Banks Exiting TARP Is Bad News

Wall Street giants such as Goldman Sachs and JP Morgan seem to be anxious to throw off the government shackles of the TARP program. On the face of it, this seems to be good news. After all, isn't it better that the banks face the discipline of the marketplace rather than corporatist government aid?

However, the short-run effect of such a move could prolong the current recession. The US banking system is still woefully undercapitalized for the size of its balance sheets. The battered capital ratios must be boosted so that lending to the wider economy begins growing again. If banks instead shrink their capital base in order to exit TARP, this will delay the credit expansion that any recovery is reliant upon.

The TARP legislation provides that banks can only leave the prgram with the government's permission. It is not enough to just pay the money owed back to the government. The US government should take advantage of what is written in the legislation.

The US Treasury should not let banks out of the TARP program until they have enough capital for the desired level of lending that the government wants. This is probably the best way to "force" the banks to use their money to start lending again and not use the money for lavish bonuses.

Exiting Quantitative Easing

Currently there are many investors who wonder how central banks will eventually exit from their quantitative easing policies. One of the main functions of quantitative easing currently is, of course, to help governments fund their ever-increasing debt burdens.

What concerns investors is what will happen when economies recover (and they will eventually). In order to reverse quantitative easing, central banks will need to shrink their balance sheets by reselling bonds. Most likely at a time of economic recovery, commerical banks will follow suit. Yields will leap higher in the ensuing bond glut and so too will interest rates.

In order to compensate for higher government borrowing costs, governments will need to slash spending. This is what Japan did in 2006. Economies will then face a double tightening - from higher interest rates and from lower government spending. That raises the likelihood of a double-dip recession.

Unless, of course, central banks do not tighten. But then inflation would set in. This is the most likely scenario - governments will not allow their central banks to tighten and a wave of high inflation will ensue. This is especially true in the United States.

Financial Stocks Earnings Are Phony

I would like to speak directly to those people who are currently buying financial stocks based on their "fabulous earnings". How dumb are you? Haven't you lost enough of your money to Wall Street? If you really insist on giving your money away, please contact me directly and I will gladly accept your "donation".

Let's take a closer look at the biggest Wall Street problem child - Citigroup - and their earnings. Its global credit card revenues were down fell by 10%, its consumer banking revenues were down by 18% and its Global Wealth Management revenues were down by 20%.

However, Citigroup overcame all of that with $4.69 billion in revenues from its fixed income trading. Here is where the fictional earnings came in. If you dig into the quarterly report, you will see that fixed income trading revenues got a $2.5 billion "booster".

The "booster" was a net $2.5 billion positive 'credit value adjustment' on derivative positions, excluding monoclines, mainly due to the Widening of Citi's own Credit Default Swaps Spreads! A credit value adjustment is the credit risk premium of a derivative product.

So once you figure everything out, you learn that Citi "made" $2.5 billion on a derivatives position designed to profit when the company's own credit default swaps spreads widen! Basically, Citi profited because it made a bet that the cost of insuring itself against a default would go up!

Following this logic to its conslusion, the closer that Citi gets to bankruptcy - the more money it would "make" on its derivatives! This should show everyone how phony their quarterly "earnings" number was.

Ben Bernacke Has It All Wrong

An academic paper from economists at Harvard and Princeton concludes that Ben Bernacke has it all wrong. The paper is called The Pricing of Investment Grade Credit Risk During the Financial Crisis. The paper was written by Jakub W. Jurek, Joshua D. Coval and Erik Stafford.

The paper concludes that "recent credit market prices are highly consistent with fundamentals". The economists say "A structual framework confirms that bonds and credit derivatives should have experienced a significant repricing in 2008 as the economic outlook darkened and volatility increased. The analysis also confirms that severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing".

In plain English, this means that the entire effort by Ben Bernacke's Fed and Tim Geithner's plan to restore normal pricing to the credit markets is based on a false premise. That premise is that credit market pricing is "abnormal".

The assets are simply not worth what the bankers "wish" they were worth. That's why the bankers pushed so hard for the recent change to mark-to-whatwesayitsworth. The study concludes that the major banks in the US are insolvent.

