A STROLL DOWN MEMORY LANE

I smell a rat. After being told by Wall Street that their stupidity and greed were not to blame for the market collapse in 2008, we are once again being treated to big interconnected financial players saying they don't pose a systemic risk - in spite of the fact that they are much larger today than before 2008.

One would hope market players feel this way because Wall Street no longer follows off-the-books, smoke & mirrors, debt bomb, strategies like this any longer. Think again.

As I've pointed out here, here, here, and here Wall Street is still betting the house, recklessly. So, with all the "recovery is around the corner" happy talk starting to come out of Wall Street again, I think it's time that we take a stroll down Wall Street memory lane (courtesy of the Daily Show) ...

* March 11, 2008: Jim Cramer, "Bear Stearns is fine, do not take your money out ..."

Bear Stearns collapsed six days later.

* April 17, 2008: Market experts, "Will Merrill [Lynch] need to raise capital? No ..."

Five months later Merrill Lynch ran out of money, and is now owned by Bank of America.

* June 5, 2008: Market experts concur, "Lehman Bros. is no Bear Stearns ..."

Lehman Bros. went under three months later.


Want more pre-collapse Happy Talk? OK ...

* October 31, 2007: Jim Cramer, "You should be buying things ... and accept that they're over valued ... but accept that they're going to keep going higher ... that's how you make money" (Dow 13,930).

* February 1, 2008: Jim Cramer, "That's why the market just won't quit ... no matter how poorly companies are actually doing" (12,743).

* April 16, 2008: Kudlow & Company, "The worst of this subprime mess is over" (Dow 12,619).

* November 2008: Market experts, "People are starting to get their confidence back" (Dow 9625).

So, how wrong was former Fed Chair Alan Greenspan before the market collapsed in 2008? Let's just say his Utopian view of markets left even him in a Inspector Renault-like state of shock after he discovered how they really worked ...





Which begs the question, how wrong was current Fed Chair Ben Bernanke? Check it out ...





One of the sadder parts of this emerging story-line story is how the media's Talking Heads - the people who are supposed to be the Fourth Estate - acted like a bunch of gushing children, buying into everything corporate America, and the Fed's Gods of Wealth, told them about markets then ... and now.

In a few words, we're screwed. Don't buy into the happy talk. Especially when we're taking a stroll down memory lane, that delivers us into a financial dead end.

- Mark

WE'RE STILL GETTING RIPPED OFF

We're supposed to feel good about this?

The headlines in the financial world are telling us that we should be happy. Why? Because the amount of money our nation's private banks are stealing borrowing from the American taxpayer Federal Reserve has dipped to about $5 billion per day. So, for the period ending May 12, 2010 the banks only stole borrowed $77.5 billion from the American taxpayer Federal Reserve.

Why is this important? Because the banks can borrow from the Federal Reserve at virtually 0% interest, and then turn around and buy U.S. securities, which pay between 3-4%. Let me emphasize this point:

1. If a bank borrows $5 billion per day from the Federal Reserve (at virtually 0%) they can then ...
2. Walk down the street to purchase U.S. securities, which pay 3-4% interest ...
3. Then collect between $150 - 200 million in interest, for no other reason than they are a bank.

Well, I guess borrowing $5 billion a day is better than when these guys were borrowing $188 billion a day at virtually zero percent interest, which they did at the height of the meltdown.

My only question is where do I sign up?

Oh, that's right. We can't. We're not banks. We're just taxpayers who get to fund and subsidize this banking bonanza. But wait. It gets even better (or is that worse?)

It turns out that the American taxpayer Federal Reserve is now on the hook for more than $67 billion (Table 1: Look for lines "Net portfolio holdings of Maiden Lane" I, II, and III)  because we've they purchased the toxic crap that came out of failed Bear Stearns, and the toxic crap (CDOs) that AIG had on their books. Why is this important? Because by purchasing the failed "investments" of Bear Stearns and AIG at contract price (not market price, because the market tanked) our money allowed America's financial institutions to say, "Look, our investments paid out ... we can now pay ourselves 100 cents on the dollar ... where's my bonus?).

It actually gets worse when you look through the Federal Reserve numbers. But I think I'll leave it alone for now.

- Mark

IRON MAIDENS & OUR MEDIEVAL-LIKE FINANCIAL RESCUE

Of all the "fun" things humanity has figured out the prolonged and brutal torture of each other seems to be among the most creative of our efforts. Among the many tools that we've concocted include the Iron Maiden. While there were many variants, one iron cast model, like the one shown here, was built to follow the general contours of the human body.

In this model, a hinged front door allowed torturers to put their subjects in, and helped keep them upright. Generally there was a small opening around the face so that the torturer could interrogate their victim, and hear their confessions (they usually confessed), with knives and nails fastened securely on the inside for maximum effect.

