Daily Digest - March 17

Tuesday, March 17, 2009, 11:03 AM
  • Bernanke's Trouble Forecasting The Future
  • Municipal Pension Time Bomb Set to Go Off
  • Unreal
  • AIG Backdoor Bailouts
  • AIG Counter-Party Details
  • N.Y. AG Wants Answers On AIG Bonuses
  • Thousands Rally Downtown Against Government Spending
  • Capacity Utilization
  • Industrial Production (February)
  • Industrial output drops in February
  • Report: Mortgage Fraud Increased in 2008
  • NAHB Housing Market Index
  • January International Capital Flows Negative...
  • Jon Stewart & Cramer "On" Uncle Jay 


Bernanke's Trouble Forecasting The Future 

"It now appears likely that real gross domestic product (GDP) will not grow much, if at all, over the first half of 2008 and could even contract slightly. We expect economic activity to strengthen in the second half of the year, in part as the result of stimulative monetary and fiscal policies; and growth is expected to proceed at or a little above its sustainable pace in 2009, bolstered by a stabilization of housing activity, albeit at low levels, and gradually improving financial conditions. "-Ben Bernanke, Congressional testimony, April 2, 2008. 

Mr. Bernanke, Chairman of The Federal Reserve and an esteemed economist said, about a year ago, that the economy was faltering, but that the slowdown was a blip and that GDP growth would be back in fine shape by 2009. Things have not turned out that way.

Last night on "60 Minutes", Bernanke said that he thought the current recession would probably end late this year.

He hedged some by saying the banking system be would have to be repaired for real growth the take hold.

Bernanke and the Fed have not done a good job of calling either the recession or the rate at which inflation would effect the economy. The agency was probably slow in dropping rates. It may be that the downturn materialized so quickly that more timely policy action would not have meant much.

It is still baffling to understand how Bernanke can justify saying that the beginning of the recovery is just just two quarters away. Credit in the US is not just tight, it is nearly non-existent. Housing prices are still dropping, and any help from the government to keep worthy people in their homes by cutting mortgage payments will almost certainly not take hold for several months. Corporate earnings are in a shambles. Retail sales drop each month and large industries including the car and newspaper businesses may not survive in their current forms.

Bernanke may have gotten on TV and felt that he had to say something upbeat to build consumer and business confidence, But, almost everyone who heard him is concerned about losing a job, a home, a business, or the ability to educate a child.

As Jack Nicholson said in the film "As Good As It Gets", "Sell crazy somewhere else, we're all stocked up here."

Municipal Pension Time Bomb Set to Go Off 

Think back to when property prices were going through the roof, personal spending was being turbocharged by ultra-cheap and seemingly limitless credit, and few could resist the siren song of consumerism. 

Under the circumstances, you would have thought that municipal authorities would have had more than enough to gorge on in their quest to squander taxpayer funds.

Yet even with all the revenues that were flowing in from real estate, income, and sales taxes, it was not enough. Short-sighted and corrupt politicians also decided that it would be a great idea to make all sorts of open-ended commitments to a key constituency: state and local government employees.

Now, however, like all of the other extravagances of the past few decades, those poor choices are coming home to roost. In "Pension Bills to Surge Nationwide," the Wall Street Journal reports on another financial time bomb that is set to go off.

Many States and Cities Face Hard Choices Because of Market Declines

Many state and city governments reeling from financial woes are about to get whacked again, this time by an unforeseen increase in their pension bill thanks to market declines.

In an effort to stave off tax increases, New Jersey lawmakers on Monday will consider a bill that would allow municipalities to defer payment of half their annual pension bill, due April 1, for one year. Those towns, counties and schools that opt to defer would face a higher pension bill for years to come.

Other states and municipalities are facing similarly difficult choices. In Pennsylvania, the state employees and public teachers pension funds both have warned that employer contribution rates could surge seven-fold from about 4% of payroll to 28%, starting in 2012. The Detroit police and fire pension plan might have to double employer contribution rates to 50% of payroll by 2011, according to the fund's outside actuary.

Two of the nation's biggest public pension funds, New York State Common Retirement Fund and the California Public Employees' Retirement System, also have warned state employers to brace for future rate increases.

"It's going to be huge showdown" between taxpayers and public employees, said Susan Mangiero, president of Pension Governance Inc., a consulting and research firm in Trumbull, Conn. "The anger is more acute today when people are feeling economic hardship."

The specter of higher pension bills comes as many states and cities are struggling to balance their budgets or, in some cases, avoid drastic measures, such as filing for bankruptcy protection, amid falling tax revenue, foreclosures and rising unemployment costs.

In most states, retirement benefits for public employees are guaranteed by law, so governments have little choice but to pay them in full. During bull markets, that wasn't a problem. But with the median rate of return for a public plan of negative 25% in 2008, according to Wilshire Associates, many plans now may be unable to meet their obligations without further injections unless markets rebound significantly, analysts said.

The Detroit police and fire pension plan, where employees are ineligible for Social Security so the benefit plan is more generous and costly, employer contribution rates could double to 50% over the next three years unless the markets turn around, said Norman Jones of Gabriel, Roeder & Smith in Southfield, Mich., the fund's outside actuary.

For future New York City police and firefighters, Gov. David Paterson and Mayor Michael Bloomberg have proposed a minimum retirement age of 50, where no minimum currently exists. They also want to raise to 25 from 20 the number of years these employees must serve before they can collect full benefits.

