FINANCIAL TERRORISTS, PREPARING THE NEXT FINANCIAL 9/11?

Wow. Check this out. Banks around the world will have to roll over (refinance) debt amounts between $5 trillion and $15 trillion over the next two years. That's a chunk of change. The primary problem is that banks could find it harder and harder to find the money to roll over debt as asset prices continue to slide downward. The banks will need some real magic. This is where friends from my youth, Rocky & Bullwinkle, come in.



The real trick comes in the form of some real regulatory stupidity (courtesy of the Financial Accounting Standards Board, or FASB) that allows America’s financial institutions to revalue the price of their toxic assets. I’ll leave it to market sociopaths to explain "the market" rationale, which you can find here. The end result is to create a world where Alice in Wonderland math governs our market environment, but how it works is really pretty simple.

Regulating Market Prices Out of the Market
Imagine you own a home before 2008. You likely watched a slow bleed process as it's market price tumbled over the past two years. Your $500,000 home is now worth $250,000 (or something like that). Because you have powerful neighbors who don't want to see their homes lose value if you walk away and leave an empty house (called a strategic default) they get the banks to legally allow you to reinflate the value of your home on their books.

The best part of getting another shot at reassessing the value of your home is that you can maintain previous debt levels, or borrow against the home, as if little happened to your houses market price. To be sure, it's really not that simple. But the concept applies (I've written in greater detail about the process here, here, and here). The end result, though, is that we effectively regulate market prices right out of the market. Same hat trick, different result.



The problem with this regulatory maneuver is that this is not being done for your home. You don't get to use the regulatory tools that the banks have access to. Like handicap parking it’s only available to a certain class of banks. In this case it's (FASB, Statement 157) only available to the incompetent sociopaths who run America’s biggest financial institutions.

Taking the Market Prices Out of the Market
By allowing America's financial institutions to re-price their toxic assets two things happen. Both will help solve our bankster's trillion dollar problem above.

ASSETS ROLLED OVER/GAME CONTINUES: It allows banks and governments, who had to rollover loans in 2009, to pretend the assets they underwrote are worth more than they actually are.

FINANCIAL AND LEGAL BAILOUT: It shields private equity firms in our shadow banking system (private investors) who “invested“ in toxic assets. They escape culpability and investor lawsuits. 

On one level this explains why the recovery we're experiencing is superficial, at best. First we got $1.5 trillion in bailout money from the Bush and Obama administrations to save our nation's financial institutions and their incredibly self-absorbed executives. Then we got trillions more for America’s financial institutions in the form of government guarantees and credits.

And, just like that, our nation’s financial institutions are able to go to the Federal Reserve and Treasury Department and say, "Let us use these repriced (toxic) assets as collateral for a new loan. You can go ahead and keep the asset if I stop paying (wink, wink)."

Flush with bailout cash, new credits, new guarantees, and government approved unicorn methods to revalue their assets, and it should come as no surprise that America's financial institutions have continued to live in a make believe world drenched in irresponsibility and never ending

How Banksters Will Stick Us With the Bill
In 2008 only 2.7% of BofA’s failing loans were backstopped by the American taxpayer. In 2009 that number jumped 20.5%! Take a look at the numbers. But wait, it gets worse. These bad assets - which the Federal Reserve and the financial industry like to call "legacy assets" - are being dumped on the American taxpayer. This is how it's being done.

In order to put America's toxic, or legacy, assets on life-support (while putting more money into the banking system) we created something called a Term Asset-Backed Securities Loan Facility (TALF). In real simple terms TALFs are government-backed loans. They can be accessed by those who hold financial crap, or non-performing securities. To better understand the concept let's use our home example from above.

If TALFs were available to America's home owners they would be able to use their homes to get a loan from the bank, even if they're upside down on the loan. Unfortunately, TALF loans are only made available to America's largest and most powerful financial players through the Federal Reserve of New York (and, no, President Obama's Making Home Affordable Program doesn't even come close to TALF).

Here's the real good part.

The big financial players don't need to put up any good collateral for the loans they get. They can use their poorly performing toxic assets as collateral. Best of all, they can revalue these assets upward, courtesy of the federal government. If the collateral doesn't pay off you and I are stuck with the bill.

How much will this add up to? We don't know just yet. But we do know that the Federal Reserve has made at least $1 trillion available for these TALF products, and another $1.45 trillion for non-performing assets in the housing market.

Put another way, don’t worry about the banks. They’ll get their money to rollover their loans. The American taxpayer, however, will be stuck with the toxic assets and the affects of an austerity program that’s just beginning to take shape.
 
- Mark

CENTRAL BANKS BURNING THROUGH CASH AND CREDIT ... AND LOSING MONEY IN THE PROCESS

Can a central bank lose money? Unfortunately, yes, it can. Zero Hedge's Tyler Durden points us to just one example across the Pacific. 

Japan's central bank just reported an operating loss of ¥183.4 billion and a net loss of ¥232.9 billion ($2.83 billion) for the first half of the 2012 fiscal year. This is ¥96 billion more than it lost in the same period last year. Incredible. 

I know what you all are thinking. Aren't central banks supposed to have just one, very simple, job? Yes, and it's tied to protecting the integrity of the currency.

So how did the Bank of Japan lose so much money? Good question. Part of the reason for the size of the Bank of Japan's losses is pretty simple. The size of the banks balance sheet (assets/liabilities) has been growing for some time, and now stands at well over ¥155 trillion ($1.89 trillion) ... 

