Saturday, March 29, 2008

Cooked Books Now Standard Procedure

Cold and windy today. Stopped at the Home Depot to buy some trash barrels and bought a bunch of seeds to plant. Turnips, cucumbers, and the wife wanted sunflowers. This garden idea is taking on a life of its own. If the weather ever improves, I am actually going to have to do some real work! Wonderful.

Case Closed on The FED as a Market Manipulator
Over the years I have followed finance, there has been a debate on whether the FED has been complicit in market manipulation or not. Some observers argued that the FED was independent. They said the FED was concerned with monetary issues and not the markets in general. They stated the FED had no interest in the day to day market gyrations.

All those folks can now be silenced forever. The FED and the Treasury have proven beyond a shadow of a doubt that their basic mission is to act as a market prop. There can no longer be any real argument about this. The myriad of FED auctions, the forced Bear Stearns buyout, the surprise rate cuts on option expiration days, and a host of other actions have finally elucidated the facts.

The FED has become a market pumper, not unlike any other pumper on CNBC. A new mandate to in effect make rising markets occur is clearly a priority. What does this mean? While most astute players have known this for some time, a general acceptance of this prop will now take hold. Take a look at this quote from a Citi analyst in regards to troubled Lehmen Bothers and their liquidity position:
"With $34 billion in liquidity at the parent company, the ability to get access to over $200 billion in liquidity from the Fed's primary dealer credit facility, and its ability to tap the term auction facility, access to liquidity is a non-issue," Bhatia wrote in a note to clients."
As you can see free and total access to unlimited amounts of cash has now become a "market expectation" that buy recommendations are based upon. And you know how the FED loves to make sure expectations are met, yes?

New Expanded Role for Federal Reserve
From our "Stupid Government Ideas" news desk we get a report that a new and expanded role is planned for the Federal Reserve. As if destroying the dollar, failing to curb inflation, and printing enough money to bailout the universe were good things that we needed more of. At least with more direct control over things the FED can engineer a Depression that much quicker. I am a fan of expedience!

The list of new powers is long, and mainly regulatory in nature. The puzzling thing is that the FED will now be able to look into the books of ANY firm that "threatens to destabilize" the system. What the criteria for destabilization is I have no idea. I would wonder how wise it is for the FED to be opening their balance sheet to banks and entities if they have no current idea of the books for those firms? The best roundup I have found was from the Prudent Bear site, and I recommend it as a glimpse into the future regulation likely to come from this:

The market hates "uncertainty" and I do not see how more oversight from the FED is going to be a good thing for the financial sector going forward.

Cooked Books Now Standard Procedure
For the past few years the readings on inflation have been very low, even in the face of rapidly escalating prices. The data was sliced, diced, and massaged to "make the numbers" sort of speak with regards to the inflation reports. Fannie Mae practiced creative booking of revenues in order to smooth out their earnings reports. Mortgage applicants opted to use "stated income" paths to inflate their earnings. The list goes on and on. It seems that while the USA does not actually produce anything useful, it does lead the world in the production of cooked books.

Floyd Norris at the NY Times has a good piece up about how cooking the books is now encouraged and will be standard procedure. I ask you to read the entire piece here:

Key section;
But one part of the letter stood out to me, providing an excuse for companies to ignore a market value if they don’t like it (italics added):
“Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability.”

There it is. Ignore prices that are deemed too low, and magically everything is wonderful once again.

This makes sense, and is the logical extension of our entire financial system. There is simply too much bad debt, impaired assets, non payable insurance, and lack of hard capital to backstop all the paper written on it to EVER HAVE A REALISTIC PRICING applied to them. All the delay tactics being practiced right now (FED auctions, treasury swaps, etc) must be viewed through the lens of perpetuation of fantasy.

