Daily Digest

Daily Digest - February 23

Tuesday, February 23, 2010, 10:54 AM
  • Wall Street's Bailout Hustle
  • Investment Banksters Reap Windfall Profits They Collect On CDS As Markets, Nations Fall
  • A Desperate FDIC Begs Americans To Open Savings Accounts During "America Saves" Week
  • Buffett's Partner: 'It's Over' for U.S. Economy
  • Republicans Pushing To Count GSE Debt Toward Statutory Debt Limit May Be Surprised To Find Real Debt-To-GDP Ratio Is 130%, And That Greece Is Amateur Hour 
  • The Puzzle of Coal: American Ingenuity in the Cleaner Energy Mix
  • T. Boone Pickens Bets Cramer $100 He Can Make A Killing Manipulating Energy Regulations In His Favor
  • Oil Above $80 As Traders Eye Low Interest Rates
  • New Jersey's Clean-Energy Advocates Fear Job Losses
  • Energy Inventor Makes Bold Promise With 'Bloom Box'
  • Gasoline Heading Above $3/Gallon By This Summer
  • California solar project gets $1.4bn U.S. guarantee
  • Operator of Monju fast reactor seeks resumption talks with Fukui Pref.
  • Nuclear industry official says U.S. falling behind
  • Much At Stake As Decision Nears On Endangered Status Of Sage Grouse

Economy

Wall Street's Bailout Hustle (Re-post, Jeff B.)

On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis.

Investment Banksters Reap Windfall Profits They Collect On CDS As Markets, Nations Fall (Claire H.)

When Wall Street planned and executed the U.S. housing-bubble (and all its related scams), it destroyed the lives of tens of millions of Americans. Then, when it subsequently 'crashed' global markets, it inflicted hardship on most of the world. But the Oligarchs were just getting started.

A Desperate FDIC Begs Americans To Open Savings Accounts During "America Saves" Week (Nickbert)

The question of just how underfunded US banks are if the FDIC has to resort to such fund raising gimmicks is obviously irrelevant. Well, not quite - luckily, the FDIC will come out this week with its quarterly banking update so we can all see how many tens of billions the DIF burned through in the past 3 months.

Buffett's Partner: 'It's Over' for U.S. Economy (Walt & Maria)

Charlie Munger, Warren Buffett’s longtime business partner in Berkshire Hathaway, warns in a new column that the U.S. economic empire is crumbling before our eyes, thanks to federal debt and poor planning.

Republicans Pushing To Count GSE Debt Toward Statutory Debt Limit May Be Surprised To Find Real Debt-To-GDP Ratio Is 130%, And That Greece Is Amateur Hour (Davos)

A new proposal by House Republicans, lead by Rep. Scott Garrett (R., N.J.), is seeking to address changes to Fannie and Freddie accounting, along the lines of what has been previously proposed by Zero Hedge, and to not only include the GSE's losses as part of the Federal budget, but to also count the debt from the two mortgage zombies toward the nation's total statutory debt limit.

Energy

The Puzzle of Coal: American Ingenuity in the Cleaner Energy Mix (mooselick7)

Last week, President Obama announced the creation of a Carbon Capture and Storage (CCS) Task Force. For those of us in the energy industry, this watershed event demonstrates the Administration's recognition of the need for coal in our nation's cleaner energy strategy.

T. Boone Pickens Bets Cramer $100 He Can Make A Killing Manipulating Energy Regulations In His Favor (mooselick7)

After plunking down $62 million in ads aimed at twisting American opinion to support alternative energy legislation he's conveniently pre-positioned to profit from, T. Boone Pickens must feel like $100 is chump change

Oil Above $80 As Traders Eye Low Interest Rates (mhoop)

The Fed surprised investors late Thursday when it raised the so-called "discount" lending rate on emergency bank loans by one-quarter point to 0.75 percent. But Fed officials on Friday were quick to downplay the possibility of across-the-board rate hikes.

Consumer prices edged up 0.2 percent in January, the Labor Department said Friday, and excluding volatile food and energy, prices fell 0.1 percent, the first monthly decline since December 1982.