Proposals pending elsewhere would move new public employees to a 401(k) plan. Some state lawmakers believe they would save money with a 401(k), which requires employees to pay a higher percentage of the contribution rate than they do under defined-benefit plans, said Alicia Munnell, director of the Center for Retirement Research at Boston College.

Municipal unions said they would oppose such a shift, and note that such efforts have failed in the past, including four years ago in California. "It's not a program that is attractive to state employees," said Richard Ferlauto, director of corporate governance at the American Federation of State, County and Municipal Employees. "It's doesn't work because you wouldn't be able to hire people."

But soaring pension costs are emboldening critics of public plans. They said local governments cannot afford to pay what are often perceived as generous benefits to government employees when the 401(k) plans held by others have shrunk, and as taxpayers already are looking at higher taxes and fewer services.

The pain is about to start in Wisconsin. The state has an unusual policy of adjusting the amount of benefits paid based on the pension fund's performance. Now, for the first time in 25 years, the majority of retirees will receive a benefit reduction.

This month, Wisconsin officials said that beginning in May nearly 150,000 retirees will face at least a 2.1% decrease in benefits, after the pension fund had a 26% negative return in 2008.

About 35,000 of retirees who held a portion of their retirement savings in an optional fund that invests entirely in stocks will be hit harder. Depending on how much of their savings they earmarked for the all-stock fund, their overall retirement income could be cut by up to 40%, according to a spokeswoman for the State of Wisconsin Investment Board.

Jim George, a 64-year-old retired elementary-school teacher in Milwaukee, estimates that his $3,700-a-month benefit check will be slashed by about $600. He is talking with his wife about where they will have to cut back: their annual January vacation to Florida, eating dinner out, maybe their high-speed Internet connection. "It's going to make things tight," he said.

His brother John George, a retired teacher in Madison, Wis., faces the 2.1% benefit reduction. But with the markets reeling this year, he is worried about what future cuts might look like. "The stock market and my pension fund are a daily worry," he said.

Optimism, in part, contributed to this quandary: Legislatures from Pennsylvania to California boosted employee benefits after the stock market boom years of the 1990s, which has added to their burden now.

Most pension funds also took the step of enacting smoothing policies, in which the benefit determination is based on average returns over five years. This was intended to dilute the impact of a particularly bad year. For the most part, this policy has worked to limit sudden or severe rate increases at most pensions.

"But these policies weren't meant to accommodate losses as big as pension funds suffered last year," said Ms. Munnell of Boston College. The college's Center for Retirement Research estimates that the average public plan's liabilities, if based on year-end 2008 market prices, now exceed its assets by 35%. For public funds in worse financial shape, including funds in Connecticut, West Virginia and Indiana, due to stock-market declines liabilities exceed assets by 50% or higher, according to the center.

Some states may decide it is easier to cut public employee benefits than it is to raise taxes, especially during hard economic times. In the Virginia General Assembly, a bill would freeze the current pension plan starting in July and replace it with a 401(k) plan for all future hires.

A state senator in Pennsylvania introduced a similar bill in 2007, and it went nowhere. But this year it is attracting attention.

If employer contribution rates in Pennsylvania jump as high as 28%, "the pension system is just not manageable," said Pat Browne, the Republican state senator who sponsored the bill. He said he expects it to be voted on this year. "We need to get it passed quickly if we are to phase out the existing plan in time to make an impact."


AIG Backdoor Bailouts

AIG Counter-Party Details

N.Y. AG Wants Answers On AIG Bonuses 

(CBS/AP) New York state's attorney general joined the growing list of those angered by news of American International Group's bonuses, and wants to have details on his desk this afternoon about who is getting it rewarded. 

Attorney General Andrew Cuomo says his office will investigate whether recipients of the payments were involved in the insurance giant's decline and whether the payments are fraudulent under state law.

In a letter to CEO Edward Liddy, Cuomo said he's been investigating AIG compensation arrangements since last fall and would issue subpoenas at 4 p.m. EST Monday if he didn't get the names of employees scheduled for bonuses plus information about their work and contracts.

"Covering up the details of these payments breeds further cynicism and distrust on our already shaken financial system," he wrote.

"Taxpayers of this country are now supporting AIG, and they deserve at the very least to know how their money is being spent. And we owe it to the taxpayers to take every possible action to stop unwarranted bonus payments to those who caused the AIG meltdown in the first place."

Earlier Monday, President Barack Obama said he's asked Treasury Secretary Tim Geithner to pursue "every single legal avenue" to block the payouts.

"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," the president said. "How do they justify this outrage to the taxpayers who are keeping the company afloat?"

The Obama administration is looking for ways to recoup at least some of the money reports CBS News correspondent Peter Maer.

The White House continues to negotiate with AIG to bring any payments in line with the government's priorities, an administration official told CBS News.

The administration official said that the bonuses "long been known about inside and outside AIG. But we didn't want to accept them."

"This isn't just a matter of dollars and cents. It's about our fundamental values," Mr. Obama said at the beginning of a speech at the White House on lending to small business owners.

Maer reports that the White House is seeking what are described as "mechanisms" to recover money spent on bonuses, but the company insists some of the bonuses are part of legally binding contracts signed before the government's bailout.

The administration is concerned that public reaction to the bonuses could affect the president's overall economic agenda, reports Maer.

"It is unacceptable for Wall Street firms receiving government assistance to hand out million dollar bonuses, while hard-working Americans bear the burden of this economic crisis," the official told CBS News.

Meanwhile, AIG disclosed Sunday that it used more than $90 billion in federal aid to pay out foreign and domestic banks, some of whom had received their own multibillion-dollar U.S. government bailouts.

