The Mother Of All Ponzi Schemes

You've Been Approved!

Another Day, Another Skeleton

And we've only just begun to take an inventory of the closet.

The Office of Thrift Supervision’s western regional director, Darrel W. Dochow, allowed IndyMac Bank to receive $18 million from its parent company on May 9 but to book the money as having arrived on March 31, according to the Treasury Department’s inspector general, Eric M. Thorson. The ilegally backdated capital infusion allowed IndyMac to plug a hole that its auditors had belatedly found in the bank’s financial results for the first quarter. If IndyMac had not been able to plug that hole retroactively, its reserves would have slipped below the minimum level that regulators require for classifying banks as well capitalized.

If IndyMac had lost its well-capitalized status it would not have been allowed to accept "brokered deposits" from other financial institutions. Brokered deposits are typically high-yielding certificates of deposit arranged by brokers and sold to savings and loans. IndyMac relied heavily on brokered deposits, which amounted to $6.8 billion or 37 percent of its total deposits last spring.

I wonder how many heads will roll. Zero, most likely.

John M. Reich, director of the Office of Thrift Supervision, said he had removed Darrel Dochow from his job pending the results of a separate inquiry.

"Planet Finance"

Angry that the world is so unfair? Infuriated by fat-cat capitalists and billion-bonus bankers? Baffled by the yawning chasm between the Haves, the Have-nots - and the Have-yachts?

You are not alone. Throughout the history of Western civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the "real" economic activities of agriculture and manufacturing.

This hostility has three causes. It is partly because debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter. It is partly because financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather than stability. And it is partly because, for centuries, financial services in countries all over the world were disproportionately provided by members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust.

Despite our deeply rooted prejudices against "filthy lucre," however, money is the root of most progress. To adapt a phrase from Jacob Bronowski (whose marvellous television history of scientific progress I watched avidly as a schoolboy), the ascent of money has been essential to the ascent of man. Far from being the work of mere leeches intent on sucking the life's blood out of indebted families or gambling with the savings of widows and orphans, financial innovation has been an indispensable factor in man's advance from wretched subsistence to the giddy heights of material prosperity that so many people know today.

The evolution of credit and debt was as important as any technological innovation in the rise of civilization, from ancient Babylon to present-day Hong Kong. Banks and the bond market provided the material basis for the splendours of the Italian Renaissance. Corporate finance was the indispensable foundation of both the Dutch and British empires, just as the triumph of the United States in the 20th century was inseparable from advances in insurance, mortgage finance and consumer credit. Perhaps, too, it will be a financial crisis that signals the twilight of American global primacy.

Behind each great historical phenomenon there lies a financial secret, and this book sets out to illuminate the most important of these. For example, the Renaissance created such a boom in the market for art and architecture because Italian bankers like the Medici made fortunes by applying Oriental mathematics to money. The Dutch Republic prevailed over the Habsburg Empire because having the world's first modern stock market was financially preferable to having the world's biggest silver mine. The problems of the French monarchy could not be resolved without a revolution because a convicted Scots murderer had wrecked the French financial system by unleashing the first stock market bubble and bust. It was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon at Waterloo. It was financial folly, a self-destructive cycle of defaults and devaluations, that turned Argentina from the world's sixth-richest country in the 1880s into the inflation-ridden basket case of the 1980s.

Read this book and you will understand why, paradoxically, the people who live in the world's safest country are also the world's most insured. You will discover when and why the English-speaking peoples developed their peculiar obsession with buying and selling houses. Perhaps most importantly, you will see how the globalization of finance has, among many other things, blurred the old distinction between developed and emerging markets, turning China into America's banker - the Communist creditor to the capitalist debtor, a change of epochal significance.

At times, the ascent of money has seemed inexorable. In 2006 the measured economic output of the entire world was around $47-trillion. The total market capitalization of the world's stock markets was $51-trillion, 10% larger. The total value of domestic and international bonds was $68-trillion, 50% larger. The amount of derivatives outstanding was $473-trillion, more than 10 times larger. Planet Finance is beginning to dwarf Planet Earth.

And Planet Finance seems to spin faster too. Every day two trillion dollars change hands on foreign exchange markets. Every month seven trillion dollars change hands on global stock markets. Every minute of every hour of every day of every week, someone, somewhere, is trading. And all the time new financial life forms are evolving. In 2006, for example, the volume of leveraged buyouts (takeovers of firms financed by borrowing) surged to $753-billion. An explosion of "securitization," whereby individual debts like mortgages are "tranched" then bundled together and repackaged for sale, pushed the total annual issuance of mortgage backed securities, asset-backed securities and collateralized debt obligations above $3-trillion. The volume of derivatives -- contracts derived from securities, such as interest rate swaps or credit default swaps (CDS) -- has grown even faster, so that by the end of 2007 the notional value of all "over-the-counter" derivatives (excluding those traded on public exchanges) was just under $600-trillion. Before the 1980s, such things were virtually unknown.

