HOW BANKS ARE RIPPING OFF THE AMERICAN TAXPAYER

I can't see how this is a surprise to anyone ...

In a recently released study from the Congressional Research Service we learn that the nation's largest banks profited off of our nation's financial crisis-era programs by borrowing cash for almost-zero percent interest. Then they lent it back to the federal government at substantially higher interest rates.

Yeah, that's right, deliberately low interest rate programs - designed and justified with the idea of getting money into the hands of ordinary middle-class Americans - were hijacked by banks who borrowed cheap money from Uncle Sam (a.k.a. the American taxpayer). They then showed their appreciation by hoarding it (for their rainy days).

And when it suited their interests they lent it back to Uncle Sam and the American taxpayer at higher rates.

Let's see, where I have seen this before ...

Oh, yeah. I've been writing about these dynamics for years now. So have others, like one of my favorites, Barry Ritholtz.

The worst part is that trillions - perhaps as much as $9 trillion - was spent, lent, credited, or guaranteed ("encumbered") by the Federal Reserve over the past years, but no one really knew where the money was going. Yeah, that's right, the people who are supposed to be following and tracking where our money goes are about as clueless as Chief Wiggins.

But nobody pays attention to this stuff because getting people to take a look at how America's economy really works (especially with Maiden Lane, TALF, and other trillion dollar corporate welfare giveaways) is akin to getting Americans to line up for a root canal. It might be good for them, but they simply won't do it.

So, we continue to live a lie, believing in the myth that the banks do the right thing and that "free markets work best."

Sigh ...

- Mark

WALL STREET'S TRILLION DOLLAR MONEY FLOOD

I've been saying this for some time now, but it bears repeating since most of America doesn't seem to be interested in much beyond Sarah Palin's latest Tweet and who's on American Idol. So let me make this perfectly clear, again: The $750 billion bailout that George W. Bush signed off on, and the subsequent $700 billion stimulus package that President Obama coughed up, were only the beginning.

Drops in the bucket, as it were.

What we should have been looking at - as I pointed out in my book, and have posted on my blog- are the trillions of dollars that were made available, loaned on the cheap, or effectively handed over to Wall Street's banks and other financial players.

Now, as a result of a forced transparency rider attached to the Wall Street reform bill (thank you Sen. Bernie Sanders) we have some numbers and names. Check out the trillions of dollars that were transferred to Wall Street by the Federal Reserve as our market collapsed ...

Goldman Sachs ... $600 billion
Bear Stearns ... $1 trillion
Citigroup ... $1.8 trillion
Merrill Lynch ... $1.5 trillion
Morgan Stanley ... $2 trillion

And this is just the easy stuff to pick out from the numbers. No wonder Wall Street's been making record profits. The U.S. taxpayer Federal Reserve essentially flooded Wall Street's accounts with cash so they could pay off each others bad bets.

This money, my friends, explains why Wall Street was able to pay 100 cents on the dollar for ill-conceived contracts, and then made good on billions in bonus payouts (to each other) for their incompetence.

 

At the same time, by looking at the figures on the Federal Reserve's new site we're able to confirm that the market collapse began a long time before September 2008. Worse, what we're able to see from the data is that the geniuses on Wall Street, and their errand boys in Washington, knew what was happening long before September 2008!

In fact, as I pointed out in December of 2007, Wall Street and the Federal Reserve began setting up the bailout "facilities" that would transfer trillions to Wall Street's biggest banks way back in 2007 (be sure to play with the graphs on the site to see what I mean).

But wait. It gets worse. Today the NY Times is confirming what I've been writing about for a while now.

Not only did Wall Street effectively extort money and guarantees from Washington but the Federal Reserve was either playing dumb or deliberately covering up for Wall Street during the bailout. Like Sargent Schultz in Hogan's Heroes, they knew or saw nothing as trillions were flying out the door.



Specifically, the NY Times is confirming that thousands of private firms and other market players who had their hand out received trillions in low interest loans AND other market guarantees from you and me the Federal Reserve during the bailout.