New Jersey's Clean-Energy Advocates Fear Job Losses (mhoop)

Last week, when Gov. Chris Christie froze unspent funds in many agency budgets to cover the state’s $2.2 billion shortfall, he appropriated $158 million from New Jersey’s Clean Energy Fund, the engine behind one of the few bright spots in New Jersey’s economy, the renewable energy industry.

Advocates of the Clean Energy Program, which is administered by the Board of Public Utilities, say losing the $158 million could result in lower grant and rebate amounts this year, endangering thousands of jobs and setting back the state’s solar industry, the largest in the country after California.

Energy Inventor Makes Bold Promise With 'Bloom box'  (mhoop, Ben Johnson)

The "box" generates its power wirelessly through a combination of oxygen and a fossil fuel - natural gas, bio-gas, etc. It is presently being tested by companies such as Google, WalMart, FedEx and eBay, who have shelled out hundreds of thousands for the "green" machines, the CBS News program reported. Smaller versions could be used to power individual homes, and would be environmentally friendly.

Gasoline Heading Above $3/Gallon By This Summer (mhoop)

What's pushing prices higher isn't American consumption. It's the crude oil that's used to make motor fuel, Rozell said. Crude is an international commodity that's become ever more expensive as demand grows in China. As crude increases, so does gas.

California solar project gets $1.4bn U.S. guarantee (Nickbert)

The conditional loan guarantees from the U.S. Department of Energy, the largest federal loan commitment offered to a renewable energy firm, would help BrightSource build three utility-scale solar thermal plants for its Ivanpah project, which will be located on federally-owned land in the Mojave Desert in southeastern California.

Operator of Monju fast reactor seeks resumption talks with Fukui Pref. (Samuel A.)

The operator of the Monju fast-breeder reactor in Tsuruga, Fukui Prefecture, asked the prefectural government Tuesday to start talks on restarting possibly by the end of March the prototype reactor, which has been suspended since a 1995 sodium coolant leak.

Nuclear industry official says U.S. falling behind (mooselick7)

With 104 nuclear reactors, the United States still has the largest nuclear energy industry in the world. But many in the industry say the U.S. may lose that status quickly.

Environment

Much at stake as decision nears on endangered status of sage grouse (mooselick7)

A finding is expected by week's end and the oil and gas, livestock and wind energy industries - to name the bigger interests concerned - all have an enormous stake in whatever the agency decides.

Please send article submissions to: [email protected]

15 Comments

saxplayer00o1's picture
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Re: Daily Digest - February 23

"Feb. 23 (Bloomberg) -- Ballooning public debt is likely to force several countries to default and the U.S. to slash spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big U.S. banks. "

"“I expect unemployment to remain painfully high for years,” Yellen said during a talk at the University of San Diego. “The unemployment rate should edge down from its current level (9.7 percent) to about 9.25 percent by the end of this year and still be about 8 percent by the end of 2011, but that’s a far cry from full employment.”

As a result, she said, “this is not the time to be removing monetary stimulus.”"

"New York’s budget deficit for this year may be $2 billion, or 43 percent wider than projected earlier this month by the Division of Budget, comptroller Thomas DiNapoli said.

Tax collections by the March 31 end of the state’s fiscal year might be less than anticipated, according to DiNapoli. Also, a $300 million payment expected from developers of a gambling parlor at Aqueduct Racetrack, $200 million from the Battery Park City Authority and $250 million from a tax amnesty plan may not materialize, he said."

"New York City Health and Hospitals Corp. has projected an operating loss of at least $1 billion through June 30, 2011, despite an expected infusion of “hundreds of millions of dollars” of retroactive Medicaid payments.

The one-time Medicaid payout, plus ongoing efforts to cut costs and improve efficiency, will help the 12-hospital system close its books this June with an operating gain, said system President Alan Aviles, but operations will “burn through that at a pretty torrid rate.” Aviles said growing demand for subsidized and free care during the recession and cuts to Medicaid, which covers roughly two-thirds of the system's patients, has left it struggling to balance its budget." 

"APPLETON — A former state budget director believes businesses should monitor future budget talks, because they could get stuck helping lawmakers close a budget deficit in the form of higher taxes."

"In passing the 2010-2011 budget, the state faced a deficit of $5.4 billion. Chandler said $2.2 billion in funds from the $787 billion federal stimulus package helped close that deficit gap, but it's unlikely federal aid can be counted on again.