Some of the biggest recipients of the AIG money were Goldman Sachs at $12.9 billion, and three European banks - France's Societe Generale at $11.9 billion, Germany's Deutsche Bank at $11.8 billion, and Britain's Barclays PLC at $8.5 billion. Merrill Lynch, which also is undergoing federal scrutiny of its bonus plans, received $6.8 billion as of Dec. 31.

Lawrence Summers, Director of the White House National Economic Council, said on CBS' Face The Nation on Sunday that the AIG bonuses were "outrageous... The whole situation at AIG is outrageous. What taxpayers are being forced to do is outrageous."

The company, now about 80 percent owned by U.S. taxpayers, has received roughly $170 billion from the government, which feared that its collapse could cause widespread damage to banks and consumers around the globe.

In an exclusive interview aired Sunday on 60 Minutes, Federal Reserve Chairman Ben Bernanke spoke with unusual candor of the frustration he felt in bailing out AIG.

"Of all the events and all of the things we've done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG," Bernanke told 60 Minutes correspondent Scott Pelley.

"Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system," Bernanke said.

"It makes me angry. I slammed the phone more than a few times on discussing AIG. I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy," he told Pelley.

The $90 billion chunk of the bailout money went to banks to cover AIG's losses on complex mortgage investments, as well as for collateral needed for other transactions.

Other banks receiving between $1 billion and $3 billion from AIG's securities lending unit include Citigroup Inc., Switzerland's UBS AG and Morgan Stanley.

Municipalities in certain states, including California, Virginia and Hawaii, received a total of $12.1 billion under guaranteed investment agreements.

Thousands Rally Downtown Against Government Spending 

CINCINNATI -- Thousands of Tri-State residents gathered Sunday on Fountain Square in downtown Cincinnati to voice their opposition to government spending bills recently signed by President Barack Obama. 

The group called itself the Cincinnati Tea Party, modeled after the Boston Tea Party of 1773.
Images: Cincinnati Tea Party.

Many of the demonstrators carried signs with slogans that said, "Honk if I'm paying your mortgage" or "Stop spending my allowance." Some even wore tea bags on their hats to make their point.

Cincinnati police estimated the crowd at 4,000 people. Many who spoke with News 5 Sunday afternoon said they're angry, including Rep. Jean Schmidt.

"I bet there's 5,000 people here and they're mad, just as I'm mad. They have a right to be mad at the unbridled spending that's happening in Washington," said Schmidt.

Protesters argued that the government shouldn't be spending money it doesn't have and they fear taxes and deflation will follow.

"The money you have now will be worth half as much next year, if they keep spending this money. They've got to stop spending this money," said Mike Sparks.

Protestors signed a petition rejecting the stimulus package. Organizers said they planned to gather again on April 15 and march the petition to city hall. 

Capacity Utilization

Industrial Production (February)

Industrial output drops in February 

WASHINGTON (AP) -- The nation's industrial output fell for the fourth straight month in February, with factories operating at their lowest level in six decades of record keeping. Analysts forecast more production cuts to come as companies are battered by recessions at home and abroad. 

The Federal Reserve reported Monday that industrial output dropped by 1.4 percent last month, slightly larger than the 1.2 percent decline economists had expected.

The weakness included a 0.7 percent fall in manufacturing output, which pushed the operating rate at the nation's factories down to 67.4 percent of capacity last month, the lowest level on records that go back to 1948.

The drop in manufacturing output occurred even though production at the nation's auto plants actually rose sharply after four straight months of declines.

Despite the news, Wall Street stocks pushed higher for a fifth straight day. They were bolstered by reassuring comments from Federal Reserve Chairman Ben Bernanke in a television interview that the recession would probably be over by year's end if the government's program to boost the banking system succeeds.

But private economists viewed the further plunge in industrial production as another sign of how weak the economy is at present. The recession that began in December 2007 is already the longest in a quarter-century, with the economy plunging at an annual rate of 6.2 percent in the fourth quarter. Many economists believe the downturn in the current quarter could be just as severe.

They said manufacturers are being hammered by the deep U.S. recession and a spreading downturn overseas that has cut sharply into demand for U.S. exports in major overseas markets.

"The manufacturing sector is still declining as firms struggle to pare inventories and come to grips with lower consumer spending, the housing collapse, evaporating exports and the full force of a capital spending downturn," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI. "These negative forces are a lot to absorb and it is too early to see a turnaround."

Nariman Behravesh, chief economist at IHS Global Insight, said that one glimmer of hope could be seen in a slowdown in the rate of decline in manufacturing outside of autos. He said if this persists over the next few months, it could be an indication that manufacturing has at least hit a bottom and is not falling further.

For February, output in the mining industry, a sector that includes oil and gas drilling, was off by 0.4 percent and utility plant production plunged by 7.7 percent, reflecting warmer-than-normal weather last month which cut into demand.

Production at auto plants and auto parts manufacturers rose 10.2 percent in February after four straight months of declines including a sharp 24.7 percent drop in January. But even with the rebound, the auto industry remains under tremendous pressures because consumers, faced with widespread layoffs, are not in a mood to make big-ticket purchases of autos or many other goods.

The overall operating rate for manufacturing, mining and utilities fell to 70.9 percent of capacity in February, matching a record low set in December 1982, a month when the country was just beginning to pull out of the severe 1981-82 recession.

U.S. factories are being battered not only by falling demand in the United States but also in key overseas markets as the recession that began in the U.S. spreads overseas.

