave as debt-deflationists such as Mike Shedlock, Steve Keen, and Karl Denninger have been warning, there could be a 20% bank credit contraction over the course of this year. Such a credit collapse would completely overwhelm Washington’s present strategy of substituting government debt for private debt; as we’ve seen, the Obama administration had to produce a record $1.4 trillion deficit in 2009 in order to keep the overall debt level from falling more than one percent. A further 20% contraction in bank credit, (which makes up about 15% of total credit market debt), would require an additional $1.34 trillion in government debt to replace it and keep the economy “growing”. It should be obvious that this is not a stable or sustainable situation.

Of course, when your GDP is made up of nothing more than borrowed G, you don’t have a free market economy. You don’t really have anything that can even be reasonably described as an economy. On a related note, Steve Keen brings to our attention the Real-World Economic Review’s Dynamite Prize poll where one can vote for the economist most responsible for the Great Financial Collapse of 2008. You can cast up to three votes; I voted for Alan Greenspan and Paul Samuelson.

The irrelevance of Glass-Steagall II

Arkady explains why the Volcker Rule is inadequate:

This topic may sound mundane, but understanding the history behind this controversial act is important to absorb as talks about it’s reinstatement heat up. Glass-Steagall was repealed in 1999 by the Gramm-Lichey-Bliley act and has been blamed by many as the primary cause of the 2008 Housing Crisis. Recently John McCain and ex-Fed chairman Paul Volcker proposed the return of Glass-Steagall along with many Democrats and prominent bloggers including Karl Denninger of Market Ticker fame. However without examining the history of Glass-Steagall and the cause of its existence can lead to needless legislation and shift the conversation away from the true root cause of our financial system.

It’s a good article. While there is no question that the rollback of Glass-Steagall exacerbated the ongoing financial crisis, it clearly was not and could not be the root of the problem, as the global scope of the crisis clearly proves. The problems in Greece, Portugal, Spain, and Dubai cannot be traced to Washington. That doesn’t mean it’s not a good idea to prevent the banks from digging themselves into even deeper holes, but it is essentially a sideshow.

The real problem, as Arkady points out, is the increasingly creaky Federal Reserve System, which will eventually fail on the basis of its structural dependency on ever-increasing debt.

The Baseline Scenario likewise concludes that the Volcker Rule is insufficient:

I testified yesterday to the Senate Banking Committee hearing on the “Volcker Rules”. My view is that while the principles behind these proposed rules are exactly on target – limiting the size of our largest banks and preventing any financial institution backed by the government, implicitly or explicitly, from taking big risks – the specific rule changes would need to be much tougher if they are to have any effect.

As events should demonstrate reasonably soon, all of the finagling over petty details will likely be rendered meaningless by the tidal wave of debt-deflation. One really big default will be enough to set off the panic; the recent market retreat is a sign that the investing class is beginning to realize that the reflation strategy has failed.

Too big to prosecute

The Federal Reserve appears to have broken the law in the AIG bailout:

I looked at the source document folks – and while most of it looks ok, there’s one little line in the trust agreement that might be the problem referred to – specifically, here:

Section 1.03. Trust is Irrevocable. This Trust Agreement and the Trust shall be irrevocable and, except as provided in Section 5.01 hereof, unamendable except that the Board of Governors may terminate or amend its authorization pursuant to Section 13(3) of the Federal Reserve Act, thereby revoking or amending the Trust in accordance with Federal law, provided, however, that a Trustee’s rights to resign as a trustee hereunder and to compensation and indemnification with respect to acts or omissions occurring prior to any such revocation or amendment may not be modified without the written consent of that Trustee.

A trust of this sort, to be lawful, has to be irrevocable – you can’t reserve the ability to modify it later. The NY Fed knew they didn’t have the authority to take equity – thus, these “trust” agreements. I’ll note for the peanut gallery that I’m not an attorney, but I do have a reasonable understanding of the requirements for an irrevocable trust of this general sort to be valid. A phone call with the plaintiff’s attorney, David Yerushalmi this morning confirmed that this indeed was the primary problem. Mr. Yerushalmi went on to assert that this establishes a prima-facie violation of the money laundering statute – an extremely serious allegation as that law, if violated, carries very heavy criminal penalties.

There is also apparently a second issue in that the beneficiary is named as The US Treasury, which is, effectively, a bank account and not a “person or entity.” That’s a potential problem too although I can see the counter-claim being made that “The Treasury” is in fact The institution of The Treasury, not the account called “The US Treasury.” This is an explosive allegation – if the trust is defective then it is as if it never existed, and the entirety of the AIG bailout and everything related to it may be criminally unlawful.

It should be completely obvious at this point that Bernanke, Geithner, and Paulson, among others, are criminals who merit investigation, prosecution, conviction, asset forfeiture, and life imprisonment. How long with their government pals attempt to protect them before they finally throw them to the populist wolves? Or are they simply too big to prosecute? The real question is this: is America a society of law or is it simply one more corrupt and crumbling oligarchy about to collapse into the dustbin of history?