New institutions, too, have proliferated. The first hedge fund was set up in the 1940s and, as recently as 1990, there were just 610 of them, with $38-billion under management. There are now over seven thousand, with $1.9-trillion under management. Private equity partnerships have also multiplied, as well as a veritable shadow banking system of "conduits" and "structured investment vehicles" (SIVs), designed to keep risky assets off bank balance sheets. If the last four millennia witnessed the ascent of man the thinker, we now seem to be living through the ascent of man the banker.

- From The Ascent Of Money by Niall Ferguson. Copyright © 2008 by Niall Ferguson.

Burnin' The Greenback Down

Lately, the currency markets have been extremely volatile. The Japanese Yen's relative strength has dominated world currencies. The U.S. Dollar's spiked off of its all time low of a few months ago. The dollar/pound exchange rate and dollar/euro exchange rate has been a roller coaster. Now the dollar has resumed its decline, and the Fed seems resiugned to burning the dollar to the ground.

Talks of a Bretton Woods II continue. Will major currencies undergo a major remodel? Will the dollars standing as the reserve currency end? Will gold regain its place in world of paper currencies?

From the IMF website:

Special Drawing Rights (SDRs)

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies.

Why was the SDR created and what is it used for today?

The Special Drawing Right (SDR) was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets— gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.

However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

Today, the SDR has only limited use as a reserve asset, and its main function is to serve as theunit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

SDR valuation

The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies,today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted daily on the IMF's website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world's trading and financial systems. In the most recent review in November 2005, the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which were held by other members of the IMF. These changes became effective on January 1, 2006. The next review by the Executive Board will take place in late 2010.

The SDR interest rate

The SDR interest rate provides the basis for calculating the interest charged to members on regular (non-concessional) IMF loans, the interest paid and charged to members on their SDR holdings, and the interest paid to members on a portion of their quota subscriptions. The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.

SDR allocations

Under its Articles of Agreement, the IMF may allocate SDRs to members in proportion to their IMF quotas. Such an allocation provides each member with a costless asset on which interest is neither earned nor paid. However, if a member's SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall. The Articles of Agreement also allow for cancellations of SDRs, but this provision has never been used. The IMF cannot allocate SDRs to itself.

There are two kinds of allocations:

General allocations of SDRs have to be based on a long-term global need to supplement existing reserve assets. General allocations are considered every five years, although decisions to allocate SDRs have been made only twice. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72. The second allocation was distributed in 1979-81 and brought the cumulative total of SDR allocations to SDR 21.4 billion.

A proposal for a special one-time allocation of SDRs was approved by the IMF's Board of Governors in September 1997 through the proposed Fourth Amendment of the Articles of Agreement. This allocation would double cumulative SDR allocations to SDR 42.8 billion. Its intent is to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund after 1981—more than one fifth of the current IMF membership—have never received an SDR allocation. The Fourth Amendment will become effective when three fifths of the IMF membership (111 members) with 85 percent of the total voting power accept it. As of end-March, 2008, 131 members with 77.68 percent of total voting power had accepted the proposed amendment. Approval by the United States, with 16.75 percent of total votes, would put the amendment into effect.

Happy Days Are Here Again!

Inflation is yer friend, mmmkay?

No, really...

0.00% - 0.25%

Japan - Version 2.0

I hope it's less buggy than version 1.0

The Federal Reserve cut its benchmark rate to a range of zero to 0.25% today. The cut surprised most economists who were expecting the Fed to lower rates to 0.5% but since the Fed's rate was effectively zero anyways, Bernanke just said "What the heck, let's throw 'em a curveball." The Federal Reserve has never set a range for interest rates and has never cut to lower than 0.50%

If this rate cut doesn't work, the Fed will try leaving pallets of cash outside the doors of the 12 Federal Reserve banks, free for the taking. The cash giveaway will work like the Halloween honor system where your anti-social neighbor would leave a bowl full of candy next to a sign asking you to please just take one, only the Fed will encourage everyone to grab the cash with both hands or wheelbarrows.

Now that the benchmark rate is zero, the next trick in Bernanke's bag is full blown quantitative easing. The Fed will be buying Treasuries, which is sorta like opening a restaurant where you're both head chef and customer...

Popular Delusions

The market is a forward looking mechanism that discounts the future.

Is it, and does it? If so, what was the market predicting in the middle of 1974? What was it predicting in October of 1987. January of 2000? October of 2007? October of 2008?

