Friday, November 16, 2007

You Cannot Make This Stuff Up

Hello all loyal readers. I was away from the blog for a couple of days due to unforeseen circumstances. I know all 3-8 of you out there cannot wait for my latest post, so I will try extra hard to entertain and inform this evening. Its been quite the week for all kinds of financial news. The rumored FED rate cut for Thursday never materialized, and the DOW slowly melted down after Wednesday's rally with the Financials being especially weak. Seems like some folks got suckered there! Gold and Silver took a terrific beating as well this week. With so much to cover, I recommend Calculated Risk and Mish's site for a full weeks rundown. I will post tonight on what I feel was the theme of the week from my point of view.

Dangerous Precedent
News hit the wires on Wednesday that a GE run money market fund was going to "break the buck" as its called. Great roundup here: http://globaleconomicanalysis.blogspot.com/2007/11/ges-enhanced-cash-fund-breaks-buck.html
What is extremely important here is that the "well contained" subprime losses in the mortgage markets are now even threatening the most basic of financial instruments. If one cannot even trust the banks to keep a money market fund from losing money, what does that imply for confidence? While that certainly applies to the average guy on the street, more damaging is if trust erodes between large institutions. The US debt and credit economy simply cannot afford any deceleration in money and credit. The event will be seen in future times as a watershed moment.

You Cannot Make This Stuff Up
Suppose, like me, you are on the bearish side as it pertains to the US economy and especially to the housing market. As more and more information and data comes forward a definite set of problems become clear. Even so, the banking system and the stock market seem impervious to the enormity of the losses involved. While there is a certain amount of the Economic Disconnect that can be explained away by shear stupidity of market participants, I cannot help but think that there is an elaborate cover up going on to try and buy time for the banks to recover. The FED, the banks, wall street, and the government all are involved in this delay game. Some might say I am paranoid. Some might call me a conspiracy nut. I will remove the tin foil from my head long enough to present exhibit A; Fannie Mae and the old switcheroo.

AP
Fannie Under Fire Over Accounting Change
Friday November 16, 6:56 pm ET By Marcy Gordon, AP Business Writer
Fannie Again Draws Scrutiny, Defends New Calculation for Potential Loan Losses As Stock Sinks
Full article: http://biz.yahoo.com/ap/071116/fannie_mae_accounting.html?.v=12
Key info point one:
"Using the new method, Fannie reported a so-called "annualized credit-loss ratio" of 4 basis points for the first nine months of this year, meaning the value of four out of every 1,000 mortgages it owns declined during that period. The Fortune article pointed out that under the old method, the credit-loss ratio for that period would have been 7.5 basis points -- far exceeding Fannie's forecasts on the $2.4 trillion worth of mortgages it owns."

Damning key info point two:
In Friday's conference call, Chief Financial Officer Stephen Swad said some of the $670 million in provisions for credit losses on soured home loans that Fannie wrote off in the third quarter likely would be recovered.
"We book what we book under (generally accepted accounting principles) and we provide this disclosure to help you understand it," Swad said.
Several analysts asked the executives in the conference call why the company couldn't disclose what proportion of high-risk mortgages it is able to refinance into fixed-rate loans and save from default.
"The problem is that we don't have the underlying information," said Credit Suisse analyst Moshe Orenbuch.


Case closed. There is absolutely no defending the move by Fannie. The "new" calculations can only be explained as a price discovery delay device. That's it. That's all. A company that has not even produced financial statements in 2 years simply cannot be trusted. Some key questions Fannie MUST answer right away:
  • Does the "New Math" use historical models that are not applicable to the current market conditions or is the new math reflecting current trends in foreclosures and defaults? (You already know the answer to this one!)
  • Is Fannie expecting that past due loans can be brought current based on the same historical rates that have no basis in the current market? (What do you think?)
  • Can the models and projections in use for the assumptions Fannie is making be made available for review by outsiders? (Care to Guess?)