It makes sense that if you have a big balance sheet losses might be large too. But the real problem isn't the size of it's asset base. It's quality. It's what's in those assets. Simply put, the Bank of Japan has been purchasing risky assets to help stabilize markets. 

Sound familiar? 

More specifically, over the past few years the Bank of Japan bought large amounts of toxic financial crap created by incompetent market players in real estate and "exchange" markets (called REIT and ETF markets). You know, just like our central bank, the Federal Reserve, has been doing the past four years. 

Some of you might be saying, "But aren't central banks supposed to be in the business of protecting the integrity of the currency, and nothing else?" On this you would be absolutely correct. 

Unfortunately central banks like the Bank of Japan and the Federal Reserve have become glorified ATMs for some of the world's largest financial institutions. In return for their failed market instruments (and other toxic crap) large financial institutions get to belly up to the ATM central bank bar and pull out fresh cash reserves. 

Some of you might be saying to yourselves, "That's alright, the central bankers know what they're doing. They've been watching the numbers." Think again ... and this is especially the case when it comes to the recent history of the U.S. Federal Reserve.

Here's Rep. Alan Grayson (D-FL) during his first term grilling Federal Reserve Chairman Ben Bernanke. He's asking what happened to half a trillion dollars that the Federal Reserve created for Europe (1:20) ... 

As if not knowing what happened to half a trillion dollars wasn't enough here's Alan Grayson questioning the Federal Reserve's Inspector General about trillions (much of it in credits) that suddenly appeared on the Federal Reserve's books. As you will see (3:14), the Inspector General has no clue about the trillions in credit that's been extended by the Federal Reserve ... 

Long story short, central banks can lose money. Lots of it. The Bank of Japan is doing it. So is the Federal Reserve. Our problem is that the vast majority of the general public (in Japan and the U.S.) has no real idea how any of this works, so the private sector continues to pass their toxic crap off to central banks in exchange for fresh cash. 

This is just one reason why our real threat isn't with the "welfare queen" sucking chump change off the system in the Bronx. It's the financial kingpins on Wall Street, sucking trillions off the system in Manhattan, who are burning down the house.

- Mark 

P.S. If you're wondering what the Federal Reserve's balance sheet looks like since it began extending credit and making massive purchases of toxic assets take a look at this ... 

WHY THE BANKS ARE STILL IN TROUBLE

I've been saying this for some time now. In spite of trillions in aid the banks are still in trouble and the Federal Reserve is doing their level best to cover for the banks.

Specifically, the Federal Reserve is flooding Wall Street's biggest market players with money by keeping interest rates low. But, instead of being called Wall Street's Trillion Dollar Money Flood, or Wall Street's Bailout in Perpetuity Program (BPP), like it should be, the media is going along with the Federal Reserve's misleading and mind-numbingly opaque "quantitative easing" (QE) terminology.

They're doing this because, you know, Wall Street hates it when they get money virtually for free and we call it what it is - Corporate Welfare.

Interestingly, even though we are deep into the second phase of the Federal Reserve's trillion dollar QE/Money Flood for Wall Street, the Fed knows full well that their first two QE programs aren't working. How do they know this? Because the economy stinks and, in spite of having trillions of dollars dumped in their laps (a process that actually began in 2007), the banks still aren't lending because they don't trust one another.

As a result, the Federal Reserve is moving beyond QE II and is now preparing to push through QE III - or, more appropriately, they're preparing another money dump for Wall Street.

There are four reasons that the banks are in trouble. I've been blogging on these reasons for some time now, but Shah Gilani, contributing editor for Money Morning, has done us all a favor and put them into a nice little list.

Banks Still Carrying Toxic Assets: In spite of being able to dump hundreds of billions in toxic assets on the American taxpayer Federal Reserve the banks still have toxic assets on their balance sheets - for starters, $2.4 trillion in mortgages and more than $1 trillion in mortgage-backed-securities.


Industry Accounting Gimmicks: The banks have been able to juggle accounting rules to make their books look better than they really are.

Bank Smoke & Mirror Profits: The banks have made their recent profitability look robust by moving loan-loss reserves back over into the revenue columns of their income statements - booking that as top-line growth.

Banks Facing Lawsuits: And the onslaught of litigation banks now face that could force them to mark down their assets at the same time that they will have to buy back tens of billions of dollars of non-performing mortgages they originated and securitized.

There you have it. Trillions of dollars handed over Wall Street's biggest banks. Still, in spite of using dishonest accounting standards, and dumping hundreds of billions of their toxic assets on the American taxpayer, the banks are still in trouble. They know it ... The Fed knows it ... The Obama administration knows it. Yet, we're going to do it all over again with QE III.

For what we've gotten in return I'd say this is like dumping money down a drain.

- Mark

HAPPY BIRTHDAY FEDERAL RESERVE! 100 YEARS AGO YESTERDAY IT BEGAN OPERATIONS ... UNFORTUNATELY, IT'S NOW OUR NATION'S ECONOMIC LIFELINE

After securing its charter in 1913, 100 years ago yesterday (November 16, 1914) the 12 cities chosen as the official "branch offices" of the Federal Reserve began operations.

Fast forward 99 years and we learn via Zero Hedge that by December of 2013 the Federal Reserve has over $4 trillion in "assets" to its balance sheet. Yeah, that's a "t" for a trillion.

