PRINTING MONEY (A.K.A. "QUANTITATIVE EASING") EXPLAINED

I attached this as a post script on my previous post, which dealt with social security and quantitative easing. It's too good to leave as an add-on.



- 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

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

PIRATE ECONOMICS & MARKET SOCIALISM

Imagine getting behind on your bills. Then imagine taking on debt through your credit cards to make up the difference. Now imagine how life would be if you could write-off that debt at the end of the year. What a sweet deal, right?


Well, guess what? This is exactly what the Bush administration's Treasury Department is allowing Corporate America's largest financial institutions to do, as they acquire collapsing financial institutions (with taxpayer funded bailout money, no less). Because of a simple five-sentence note that was added to Sec. 382 of the tax code (on Sept. 30th) it looks like the American taxpayer will fork over an additional $140 billion to Corporate America. Here's what was changed:

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

While the financial world was fixed on the Bush administration's request for a $700 billion bailout of the banking industry the Treasury Department issued a five-sentence notice, which attracted almost no public attention, effectively repealing "no write-off" provision of Sec. 382. And did I mention that the financial institutions are using bailout funds to purchase distressed firms?

So, this is what we have ... You and I pay for a bailout. The idea behind the bailout is to kick-start consumer lending by providing banks with taxpayer money. Instead, banks sit on the money and/or look for good deals in the form of collapsing financial institutions. Taxpayer dollars are used to purchase these institutions. Then we pay for the losses these firms bring with them.

Now, what was it that the Republican Ticket called it when you take taxpayer money and shift it from one sector of the economy to another? Oh, yeah ... socialism.

If you want to read what this all means, check out Naomi Klein's excellent article, which describes President Bush's "final pillage" of the American taxpayer - the bailout of America's financial institutions.

- Mark

SO, WHERE'S THE TRANSPARENCY?

By way of David Sirota, we find out that the Bush administration is already hiding how it is spending taxpayer dollars on the bailout. Monthly fees are being blacked out ...

... as are hourly wages ...


This certainly doesn't fit with Paulson's earlier promise to open things up by creating "a single, powerful financial regulator that demands transparency."

- Mark