The government reported Friday that U.S. exports fell for a sixth straight month in January. Many of the nation's biggest companies, which do a large share of their business overseas, are struggling with the effects of the global drop in demand. More than 75 percent of the orders for commercial planes that Boeing Co. held last year came from outside North America, as did about 60 percent of Caterpillar Inc.'s sales of heavy machinery and engines.

Both companies are forecasting lower results this year and are slashing jobs. Boeing has said it plans to cut 10,000 jobs in its commercial and military divisions while Caterpillar said it will trim 22,000 positions.

Pay Down Debts? No Spend It!  

COLUMBIA, S.C. - The Obama administration on Monday rejected South Carolina Gov. Mark Sanford's request to use $700 million in federal stimulus cash to pay down state debt. White House Budget Director Peter Orszag said in a letter to the Republican that the federal stimulus law doesn't allow President Barack Obama to make an exception for that cash. Sanford spokesman Joel Sawyer had no immediate response, but the governor has said he would reject part of the stimulus money if Obama wouldn't give him flexibility in spending it. 

Report: Mortgage Fraud Increased in 2008 

Update: Housing Wire has more: Mortgage Fraud at All-Time High: Report 

This report appears to deal with Fraud for Housing, and not Fraud for Profit (what most people think of as mortgage fraud).

From Dina ElBoghdady at the WaPo: Mortgage Fraud Rises Even as Loans Decline

Mortgage fraud rose last year even though fewer loans were issued nationwide ... Fraud jumped by 26 percent in 2008 from the previous year, the study concluded, based on data collected from roughly 70 percent of the nation's lenders as well as mortgage insurance companies and mortgage investors. The study was prepared by the Mortgage Asset Research Institute, an arm of LexisNexis, for the Mortgage Bankers Association.
"With fewer loan originations today, the data suggest that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud," said Denise James, one of the study's authors.

The most common type of fraud continues to be application misrepresentation, which includes falsifying a borrower's income. That kind of fraud represented about 61 percent of all the reported cases last year, followed by fraud on tax returns and financial statements. The volume of reported fraud related to credit reports dropped from 9 percent to 4 percent in the past year.
The study noted that the spike in fraudulent activity cases can be partially attributed to more vigorous reporting and investigations.
Historically there have been two types of mortgage fraud: fraud for housing, and fraud for profit. The MBA/MARI report focuses on fraud for housing (and that probably includes refinance fraud because borrowers are desperate).

Tanta explained this well: Unwinding the Fraud for Bubbles
There is a tradition in the mortgage business of distinguishing between two major types of mortgage fraud, called "Fraud for Housing" and "Fraud for Profit." The former is the borrower-initiated fraud-inflating income or assets, lying about employment, etc.-that is motivated by the borrower's desire to get housing (not the same thing as "real estate"), by means of getting a loan he or she doesn't actually qualify for. It may require some collusion by the loan originator or appraiser, but it may not. It is usually the least expensive kind of fraud to lenders and investors, since the goal is getting (and keeping) the property, so the borrower is at least usually motivated to make the payments. The problems come about, of course, because these borrowers failed to qualify honestly for a reason. Borrower-initiated fraud loans may be considered "self-underwritten," and such loans do have a much higher failure rate than the "lender-underwritten" ones. Their only saving grace is that the lender tends to recover more in a foreclosure than in a fraud for profit case. Penalties to the borrower rarely ever come in the form of prosecution; losing the home and becoming a subprime borrower for the next four to seven years-with the credit costs that implies-are the borrower's punishment.

Fraud for profit is simply someone trying to extract cash-not housing-out of the transaction somewhere. If it is borrower-initiated fraud, it's not a borrower who wants a house; it's a borrower who wants to flip a piece of real estate or launder money or in some other way grab the cash and leave the lender holding the bag. Most of it, however, is initiated by a seller, real estate broker, lender, or closing agent (or all of them in collusion). It generally requires additional collusion by bribable appraisers, although it can certainly be initiated by a corrupt appraiser looking for a kickback, or can merely take advantage of a trainee or gullible appraiser. This is the flip scam, straw borrower, equity skimming, misappropriation of payoff funds, identity theft kind of fraud. It may not be as common as fraud for housing, at least in some markets, but it's much, much more expensive to the bagholder. At minimum, the fraud-for-housing borrower wants to take clear, merchantable title to the property and maintain it at an acceptable level. That's either unnecessary expense or (in the case of title) a hurdle to be gotten over by the fraud-for-profit participant.
As Tanta noted, during the housing bubble, these two frauds merged, and that is probably not happening now. I suspect most of the fraud today is "fraud for housing" by homeowners desperate to refinance.

NAHB Housing Market Index

January International Capital Flows Negative... 

TIC data (Treasury International Capital) was just released for January. This is the Fed's worst nightmare coming true. 

We Americans were running trade deficits of approximately $60 billion a month until just recently but that has now fallen into the high $30+ billion. This is money that must be financed by international capital. In other words, as your dollars flow to China and other parts of the worlds, an equal amount of dollars must flow back. If they do not flow back by us selling goods, then we run a deficit. This deficit must be financed otherwise we would drain all the capital.

We track this flow of funds in a monthly report called the TIC data. It was HUGELY negative for the month of January.
TIC Data

Treasury International Capital (TIC) Data for January

Washington -The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for January 2009. The next release, which will report on data for February 2009, is scheduled for April 15, 2009.

Net foreign purchases of long-term securities were negative $43.0 billion.

Net foreign purchases of long-term U.S. securities were negative $18.8 billion. Of this, net purchases by private foreign investors were negative $10.2 billion, and net purchases by foreign official institutions were negative $8.5 billion.