"It's likely there will not be another federal stimulus," Chandler said. That means state government will have to find ways to cut spending or raise taxes to close the next deficit gap.

An assortment of higher fees and new taxes was expected to generate about $1.2 billion for the state, he said. Some of those costs were shouldered by businesses."

"TALLAHASSEE -- Last year, with unemployment heading higher and worries about the state's ability to pay for unemployment benefits growing, business groups asked the Legislature to pass a temporary $650 million-a-year tax increase to buoy the fund that pays jobless Floridians.

In doing so, they persuaded lawmakers to pass over a $444 million pot of federal stimulus money that they said would ultimately prove more costly for businesses because it required expanding eligibility for the benefits.

Now, many of the same groups are joining legislative leaders in calling for a two-year delay in the tax hike, saying eye-popping increases in some businesses' bills could leave them no choice but to lay off more workers or even close down."

""We didn't expect to utilize all of our trust fund dollars as fast as we did," said Rep. Jennifer Carroll, R-Fleming Island. "And we didn't expect to have to borrow the amount of money that we've borrowed."

In all, the federal government has loaned the state more than $1 billion to plug the hole in the unemployment compensation trust fund. Interest payments could come due in 2011, unless the federal government decides to forgive some of the debt, as some lawmakers hope." 

"A standoff between Greece and its euro-zone partners over the timing and terms of a potential rescue is nearing a crucial juncture as the cash-strapped country faces a key test of investor willingness to keep funding its ballooning deficit. "

"The Greeks have the stronger hand, because they can say: 'Do you really want to make us bankrupt?" says Daniel Gros, director of the Centre for European Policy Studies, a Brussels think tank.

A Greek default would create too great a risk of financial-market panic spreading to other struggling economies including Portugal, Spain and Italy, threatening major German and French export markets as well as the financial health of many euro-zone banks exposed to Southern European debts.

In addition, Greece still has the option of asking the International Monetary Fund for aid, bypassing other euro-zone governments.

...................7A) Germany Faces Ratings Dilemma in Greek Bailout, Schroders Says

"Feb. 23 (Bloomberg) -- Germany risks either harming its credit rating or damaging exports depending on whether it agrees to help bail out Greece, according to Schroders Plc.

Any transfer of funds to the European Union’s most indebted nation from its biggest economy may hurt Germany’s AAA rating, said Jamie Stuttard, who oversees $25 billion as head of European fixed income at the London-based company. A refusal to do so would harm the economies of countries such as Greece, Ireland, Italy, Portugal and Spain and damage Germany’s ability to sell goods into those markets, he said."

"House Fiscal Director Mitch Bean doesn’t do politics, he does numbers, and he says right now the numbers don’t add up. He says the state is looking at a 1.8-billion dollar budget deficit next year, which could grow.

Kalamazoo School Superintendent Michael Rice says the $165per pupil cut they took this year was the biggest in state history, and next year’s may be even bigger and that will mean serious cuts.

He says the state needs to expand the sales tax to services and look at other sources of revenue to guarantee proper funding for education." 

"Sterling fell sharply today after Mervyn King, the Governor of the Bank of England, warned that it may be necessary to continue the Bank’s asset purchase programme and pressed the Government to reveal its plans to reduce the country's record £178 billion deficit. "

"Jeremy Cook, chief economist at the currency exchange broker World First, said: “Mervyn King’s constant assertion that we may see further quantitative easing later in the year is acting like a dead weight around sterling’s neck at the moment."

"Illinois hasn’t paid the current school year’s education bills in months"

"School districts are likely to see decreases in state aid over the coming year, said Rep. Suzi Bassi, R-Palatine, who serves on an education appropriations committee, referring to the $6,119-per-pupil payments in general state aid to districts. The amount is adjusted according to a formula based on a school district's property wealth.

"This is across the board. It is not just education," she said. "The state is in utter crisis. We are right next to bankruptcy. We have a $13 billion hole in a $28 billion budget.""

"“If this was a private business, we’d have already declared bankruptcy,” said Senate Majority Leader Barbara Buono, a Democrat from Edison who sponsored the bill ending pensions for part-time workers. “We’ve got to do something.”

New Jersey’s pension gap nearly tripled since 2004 as previous governors skipped contributions while expanding benefits. "

"Vermont's workforce may be called upon to help fill the state's nearly-empty unemployment insurance fund.