If you're wondering, $4 trillion is almost the functional equivalent of one-quarter of all the goods and services that the United States produced in 2013 ($16.2 trillion). But $4 trillion is not a static number. By May 2014 the asset sheet of the Federal Reserve reached $4.3 trillion.

Today, the total value of what's on the books of the Federal Reserve now stands at about $4.5 trillion.

What this means is that the Federal Reserve has purchased about $4.5 trillion in contracts and other assets, which they would like you to believe are marketable, and hold real value in the market.

Here's the problem. If the products, or assets, they have purchased were so marketable why aren't market players lining up to purchase the goods themselves?

Good question.

Here's the answer: No one's lining up to purchase what the Federal Reserve is purchasing because the assets are either toxic crap no one wants, or they don't generate the kind of rate of return that market players want. Ergo, the Federal Reserve has to make these purchases to keep our market system from tanking, again.

Put another way, the successes we see in the market today are buoyed by trillion dollar purchases from the Federal Reserve. It's that simple.

So, what does the Federal Reserve get in return for the trillions that they've dumped into the market? Simple. The Fed's asset sheet is pretty much made up of the toxic crap we took off of Wall Street's books - which added billions in profits to America's financial sector - plus the U.S. Treasury Bills the Fed has been purchasing because few investors want to load up on T-bills that pay out less than 1 percent.

Happy Birthday Federal Reserve! It has officially become the Sugar Daddy of both Wall Street and our national economy.

Aren't free markets great?

- Mark 

BofA RETURNING BAILOUT CASH ... IT'S SMOKE & MIRRORS

In an effort to get out from under the watchdog eyes of the federal government Bank of America is re-paying $45 billion in TARP bailout money. Sounds like great news, huh? The "road to recovery" others will argue. Well, hang on to your wallets. It's all smoke mirrors ...

QUICK OVERVIEW
BofA is saying that they will use $26.2 billion of its own money, and $18.8 billion in raised capital (for a total of $45 billion), to pay down what they borrowed from the Troubled Asset Relief Program (TARP). Where have they gotten the $26.2 billion? This is especially a good question since they were moving toward financial Armageddon after purchasing the very toxic Merrill Lynch just 9 months ago. BofA is getting the money from at least three developments:

* TAPPING RAINY DAY FUNDS

* BAILOUT FUNDS TURNED STRAW INTO GOLD

* CONTINUED GAMBLING

I'll take each one in turn.

TAPPING RAINY DAY FUNDS
BofA, like all other FDIC-backed financial institutions, has reduced the amount of money they are putting aside for a rainy day (blue line on the chart; called Coverage Ratio). As The Pragmatic Capitalist points out (in "The Bank Profit Mirage"), this means that if things go bad in some client accounts banks will have less money to deal with the problem than they did before the market collapsed last year. How do we know this? Because the FDIC keeps track of this stuff. Again, look at the Blue Line on the chart.

But then it gets really bad. Every time somebody decides that they can't make payments on a home loan or a small business loan it becomes a non-performing loan. Look at the red line on the chart (Non-Current Loans & Leases). As you can see, things aren't going well for American debtors these days. When BofA (or any bank) decide they can't squeeze any more money out of a debtor they simply write the account off as a loss (or a "charge-off"). Things aren't going well here either. Look at the green line in the chart (Loan Loss Reserves).

You don't have to be a rocket scientist to see things aren't going well for FDIC-insured banks.

Most institutions are supposed to have money to cover accounts they anticipate will go bad. After last year - and given current economic conditions for Middle America - you would think that banks would be putting billions more into the Blue Line (Coverage Ratio, to cover anticipated losses). They're not. Instead of using billions as operational (rainy day) funds they're shifting them over to their bottom line and calling it a "profit."

And just like that, it looks like banks are doing better. See how easy that is?

In a few words, BofA is taking billions out of it's rainy day fund at precisely the time that they should be putting more into it. My guess is that they're confident that their current market bets will continue to pay-off because of government guarantees in other (non-TARP) areas. Here's why.

BAILOUT FUNDS TURN STRAW INTO GOLD
I'll try and make this as simple as possible. The once toxic derivatives, and other market garbage, that Merrill Lynch, Goldman Sachs, and AIG (among others) had were suddenly cleansed. Because of the federal government's bailout money, the Federal Reserves gurantees and credits, and the Treasury Department's intervention, well over $5 trillion in watered stock, bad assets, and toxic securities were pretty much cleaned up by the U.S. government. I previously wrote about this in my "Iron Maiden" posts.

These financial cleansing activities by the Federal Reserve and the Treasury Department covered at least $1.9 trillion for new lending and $4.8 trillion for troubled asset purchases. They also explain why Goldman Sachs, Merrill Lynch, AIG, etc. were suddenly made "profitable" to the point that they could pay out 100 cents on the dollar. Everything they thought was toxic was suddenly turned into gold.

In a few words, banks are profitable because the American taxpayer has made them profitable through Federal Reserve and Treasury Department trillion dollar guarantees. If our financial institutions, like BofA, were really doing fine they would pay back the TARP money and then ask the Federal Reserve and the Treasury Department to rescind their trillion dollar guarantees. But they can't. They need the guarantees to make money off the toxic assets they're still flushing out of the system. This is not a sign of recovery.