U.S. residents purchased a net $24.2 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $60.9 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities increased $30.9 billion. Foreign holdings of Treasury bills decreased $15.4 billion.

Banks' own net dollar-denominated liabilities to foreign residents decreased $118.9 billion.

Monthly net TIC flows were negative $148.9 billion. Of this, net foreign private flows were negative $158.1 billion, and net foreign official flows were $9.2 billion.
Complete data is available on the Treasury website at

Negative flows of $148.9 is of great concern (to put it mildly). Last year we ran negative TIC data for a few months (first time in a very long time), but not on this scale, and the negative months are coming more frequently.

If we run negative TIC flows for long, demand for our debts will not be high enough to keep interest rates low. This may force Bernanke into "quantitative easing" or the buying of our own debts. That is just printing, it is a false economic concept (to say the least) and has never worked for any extended time period in history.

This morning TLT and other bonds and treasuries dropped on the news. TLT is sitting right on that old line in the sand, right at the 101 level. Should we break this area, it will be a sign that government support to bonds is being overwhelmed. Each time we've been in this region over the past couple of months, a rally has ensued.

There is definitely negative underlying pressure in foreign capital flows. Should this continue for long, you will see the pressure in the bonds markets (as we already are), and eventually that will translate into higher rates and then into the economy itself.

Jon Stewart & Cramer "On" Uncle Jay

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Davos's picture
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Re: Daily Digest - March 17

Well, someone said to me today that they have no plan. I'd differ. Last week it was lipstick on a pig, a very ugly pig and some very expensive lipstick.

This week there is rhetoric. The AIG pig with all the loot is out of the barn - but next time there will be fiscal responsibility.

Lipstick to loot squealing. Seems like a plan to me.

As for the masses: Last summer it was protests over marriages, looks like this summer it will be more tea parties, my hunch the numbers will be well north of the 4,000 in the tea party article above.

Take care 


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Mike Pilat
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Re: Daily Digest - March 17

Not just tea parties.

On April 25th, there is a nationwide End the Fed rally / protest being held in over 20 cities. See here:

Click on the "find your local End the Fed group" link in the upper left to get more details on rally points for your region.

Sorry to hijack this thread, but I get the sense that this could be much bigger than the previous one held November 22nd. I'll use the participation levels in this upcoming rally as a barometer of just how much the public is catching on to the way of things in this country.

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Re: Daily Digest - March 17

I'd like to see a legal battle between the US Congress and the AIG 'bonus-beneficiaries' re: their right to the 'boni' (not that they deserve it by any stretch)

- it would be along the lines of the 'thrilla-from-Manilla' - it could be called the "The Naer-do-well Knockdown !!"

"Barney & Co.'s" strategy is layed flat on the table - "Float like a Hindenburg, sting like a Sponge"

.......the 'Boni-Boys' of course would drag Barney & Co. through Legal Discovery, since their defense is "Regulatory Negligence' on the part of Barney & Co. and subsequent crash of the US Economy - maybe we'd finally get answers, if not resolution, on 'how da heck we got here'

---- now that would be a hoot !



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Re: Daily Digest - March 17 - more on stewart v cramer

Washington Post article by  Richard Cohen:

His basic point is that maybe Cramer and CNBC really didn't know, couldn't know, that the financial collapse was coming. He points out even those on the inside didn't know:


For proof, I can offer some names. Let's start with Maurice "Hank"
Greenberg, who was instrumental in building what is now probably the
world's most reviled corporation, AIG. He resigned as chairman and CEO
in 2005, but still it is logical to assume that few people knew more
about the company than Greenberg. He kept much of his net worth in AIG
stock. He's now lost much of that worth.

Or take Richard Fuld. He is the former chairman of Lehman Brothers, which, as we all know, is no more. He lost about $1 billion.

Or take Citigroup's former chairman, Sanford Weill. He lost about $500 million.

Or take all the good people at Bear Stearns, the company Cramer adored
almost to the bitter end. They went down with their stock.

Of course this ignores those sages on the outside (such as our own CM) that DID see it coming. So you wonder, were these guys unaware, uber-arrogant, stupid, or what?

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Re: Daily Digest - March 17

I read that Cohen piece as well. My question (once I got done saying. "That's the WaPo for you these days") was, did Greenberg, Weill and others really voluntarily hold onto that stock? I thought these guys usually had to do so for awhile, that they couldn't just immediately dump it and run. (Fuld, I would've thought, never got a chance to do so anyway, the disaster came upon him so quickly.)

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Re: Daily Digest - March 17 - SC Stimulus Money

OK, I can't take it!!! So the governor of an independent state is being 'forced' by the federal
government to take stimulus money. Additionally, Sanford wants to pay off debt
but the federal government says, "no." This is not American nor is it
freedom. The federal government has no place dictating what a state is
to do or not to do.

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Re: Daily Digest - March 17

You must have fantastic pensions in the USA:

'They also want to raise to 25 from 20 the number of years these employees must serve before they can collect full benefits.'

Here in the UK, my local government pension will pay one eightieth of my final salary for every year that I work there. This is subject to a maximum of forty eightieths, so after forty years work, my pension stops increasing. Aslo, if I retire early, it stops increasing, and I don't start getting it until I am sixty.

One1776's picture
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Re: Daily Digest - March 17 - AIG Backdoor

That chart is amazing. Basically it turns out AIG was used by the federal government to essencially launder money to
other finanacial institutions that did not (publically) want bail out money so all these banks (and others) saying "i don't want governemnt money" were
getting it anyway out the backdoor of AIG. The whole thing is a set-up to dupe the dumb american people.