About 20,000 Vermonters are now out of work. The fund was set to run out of money last month and the state will have to borrow millions from the federal government to keep it running.

Now a Senate Committee is proposing a tax on workers and employers to fill the gap. A worker making $40,000-a-year would pay $80, which would raise about $24 million a year. There would also be changes in who's eligible for unemployment benefits.

The tax proposal is facing broad opposition."

"Feb. 23 (Bloomberg) -- U.S. “problem” lenders climbed to the most in 17 years, and the Federal Deposit Insurance Corp. fund protecting customers against bank failures extended its deficit into a second quarter, the agency said.

The FDIC included 702 banks with $402.8 billion in assets on the confidential list as of Dec. 31, a 27 percent increase from 552 banks with $345.9 billion in assets at the end of the third quarter, the regulator said today. The agency said the deposit insurance fund had a deficit of $20.9 billion. "

"Baltimore's mayor says the Great Recession and the resulting budget deficit will be as challenging for the city as the great fire of 1909 and the riots following the assassination of Dr. Martin Luther King Jr.

Mayor Stephanie Rawlings-Blake delivered her first state of the city address Monday. She says the city's $120 million budget deficit "is brutal and will hit all of our citizens hard.""

"DETROIT (AP) - About a third of Detroit's estimated 10,000 vacant homes that need to be demolished are slated to be torn down this year as the city attacks blight in its neighborhoods.

The only thing preventing more demolitions is lack of funding.

Of Detroit's $47-million share of federal Neighborhood Stabilization Program funds, about $14 million has been earmarked for such demolitions, building officials told a City Council committee Monday.

Detroit is facing a budget deficit estimated at more than $300 million and no general fund dollars are planned for demolitions.

Between 2,500 and 3,000 houses are on the list to be razed. It costs upward of $10,000 to tear down each single-family home, and all the federal stimulus funding for demolitions is expected to be exhausted this year."

"But a number of economists, investors and officials here and abroad interviewed for this story say the longer-term prognosis is far from rosy.

As the United States racks up staggering deficits and the center of economic activity shifts to fast-growing countries such as China and Brazil, these sources fear the United States faces the risk of another devaluation of the dollar. This time in slow motion -- but perhaps not as slow as some might think. If the world loses confidence in U.S. policies, "there'd be hell to pay for the dollar," Pardee said. "Sooner or later, the U.S. is going to have to pay attention to the dollar."

French President Nicolas Sarkozy isn't on anybody's short list for the Nobel Prize in economics. But at January's World Economic Forum in Davos Sarkozy proposed, to scattered applause, creating a new version of the Bretton Woods currency accord, which set up the very gold standard that Nixon brought crashing down."

"Feb. 23 (Bloomberg) -- The Philippines raised 100 billion yen ($1.1 billion) selling Samurai bonds and the government said it plans further global issuance to fund a widening deficit as peso bond sales fail."

"The Philippines’ foreign currency long-term debt is rated BB- by Standard & Poor’s, four levels below Mexico’s BBB, the data show. The nation’s budget deficit widened to a record 298.5 billion pesos in 2009, ballooning from 68.1 billion pesos in 2008."

"Defaults by issuers of municipal bonds will rise as the worst recession since the 1930s leaves governments facing "unprecedented stress" on their finances into next year, according to Moody's Investors Service."

"Atlanta leaders on Monday discussed several ideas -- including raising property taxes -- to pay for the city's most pressing challenge, its skyrocketing pension costs.

The idea, however, that was more popular among some Monday -- particularly union leaders -- is to create a special sales tax to help fund its three pension plans."

""Atlanta's [potential] greatness is really in the money we're spending on pensions," Reed said. "It's literally absorbing all of the dollars."

The mayor added: "I am not calling a false alarm."

The amount of money Atlanta spends on pensions has more than doubled since 2001. That year, the city spent $55 million; it is expected to spend about $125 million on pensions in the 12-month period that ends June 30. By 2015, the annual cost to the city is estimated at $160 million"

"Meanwhile, the three pension funds have not earned as much as anticipated. As a result, the plans are about 53 percent funded, Mellott reported. The recommended average is 80 percent, some experts say. The city has an unfunded liability of about $1.5 billion, officials said. In 2001, the unfunded liability was $321 million."