CONTINUED GAMBLING
As I pointed out two posts ago one of the reasons financial institutions are starting to see profits is because they've gone back to the same derivative markets that helped get us into this mess. Rather than making loans to small businesses and entrepreneurs (who take longer to pay off) financial firms like BofA are betting on making a quicker buck on derivative contracts. This "recovery" strategy - as any half-wit should see - is only working because of the trillion dollar Federal Reserve guarantees and Treasury Department interventions.

Gambling with a continuous stream of the House's money does not make you a success ... no matter how much you make. In fact, it should make you the butt of the gambling den's jokes. But that's not the case for America's financial institutions. They actually believe they're the ones making things work.

FINAL THOUGHTS
The additional $18.8 billion that BofA says it will use to pay it's TARP loan back will come from selling more of it's stock. This means BofA will dilute the value of current shareholder stock in order to raise capital. This is not good news for their shareholders. But the goal isn't to appease shareholders today. It's to get the U.S. government off of its back so that BofA

At the end of the day, that anyone buys into the idea that the major financial institutions are healthy is dumbfounding. Toxic assets were spun into gold by the U.S. government. Money (or "profits") used by BofA to pay back the federal government is really operational capital that should be used for the rainy day around the corner. Instead, BofA, like other financial institutions, is banking on the Fed's trillion dollar guarantees to make anticipated losses whole. But this is understandable. Federal Reserve trillion dollar guarantees don't have TARP-like conditions attached to them (thank you Tim Geithner and Ben Bernanke).

Finally, that BofA and other financial institutions continue to bet on interest rate and foreign currency derivative markets - which have been made whole by government money - should be a red flag. The fact that the media wants to talk about the "recovery" of BofA, instead of asking why they're so healthy, tells me one thing: We've learned nothing from the previous years of smoke & mirrors.

Stay tuned.

- Mark

HOW WE'RE GETTING RIPPED OFF

OK, I've been writing for some time now about some of the smoke & mirror games that allows Wall Street's biggest financial players to "privatize the profits and socialize the losses." To do this, they've been dumping their toxic - or close to toxic - assets on the American taxpayer, and securing good money for their efforts. Two of ways that Wall Street has been doing this include:

1. Using shaky contracts as collateral for government-backed loans.

2. Revaluing shaky contracts above market price to make these loans bigger than they should be.

If you want to know the technical terms and details behind these deals go to this post from Yves Smith at nakedcapitalism.com. All of the stuff she posts is a treasure trove of insight and information. This post, however, is dedicated to simplifying (oversimplifying?) the details.

Let's say you acquire a car. You expect to make lots of money racing it. You also expect to sell it later as a classic. The car makes you look edgy. You have lots of friends. All is good.

But then things go bad. You wreck the car in a multi-car crash. Your car is still drivable, but you're not going to win any races any time soon. You now have no friends.

Even if you fix the car, problems will arise because of questions about the frame, replacement parts, etc. But things become even worse because people know that you wrecked your car in a demolition derby, where everyone else was trying to win races, just like you.

No one wants the cars that were in the derby. So sad.

The market for cars in general isn't good. But the market for wrecked cars in the derby you raced in - no matter how nice they were to begin with - is even worse.

Now imagine going to a bank and saying, "Give me a full value loan on my fine auto ... it will be worth much more once I fix it." In the real world, this is the response you should expect to get ...

But in our "privatize the profits, socialize the losses" world the Federal Reserve has figured out a way to help you (i.e. Wall Street) out. The Federal Reserve created a Primary Dealer Credit Facility (PDCF) where owners of wrecked vehicles can use their cars as collateral to get a loan. And, just like that, based on the original promise of the car (and your promise to fix it), your racing investment is now worth something.

But no one is quite sure how much a car from the demolition derby - even the ones that escaped major damage - might be worth. Still, you're confident, because The House (the Federal Reserve) is letting you sit at the tables, with their money. They're going to be helpful. Your derby friends return.

Suddenly, things get even better. Since the car is drivable, and you promised to fix it, the Federal Reserve's PDCF window allows you to value the car according to what you think it's worth - or what you think it should be worth - once the market for your wrecked vehicle improves (this is the concept behind "mark-to-market"). Cha-ching ...

You leave the car with the Fed as collateral, and walk out with some real money.

Do you return for the car, and pay back the money? Wouldn't it be so much easier to leave it with the Federeal Reserve? You've got the money, right? Instead, because there are no penalties for being reckless, you go out and buy another car, and do it all over again. The Federal Reserve American taxpayer has to eat the losses on the collateral you left.

In many instances, this is what we're going to end up with on many of the collateral contracts the Federal Reserve the American taxpayer is absorbing through the Fed.

While all of this may be an oversimplified version of what's going on, it makes the point. We're taking on toxic instruments, and exchanging it for good money. But most Americans don't have a clue about any of this because of the complexity behind Iron Maidens, market-to-market accounting, CDOs, etc.

This is why greater transparency about the what the Federal Reserve is doing is necessary. They're not giving up enough information now, which makes the details even more fuzzy. Worse, because there were never any penalties for reckless behavior in the first place (the behavior was rewarded), we may be setting ourselves up for another financial demolition derby.

Stay tuned.

- Mark

WHY MAIN ST. WILL CONTINUE TO STAGGER ... AND HOW WE BREAK THE BANK'S "REFINANCING" STRIKE

"The American Republic will endure

until the day Congress discovers that it

can bribe the public with the public's money."