Walk away, walk away

Walk away, walk away, banks will crumble:

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

If you own a property that is underwater, it is financially insane for you to continue paying the mortgage if it is less expensive to rent a similar place. There is no “moral” aspect to the situation since the contract clearly delineates the limits of your responsibility. So long as you give up the property, you have abided by the contractual terms specified as part of the deal. While it’s very important to confirm that you have no more liability than the loss of the property before taking such an action – the debtor’s liability varies on a state-by-state basis – that’s the only decisive factor.

As for fears of how a mortgage default will impact your credit score, were you not paying attention for how the banks have behaved over the last ten years? During the expansion phase, banks will loan to anyone who will take their money and during the contraction phase they’re not going to loan to anyone who would find themselves underwater, so in practical terms it’s a non-issue. Keep in mind that 90% of the 4.5 million homeowners who are more than 25% underwater haven’t defaulted yet. But most of them will, and the impact of that wave of defaults is not going to improve your home equity position.

Actually, that would be amusing

The Baseline Scenario recommends PAUL KRUGMAN for the Fed. And with a straight face, no less:

The danger here is uncertainty – the markets fear a prolonged policy vacuum. Fortunately, there is a way to address this. Ben Bernanke should withdraw and the president should nominate Paul Krugman to take his place.

The ironic thing is that although Krugman is a willfully ignorant Neo-Keynesian who couldn’t correctly predict the sun rising tomorrow, he would still be a better choice than permitting Ben Bernanke to destroy the tattered remnants of the American economy in order to delay the liquidation of the zombie banks.

I don’t care if Bernanke is reconfirmed or not. Should he be? Of course not. He’s been an unmitigated disaster; only Greenspan was worse. But as Calculated Risk correctly points out, it’s not really a question of the right man for the job, but the right man for the job in the eyes of the bankers and politicians who created the current mess. You can count on one thing regardless of whether Bernanke is kicked out or not; anyone capable of being confirmed is not the right man for the job.

Is Obama serious?

He can come back in a big way if he is really going to take on the banks. But the Market Ticker’s enthusiasm for Obama’s so-called “declaration of war” notwithstanding, that’s a pretty big if. However promising his populist rhetoric sounds, I strongly suspect this is nothing more than another smokescreen fired out of the Federal extend-and-pretend Nebelwerfer. Nor am I alone in these suspicions:

Senior staff at the investment banks themselves were determined to play down the significance of the speech. “What you are witnessing it a political panic,” said one. “Obama lost a crucial vote and is now trying to win back political ground by some serious bank bashing. This has to go through a long and complicated political process before it gets anywhere near being law.”… Last night, David Viniar, Goldman’s chief financial officer, showed the first sign that President Obama faces a fight. “To put rules in place that roll back the financial system by 10 years is going to be a very, very hard thing to do,” he said.

Translation: we will fight in the boardrooms, we will fight in the Congressional offices, we will fight in the Senatorial backrooms, we will never roll over and surrender our fraud, our theft, or our ill-gotten gains! While Obama’s political survival instincts are leading him to take the right tack, Barney Frank has already made it clear that Congress, being largely owned by Wall Street, isn’t about to play ball. When one considers the way Harry Reid and Nancy Pelosi rolled Obama last year, I wouldn’t bet the housing market against them doing it again, especially when they’ll have a lot of support from idiot Republicans defending the “free market” right of banks to collect federal subsidies, enjoy federal protection against competition, commit massive amounts of open fraud, and get bailed out when they still somehow manage to bankrupt themselves despite all those advantages.

There is an easy way to determine if Obama is genuinely declaring war on Wall Street or not. If he fires Geithner and Summer, withdraws his support for Ben Bernanke, and promotes Paul Volcker to the Treasury, it’s on. If he gets behind Ron Paul’s bill to audit the Fed, it’s nuclear. But if he leaves all the usual suspects in place, and I have seen no indications that he will not, then this is just a bit of populist window dressing meant to alleviate his plunging poll numbers.

On a tangential note, speaking of those who have to go, check out the latest piece of bank-related corruption in the Obama administration: “Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment. Mortgage documents for that 14-room home include a provision, known as a second-home rider, stating that Bair and her husband must keep the house for their “exclusive use and enjoyment” and may not use it as a rental or timeshare. Yet the couple has been renting out part of the house since they left for Washington, with Bair listing income from the “rental property” in Amherst as between $15,000 and $50,000 a year on her most recent financial disclosure form as head of the FDIC.”

These people belong in jail, not running massively influential financial agencies and deciding which corporations will live and which will die. And yet we’re somehow supposed to believe they are capable of salvaging the economic situation?

Now they care about the Constitution?

Wall Street is considering a legal challenge to Obama’s proposed bank tax:

Wall Street’s main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank tax proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter.

In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks, according to these officials, who did not want to be identified to preserve relationships with the group’s members.

How very strange! I don’t recall them being overly concerned about the massive violations of the Constitution that were involved in bailing them out of bankruptcy in 2008. These men aren’t merely criminals and fraudsters, their foolishness and hypocrisy simply knows no bounds. And their greed makes even the most staunchly right-wing Republican dream of tumbrils and guillotines.

As Karl Denninger says: “Stop the looting, start prosecuting.”