Japans Nikkei index reached a peak of 39,000 in 1989. Less than three years later the index had dropped to just over 14,000, a drop of more than 60%, and has only managed to climb back to half of the 39,000 peak a handful of times. Almost twenty years after Nikkei's Mt. Everest, the index trades at only 8,500 or 22% of its former self.

What was Japan's market looking at in 1989?

Ecuadors Rubber Checks

Ecuador defaulted on its debt for the second time in less than 10 years.

President Rafael Correa, who earned his Master of Science in Economics and his Ph.D. in Economics at the University of Ilinois said, "If we have to face international litigation due to this, we will."

Correa, after smoking his morning banana peel, gave an order to not make a $31 million interest payment, due on Monday, on 2012 global bonds, saying the debt was illegal.

Investors who helped finance the country's economy by buying government debt will now take Correa's middle finger as payment.

As an OPEC member, Ecuador will most likely tap Iran and Venezuela for funding. I assume they're not liking the taste of $40 crude, although lower energy prices probably help their banana exports.

Turn Out The Lights

The party’s over
It’s time to call it a day
They’ve burst your pretty balloon
And taken the moon away
It’s time to wind up the masquerade
Just make your mind up the piper must be paid

The party’s over
The candles flicker and dim
You danced and dreamed through the night
It seemed to be right just being with him
Now you must wake up, all dreams must end
Take off your makeup, the party’s over
It’s all over my friend.

************

Snuggle up to the Kondratieff Winter.

Our New Mantra

When inefficiency is rewarded, efficiency gets punished. The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished. The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

When inefficiency is rewarded, efficiency gets punished.
The result is ALWAYS increased inefficiency.

It looks like the Treasury is going to reverse course and dole out some of the TARP/TALF taxpayer money to GM and Chrysler. Chalk up another one for the bad guys.

The market defied the laws of physics and closed higher.

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Haven Trust Bank of Georgia, and Sanderson State Bank of Texas were seized by federal regulators today making them the 24th and 25th bank failures of 2008.

Auto Bailout Verdict: FAIL

After passing last night in the House, the auto bailout was voted down tonight by the Senate.

The UAW decided to play chicken, lost, and is now beaks, gizzards and feathers flying all over the place. It basically went like this:

- Congress asked the United Auto Workers to pull their heads out of their asses, and accept wages that were similar to those of Honda, Toyota, Nissan and BMW workers.
- The United Auto Workers said "Gosh, no way in heck, we're what makes this country great. We're the backbone of this country. We deserve more. We sling the best rachets."
- Congress said, "Fuck off, then. How's no job taste."
- The United Auto Workers said, "Whoops. Oh no. Our plan backfired."

Slow, slow golf clap for UAW President Ron Gettelfinger.

GM will file for Chapter 11 bankruptcy protection before the end of the month. This is the beginning of another huge leg down.

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Bernard Madoff, former Nasdaq Stock Market chairman and founder of Madoff Investment Securities was arrested and charged with securities fraud. Apparently Madoff told senior employees that he was "finished," that "it's all just one big lie....basically, a giant Ponzi scheme."

Initital estimates put the losses at $50 billion. Somewhere, Charles Ponzi is taking a dirt nap and smiling. If the allegations are true and his investors have in fact been wiped out, may Bernie Madoff take his dirt nap shortly.

This should do wonders for investor confidence.

Poor GMAC

GMAC, the financing arm of FAILed car maker General Motors, has FAILed to magically turn itself into a bank holding company.

How does the financing arm of a failing auto maker ALSO deliver massive truckloads of FAIL? It decides to supplement its SUV loan business with some sweet, sweet subprime homeloan action.

Naturally, when you're an auto loan company like GMAC (or a credit card company like American Express, or a light bulb company like GE, or an investment bank like Morgan Stanley) and you're on the verge of BK, transforming yourself into a bank holding company so you can get your share of the taxpayer dollars being handed out via TARP or TALF is the natural progression of your business plan.

Sadly, today GMAC failed to raise the $30 billion in capital which was required to become a bank holding company, so it will most likely file for Chapter 11. Who woulda thought that you'd be required to raise money before you could ask for a handout? It's a strange, strange world.

I wonder, what's the notional value of all the credit default swaps written against GMAC's debt? I'm sure we'll find out soon enough.

Back on the rollercoaster.

Less Thank Zero

The three-month treasury bill got more stupid than keeping your cash in your mattress today, as the yield dropped into negative territory for the first time in history.

So if you bought $1 million worth of three-month bills at today’s negative discount rate of 0.01%, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56.

That's right, people are paying the U.S. Treasury to keep their money for 3 months. Paying for the pleasure of just getting most of it back in 90 days.

I smell another bubble. It might be time to short treasuries.