That's right. It wasn't just Wall Street's biggest banks that looted the treasury. Wall Street's biggest market players - a.k.a. America's super rich - also had their hand in our trillion dollar bailout cookie jar.

Try sticking this in your conservative friends' Christmas stocking, and then see if they want to hold a Tea Bag rally over it during our Christmas holidays. My guess is that they'll be more concerned over President Obama's birth certificate, or whine about more tax breaks for the super rich because they're the ones who "create jobs" in America.

Idiots.

- 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

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

MARKET DELUSIONS RUN DEEP, II

A couple of days ago a friend sent me this market analysis, written by two economists, who explain why Wall Street wanted to suspend market prices on certain products. This practice, which suspends the "market-to-market" (MTM) accounting method, essentially allows market players to reprice an asset that they hold if it's generating income, even if the underlying asset is under water (akin to a homeowner making payments on a house that is not worth what they owe on it).

The logic behind suspending market prices is to help keep those who "own" the product from having to provide more cash or collateral to backstop the asset. The idea is to prevent fire sales on Wall Street. All things being equal, this is a good idea.

But all things aren't equal.

I wrote about this on Friday, and made it clear that the suspension of MTM effectively allows the financial sector to suspend reality. Among the many concerns I have is that suspending MTM is being done for the wrong reasons, with virtually no strings attached, and with plenty of government guarantees. It virtually invites another market collapse.

MARK-TO-MARKET’S A RED HERRING
As Bloomberg’s David Reilly points out, MTM is little more than a diversion employed by America's biggest financial institutions “to dodge two big issues -- their reckless use of borrowed money to boost returns and their inability to make sound loans and investments.” According to Reilly, of the $8.46 trillion in assets held by the 12 biggest banks before the meltdown, only 29% of it was something that could be marked to market. In some cases it wasn't even that at that level. General Electric Capital - which is similar in size to the sixth-biggest U.S. bank - said that just 2 percent of it's assets could be marked to market.

What’s really dragging down the banks? According to Reilly, its loans made to consumers, businesses, and other institutions. Because loans for cars, credit cards, and other activities are held at their original cost, when they fail to pay out they act as a drag on the banks. When this happens they need to come up with more collateral, or loan loss reserves. The banks didn't have the money. This is what banks were up against.

Put another way, MTM is a red herring that diverted attention form the bad loans banks made.

Real investors know this. They’re worried about the loan portfolios and the bad investments of the biggest banks. Simply put, they didn’t trust what the biggest banks were doing, and where they were lending their money. As Reilly points out,

… the Big Four have a higher percentage of tough-to-value assets due to their investment- banking activities. In many cases, losses that stemmed from those holdings reflect banks’ decision to enter risky transactions or markets. In that case, mark-to-market simply recognizes the reality of those missteps.

The biggest banks were being dragged down by their short-sighted lending decisions and their own stupidity. Mark-to-Market helped expose this.

DUMPING THEIR STUPIDITY ON THE AMERICAN TAXPAYER
Apart from transparency, and exposing the short-sighted decisions of America's financial institutions, why should we continue to use market prices to gauge what a product is worth? Because suspending MTM effectively allows financial institutions to reprice toxic securities. This, in turn, allows them to tell their creditors, their customers, and the government “Look at how much our securities are worth now … we don’t need more collateral or loan reserves … And besides, based on our magically repriced asset, if we want we can get a government guarantee or a government backed loan (through Federal Reserve and Treasury Department sponsored programs).”

I won’t go into the details how this happens (take a look at TALF and Maiden Lane programs to get an idea). Still, it's says much that Bank of America is shoving more and more of it’s “nonconcurrent” (and probably most toxic) loans on to the backs of the American taxpayer.

Consider the following. Last year, only 2.7% of BofA’s failing loans were backstopped by the American taxpayer (student loan guarantees, etc). Today over 20.5% of BofA’s $61 billion bad loans are now the responsibility of the American taxpayer. Take a look at the numbers.