The paper also concludes that following: The bailouts are just a big transfer of wealth; Efforts to bring buyers and sellers together in the credit markets don't work. The paper says that "any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities".

And finally the paper says "Policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay - and perhaps even worsen - the day of reckoning".

The only questions that remain is how long can Bernacke/Geithner delay this day of reckoning and how much worse are they making the situation?

Wall Street's Recent Rally Coming to a Close

It looks to me that the recent vigorous rally on Wall Street is coming to a close. It looks like it was a typical bear market rally - short and sharp.

Why do I say this? The first reason is simply my contrarian instincts. Just turn on CNBC for a minute and all the bullish talking heads are back in full force. Not a good sign. I have also noticed a lot more bulls at sites such as Seeking Alpha spouting off. These bulls are actually laughing at the bearish arguments and saying that the US dollar and Treasuries will skyrocket while real assets like gold will plummet. Again - not a good sign for the longevity of the rally.

Let's look also at the major reason for this recent rally. This reason was the relaxation of the accounting rules for the banks. So-called investors were actually celebrating the fact that the banks were able to continue lying about the amount of losses in their loan portfolio?? They were celebrating the fact that there was an attempt to further bury the truth about banks - that many major banks are insolvent??

The stupidity of people never ceases to amaze me...................

Obama - No Real Change

Despite hopes that the Obama Administration would bring about some desperately changes on the economic front, nothing much has changed from the Bush Administration. Economic policy continues to be set by the powers that be on Wall Street.

Just look at President Obama's two key economic appointments. First is Treasury secretary Tim Geithner who many people are now seeing as a poor choice. After all, he was the head of the New York Fed and was supposed to be overseeing Wall Street. Mr. Geithner was either too inept or too corrupt to stop Wall Street bigwigs from robbing the country blind.

Then we have President Obama's top economic advisor - Larry Summers. Last year, Mr. Summers received $5.2 million in compensation from hedge fund D.E. Shaw and another $2.77 million from speaking engagements for various firms such as Wall Street giant, Goldman Sachs.

I'm sure that when he deliberates on important economic matters, Mr. Summers will be looking out for the "little guy". Or that he will object to many billions more being handed over, with no questions asked, to Wall Street.

The Quiet Coup Article in the Atlantic

I urge everyone to read an article titled The Quiet Coup by Simon Johnson in this month's Atlantic magazine. Mr. Johnson is a professor at MIT's Sloan School of Management and he was also the chief economist at the IMF during 2007 and 2008.

The article goes into great detail about the current financial crisis. Professor Johnson says that we face two major interrelated problems. The first problem is a desperately ill banking sector that threatens to choke off any incipient economic recovery that the fiscal and monetary stimulus might generate.

The second problem is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support. Big banks, it seems, have only gained political strength since the crisis began.

With the financial system so fragile, the damage that a major bank failure could cause is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington.

Gee, what a suprise - Wall Street banks and exploitation! The article goes on say that if this were any other country, the banks would have been nationalized by now. That is the solution - remove the scum bag senior management and nationalize the banks now!

Greenspan Is Guilty as Charged

The former chief economist for the Bank of International Settlements, William White, has been arguing for many years now that the root cause of our current economic turmoil lies squarely at the feet of the Federal Reserve and Alan Greenspan.

Here is some of what Mr. White wrote years ago: "How, for example, could a huge shadow banking system emerge without provoking clear statements of official concern? Perhaps it is simply that no one saw any pressing need to ask hard questions about the source of profits when things were going so well". Sad, but true!

Here is more of what Mr. White wrote years ago: "Virtually no one foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the 1990s. Each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators (including Alan Greenspan, I may add) to suggest that a 'new era' had arrived".

These comments re-enforce in my mind the total worthlessness of both economic forecasters and also technical market analysts. All the stock market chartists completely missed the 1987 stock market crash and also the severity of the current decline. People would probably do better consulting their daily horoscope than Wall Street chartists and technicians.

In fact, in 2003 Mr. White pleaded directly with Alan Greenspan to change course. Of course, he was fluffed off as someone who was trying to rock the boat of the US/Wall Street. Actions taken then and perhaps a short, shallow recession would have probably headed off the dire problems we face today.