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In related news, the credit-default swap rates on U.S. Treasury debt continue to rise. The idea of the United States defaulting on its debt is more than a little bizarre.

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In related news, Ecuador is on the verge of defaulting on $3.9 billion in government bonds. Ecuador's S&P rating is CCC-, the junkiest of junk and just one step above default...

Extra, Extra Read All About It!

Tribune Company, America’s largest employee-owned media company, operating businesses in publishing, interactive and broadcasting, including ten daily newspapers and commuter tabloids, 23 television stations, WGN America, WGN-AM and the Chicago Cubs baseball team announced a bombshell full of FAIL today.

And 'employee-owned' means employees who received stock as bonuses, incentives and other forms of compensation are feeling incredible pain right now, which is tragic. Shares of Tribune Co. fell by 94% today from $17.50 to $1.07.

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Most likely, the auto maker bailout will be announced tomorrow. So, as a taxpayer, my distressed debt arbitrage portfolio is getting stronger (Fannie Mae, Freddie Mac, AIG, GM, Ford, Chrysler). If we can get a technology company, an energy company and maybe a commodity company to need a bailout, average Joe's portfolio will be nicely rounded out. Good times.

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Gold backwardation? Say it with me. Gold back-ward-a-tion.

Rick Wagoner Voted Off Island?

Outwit, outlast, outplay?

Satements from Senator Chris Dodd called the fate of GM CEO Rick Wagoner into question. When asked about round two of the "Big 3" Congressional hearings Dodd said, "I think it's clear GM is in the worst shape." Senator Dodd was in agreement with other lawmakers who suggested that GM replace Rick Wagoner and bring in a new management team.

"I think he has to move on," Dodd said.

Agreed. Bring me your torch. Rick Wagoner will be the next CEO voted off Survivor Island.

"It's Not A Too-Mah!"

"Get to da chopa!"

"I'm a cop you eeediot!"

Arnie has issued a fiscal State Of Emergency. With a growing budget deficit and frozen credit markets, California may issue IOU's to vendors for the second time in history. When was the first time? Wait for it... wait for it... the Great Depression.

"To those critics who are so pessimistic about our economy, I say, don't be economic girlie men!" - Governator Schwarzenegger.

Now I'm off to the gym to hammer my pecs and blast my gluttes.

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One of the best gold related articles I've read in a long time.

The Manipulation of Gold Prices

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Yesterday, First Georgia Community Bank was closed by regulators, making it the 23rd bank to board the FAILboat this year.

Will Work For Plasma TV

The U.S. lost 533,000 jobs in November, the worst monthly decline since 1974 and the 5th worst monthly loss in history. The official unemployment rate rose to 6.7%, with unofficial numbers between 10 and 11% (the official number does not include people who have stopped looking for work and does not take into account part-time workers who want full-time work but cannot find it).

The national foreclosure rate rose to 2.9%, with an additional 6.9% of home mortgages delinquent. In short, almost 1 in 10 homes is either late or in foreclosure.

In the face of these two pieces of very bad news, the market shrugged it off and rallied. This has to be seen as a very, very good sign. This is the third time in the last couple of weeks that the market has digested bad news and rallied in the face of it. Does it mean that things have turned around? I doubt it. But, I do think it's the first sign of light at the end of the tunnel.

Lunatics Run The Asylum

Republican Senator Bob Bennett from Utah won the award for the dumbest monkey on the planet today when, in the U.S. auto maker Congressional hearings, he said that the problem was that Ford, GM, Chrysler etc. made automobiles that were too well built and lasted too long so people didn't need to replace them often enough.

That's right. That's what he said.

I'm. Fucking. Speechless.

If morons like this remain in charge, I'm convinced that we are doomed.

The Not-So-Big Three...

...are in Washington again, threatening doom and the fires of hell if we don't save them. It's true:

"There isn't a Plan B," said Chief Operating Officer Fritz Henderson. "Absent support, frankly, the company just can’t fund its operations." Without help, he warned, "the company will default in the near term, very likely precipitating a total collapse of the domestic industry and its extensive supply chain, with a ripple effect that will have severe, long-term consequences to the U.S. economy."

Grab your soup cup (for the soup lines) and run for the fucking hills screaming "Fire! We're Doomed!"

Remember just two weeks ago when Wagoner flew to his corporate jet to Washington asking for $10 billion? Now it's $18 billion. I'm not sure what's changed in two weeks but why stop at $18. If could wave a wand I'd give Rick Wagoner all the money in the world. Right before I kicked him right in the balls and took the money back.

BREAKING NEWS: U.S. In Recession

This just in... NBER (National Bureau of Economic Research) announced today that the U.S. has been in a recession since December of 2007.

O, rly?