I can't tell (yet), but it seems to me that BofA is doing this because they’re now able to tell the government, “These loans aren’t really bad because the underlying asset is still worth $100 million. See, we just repriced the asset.”

Yeah, and watch me pull a rabbit out my hat … nothing up my sleeve. 

At the end of the day, MTM is not the real problem. The problem is how much banks borrowed against assets whose prices have collapsed. I'm not sure, but it seems to me that suspending MTM was just another way for America's biggest financial institutions to reprice assets so they could dump them on the government through taxpayer funded guarantees.

OK, SO WE SUSPENDED MARK-TO-MARKET
OK, so the Financial Services Accounting Board (FASB) suspended MTM last April (2009). This could be a good thing. Franklin D. Roosevelt did it, so it can't be all that bad, right?

What we've forgotten is that FDR backed away from MTM because he had other programs and regulations in place (or being put in place) to help insure that suspending MTM wouldn't get out of hand ... or lead to excessive borrowing, inflated books, or wild speculation in other areas. What this tells me is that if we're going to take market prices out of the market, as FDR did, we should also reinstate the 1933 Glass-Steagall Act, which kept commercial banks, investment banks, and insurance companies away from each other's business.

While we're at it we should also repeal the Federal Reserve's 3-2 decision in 1987 that allowed commercial banks back into the securities' market in a big way. We should also put some teeth into the Securities and Exchange Commission, pare back FDIC guarantees, limit brokered deposits, do something about credit default swaps, repeal FANNIE MAE's privatization, and put some teeth into limiting GSEs. And, for good measure, we should have brought back HOLC (instead of President Obama's disasterous, and bank-driven Making Home Affordable Program) and bolstered the hand of labor.

The point is, FDR suspended MTM only because there was a regulatory framework in place to help insure the stupidity we saw in the run up to meltdown in 1929 (and 2008) did not occur.

CONCLUDING COMMENTS ON MARK-TO-MARKET
At the end of the day, the market analysis from the two economists got it wrong. Bringing MTM back in 2007 didn’t cause the market to collapse. It simply exposed the market stupidity that was going on after we deregulated the markets.

Look, I have no problem with suspending MTM, like FDR did. But if we're going to suspend MTM, and channel the legacy of FDR in the process, we should also bring back FDR-like programs which worked to insure that bubbles and other market stupidity didn't get out of hand in the post-war era.

We want to keep in mind that one of the reasons that market players were able to create such fabulous "wealth" over the past 20 years was because no one really knew how much some of the instruments they created were worth. But their computer models did. This helps explain why so much toxic, over-leveraged, debt was created. Market players were living in a market world governed by computer models rather than the logic of the market. MTM helped expose this fairytopia.

Simply suspending MTM, without calling for the regulatory infrastructures (especially related to over leveraging) that helped make our economy such a success in the post-war era, is like throwing a group of kids into a candy store and saying "Do what you want, but don't eat too much". Without rules, things will get out of hand.

What many ignore in all of this is that if our financial institutions hadn't borrowed and lent so much against shady assets - or if they had kept enough capital reserves - they wouldn't be worried about MTM valuations. Hyman Minsky has much to say about this (I'll leave Minsky alone for now; you can read about Minsky in my book, or in the labels below). But in a deregulated environment, where the biggest market players are borrowing and/or betting on assets of dubious value, well ...

Banks and other financial institutions have been making stupid decisions for years. The series of bailouts and subsidies for industry is long and sobering (for my money, much of it starts with the bank bailouts in 1982, and the S&L debacle). What happened in 2008 should have been a wake up call for the industry.

If market players don’t like what they saw once MTM exposed what was happening after 2007 they should act like real market players. They shouldn’t be getting so deep into products that create such a big mess for them, and the American taxpayer. That’s the way real market players deal with uncertainty.

Pretty simple if you ask me.

- Mark

HERE COMES THE BAR TAB ...