So there you have it. Fannie is changing its own accounting rules. Fannie says they will make a ton of loans that are failing become full performing. They just cannot say how many or how they expect that to be so. Glad this puppy is backed by the US government!

Seriously folks, you cannot make this stuff up anymore. The Fannie situation is an abject disaster. No amount of window dressing can change that.

Future Changes for the Overall Good

In the future here are some new accounting changes we can look forward to:

  • Realising that home owners equivalent rent is not the best measure of inflation as it relates to housing, the FED will now base housing inflation numbers on the Case-Shiller housing index. The FED will compare home prices on that scale with mid 2006 as the start point. Clearly then, there has been no inflation, and actual deflation in housing prices, and the CPI runs negative going forward! Amazing!
  • The FED acknowledges that food and fuel prices are indeed a component of inflation, but they introduce a new correction factor that takes into account that as the price goes up for these items, you appreciate them more, so the real gain in prices is minimal! Again, no inflation even with food and energy thrown in!
  • Bank losses related to mortgage defaults are no longer "losses" but a charitable write off trying to help the average US citizen achieve the dream of home ownership.

Well, maybe not the last one.

Credibility of the credit markets took a tremendous hit this week. Between the FED, Fannie, and the ratings agencies there is not one shred of evidence that any of them can be believed or trusted. What happens when an economy built on debt and a silly fractional reserve banking system cannot convince the US consumer that all is what it seems? I'm not sure, but I doubt its going to be pretty.

Have a good night.

7 comments:

Anonymous said...

I'm not sure, but I doubt its going to be pretty.

"Dear Liberty Dollar Supporters:
I sincerely regret to inform you that about 8:00 this morning a dozen FBI and Secret Service agents raided the Liberty Dollar office in Evansville.
For approximately six hours they took all the gold, all the silver, all the platinum and almost two tons of Ron Paul Dollars that where just delivered last Friday. They also took all the files, all the computers and froze our bank accounts.
We have no money. We have no products. We have no records to even know what was ordered or what you are owed. We have nothing but the will to push forward and overcome this massive assault on our liberty and our right to have real money as defined by the US Constitution. We should not to be defrauded by the fake government money.
But to make matters worse, all the gold and silver that backs up the paper certificates and digital currency held in the vault at Sunshine Mint has also been confiscated. Even the dies for mint the Gold and Silver Liberties have been taken.
This in spite of the fact that Edmond C. Moy, the Director of the Mint, acknowledged in a letter to a US Senator that the paper certificates did not violate Section 486 and were not illegal. But the FBI and Services took all the paper currency too.
The possibility of such action was the reason the Liberty Dollar was designed so that the vast majority of the money was in specie form and in the people’s hands. Of the $20 million Liberty Dollars, only about a million is in paper or digital form.
I regret that if you are due an order. It may be some time until it will be filled... if ever... it now all depends on our actions.
Everyone who has an unfulfilled order or has digital or paper currency should band together for a class action suit and demand redemption. We cannot allow the government to steal our money! Please don’t let this happen!!! Many of you read the articles quoting the government and Federal Reserve officials that the Liberty Dollar was legal. You did nothing wrong. You are legally entitled to your property. Let us use this terrible act to band together and further our goal – to return America to a value based currency."


It sure in the hell ain't.

Kevin

Anonymous said...

thank you my friend ... your site has joined my short-list of daily must reads
--Chris

Anonymous said...

Kevin:

I regret that if you are due an order. It may be some time until it will be filled... if ever... it now all depends on our actions.

Sounds like the dog ate his homework. Sorry you won't get any of your money back. The president of the company needs to leave the country on his "vacation" now.

Seriously- selling paper certificates from a private company? to be used as currency? that totally invites fraud! I sure as hell wouldn't buy paper certificated from some company located in a strip mall. And I'm supposed to believe that the paper will be backed up by GOLD?
SCAM

-Russ

getyourselfconnected said...