- Alexis De Tocqueville, author of Democracy in America (1835) 

With corporate America sitting on more than $2 trillion dollars in cash, and the banks flush with bailout money and government guarantees, one has to wonder why our business class isn't spending any money. But, contrary to prevailing opinion from the right wing blogosphere, it has nothing to do with regulations, our tax code, and out of control "socialist" spending.

Think about it. Over 30 years of deregulation freed corporate America to extract wealth and to pillage the American economy. Today, due to deregulation and other corporate gifts from congress, wealth gaps in America are similar to what they were during the Roaring Twenties and during the time of the Robber Barons (though, to be fair, the Robber Barons actually created something of value).

As well, can anyone say with a straight face that Steven Jobs waited for the capital gains tax to drop before he had the Apple idea? Did Bill Gates develop Microsoft because he was in the right tax bracket? A good idea is a good idea (moreover, capital gains taxes are lower now than they were under Reagan).

Finally, it's sheer lunacy to claim that we're sliding into socialism when Federal spending represents 25% of the economy this year vs. 23.5% under Reagan during a similar period in his presidency (and Reagan didn't have to deal with two failed wars and a collapsed economy bordering on Depression Economics).

The simple reality is that corporate America - and this includes the banks - don't trust what's going on with the banks and their partners in crime in the financial sector. And this is NOT suddenly a new development.

Why Corporate America is Not Investing (It's not new)
As I pointed out in December 2007, "banks are in a financial storm of doubt and edginess because of the mess caused by fraud, stupidity, and the outright greed of big lending institutions." By December 2007 one institution after another was reporting that they were writing off billions of dollars in losses because of the toxic assets and other sub-prime lending packages they were sitting on.

As a result the financial sector found themselves short on cash, drawing on reserves, or seeking out other institutions, in the hopes that they would lend them operating funds. But banks were lying to themselves and to each other about what they had in the books. Doubt and distrust was in the air.

Investors and banks were reluctant to lend to anyone, especially each other. In December of 2007 the Wall Street Journal reported why:

Financial institutions remain suspicious of each other after multiple rounds of announcements of mortgage-linked losses, and are anticipating more. They also are eager to hold onto cash to shore up their troubled balance sheets.

Nine months later - with banks and other financial institutions hemorrhaging money - the Federal government had to step in and bailout Wall Street. The only problem is that the Federal government didn't demand changes in the operating status quo. Nor did it do anything to force financial institutions who received bailout money to clean up their books in exchange for their bailout and other market guarantees.

In effect, we said to Wall Street, "Here, take the money. You don't need to do anything for mortgage holders, or other Americans who are in debt ... in spite of wrecking the economy we'll let you muddle along with toxic debts on the books by creating mind-numbingly stupid "mark-to-market" arrangements that allow you to reprice toxic assets on your books.

And while we're at it, we'll create neat, but complex, programs for you to dump your toxic financial waste on the American taxpayer (Maiden Lanes, TALF, etc.)."

As if this wasn't enough, the Federal government (under Bush and Obama) pretty much told our moneyed elite, "And, by the way, if you want to gamble like idiots again, or purchase public debt with the money you've swindled out of the taxpayer, go ahead. The American taxpayer - who just bailed you out - will pay the interest on the Treasury debt too."

And just like that, Wall Street was able to walk away with bailout money courtesy of the taxpayer Washington, and then take that money to gamble on Wall Street (again), or to walk down the street and purchase interest paying U.S. debt securities.

Corporate America sees and understands this. Why invest $2 trillion if the banks haven't been disciplined, and continue to act like pigs at the trough?

But herein lies the problem. After forgiving Wall Streets stupidity and greed, we didn't do anything for the American consumer, or for U.S. mortgage holders.

Worse, after being forced to hand Wall Street trillions in cash and market guarantees, we didn't turn around and force Wall Street to take a financial hit and refinance Main Street's upside down mortgages (especially by reducing loan principal) and/or renegotiating it's debts. With financial credits and other guarantees in their pocket, the toxic waste on the bank's books could remain, indefinitely.

Why Main Street (and the economy) Will Continue to Stagger
As Christopher Whalen points out, today "the largest banks remain profoundly troubled by bad assets on their books as well as claims against these same banks for assets sold to investors." In layman's terms? No one trusts the banks, including other bankers, because they continue to hold toxic assets that they don't want to - and don't have - refinance or renegotiate.

Because Washington didn't demand any concessions from Wall Street - which could have provided relief to the American consumer and it's debt holders - the banks have been able to “muddle along” and pick and choose which recovery path is most profitable for them. In the mean time U.S. workers and households struggle along under a "death by a thousand cuts" threat of unemployment, lost jobs, record bankruptcies, collapsed home values, foreclosures, wage cuts, economic uncertainty, and on-going debt loads, among others.

Worse, because the Federal Reserves cheap money policies, and the bailout programs (referred to as "quantitative easing", or QE) , are designed to save the biggest banks, they've "broken the mechanism" which traditionally converted interest rate drops into debt refinancing for American debtors. But one former Federal Reserve official, who worked in the banking industry for decades, says that our problems are much deeper.

In this last easing ... [the biggest] banks have conspired to break the transmission mechanism for monetary policy and are now strangling the U.S. economy to save themselves from past errors.

Put more bluntly, as was the case in 2007, the banks that can afford it are hoarding cash. Our bailed out financial institutions can afford it. So no one's lending. The big banks aren't lending to the small banks. The small banks aren't lending to small businesses or the American consumer.