I think one of the great frustrations for most Americans today is that we understand that we're getting screwed. The people who gave corporate America the favorable legislation they needed to wreck our economy, and the idiots on Wall Street who are stealing and looting from the U.S. Treasury, are still singing and dancing on the deck of the Titanic. They're acting as if the financial iceberg we just hit is no longer a concern because Captain Bernanke and his crew at the Federal Reserve think they see land on the horizon.

So Congress continues to play games with regulations that need to be created, or reinstated, while Wall Street continues to extract wealth from the American taxpayer.

Worse, as Tim Iacano at Iacano Reserch points out, we just gave Ben Bernanke another term at the Federal Reserve. We did this in spite of the fact that he clearly demonstrated that he had no idea that the financial icebergs floating in our economic waters before the market meltdown only represented a small portion of what was out there (what we see of icebergs generally represents about 10% of it's total mass).

If anyone needs reminding, this is what Captain Bernanke saw as he was asked about all the financial icebergs before the 2008 market collapse.



Well, hang on to your hats because it looks like we're taking on water again. Only this time it's just you and me, the American taxpayer, who's sitting in the sinking ship. But rather than floating us a life boat - or a yacht, like they gave Wall Street - the Federal Reserve is throwing the American taxpayer an anchor. And it's coming in the form more debt that we're going to have to pay for as we pick up the tab for the stupid decisions made on Wall Street. Here's how it's happening.

If you recall, not only did the Bush and Obama administrations commit $1.5 trillion in the form of TARP and stimulus program money, but the Federal Reserve and the Treasury Department have been working in tandem to commit trillions more guaranteeing and purchasing the failed business contracts that companies like AIG, Goldman Sachs, and Merrill Lynch wrote, but don't want on their books.

So, for example market players (they're not investors) would bundle up hundreds of thousands of debt contracts - car loans, credit card debt, mortgages, etc. - and repackage them as securities. Of course, in the process they paid themselves handsome fees and bonuses for writing these contracts. When they found gullible pension funds, foreign banks, and domestic institutions willing to buy these security contracts they did this over and over again (I say "gullible" because, as Brooksley Born pointed out during the Clinton adminstration - and as the FDIC made clear in 1998 - these markets were far from stable).

Still, as you can see from the graph below, contracts for unsecured or "non-agency" (no Fannie Mae or Freddie Mac backing) mortgage backed securities (MBS) reached over $1.1 trillion in value by 2005, and then climbed to $8.2 trillion in 2006 and $9 trillion in 2008 for all housing related securities.

Along the way came companies like AIG (among others) who insured these securities. And why not? Ben Bernanke was confident that the bank regulators were doing the right thing, "market fundamentals were strong," and housing prices don't fall, right?

Insurance + the sage words of Fed Chair Ben Bernanke helped make those who bundled up debt contracts feel secure. Since housing markets don't collapse why not write more security and insurance contracts, right? As a result, Wall Street and the financial titans of America actively went out and looked for more debt to write up, bundle up, and insure.

When people stopped paying their debts and mortgages (for whatever reason) what should have happened is that those who insured the securities should have paid up. Let me be clear here. When people stopped paying the debts and mortgages that made up the security what should have happened is that those who insured the securities should have paid up.

This is what happens in a real market economy. But it didn't. Why? I'd like to say because we don't have a real market economy. While this is true, in practical terms companies like AIG didn't have the money. In essence, they had been writing insurance contracts for products they didn't have the money to pay out.

Rather than have the holders of the securities that went bad lose their money, or force them to sue companies like AIG for their insurance money, big market players cried "market collapse." Instead of taking their lumps for diving into shaky debt markets Wall Street was able to convince the federal government to purchase, guarantee, or hold their bad deals.

How did they do this?

Between Congress and the President (both Bush and Obama) an environment had been created for the government (through the Federal Reserve) to loan money to the holders of failed or failing security contracts. In return the government the American taxpayer would accept as collateral the toxic securities that companies like AIG were supposed to have insured.