Reader Chris,
Thanks for coming by. I appreciate your readership.

Russ,
You make some good points, but what is money issued by the US government at this point, in light of the fraud and leverage coming to light, but pieces of paper backed by a big strip mall? Its all perception.

Thanks to all that left comments.

Anonymous said...

Russ

First off I don't buy gold over the internet anymore but I was when gold was less then 400 an oz. and only then from companies that had been in business for years. I tend to like to do business face to face. But my point is that this is basically the government getting nervous and your rights a slowly being dismantled.

This will be interesting to follow and I doubt that customers being ripped off due to fraud and not reciving gold they had purchased over the net is the issue. This is a threat to goverment issued fiat money.

Kevin

Anonymous said...

Another story I'm following with great interest.

Four-month trial ends with no convictions

Informally called the Kahre case -- after the primary defendant, local business owner Robert Kahre, who paid workers in gold and silver coins -- the trial lasted four months. It relied heavily on evidence gathered in a controversial armed raid in May 2003 on several of Kahre's local business places. The raid entailed keeping more than 20 workers handcuffed, at gunpoint, in 106-degree heat without shade or water while agents collected records and equipment.

The Internal Revenue Service had never before provided guidance on how to handle gold and silver coins that circulate, only on noncirculating collectible coins, according to Kennedy, who is a federal public defender. "If that's the case, we're not going to take someone's liberty from them, on something that a (certified public accountant) with a master's degree doesn't even know. That's a scary country, and I don't live in that country."

http://www.lvrj.com/news/9893062.html

Basally the issue here is if a 1oz gold eagle US coin is stamped with a value of $50 and an employee is paid $50 with it why should the IRS be able to tax you on anymore the that?
The tangled webs our government weaves

Kevin

Anonymous said...

Kevin:

I suspect the fraud concerns on the part of the secret service didn't have to do with selling gold coins- however they may be stamped as long as they won't appear to be Us currency. These liberty dollars look like US currency. they say USA. they say dollar.

I wasn't referring to anyone's right to buy gold. Rather the paper certificates which were redeemable for "liberty dollars" or I thought, GOLD.

This company's web site had a multi-level sales commission scheme outlined. You get people to come into the business under you. And then you issue paper certificates for GOLD supposedly in a vault (in the strip mall next to the gun shop?) In Idaho???

This arrangement invites fraud (issuing paper certificates with no gold behind them) on the part of profit-seeking business operators. This totally looks like a Ponzi scheme variant to me. Thankfully it was shut down before the real money could disappear to South America.

Being non-supported businesses that have to make a profit to keep the lights and heat on, there will be lots of transaction costs to convert money into gold, and to/from Us dollars. These transaction costs could potentially be large. And anyone would resent paying 10-20% transaction fees just to exchange their money. You probably can't avoid them once you buy into Liberty dollars. I know I resented paying commissions transferring between currencies at the airports. And with a proprietary currency like the "liberty" there is no other mechanism of exchange to keep the money changers even relatively honest. That would be a con, right? The one ounce of silver in the $20 Liberty Dollar is worth slightly less than $15.

This system of paper money issued by new small businesses operating in a strip mall invites abuse and I think it was right to shut it down before people's savings had disappeared.

Not to mention the tax avoidance. Shop owners can easily avoid collecting sales tax if they are paid in liberty dollars and can trade them for other goods. Egold , another alternative currency, is used in money laundering and kiddie porno.

Then there are the links to rightwing hate groups (nazis).

But selling gold bullion or gold coins should definitely be legal. but using it as tender will get you in jail so says the washington post october 2006. 'Liberty Dollars' Can Buy Users A Prison Term, U.S. Mint Warns. So it appears they were warned but were being obstinately stupid.

The U.S. Mint says only the government may pass or create "any coins of gold or silver or other metal, or alloys of metal, intended for use as current money." Seems pretty clear to me.

-Russ