Am I right in understanding all this?

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Re: Daily Digest - March 17

Turbo - I think you have it exactly right, and that is why the intense anger over the bonus pay is mis-placed, a smoke screen deflecting attention from the real crime (not to say the bonus pay is warranted in any way).

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Re: Daily Digest - March 17

Last night I read in Trend Following by Covel (good read!) that history doesn' repeat, people just keep forgetting it.

He also pointed out that given the choice between a simple easy to understand explanation that works and a difficult one that doesn't work people tend to pick the latter.

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Re: Daily Digest - March 17

A cynic might conclude that Mr. Paulson, fully aware of the terrible state affairs that the financial gamblers on Wall Street had created and how precarious the bank balance sheets were, allowed competitor Lehman Bros. to fail in order to create a panic that could then be used to get a blank cheque from congress to shore up favored firms.

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Re: Daily Digest - March 17
Davos wrote:

The AIG pig with all the loot is out of the barn

OK, the after seeing the AIG farse (what can I call it?), I have to say that the U.S. officially classifies as a Banana Republic.

I've seen that movie too many times before, growing up in Brazil. The politicians screamming about how they are sooo outraged, but doing nothing of consequence. Bernanke even banged on the phone, gasp!!! A big show that won't end up in anything changing...

Your government changed laws in days after 9/11 to arrest people without proper evidence or charges. Changed wiretapping laws, against the will of the people. Broke the Geneva convention. Heck, started a war against a UN decision... But they can't stop those thieves, even with full support of the american people???

And to think that I had so many hopes for Obama... Really, no joke.

C.M. is once again vindicated. We all recall his strong words about a "looting operation". Hey, even I thought that he was a little paranoid at the time - Live and learn.

Well, i'm older and more cynical, and now live in Canada, and I'm never going back to that gong show. I honestly feel terrible for your nation (by that I mean the honest, hard working people).

Best of luck to you...


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Re: Daily Digest - March 17 - AIG Backdoor
turbo wrote:

That chart is amazing. Basically it turns out AIG was used by the federal government to essencially launder money to other finanacial institutions that did not (publically) want bail out money so all these banks (and others) saying "i don't want governemnt money" were getting it anyway out the backdoor of AIG. The whole thing is a set-up to dupe the dumb american people.

Am I right in understanding all this?

Very good point!!!

Is it a coincidence that the finantial institutions all the sudden started showing profits over the last little while? They're not doing any more business, but in the books there are billions of tax payer dollars coming in.

GM will also be just fine... As long as you keep giving them $$$

Wonder how long they can keep this up.

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Re: Daily Digest - March 17

A couple of articles posted on the Global Research site suggest major disagreements between US/UK and European financial powers - doesn't bode well in my opinion.


Wall Street’s and the City’s Attempt to Destabilize the EU Banking System and the Euro

Growing Transatlantic Tensions on the Eve of the G20 Summit
Global Research, March 17, 2009   by GEAB
If we found this a relevant theme, it is because it represents in our opinion a deliberate attempt on the part of Wall Street and the City (2) to make the world believe in some rupture within the EU and to instil the idea that some « deadly » risk is weighing on the Eurozone, by endlessly conveying phony news on a “banking risk coming from Eastern Europe” and by stigmatizing a “cold-feeted” Eurozone as opposed to the “voluntarist” actions initiated by the Americans and the Bristish. One aim is also to divert the attention from the increasing financial problems encountered in New York and London, and to weaken the Europe position on the eve of the G20 summit.

The idea is brilliant: pick up a current and “in the news” theme to ensure interest, add one or two striking analogies to guarantee that the media and internet are eager to circulate the information; then call on a few devoted men and organisations, always available to tell one more lie. With this kind of a cocktail, you can even make people believe for a while that the war in Iraq is a great success, that the subprime crisis will not affect the financial sector, that the financial crisis will not affect real economy, that the crisis is not really severe, and that, if it is, everything is under control! ................


The idea presented in the above article is that Latvia and Hungary are small states with tiny GDP and their difficulties can't threaten the Eurozone (problems in Ukraine, Spain, Ireland, Greece, and Italy are not mentioned...) It is not clear to me that the problems in the European financial sector are really minimal and being unduly over-emphasized in the US and UK press. However the discord represented by this view seems significant. I doubt that the authors are alone in holding it.
The one below summarizes some issues behind one of the buzz phrases I have seen in the MSM: "the Europeans want better regulation, the US wants more stimulus."
I don't think the G20 meeting will have on the agenda finalizing the NWO or a global currency - more likely it will be like a meeting of competing mafia dons - wonder if they will have to check their weapons at the door...

Bernanke's Witness Protection Program
Welcome to the TALF
Global Research, March 17, 2009
CounterPunch - 2009-03-16


The economy is sliding headlong into another Great Depression because of the mispricing of risk, the sale of complex and unregulated derivatives, the vast and unsustainable use of leverage, and shadowy and fraudulent off-balance sheets operations. When the TALF is launched on Thursday, all of these same activities will be reignited with the explicit blessing of the Central Bank. It is a reckless, wacky plan to keep the banks in private hands and to keep asset prices inflated beyond their true market value.