How much of this market crap is the government the American taxpayer currently holding? We're now sucking on trillions of dollars of downgraded and worthless crap. Check this out (don't be fooled by the term "Asset Side"; when it comes to MBSs they're ghost assets) ...

Yes, these trillions add up to much more than the $1.5 trillion President Bush and President Obama asked for and received from Congress. If you want to know what this looks like in real terms, this is what we're looking at ...

In practical terms, unless we do something on the jobs front and with regulations on Wall Street, we're looking at a long recession, higher taxes, inflation, and/or a mix of all three. It's not pretty.

So, the financial mandarins who caused this messs - by diving into debt markets, and insuring toxic crap they couldn't afford to pay out on - are now cruising away on their bailout yachts. You and me, however, are getting stuck with what's left of our debt-ridden ship. The names (Maiden Lane, TALF, etc.) of the bailout programs really don't matter at this point (names, explanations and amounts dumped on the U.S. taxpayer can be found here, with updates here). What matters is that in addition to losing jobs, suffering through pay cuts, home foreclosures, and enduring the uncertainty that wrecks families you and I are going to have to pay the tab for Wall Street's greed and stupidity.

A bunch of arrogant fools create a debt-driven bubble that they led everyone to believe they could manage. Then they dump it all on us, and get rich in the process. Does this seem right to you? 

- Mark

IGNORE REGULATION NOW, PAY (again) LATER

Yves Smith at nakedcapitalism has an interesting post on the new regulations proposed by the Federal Deposit Insurance Corporation (FDIC), the federal institution that insures your bank deposits. The goal is to put some limits on the stupidity and greed that helped bring down our markets, and threaten to do so again (because we've done nothing to alter behavior, and have left the same guys playing the same games).

These three suggestions stand out:

1. SEASON THE LOANS: Make sure mortgages are "seasoned" - or maintained with the loan originator - for 12 months before they can be passed on to other market players (who either packaged or cut up mortgages to be sold elsewhere).

2. REAL BUY-IN: Loan originators must maintain a 5% stake in the mortgage contract after it's sold. The ideas is that if loan originators have a stake, they will write better loans.

3. NO CDOfication: Collateralized Debt Obligations (bundling up loans that are sold as a security) are not permitted.

If these proposals are real I like them, as a start.

Now, I'm sure there are some people out there - like the parasitic sociopaths on Wall Street who got us in this mess - who are probably going nuts over the idea of regulating the market. I say to hell with them.

They should have learned something from the market collapse, but didn't. One thing they haven't learned (nor appreciate) is that, were it not for the trillion dollar bailout, many of the those complaining about financial and security regulations would now be in court fending off lawsuits, or in jail (because the bailout helped fill financial gaps - especially by allowing collapsed securities to be used as collateral for government loans - securities related lawsuits declined dramatically in 2009).

What these parasitic sociopaths fail to understand is that markets don't self-regulate. Market players don't always do the right thing. Consider the following.

Part of what started our economic landslide were unregulated over the counter (OTC) markets. Market players bought and sold complex financial instruments (derivatives) in OTC transactions that few understood, and even fewer could justify as a meaningful contribution to society. These transactions did little more than inflate claims on money between Wall Street power brokers, and created a massive bubble economy. We're now paying for these acts of greed and stupidity in the form of collapsed home values, increased unemployment, rising credit card rates, reduced tax revenue and higher government debt, etc.

How much did they inflate market claims? Brooksley Born, former head of the Commodity Futures Trading Commission (CFTC), said that by June of 2008 trading on the OTC markets surpassed $680 trillion. How big is this amount? The total amount of goods and services the U.S. is expected to produce this year is worth around $14 trillion. Six hundred and eighty trillion dollars, according to Born, is more than 10 times the gross national product of all the countries in the world, combined.

