Thursday, May 7, 2009

Solvency, Solvency Everywhere But a Sea of Money Awaits

I am currently in the middle of an early spring thunderstorm right now, so lets us hope that I:
-Can finish this post
-Do not get electrocuted
-Do not kill my dog who barks NONSTOP during thunderstorms

Top Ten Reasons This Bear is Wrong About the Markets
A while back I opined that I thought the DOW could run to 10,000 and the S&P to 1000 by late June/early July. I figured reality could be suspended long enough that a move up could happen. While that call may seem right as we continue the march north, the time span and elements of the current rally are faster and more vicious to the upside than I had imagined. I also never saw the banks leading the way higher with rippers of 20% plus almost daily.

So why was I wrong? In Letterman like fashion, allow me to present the Top Ten Reasons This Bear Was Wrong:
10. I have no idea what I am talking about; probably the best reason
9. I did not appreciate the ability for many to pretend they cannot read or think
8. I did not take into account how many others would follow those from #9 into a buying spree
7. I figured the Congress would be a no go for any more banking money, but I failed to see just how crafty the FED/Treasury/FDIC were going to be about taking money without asking
6. I had no appreciation for the market manipulation possible by Goldman Sachs and others (GS made money on an astounding 87% of their trades as of late, via Zero Hedge)
5. I never thought that people would buy into being told "everything is fine" by an incompetent government
4. I fully expected public anger over bonuses and bailouts to last more than 5 minutes; I had hoped for a full half an hour
3. I figured to save any credibility the FED would have to stop taking garbage onto their balance sheet at such a high rate; but they just pushed the pedal through the floorboard instead
2. I figured nobody would want to talk stocks after getting clipped for a 50% down hit; instead everyone is all giddy about the 30% rally.....
1. After said 30% rally nobody remembers they are still 40% down because simple math is not taught in America anymore and thus they have no idea they look dumb talking about how "well" their stocks are doing

That is my list. Add your own in the comments section.

Bad Timing For Bernanke
If there is one person out there with worse timing than yours truly it has to be Ben Bernanke. One day after giving a speech where he outlined how the FED needs more power to oversee operations of banks to "ensure stability" we get this gem:
New York Fed Chairman Stephen Friedman resigns
WASHINGTON – Stephen Friedman, chairman of the Federal Reserve Bank of New York's board of directors, has resigned effectively immediately, the bank announced Thursday.
Friedman was the subject of a recent Wall Street Journal story that raised questions about his ties to Goldman Sachs Group Inc.
"Although I've have been in compliance with the rules, my public service ... on the Reserve Bank Board is being mischaracterized as improper," Friedman said in his resignation letter. "The Federal Reserve System has important work to do and does not need this distraction."
Goldman Sachs late last year received quick Fed approval to become a bank holding company. During that time, Friedman sat on Goldman Sachs' board and had a large holding in the company, a violation of Fed policy, the Journal reported.
But the New York Fed's executive vice president and general counsel Thomas Baxter on Thursday said Friedman's purchases of Goldman Sachs stock in December 2008 and January 2009 "did not violate any Federal Reserve statute, rule or policy."

Spare me the whole "did not violate rules" junk. A sitting NY FED head was aggressively buying GS stock in December 2008-January 2009 right before a monster rally in financials and you expect me to believe you had no idea what was about to come? Whatever. The burden of proof would be on those at the FED to prove both that GS was not engaging in futures gouging to pump stocks and that if they were the FED heads had no idea they were. Go ahead and try.

Beyond that, the FED cannot both be in bed with the banks and be regulating them. While I hate "independent panels" that oversee such things because they are made up of US Congressional members that are not impartial at all, it seems any real regulator would have to be a complete outsider. My I recommend my top four panel members of any regulatory committee:
-Michael Shedlock
-Karl Denninger
-Calculated Risk
-Yves Smith

I know, but one can dream.

Solvency, Solvency Everywhere But a Sea of Money Awaits
As you may have heard, the previously leaked "stress test" results were published in their entirety today. I will not recount all the particulars, the more technical and spreadsheet talented writers in the blogroll do a much better job than I can on that.

Tim Geithner has made the rounds saying that the banking sector is very sound and they are all very solvent, save the itsy bitsy bit of capital some banks need to raise. The first trick is about "when" they must raise that capital.

But Economic Disconnect, surely you are aware that the banks have 30 days to raise the cash, right?

Oh no my apprentice, you must read the really small print with these guys. I want you to think Chrysler and GM. Now understand that:
-The banks must submit a PLAN to raise the capital through private markets in 30 days BUT....
-The actual capital raise must be done by November 9th 2009!

Trust me, by November 9th no one will remember this tidbit so it may as well be November 9th 2050 or any year. They are consistent; submit a plan then wait for that to collapse.