It doesn't matter that the American taxpayer footed a multi-trillion dollar bailout for Wall Street and it's largest financial institutions. Because both the Bush and Obama administrations failed to extract any concessions from either group, the American consumer, and the American economy, will continue to stagger in a cesspool of economic uncertainty.

How to Break the Bank's "Refinancing" Strike
According to Christopher Whalen, if our bailed out financial institutions don't care to help the American taxpayer and the American consumer - and they won't, no matter how much taxpayer help they received - the Obama Administration needs to do the following:

1. DEBT RELIEF: Use the power provided in the Dodd-Frank legislation to force an accelerated cleanup of bad assets and to mandate refinancing and principal loan reductions for performing loans with viable borrowers. If any banks resist, the Treasury should use the power under current federal law to remove recalcitrant officers and directors of these same banks.

2. REFINANCE MORTGAGE DEBT: Because the market collapse forced consolidation in the mortgageg industry it is "now dominated by a cozy oligopoly of Too Big To Fail banks" (the top three banks control 55% of all mortgage originations, while the top 10 banks control 95%). The Treasury needs to force these institutions to make rules changes to allow for the refinancing of all existing residential mortgages, if only to reduce the current cost of the debt and increase disposable income for households.

3. END TAXPAYER SUBSIDIES TO BANKS: With Federal Reserve rates so low, currently loan origination margins (what they get for setting the loan up) for the top four banks have gone from a minimum of ½ point to over 4 points in the last two years. This is a subsidy for Wall Street, especially since the zero interest rate policy of the Fed was designed to benefit Main Street by getting cheap money into their pockets. This subsidy needs to end.

There's more in Whalen's piece that needs to be considered. For the true die-hards, you can find even more in this Wall Street Sector Selector piece from John Nyaradi.

But one thing is clear. Without legislation or executive action to force our taxpayer bailed out financial institutions to begin making concessions in the form of loans, negotiations, and write-downs, our economy will continue to stagnate. We can no longer afford to place our trust in the "private" banking sector. And why should we? They don't even trust one another.

As long as the mission of the largest banks remain unchanged all the talk of pumping more money into the financial system (referred to as QE II) will NOT do any good. Without reconstituting the banks - by forcing them to work with the American taxpayer and consumers who saved their hides - even John Maynard Keynes would not support the cause.

And besides, simply pumping more taxpayer funded money into the economy because the banks don't trust one another, only delivers us to the steps of Alexis De Tocqueville's warning noted above, which was made over 175 years ago (hat tip to Fortune's Keith R. McCullough for the quote):

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

We need to stop the undeserved market subsidies, and force our bailed out banks to renegotiate and write-down loans. Otherwise we should prepare for ourselves for another market meltdown, or worse.

- Mark

THIS IS WHY MORE AMERICANS SHOULD BE IN THE STREETS

Yesterday we had an interesting conversation in class about the global economy and America's debt load. Students wanted to know why we're accumulating so much debt. I explained, apart from reckless policy decisions made under President Bush, that we're lending or committing massive amounts of money - backed by the American taxpayer, mind you - with little or no understanding of where it ends up.

One egregious example was when half a trillion dollars was transferred to Europe's central banks. Federal Reserve Chair Ben Bernanke couldn't track or explain it's final whereabouts. Seriously, even after trying to check his notes, Federal Reserve Chair Ben Bernanke had no clue about the final destination of half a trillion dollars. That's $500,000,000,000. Check it out here.

Look, accounting for a half a trillion dollars shouldn't be that difficult. Back in 2009 half a trillion dollars amounted to approximately one-half of what all of America produced and sold (GDP) in one month ...

Not being able to account for the monetary equivalent of one-half of America's total economic output for a month is akin to you and me not knowing where half our paycheck goes every month. Most people can explain where one-half of their paycheck goes every month.

I know I can. And I can do it without notes too.

But wait. It gets better (or is that worse?). Half a trillion dollars is small potatoes when we consider the trillion dollar transactions that the Federal Reserve couldn't account for back in May of 2009. Actually, it was about $9.7 trillion. But who's counting, right?

Fortunately, for us, there were several independent bean counters who figured out where the money was going. And they have nice interactive graphs that explain where the money went. Here's The Atlantic Monthly with a nice interactive of "The Fed's Cash Machine" ... in May of 2009.

If Bernanke was too busy saving the world during May of 2009 to read the The Atlantic Monthly he could have checked out Bloombergs interactive of the $9.7 trillion that we've encumbered ... back in February of 2009!

So, how many of you have heard Washington's courageous politicians talk about the trillions in future obligations that we've been put on the hook for to save Wall Street? But I'm sure you've heard plenty about taxing the bottom 50% of Americans who pay no income tax, right?

But consider this. The bottom 50% earn or own the equivalent of $1.5 trillion, total. This means we could confiscate everything the bottom 50% earn or own this year - and then turn them into industrial slaves - and we still wouldn't come close to paying what we've paid as a down payment on the 2008 market collapse.

At the end of the day, as I explained in class, we're looking at several problems here.

First, all of the money we've made available to Wall Street and the biggest banks is being used to clean up toxic assets and the failed market bets that created our bubble economy. The result is that many market players now look solvent and successful when, in fact, many should be under indictment.