The worst part of this is that market players (they're not investors) were gambling with borrowed money, and providing insurance on products that they could not pay claims on because they didn't have enough capital on the books. One of the few people who saw what was happening in the 1990s and tried to do something about it was Brooksley Born. For her efforts - to secure information (which started with a concept release) and regulate the OTC market - Born  was beat up politically, and effectively muzzled, by Alan Greenspan, Bob Rubin, and Arthur Levitt.

You can read about Born's warning here, or you can watch "The Warning" on Frontline here. It really does a great job of explaining what we're up against. What's clear is that we can ignore the calls for regulation now, or pay (again) in the future.

- Mark

ET TU, OBAMA ... WHERE'S OUR TALF RELIEF?

A few posts back I suggested that President Obama needs to get on the side of Main Street and should enact an immediate payroll tax cut, spend hundreds of billions on infrastructure projects, and then go after Wall Street. I still think he needs to this. This Robert Reich post offers two other proposals that I like.

(1) Enact a second stimulus. It should mainly focus on bailing out state and local governments that are now cutting services and raising taxes, and squeezing the middle class. This would be the best way to reinvigorate the economy quickly.

(2) Help distressed homeowners by allowing them to include their mortgage debt in personal bankruptcy — which will give them far more bargaining leverage with morgage lenders. (Wall Street hates this.)

There's a reason why Wall Street hates the second proposal. It would force them to renegotiate with homeowners in a fashion that the big banks were able to negotiate with Washington when they had their economic meltdown. In many ways it would force the banks to consider negotiating TALF-like loans for homeowners, which would allow homeowners to get new loans by using their "legacy assets" as collateral.

More simply, it would allow homeowners to claim that, in their world, their house and their lives are too big to fail so they deserve help. Just like the big banks homeowners would be able to secure a new, lower value, loan on their home, as long as they stay in the home for a certain period. The loan would be made by the banks, and guaranteed by the federal government (like the TALF loans are). The argument, which was "all good" when Wall Street's financiers were going under, is not viewed as legitimate when it comes to Main Street. Nice.

Apparently, in the grand scheme of things, President Obama isn't going to put the effort into helping Main Street that he put into bailing out Wall Street. He's going to propose a three-year freeze on a large portion of discretionary spending, which will make it virtually impossible for him to stand up for Main Street's immediate needs, or it's interests. Economist (and frequent guest on my program) Mark Thoma calls it a "cheap political trick." I agree. This recession isn't your Great-Grandfather's depression. And, as Robert Reich points out, it's not the recessions Reagan or Clinton had to deal with either.

Of course Wall Street's happy as a bug in a rug because it signals that President Obama isn't going to put any teeth into taxing or reining in Wall Street's greed and stupidity. Main Street is the only sector that's going to take the hit on the recovery. This is all we need to know that President Obama's proposal stinks.

Like Julius Caesar, I get the strange feeling that our friends are stabbing us in the back, again. I'll have more to say on this later.

Sigh ...

- Mark

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

LEGACY ASSETS & TALF

OK, let's assume that you're upside down on your house. You owe more than your house is worth. Still, you walk into a bank and are able to get a government-guaranteed loan based on the promise that the house eventually will create enough wealth (equity) so that you can pay off the loan. Imagine, getting a $250,000 loan (it's market value today) on a house when you owe $350,000.

You can use the money for many things, until the market recovers. Better yet, since there's a government guarantee, you could even walk away and leave the bank with your house if the market doesn't recover. Heads I win, tails you lose.

Many of you who owe more than your house is worth are probably thinking, Wouldn't that be nice? Well, this is exactly what Wall Street's financial titans have access to with the Federal Reserve's $2.45 trillion legacy asset program (one of many such programs).

So, what's a legacy asset? In a few words, legacy assets are the fine sounding name that the financial sector and the Federal Reserve gave to debt investments that were not paying off after last year's market panic. In your world a legacy asset would be a house that is upside down. On Wall Street legacy assets are debt contracts (home loan mortgages, credit cards, or other debts) that were sold to market players as money making instruments, but are no longer being paid. They are bad debts.