"Feb. 23 (Bloomberg) -- The Federal Deposit Insurance Corp. may start selling bonds tied to the assets of failed banks as soon as next month.

Initial offerings may include about $2 billion of the FDIC’s remaining stakes in loans from Corus Bank and Franklin Bank, according to people familiar with the discussions who declined to be identified because the talks aren’t public. The debt would be guaranteed by the agency, they said. "

"The FDIC, which insures bank accounts, also may offer slices from a re-securitization of about $2 billion of mortgage bonds without government-backed guarantees, with the new senior- ranked securities carrying the agency’s insurance, the people said."

"Feb. 23 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the financial crisis was “by far” the worst in history and called the recovery from the global recession “extremely unbalanced.”

In a speech today in Washington, Greenspan said the global economy has undergone “by far the greatest financial crisis globally ever.” He also said small businesses show few signs of improving because lenders are struggling with commercial real estate mortgages."

"Short sales have jumped from about ten percent of distressed property sales during most of last year to 15.9 percent of home purchase transactions in January."

"In findings that appear to paint a darker employment picture than official U.S. data, Gallup estimated that about 30 million Americans are underemployed, meaning either jobless or able to find only part-time work.

Underemployed people spent 36 percent less on household purchases than their fully employed neighbors in January, while six out of 10 were not hopeful about their chances of finding adequate work in the coming month, the poll said.

Gallup surveyed more than 20,000 U.S. adults from January 2 to 31. The results have a 1 percentage point margin of error."

Over 900 pink slips likely for SF schools

NY says Wall St bonuses up 17 percent to $20.3 billion

UAE banks owed $15 bln by Dubai World (recover 60 cents on the dollar?)

Irish economy to 'stagnate for 10 years'

Nortel pension scheme failure could cost PPF £700 million and hike levies (UK)

Sacramento County supervisors weigh $14 million in cuts, 111 layoffs

 Manchin: W.Va. Medicaid Reserve Won't Last Long

NV special session to begin on budget crisis (200 layoffs)

Tampa faces prospect of layoffs and service cuts to trim budget by $27 million

Reports: MTA Plans to Lay Off 1000 Workers (NY)

150 teachers targeted as TSC board moves toward layoffs (Indiana)

Continental Cutting 600 Reservation Agent Jobs

IPS chief eyes 300 jobs in $27M of cuts (Indianapolis Public Schools)

Plymouth school district selling land

Harrisburg's financial crisis could hit fire, police squads

Jackson Health System to cut 900 jobs (Florida)

Milwaukee County Eyeing Additional Furlough Days (Adding another 10 to the 12 they already have)

Fitch Downgrades Credit Ratings of Four Largest Greek Lenders

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FDIC

A Post from Jim Sinclairs site:

FDIC

Dear Jim,

The FDIC announced four more bank closings Friday evening, bringing this year’s total (so far) to 20. These closings cost the FDIC another $1.066 billion at least. The FDIC was also forced to take on exposure to an additional $3.74 billion in loss-share agreements.

This week’s closings displayed worrisome characteristics that have become all too familiar over the past year:

1. The failed banks appeared well capitalized on paper, but it cost the FDIC historically unprecedented sums (30% or more of the value of deposits) to close them. At the beginning of this crisis, the FDIC typically paid out less than 8% of the value of the failed banks’ deposits.

2. There turned out to be a huge disparity between the stated value of the banks’ assets and their market value.

3. The FDIC had to enter into loss-share agreements with respect to virtually all of the assets purchased by the acquiring banks, meaning the FDIC’s losses could end up being much higher than presently estimated.

The closing of the largest of the four banks, La Jolla Bank, FSB, of La Jolla, California, is a perfect example of how these elements have been playing out. On paper, it had assets of $3.6 billion and deposits of $2.8 billion. It appeared to be very well capitalized.

In practice, its closing cost the FDIC an estimated $882 million, almost 32% of the value of its deposits. By that estimate, its assets had a market value of only about $1.982 billion. They had been over-valued by at least 88%.

In order to maximize the amount the acquiring bank was willing to pay for La Jolla Bank’s assets, the FDIC had to enter into a loss-share agreement with respect to $3.31 billion of the $3.6 billion purchased. This exposes the FDIC to the risk of very substantial future losses that could dwarf its present loss estimates.