Bernanke and Geithner are moving ahead with their plan despite the clearly articulated guidelines set out by the world's finance ministers and central bankers who convened over the weekend in Sussex, England. Number 7 of the G-20's Communiqué reads:

"We have also agreed to: regulatory oversight, including registration, of all Credit Rating Agencies whose ratings are used for regulatory purposes, and compliance with the International Organization of Securities Commissions (IOSCO) code; full transparency of exposures to off-balance sheet vehicles; the need for improvements in accounting standards, including for provisioning and valuation uncertainty; greater standardization and resilience of credit derivatives markets; the FSF’s sound practice principles for compensation; and the relevant international bodies identify non-cooperative jurisdictions and to develop a tool box of effective counter measure."

It couldn't be much clearer than that. But don't expect "compliance" from Geithner or Bernanke. They have no intention of reworking their plans to meet the demands of the G-20. No way. Multilateralism and cooperation might sound great in speeches, but it's not what drives policy.

The TALF and the "Public-Private Partnership" are another slap in the face of the international community. They violate the spirit and the letter of the G-20 communique. It will be interesting to see if foreign holders of US Treasurys endure this latest insult in silence or if there's a sudden stampede for the exits. There's a sense that the world is getting fed up with the Fed's financial chicanery and would like to chart a different course. Enough is enough.

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Re: Daily Digest - March 17

AIG Backdoor Bailouts

Obama Received a $101,332 Bonus from AIG

Senator Barack Obama received a $101,332 bonus from American
International Group in the form of political contributions according to The two biggest Congressional recipients of bonuses from the A.I.G. are - Senators Chris Dodd and Senator Barack Obama

The A.I.G. Financial Products
affiliate of A.I.G. gave out $136,928, the most of any AIG affiliate,
in the 2008 cycle.  I would note that A.I.G.’s financial products
division is the unit that wrote trillions of dollars’ worth of
credit-default swaps and "misjudged" the risk.

In every sense of the word; this is a bribe.  He promised "no lobbyists" but his administration is loaded with them and it is clear that he is "paying" back their investment in his presidency.


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Re: Daily Digest - March 17 - AIG Backdoor


turbo wrote:

That chart is amazing. Basically it turns out AIG was used by the federal government to essencially launder money to
other finanacial institutions that did not (publically) want bail out money so all these banks (and others) saying "i don't want governemnt money" were
getting it anyway out the backdoor of AIG. The whole thing is a set-up to dupe the dumb american people.

Am I right in understanding all this?


I don't think you see it the right way. The charts let you think the money is simply redistributed among other financial institutions, but this wasn't done if there were no contracts between AIG and the receiving institutions. These institutions had basically securitized their debts (credit default swaps and the like), for which AIG had to pay. It was the blunder of the century of AIG to not see-trough the huge risks they were taking with these insurances, resulting in a corporate record loss in the last quarter of 2008 of more than 61 billion.

But we knew this was going on for AIG since they got basically bankrupt after the Lehman crash, which they also heavily secured..

The most interesting info from the chart is imho the clarifaction of where these  'insurance' payments did go. Notably Goldman Sachs and Deutsche Bank among many others. What you can derive from it is that some institutions might have been well aware of the risks on some of their assets. In the case of The Netherlands (where I come from) Rabobank, a dutch still-wellperforming bank (not publicly listed) insured all of their pension funds for a crashing stock market. It's one of the few pension funds with stil a normal coverage on their future payouts (like 1,28 for every 1 euro to spend, while many are now below legally required norms, like 80 cents for every euro).  

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Re: Daily Digest - March 17

Psycho, I think you are putting lipstick on the pig here. If AIG had gone to bankruptcy there would have been a settlement of some kind with the counterparties - but under bankruptcy terms. Instead the bankrupt shell has been used to launder taxpayer "money"/debt paying off selected parties at face value on the dodgy unregulated assets they bought. Instead of Goldman and the others having to publically acknowledge their bad judgement and losses they were able to receive bailout funds via this shell, no strings attached, no write-down of their losses, no pain for their mistakes. This is a pure case of privatized profit and socialized loss. These losers and theives are made whole at public expense and are free to continue their bad behavior and with the opportunity to buy up assets with their windfall at fire sale prices in a down market. Its rule by the financial mafia.

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Re: Daily Digest - March 17

CB and turbo: I don't understand why seeing the list with banks getting money from AIG, you are suddently surprised. AIG was insuringthose companies so they had to pay. When the AIG bailout was announced last year, where did you think the money will go??

Of course bankrupcy is a different story. Maybe someone explains what "too big to fail" really means.

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Re: Daily Digest - March 17

Whoa...!  The REVOLUTION is starting! 

I'm surprised this hasn't shown up in today's digest:

AIG execs pocket bonuses - then quit
March 18, 2009 - 6:39AM

Eleven executives at AIG quit the troubled insurance giant despite being
paid bonuses of at least one million dollars each to stay, New York
State Attorney General Andrew Cuomo says.

"Eleven of the individuals who received `retention' bonuses of $US1
million or more are no longer working at AIG, including one who received
$US4.6 million," Cuomo wrote in a letter to Barney Frank, chairman of
the financial services committee in the US House of Representatives.

The news undermined the argument of government-appointed AIG boss Edward
Liddy that the bonuses were necessary to retain "the best and brightest

"Given the trillion-dollar portfolio at AIG Financial Products,
retaining key traders and risk managers is critical to our goal of
repayment," he wrote in a letter on Saturday to Treasury Secretary
Timothy Geithner.

Cuomo said that AIG had paid out more than $US160 million in bonuses to
employees at AIG's Financial Products Subsidiary, the branch at the
heart of the company's near collapse.

A total of 73 employees received $US1 million or more, while the top
seven received more than $US4 million each, Cuomo said.