Also, I have a problem with Federal Reserve officials who often don't know - or claim not to know - who ultimately gets the money we lend or make available. Playing stupid with our money is not a quality we should encourage.

Look, as early as December 2008 I found a trillion dollar hole in the Federal Reserves balance sheets. It didn't take as long as you might think. If I can find a trillion dollar obligation made with taxpayer backed dollars don't you think Federal Reserve officials should be able to explain where it went? Me too.

Next - getting back to Bernanke and that mysterious half a trillion dollars we discussed above - we need to keep in mind that the European Union could collapse under a series of national defaults (hello Greece). This is a problem because we lent the money to the EU, not to individual European nations. If the European Union collapses the EU may never pay back the hundreds of billions they've borrowed. This is a distinct possibility since Europe is essentially using debt to pay off debt, and because the language in the Fed's loan contracts to Europe effectively allows roll overs in perpetuity.

This means that what we've lent to Europe would stay on our books as debt. Nice.

Long story short? We've accumulated trillions in debt obligations that Congress neither signed off on, nor seem overly concerned about. And it's all been done in the name of saving Wall Street and the biggest banks.

Even if most ordinary Americans don't understand the specifics, they intuitively understand the larger implications. This is why they are pissed off at Wall Street. It's really that simple.

- Mark

NO COLLATERAL? NO WORRIES, THE FED WILL FIX IT

The people at Zero Hedge write solid stuff on the economy and finance. Unfortunately the people at Zero Hedge can also come across as overly brainiac market guys as their writing, at times, is filled with market-speak jargon many find difficult to navigate. "Desperately Seeking $11.2 Trillion in Collateral, Or How 'Modern Money' Really Works" is one of those articles.

Fortunately, I can translate market-speak. Because what they have to say in the article is important, I'm doing that here.

In "Desperately Seeking $11.2 Trillion ..." Zero Hedge is telling us one thing: In spite of betting trillions of dollars on financial instruments (again) market players are refusing to put good assets behind their bets (again), which means that the Federal Reserve is going to have to print more money when the market collapses (again).

Ta-da.

So you know, with graphs "Desperately Seeking $11.2 Trillion ..." will print out to about 13 pages. If you have the time you should try and read it since the nuance and the graphs are what drive home the point(s) made in the article. Since the details are what make their argument come alive, below is a jargon-free 1 page translation of Zero Hedge's article ...

********************************
OK, let's start here.

After the 2008 market collapse it became clear too many market players were gambling on toxic products that didn't have the proper assets or financial backing to pay out when the market turned sour. The end result was not pretty, as we all know.

In real simple terms what happened in 2008 was the functional equivalent of your insurance broker taking in your monthly premiums, but then not having the money to pay out when an uninsured driver crashed into your car. Multiply this scenario by hundreds of billions of dollars and tens of thousands of crashes where the participants didn't have real insurance (or assets) to back their activities and you have a (partial) idea why our 2008 market meltdown happened.

Global financial authorities didn't like what they saw after 2008 and convened a meeting (Basel III) where they pretty much said that financial players need to come up with more collateral to back their market bets. Put another way, Basel III said market players hould have greater reserve and asset requirements if we want our financial markets to be stable.

Sounds fair so far, right? If you're going to gamble and invest in markets you should at least have the ability to back your market activities in case of an emergency.

Unfortunately, as Zero Hedge points out, recent attempts to make sure that the bets that have been made are backed with good assets fell flat on its face. Simply put, there weren't enough fools or institutions with good collateral willing to back the trillions of dollars in bets that the financial wizards on Wall Street have waged.

The problem that Basel III is trying to fix is a simple one. A good portion of the market bets made on Wall Street these days are made using the borrowed assets of other market players. It's kind of like hocking your grandparents China at the pawn shop so you can go gamble in Vegas. You have every intention of paying the money back, but you still need to win in Vegas. In market lingo these activities are referred to as rehypothecated market plays (click here for a description of how it works).

What's been created over the past 30 years is a multi-trillion dollar shadow banking system built around unregulated loans, borrowed assets, and a casino mentality.

Basel III is simply asking that market players start backing their market plays with "good collateral" instead of borrowed money and borrowed assets. To reemphasize (because it needs reemphasizing), Basel III is simply asking that if you're going to gamble you should at least have the money to back your bets.

Pretty simple, right? Unfortunately two problems have developed.

First, the $1-2.5 trillion in good collateral that Basel III asked for could not be found. No one wants to put up their stuff to back the market bets that they are involved with. This should tell us something (especially since it's happened before).

Second - and this is where it gets good - serious market players have made it clear that what's really needed to back the market plays out there is NOT simply $1-2.5 trillion in collateral but rather between $5.7 trillion and $11.2 trillion in good assets. There will be no way to pay off the counter parties if (when) the market collapses again without this amount of hard collateral.

So this is what we have. Speculators, institutional investors, and rock solid brick and mortar firms want to play in the casino. But they don't want to put anything of substance up to back their bets. And why should they? The people at the Federal Reserve - and their economic illiterate sycophants in the U.S. Congress - have made it clear that they are more than willing to fill in the financial holes with bailout cash.

This is precisely the point that the good people at Zero Hedge make. The Federal Reserve is going to have to bail out the system (again) when the next market collapse happens because there's no good collateral to back the bets made. Borrowed and leveraged assets aren't enough.

And you can bet that the good folks at the Fed will be yapping about "saving the system" in spite of the fact that the system they're saving doesn't deserve saving.