The second largest bank closed, George Washington Savings Bank of Orland Park, Illinois, had stated assets of $412.8 million and deposits of $397 million. The FDIC’s projected cost of closing it is $141.4 million, about 36% of deposits.

That means the estimated real market value of George Washington’s assets is about $255.6 million. It was over-stated by 62%. The FDIC had to enter into a loss-share agreement on $324.2 million of the assets acquired in order to maximize the value the acquiring bank was willing to give them.

The closure of Marco Community Bank of Marco Island, Florida, cost the FDIC an estimated $38.1 million, about 33% of the value of its deposits. The value of its assets was over-stated by about 51%. The FDIC had to enter into a loss-share agreement with respect to $104.8 million of the $119.6 million in assets acquired.

The last of the four, La Coste National Bank of La Coste, Texas, is most notable for the fact that its statistics are in line with what would have been considered a successful closure at the beginning of this crisis. As such, it serves as a useful contrast to the other three.

La Coste’s closure cost the FDIC only $3.7 million, approximately 7.5% of the value of its deposits. The value of its assets was over-stated by only about 18%. The FDIC was not required to enter into a loss-share transaction with the acquiring bank, so it did not take on any exposure to future losses.

Unfortunately, La Coste was by far the smallest of the four banks closed this week. Its deposits amounted to less than 1.5% of the total.

Respectfully yours,
CIGA Richard B.

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Re: FDIC

3. The FDIC had to enter into loss-share agreements with respect to virtually all of the assets purchased by the acquiring banks, meaning the FDIC’s losses could end up being much higher than presently estimated.

This sure looks like another way for the can to be kicked down the road just a little father.  The loss-share agreement lets the FDIC put off the actually loss a little longer and hope that things turn around or hope that it becomes someone elses problem.  From the more cynical side, it's just a transfer of wealth from taxpayer to acquiring bank.....   It sure looks like rather than just covering the deposits at an institution the FDIC is guranteeing all the loans that are leveraged from those deposits.  I didn't know the FDIC was supposed to do that?  Is the reasoning that if they don't then the loss on those loans will result in additional bank failures?

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Re: Daily Digest - February 23

These articles are so different from mainstream media reporting. The distortion, omisions & manipulation creates a very different picture.  I enjoy this site site to get an accurate view of what is really happening to our US.  We the people, are the only ones who can turn it around.

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Re: Daily Digest - February 23

Hi freespeech!

Welcome to CM.

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Re: Daily Digest - February 23

Welcome Freespeech!  The information you can gather here is in my estimation "priceless"!  It's helped me and my family to re evaluate our way of life and changed our lives for the MUCH BETTER forever!  I'll look forward to seeing you add to the character and depth of the discussions.

Cheers!

LR

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Re: Daily Digest - February 23

Losing the Red Queen's Race

 

The Red Queen's Race is an apt analogy for the meltdown in assets and debt now swamping the global economy.

The Red Queen's race refers to running very fast to stay in the same place. As asset values fall globally (except where massive government stimulus has pushed the day of reckoning forward a bit), debt holders are frantically paying down or writing down debt--running very fast--but finding themselves in the same place--zero equity--despite their prodigious efforts.

I've prepared a chart to illustrate The Red Queen's Race in assets and debt:

Owning an asset as it catapults ever higher in a credit/asset bubble offers a fateful temptation to leverage that rising equity ("free money") or extract it to enjoy. Millions of speculators did so by borrowing against their stocks (margin accounts) and tens of millions did so by borrowing against their home equity via second mortgages or HELOCs (home equity lines of credit).

Alas, when the asset bubbles bursts, values quickly begin a long and painful retrace to pre-bubble valuations. In very short order, those who bought with high leverage or borrowed 90% of their equity find themselves underwater, owing more than the value of their asset/property.

Those with 80% of bubble-top value mortgages who cling to the hope of a rapid recovery in valuations soon find they too are underwater.

Lenders who thought they were "safe" extending 80%-of-value loans at the bubble top find their 1-2% reserves against losses are woefully inadequate as assets continue their ceaseless decline to rational valuations.