In the real world, non-performing debts would be written off, and the lender (or the industry) would learn a very hard lesson about reckless lending. Not so in our Alice in Wonderland Economy.

Here's how we got to this point.

ROOTS OF "LEGACIES" ... ASSET BACKED SECURITIES
Starting about 25-30 years ago once-promising debt contracts were bundled up and sold to market players. Over time we would call these bundled up debt contracts "asset backed securities" (ABS). Market players purchased these ABS products because America's middle-class could always be counted on to make regular payments over the life of the loans they took out. Your credit card payment or your home mortgage payment are the real assets here.

Because of vigorous lobbying by the financial sector, bankruptcy and foreclosure laws were tightened up to help make sure this would happen (see especially the Bankruptcy Act of 2005). Over time market players got giddy and even started making big (and incredibly stupid) bets on these debt products paying off. These were trillion dollar bets that dwarfed the size of our national economy, and threatened our economic viability.

As we now know, things didn't work out too well. Credit and loans between financial institutions dried up. The market collapsed. People lost their jobs. Market players who made big stupid bets (called credit default swaps) didn't have the money to pay their bets. 

Market players and financial institutions who thought America's middle-class would make their (ABS) investments pay off went nuts. They even blamed consumers for not paying their bills, even when they couldn't pay the stupid bets they had made.

No matter how you looked at it, the ABS markets were in trouble.

FROM ABSs TO "LEGACY ASSETS"
This explains, in part, why the Bush and Obama administrations swung into action. With the help of the financial sector and the Federal Reserve they created a nifty sounding name to deal with collapsed ABS markets. They called them "legacy assets." They were still worth crap, but at least "legacy assets" sounded better than "liability" or what they were, dying assets.

Legacy assets ... it's a nice name for a dying instrument. Kind of like euthanasia. Except instead of killing someone painlessly - especially someone suffering from an incurable illness - we put our tumor riddled and dying financial assets on life support. Here's how.

To put America's legacy assets on life-support we created something called 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 ABSs. To better understand the concept let's use our home example from above.

If TALFs were available to America's home owners they should 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 by the Federal Reserve of New York (and, no, President Obama's Making Home Affordable Program doesn't even come close to TALF; it's a joke).

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 ABSs as collateral. If the collateral doesn't pay off then you and I are stuck with the bill (see "What happens if a borrower does not repay its loan?"). 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 (ABS) products, and another $1.45 trillion for non-performing assets in the housing market.

This is well above the $1.5 trillion that Presidents Bush and Obama made available via the Congress-approved bailouts.

WHAT WE'RE LOOKING AT ...
So, how well are things going? No one is quite sure, especially since there's no telling how bad markets really are because of our bailout-driven, re-inflated economy (not to mention the impact of mark-to-market garbage inflation). But we do know that the TALF terms are quite good for Wall Street, especially given the terms that the credit card and mortgage companies give middle-class America. Consider the following:

1. No Pre-Payment penalties (unlike many home loan contracts).
2. Principal rather than interest paid first.
2. TALF loans can continue if underlying product is paid off (TALF's % rate terms make this attractive).

Over 2009 we know that at least $50 billion has been lent out for "legacy assets" (via TALF) either in the form of mortgage backed loans or other debt-driven instruments (credit card debt, student loan debt, car loans, etc.). The Federal Reserve has already lent money for products that may not be worth the amount of the loan. Either way, market players have been able to generate cash for necessities - like their bonuses - and can walk away from the loan if the underlying product doesn't pay off.

Again, heads they win, tails we lose.

But the U.S. taxpayer is told not to worry about being taken for a ride. Somehow, rigged "stress" tests in a bailed out industry are supposed to give us confidence that "markets" will work and the Fed will get our money back. And besides, the only way these the product can fail - according to the NY Fed - is if "extremely unlikely economic circumstances" appear (you know, like in 2008).

With record bonuses continuing to occur, in a bailed out and undisciplined market, somehow this doesn't inspire confidence.