The next item I wanted to highlight was an interview given by Tim Geithner (TG) in an interview with Charlie Rose (CR), picked out by Zero Hedge. Revealing section is right here:
In the interview above, please fast forward to 17:49 for this key exchange.
CR:You will set the standard as to how much capital they need and they will tell you how much capital, or you will help them define how much capital they have.

TG: Thats right.

CR: ...and therefore theres a shortfall, in some cases, in some cases there will be none.

TG: There will be a shortfall in some cases, but again, this is not a solvency thing. There's very significant cushions in these institutions, today, and all Americans should be confident that these institutions are going to be viable institutions going forward. This is designed to make sure that the economy will be able to benefit from larger lending capacity going forward, in the event we were to face greater uncertainty again about a deeper recession. So it's like insurance... against... precautionary insurance against the risk of a deeper recession. That'll help make recovery more likely, because then banks won't have to keep behaving against the possibility that they have to protect themselves against things getting worse. So that's the dynamic this'll help us with.

So there you have it in plain English. The stress tests were worthless because the FED/Treasury are ready to put any and all resources behind the banks so that they can act as if they have no fear of losses. We are certainly at that point!

Now you may call me crazy. You may call me a bit on the fringe. I do not care what you call me, as long as you call me!

To show that I am not way off the rocker here, consider these headlines with the above interview in mind:

Obama budget keeps $250 billion placeholder for banks
So if the banks have so much money they are well off, why is $250 Billion dollars stashed in a budget to stay away from another TARP like vote in Congress? If like Mr. Geithner and company say all the banks have plenty of cushion, why keep $250 Billion in the wings for them? Makes you wonder.

Next up, the total corruption of the FDIC:
Senate approves broad bipartisan housing bill
Bill would allow FDIC to temporarily borrow $500 billion for deposit insurance fund

Another classic! The FDIC, who assures us our money is as safe as gold (well maybe not that safe!) needs access to $500 Billion! Mrs. Bair must be getting tired of all the Friday night bank closures. While we here at Economic Disconnect are off rock blogging Friday night, the FDIC is closing banks and assuming losses at alarming levels.

On the side, that $500 Billion is for the PPIP program and whatever other funding scam the banks will need to weather their total solvency period unharmed.

Take away point: The stress tests are, and were always a sham meant to give false confidence. As I am very long false confidence (FLSCONFDNC) I appreciate the effort. Action speak louder than press releases though, and if the banks were all set there would not be another almost 1 Trillion dollars waiting in the wings for them. Unless we want to "supersize" their solvency!

Long Bond Problems?
This could be a one off event, or a start of things to come. Should the Chinese grow a brain and figure that US treasuries are a pile of junk, this might just start occurring more often (Hattip Alea blog)
30-year Treasury Bond Collapses
Horrific auction results sent the long bond down more than 2 points, last yielding 4.27, highest since november.
This will be a monthly event, fasten your seat belts. Odds on, on a fail some time this year.

As an aside, should the FED succeed in forcing savers into speculation, expect the long bond to rise in yield quickly which will complicate keeping mortgage rates low! You know what they say about juggling too many bowling pins and torches....Well if you do write it in the comments but I am sure it is not good!

Had fun with this post tonight, I hope you did too.

Have a good night.


getyourselfconnected said...

Come on now, I welcome comments so do not be shy! Feedback is my reward.

Lisa said...

My dear GYSC,
I really want to leave a pithy comment, but I'm just exhausted. I enjoy your posts so much, they are appreciated. All of this trade in it and I'm working to fight it on many levels (politically, philosophically, etc). Hope you don't mind, but I'm posting a link I'd like all of you to go to. Thanks.

david said...


Great post as usual.
We live in a truly upside down world.

Here's a lesson to Bernanke from Albert Einstein.

"Insanity: doing the same thing over and over again and expecting different results."

Its amazing how you can be begging at the door of the government at one moment, and then suddenly boasting of how easily you are going to pay back the TARP!

As usual, no mention was made of the toxic wmd derivative cloud that still hangs over the 'solvent banks'

watchtower said...

I went off the deep end while you were on vacation last week and bought a musclecar.
I'm a little distracted to say the least.

Anonymous said...

"A policy mistake made by some major central bank may bring inflation risks to the whole world," said the People's Central Bank in its quarterly report.

"As more and more economies are adopting unconventional monetary policies, such as quantitative easing (QE), major currencies' devaluation risks may rise," it said. The bank fears a "big consolidation" in the bond markets, clearly anxious that interest yields will surge as western states try to exit their QE experiment.

Here are the US governments choices.
A deflationary depression now or sovereign default and hyperinflationary depression later.

Looks increasingly likely to me unfortunately that we will get the latter as the attempt to reinflate a burst credit bubble will prove the Austrians correct.

Sorry GYSC but I haven't in the mood for sarcasm lately.