In a desperate attempt to stave off losing the Red Queen's Race, The Federal Reserve essentially hands the banks billions in easy profits, loaning them unlimited funds at near-zero interest rates so they can "re-capitalize" by loaning their unlimited "free money" at higher rates of interest.

But even the incantations and legerdemaine of the Fed are no match for the inexorable punishment of running in place just to avoid falling behind; no matter how fast the Fed-induced profits flow, they cannot gain on the declining assets. Banks pocket billions yet their net equity remains far below zero.

At some point, the lender or owner tires of writing down or paying down debt to no avail, and they lose the Red Queen's Race. Having lost, some lenders, owners and even governments (see Japan, Inc. for a woeful example) maintain the fiction that equity is above zero by continuing the fraud of pricing assets at "mark to fantasy" valuations.

In other words, they list a mortgage at full nominal value, as if the underlying asset--the house--was still worth more than the mortgage.

Here's the desperate game being played now on a global scale: mark the debt as if the bubble had never burst ("mark to fantasy") in the hopes that government stimulus and lending will re-inflate the bubble, enabling owners and lenders alike to exit the asset at a price which makes them whole (no losses incurred).

That is the entire raison d'etre for quantitative easing, near-zero interest rates and massive support of the mortgage markets, from China to the U.S. If only another generation of suckers can be conned into believing that bubble prices are "rational" and can even be exceeded (greed is not just good, it is necessary), then various financial Elites can exit their liquidity and debt traps by selling at the "new top."

Unfortunately for global financial Elites and homeowners alike, there has never been a bubble which was reinflated for long. Running faster (expanding credit in a futile attempt to spark another bubble frenzy) never wins the Red Queen's Race, but it certainly sets up a higher bubble and a catastrophic exhaustion of credit, debt and belief in the system (loss of institutional credibility).

Welcome to the Red Queen's Race, which can only be lost. Writing down debt as assets fall is simply staying in one place. At some point the runners--lenders and debtors alike--tire of maintaining the futile fiction that "equity" still exists, and the race is lost: losses are finally accepted, debt is renounced, and bankruptcy wipes out the fictional equity.

<MORE> at http://www.oftwominds.com/

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Re: Daily Digest - February 23

Unless I'm missing something, most of these failed bank assets probably consist of mortgages, right?  Is this in essence any different from the mortgage-backed securities that created so many problems? 

Forgive the crudity, but I get the feeling they're attempting to sell me a dog turd spray-painted gold and tied with a pretty red ribbon Tongue out

- Nickbert

 

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Re: Daily Digest - February 23

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Re: Daily Digest - February 23

This all sounds good LOL....don't see it happening....at least voluntarily that is.

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Some advice for the West, courtesy of Chile

Jose Pinera, Chile's social security reformer (and savior) has some good advice for the West.  The interviewer's surprise at Pinera's assertion that America's real deficit is upwards of $100 trillion goes to show once again just how ignorant even supposed financial media pundits are:

http://www.zerohedge.com/article/100-trillion-problem-can-america-learn-...

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Posts: 592
Re: Daily Digest - February 23

"Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires."

ROTFLOL!! How appropriate :)

That's from http://www.rollingstone.com/politics/story/32255149/wall_streets_bailout...

Samuel

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idoctor
Status: Diamond Member (Offline)
Joined: Oct 4 2008
Posts: 1731
Re: Daily Digest - February 23

Farmer Brown thanks for that great link. I have traveled thru Chile & their economy seemed great to me. One sad note for me was the people were no where near as friendly as what we know about the country you live in.

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dickB
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Joined: Jun 28 2009
Posts: 9
Re: Daily Digest - February 24

Europe at risk of double-dip recession

http://www.telegraph.co.uk/finance/economics/7301142/Europe-at-risk-of-d...

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Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Some advice for the West, courtesy of Chile
Farmer Brown wrote:

Jose Pinera, Chile's social security reformer (and savior) has some good advice for the West.  The interviewer's surprise at Pinera's assertion that America's real deficit is upwards of $100 trillion goes to show once again just how ignorant even supposed financial media pundits are:

http://www.zerohedge.com/article/100-trillion-problem-can-america-learn-...

Good read!

Somehow I think the rest of the world (read: Debt enablers) are onto the massive Enron / Arthur Anderson accounting gig.

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