Often times slits were placed throughout the Iron Maiden so that the torturer could continue to pierce and/or kill their standing target at their discretion. Most often the slits were placed, by design, so that they would miss important organs which allowed for slower death and greater pain and suffering. These little toys of humanity worked so well that even Saddam Hussein's son, Uday, had one. But, apparently, it didn't look like this one ...

I bring all of this up because it would appear that the financial mandarins of America are not only afraid of having their emergency treasure chest of TARP money dry up, but that they have assigned the name "Maiden" to the institutions they created to help transfer money to the failed financial sector. How appropriate.

More specifically, as Willem Buiter pointed out about seven months ago, the Federal Reserve created three "Maiden Lane" corporations. If we cut through all the legalese, at the end of the day these institutions forcefully extract and transfer money from the American taxpayer to America's collapsed financial institutions. For this reason I think it would be more appropriate to call these institutions Financial Iron Maidens, or Iron Maiden Lanes.

Instead of extracting confessions - and under the authority of 13(3) of the Federal Reserve Act - today's Financial Iron Maidens are forcefully extracting money from the American taxpayer ... and lots of it ($23.7 trillion to date). And like the Medieval model, modern day Financial Iron Maidens are propping up dying entities.

In real simple terms Iron Maiden Lane I made the debts of Bear Stearns good by taking Federal Reserve funds (i.e. taxpayer money) and using them to replace the toxic assets Bear Stearns had on the books. Iron Maiden Lane I then handed the cash over to JP Morgan Chase whose "innocence" in this mess, as we all know, made them prime candidates for taxpayer money.

JP Morgan Chase executives celebrated like any Grand Inquisitor who got what they wanted by giving each other bonuses and jacking up the credit card rates of America's card holders. American taxpayers, for their part, are getting the functional equivalent of this ...

Things worked out so well for JP Morgan Chase that Iron Maiden Lane II (for AIG loans) and Iron Maiden Lane III (for AIG default swaps) were created and used to make hundreds of billions in toxic and failed AIG contracts whole. If the market continues to slowly collapse we just might have to bring out the "skull splitter" ...

Good times. Whoever thought the instruments of torture could be so educational?

- Mark

UNDERSTANDING THE ECONOMIC MESS WE'RE IN

If you want to have a better understanding of the dynamics behind the 2008 meltdown, and don't have the time to read all the great books out there, try these FRONTLINE videos.

First up, we have Inside the Meltdown, which describes the lead up to meltdown, and what was happening in Congress during those ugly September through December 2008 days.

Next, we have Breaking the Bank, the story of the forced Bank of America and Merrill Lynch merger.

Finally, we have The Warning, which introduces us to those who saw it coming ... but were ignored.

- Mark

A CONSERVATIVE WHO GETS IT: GEORGE WILL

By way of Candi, I ran across this insightful Washington Post op-ed from life long Conservative, George Will. Those of you who have been reading this blog on a regular basis will be familiar with his argument.

But suddenly the Fed is undergoing radical "mission creep" ... Did the bank "lend" $29 billion to Bear Stearns, or did it, in effect, buy some of the most problematic securities owned by Bear? ... Today's argument is that Bear Stearns was so connected to the financial system in opaque ways that no one could guess the radiating consequences of its failure [i.e. "too big to fail"] ... The Fed has no mandate to be the dealmaker for Wall Street socialism. The Fed's mission is to preserve the currency as a store of value by preventing inflation ... The Fed should not try to produce this or that rate of economic growth or unemployment ...

But I especially like what George Will had to say next. With the bailouts, our nation's financial elites are - and should be paid like - civil servants.

If Congress cannot suppress its itch to "do something" while markets are correcting the prices of housing and money, Congress could pass a law saying: No company benefiting from a substantial federal subvention (which would now include Morgan) may pay any executive more than the highest pay of a federal civil servant ($124,010). That would dampen Wall Street's enthusiasm for measures that socialize losses while keeping profits private.

For those of you inclined toward cynicism, George Will is really painting picture of our nation's financial leaders as Wards of the State. We'll be sure to discuss on Saturday.

- Mark

MORE GOOD NEWS: "DEPRESSION-ERA PROVISIONS' AT THE FED

Why they're getting serious ...

What got people's attention was how quickly Bear Stearns, the nation's fifth largest investment bank, could go from a stock market value of about $3.5 billion ... on March 14 to being sold at the bargain-basement price of about $236 million two days later ... The Federal Reserve rushed in to take unprecedented actions. It provided a $30 billion line of credit to facilitate the sale and is employing Depression-era provisions that for the first time are providing direct Fed loans to investment banks.

Can someone remind me again ... What's the logic behind bailing out people and institutions who make stupid decisions? Oh, that's right. If things blow up Americans are going to start calling for "adult supervision" (i.e. regulation) of the economy.

And in the war of ideas between common sense regulation or corporate bailouts, we all know who's going to win that one, right?

- Mark