- Mark

UPDATE: For an overview of what productive, non-financial, legacy assets are supposed to look like click here.

GUARANTEEING WALL STREET'S SURVIVAL

Incredible. The Federal Reserve's Inspector General (it's top auditor-cop) is at a complete loss to account for some important, and very basic information. In this clip the Inspector General can't account for the whereabouts of some $9 trillion (with a "t") that has been encumbered (spent, lent, credited, or guaranteed) by the Federal Reserve over the past year.



As Congressman Grayson points out, in real numbers if we have $9 trillion that's unaccounted for that means you and I are on the hook for about another $30,000 each (i.e. in addition to the $40,000 we owe for our "regular" national debt).

It's this kind of ignorance and stupidity that has enabled a Wall Street bailout culture that is now being matched by proposed accounting rule changes that are largely toothless. Worse, these accounting rule changes amount to little more than favorable legislation for the market players who got us into this mess. In simple terms, these new accounting rules allow financial institutions to reprice formerly toxic instruments so that toxic asset "market losses" can be rebooked - for credit purposes - as healthy instruments.

Think about it this way (fair warning, this is oversimplified). If your neighbor is being foreclosed on, their mortgage is realistically a toxic asset (since it won't be paid). However, the bank that is holding the mortgage might actually have a "healthy" asset because the Federal Reserve (and TARP & TALF) has guaranteed or "insured" it for the bank. So, on the books - and for accounting purposes - it looks like the bank will get paid because of it's newly insured asset.

And just like that, we have a healthy asset that can be used for guaranteed loans and credits.

The only problem is that consumer credit is collapsing while your neighbor still loses their home (in addition to seeing their credit score wrecked for a generation). Families may be ruined in the process. Chances are your neighborhood will not fare well either as housing prices continue on their downward trend.

This, in a nutshell, explains why Wall Street is happy (stock rally) and why Main Street is skeptical (consumer polls). The federal government - i.e. you and me - is guaranteeing Wall Street's survival.

- Mark

WALL STREET'S MIDDLE FINGER

Oh, the incompetence of it all ...

One of the goals of the numerous bailout programs for the Obama administration is to help homeowners and other troubled borrowers. To do this the American taxpayer has ponied up trillions in funds and other guarantees. The idea is to save banks and other financial institutions so that they, rather than the federal government, can extend credit and renegotiate with those in financial trouble. It doesn't look like this is going to happen any time soon. Here's why.

According to this Bloomberg.com article the Private-Public Investment Partnership (PPIP), which was designed by the Secretary of Treasury to get the truly toxic instruments off of the books of the banks, has hit a snag. PPIP, which is designed to put credit into the system by purging the truly toxic ("legacy") assets from the system is being undone by the financial sector's new cojones. Simply put, after receiving trillions in government bailout funds, and other guarantees, market players don't want to sell their toxic instruments.

In essence they are saying "we've gotten enough taxpayer money and federal guarantees - and have seen our situation stabilize - so we're going to wait for a better deal."

But wait, it gets better.

Today Bloomberg.com is reporting that Tim Geithner's Term Asset-Backed Securities Loan Facility program not going to be all that it can be. TALF funds are essentially Federal Reserve backed loans (for certain securities) that are designed to put credit back in the market by putting money in the hands of lenders.

The problem is that market players are not happy that the range of security "assets" that they can borrow against - which currently includes SBA loans, credit card loans, student loans, etc. - may not include real estate (because of problems associated with valuation). Put more simply, market players are saying "we won't participate in TALF if we can't borrow against the toxic mortgage securities that we helped create."

So this is what we have. In the PPIP case market players who have been stabilized by taxpayer dollars are simply holding out "until they are repaid at full value" for the toxic instruments that they helped create. In the TALF case market players are saying if the federal government wants them to put taxpayer-backed credit into the system the federal government needs to use taxpayer money to guarantee the toxic assets they want to borrow against.

If you're an American taxpayer, a pampered and bailed out Wall Street has just given you the middle finger.

- Mark