It has long been a central belief here at Economic Disconnect that the US is able to play these types of games because the foreign holders of our debt have no choice but to play along. The Chinese, Japanese, and the like hold so many dollars that they are in no position to call bullshit on our practices. This clear and obvious creative accounting should be the final straw which effectively finishes our credibility, yet it is just another story in another paper that gets little notice.

So here we are. The FED is poised to take over banking as it exists here in the US. Banking speculation that resulted in astounding losses will be spread out over the taxpayers. The same firms that have caused all the damage will be backstopped by you and me so they can continue to pay out their bonus plans to their employees. The foreign holders of US debt will stay quiet and buy more. This is truly a unique time in history indeed!

I would love to end with a statement that none of the plans will help, that things are going to crack, and that reality will descend upon us. But I do not think it is going to happen. The silliness has become so apparent and so blatant with no repercussions that I am forced to accept that this dance could continue forever. I can still complain though!

Have a good night.


watchtower said...

I believe that banking institutions are more dangerous to our liberties than standing armies. Thomas Jefferson, 1816

Did you catch that? "Liberties"

watchtower said...

lib·er·ty [líbbərtee]
(plural lib·er·ties)
1. right to choose: the freedom to think or act without being constrained by necessity or force
2. freedom: freedom from captivity or slavery
3. basic right: a political, social, and economic right that belongs to the citizens of a state or to all people (often used in the plural)

Anonymous said...


"This garden idea is taking on a life of its own."

You had better buy a freezer. Mine started out at a 4'x 8' square with a couple of tomato plants and now is about 30'x 30' and that is just the one at the house I live in. The one out at the farm is twice that size.

I agree and it is painfully obvious to anyone who has an open mind that the FED and the government are manipulating the market which is fine as there are other markets around the world and eventually capital it will flee the US. Take the money and run.


watchtower said...


It's my understanding that last summer the foreign entities already started pulling back from our debt.
Plus here lately I keep hearing about the GCC wanting to depeg from the dollar.
I guess what I'm saying is that I believe that the world could pull the rug from underneath us, especialy when you look at a country such as China, and what their long term goals may be.
I think I might have said it before, but I don't believe China, or Russia, or the Arab states are our friends (maybe I'm just reading too much J.R. Nyquist).

Anonymous said...

the 'market' is the 'banks'...................

started a garden 3 days ago. sick of pesticides laced food. poor tasting veggies..........grow my own!

great blog....

Anonymous said...

The home mortgage crisis that has Wall Street and consumers worried about an economic meltdown is prompting many in the U.S. Congress to come to the rescue of hard-hit states that just happen to be crucial to their own election-year success.

Florida, Ohio, Michigan and California have some of the highest concentrations of home foreclosures. They also are vote-rich states that congressional and presidential candidates need to win in November's elections.

Gatta buy them vote, never says who is goingto get to pay for it though- funny how that works.



Anonymous said...


Better plant some dill to go with those cucumbers if you like dill pickles that is. The wife and make our own, good stuff. If you don't there are a lot of sweet pickle recipes on the web also. Personally I can't stand the sweet ones but that's just me. My turnips just popped up out of the dirt Saturday but we have a chance for 3-5" of white stuff tomorrow so I covered them up with some straw. Hope they make it if not I'll just plant some more.

WASHINGTON/PARIS (Reuters) - Food prices are soaring, a wealthier Asia is demanding better food and farmers can't keep up. In short, the world faces a food crisis and in some places it's already boiling over.

Global food prices, based on United Nations records, rose 35 percent in the year to the end of January, markedly accelerating an upturn that began, gently at first, in 2002. Since then, prices have risen 65 percent.

Scary stuff.


Anonymous said...

Hey all,

Sorry for not posting anything the last day or so. That Chuck Norris clip was awesome!

So guess what I did this weekend?

It involves the buy of metal and I don't mean gold or silver.

So this is it guys. This IS THE SIGN. The fed/treasury is stepping in with a total control policy. Get out while you still can. Pay off everything if you can and find a nice hunker down.