What a mess.

- Mark

UPDATE: Have regulators started to move on the reserve (capital rule) requirements? This seems to be a start; i.e. until the next legislative favor/gift from Congress guts the requirement.

WHERE'S MY LEGACY ASSET LOAN, MR. BERNANKE?

A few posts back I discussed Legacy Assets. In a few words, legacy assets are poorly performing, or non-performing contracts. More simply stated, they're toxic crap. Rather than watch these toxic legacy assets drag the mortgage market down the federal government created a series of loan programs designed to get market players reinvolved in the mortgage market. One of those programs is TALF.

TALF is the acronym for Term Asset-Backed Loan Facility.

This loan program allows market players to use toxic assets - what the financial industry has ingeniously gotten everyone to call legacy assets - as collateral (check out the Federal Reserve's mind-numbing explanation of the program here). Using toxic (legacy) assets as collateral is just one of the ways the federal government determined it could support the market because (1) it allows market players to use the loans to get cash into the mortgage market, and (2) it provides a guarantee that if the loan is not repaid the federal government American taxpayer will take the hit.

Either way, it is a market subsidy. First, to the loan originators (mortgage brokers and banks) who made the dumb decisions that inflated our market (and it gets them off the hook legally). It also subsidizes the mortgage/housing market, which is still reeling from the 2008 bubble and market collapse.

I provide this background because it appears that we've been making billions in TALF loans over the past year, as you can see here, here, and here. Here's a list of the banks market players work with on these legacy asset loans (interestingly, they're the same guys who got us in this mess; e.g. Goldman Sachs, J.P. Morgan, etc.).

So you know, if your "legacy asset" (your home) is under water you're not eligible for these type of loans. Only the institutional market players are.

- Mark

NEVER FORGET: NO, NOT 9/11 (we're all too patriotic for that) ... NEVER FORGET WHO'S FOOTING THE BILL FOR THE 2008 MARKET CRASH, AND WALL STREET'S EPIC GAINS

For a host of reasons most Americans have given up on tracking how much money the American taxpayer was put on the hook for after the market collapsed in 2008. I have not. 

This Monday, September 15, marks the 6 year anniversary of our inglorious market crash.

Since the 2008 market collapse the federal government - i.e. the American taxpayer - has bailed out Wall Street and backstopped the market bets of our nation's biggest financial players. From providing low interest loans (0.75%), to backstopping market insurance programs, and by purchasing Wall Street's toxic assets, the American government (led by the Federal Reserve) has committed a little over $14 trillion to America's largest financial institutions.

Throw in the more than $1.5 trillion made available through President Bush's TARP and President Obama's stimulus package and we're talking about $16 trillion (give or take a few hundred billion dollars). Then we have the fact that America's middle class saw lives ruined  as its wealth collapse by 40 percent after 2008.

But this isn't about Main Street. It's about Wall Street.

To give you an idea of the scale behind the Mother of All Bailouts, the entire U.S. economy is expected to produce $16.8 trillion worth of goods and services in 2014 (and only produced about $14.4 trillion in 2008).

If you're looking for a functional equivalent of what we handed Wall Street that's easy to understand, imagine your bank offering to loan you the amount of your entire salary for the year at 0.75 percent interest. Now imagine your bank also agreeing to accept the full value that you paid for your house in 2007 (say, $500,000) as collateral when the value of your house today is only 60 percent ($300,000) of what you paid for it.

This is effectively what we offered Wall Street after the market collapsed in 2008. We gave them almost free money, and took crap for collateral. Nice.

So, where did all the money go? Seriously, after raining trillions on Wall Street and the financial sector, why hasn't any of the wealth trickled down to the rest of us?

The wealth hasn't trickled down for two reasons. First, the money's gone to our pampered and protected banks, who are using a variety of ways to hoard cash. As well, the money has effectively been stashed away as credits and guarantees for Wall Street's next industry induced market collapse. I have two inserts below that show who's hoarding (Wall Street and the Too Big To Fail banks) and stashing (the Federal Reserve and Treasury Department) our money.

The first tells us who are the recipients of the various government loan programs. It's from the GAO's 2011 audit of the Federal Reserves bailout costs, which was released July 11, 2011 (p. 131 in the audit report, 144 on your screen as you scroll).

Loans made to financial institutions via assorted government programs (in billions of dollars).

Because the loan programs were viewed as insufficient to deal with the totality of Wall Street's market mess the Federal Reserve and the U.S. Treasury Department are also offering an alphabet soup list of financial programs that pretty much guarantee the market bets of our nation's biggest financial firms will pay off.

Below are two area charts of the individual programs that were made available by the Federal Reserve and the Treasury Department. They add up to more than $14.2 trillion. Coupled with the more than $1.5 trillion that Presidents Bush and Obama coughed up - via the bailout (2008) and stimulus (2009) programs - and we're looking at almost $16 trillion (again, just about the value of all the goods & services we'll produce this year).

In 2011 the NY Times did a break down of these programs and their costs, which you can access here. A description of each program can be found in the appendix section of the GAO's audit (p.p. 148-242).

The point is that if there's one thing we shouldn't forget it's that the American taxpayer is footing the bill for Wall Street's foolishness, and their epic financial gains. Unfortunately, the complexity of it all is one of the reasons why we don't pay much attention to the damage.

In fact, I would say that we've forgotten all about it. Because we're patriots.

Sigh ...

- Mark