"Thus, last week, AIG made more than 73 millionaires in the unit which
lost so much money that it brought the firm to its knees, forcing a
taxpayer bailout. Something is deeply wrong with this outcome. I hope
the Committee will address it head on," Cuomo wrote to Frank.

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Re: Daily Digest - March 17 - more on stewart v cramer

Morons, the lot of'em....  which is why I refuse to believe in the conspiracies that at times abound on these forums.  They're too stupid to work out a conspiracy that works in their favor.


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Re: Daily Digest - March 17

xpromache, I am not "suddenly suprised" by what went down last fall - I am pissed that there is only real (and feigned) public outrage when the bonus payments became front page news. I was outraged last fall when the "to big to fail" mantra was used to put a gun to the taxpayer's heads. The counterparties identities were kept secret last fall to protect the guilty in this scam.

Read RussB's summary in this thread

that I will quote here:


The facts are that AIG has been running a massive pyramid scheme, selling fake insurance policies to banks to enable them to evade capital reserve requirements. Meanwhile, enabled all the way by corrupt regulators, it was allowed to turn around and claim it wasn't selling insurance after all, and therefore wasn't subject to regulation as an insurer, or to maintain the requisite capital reserves of an insurer. It could instead invest the revenues from this scam in other derivative scams, enabling other pyramid schemes, and so on. All of this was certainly in violation of the spirit of god knows how many laws, and I have no doubt an intrepid prosecutor could prove them guilty in the letter-of-the-law sense.

I feel the bonus story is obscuring the larger issue in this case.

 Matrix, are you referring to the folks at treasury? the morons at AIG? I would say the conspiracy involving quite a few major banks and investment houses has been carried off in plain sight and rather successfully so far - what is your point?

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Re: Daily Digest - March 17

Hello Mike: Good read, put in in the DG for the 18th, caught the one where the employees who had left got their bonuses hadn't seen this.

Mainstream always behind the rest of the globe for national news....

They did well, drove the stock to pennies, got sued from the last CEO, took the company to the edge of the financial cliff, got every American upset took the cash and bailed.

Funny if the joke wasn't on us. Take care 

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Re: Daily Digest - March 17

As I read and re-read the postings here, it is so obvious that we have been, and continue to be, raped by our own institutions and government.  We are absolutely headed down the road to our ultimate demise and the only way we, as humanity, will survive is with the total collapse and "overthrow" of the establishment.  It really is THAT simple imho.

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Re: Daily Digest - March 17



For proof, I can offer some names. Let's start with Maurice "Hank"
Greenberg, who was instrumental in building what is now probably the
world's most reviled corporation, AIG. He resigned as chairman and CEO
in 2005, but still it is logical to assume that few people knew more
about the company than Greenberg. He kept much of his net worth in AIG
stock. He's now lost much of that worth.

Or take Richard Fuld. He is the former chairman of Lehman Brothers, which, as we all know, is no more. He lost about $1 billion.

Or take Citigroup's former chairman, Sanford Weill. He lost about $500 million.

Or take all the good people at Bear Stearns, the company Cramer adored
almost to the bitter end. They went down with their stock.

I was thinking of the conspiracy theory bandided around that the entire collapse was planned to make the rich even richer... I fail to see how anyone's going to get richer with this mess..


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Re: Daily Digest - March 17

Mike, when the going gets tough, the knives come out. There was a big party. A lot of fools showed up along with the invited guests. Now the party is over, but some players were made whole and the sharks are out bargain hunting.

That said, if the whole house comes down there will be few who escape and some of those who still look smart will prove to be fools as well...

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Re: Daily Digest - March 17
jamesdvetter wrote:

As I read and re-read the postings here, it is so obvious that we have been, and continue to be, raped by our own institutions and government.  We are absolutely headed down the road to our ultimate demise and the only way we, as humanity, will survive is with the total collapse and "overthrow" of the establishment.  It really is THAT simple imho.

 True but they have the military. you ready to fight that? 99.99% would say no...welcome to the matrix! lol

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Re: Daily Digest - March 17{5E877CF4-8D66-46A2-A144-3EE1FF6F6C37}

Global trade collapsing

Commentary: U.S. exports falling at 49% pace as customers fade away

By MarketWatch
March 13, 2009
WASHINGTON (MarketWatch) -- For a
while, some analysts held out hope that the rest of the world would be
spared the devastation of the collapse of the great American credit
bubble. The global economy had de-coupled, they said. America's
problems were her own.
No one is saying that any more.
In fact, the latest evidence shows that global trade flows are plunging at an alarming rate.
The Commerce Department reported that the volume of U.S.
imports from abroad fell 4.6% in January while exports declined 8.6%,
the most since the monthly trade figures were first collected in 1992. See full story.
Over the past five months since the credit crunch
intensified, real exports have plunged at a 49% annual rate, while real
imports have fallen at a 30% pace.
The pace of the decline is unprecedented in modern
times, economists say. "We doubt even during the Great Depression that
trade collapsed with such ferocity," said David Greenlaw, an economist
for Morgan Stanley.
The Great Recession, as the IMF calls it, has severed a
crucial link in the global economy. U.S. consumer spending has been the
main engine of growth for the whole world, but that spending was based
largely on phantom gains in asset prices that were inflated by that
cheap money from abroad that has now been disrupted.
The profits that foreign producers made from selling to
America, in turn, created millions of jobs in places such as China,
Southeast Asia and the Persian Gulf. That was then: China reported its
exports plunged 25% in February compared with a year earlier.
Those jobs are disappearing, sparking a great reverse
migration back to rural China, the Philippines and South Asia. In
China, an estimated 20 million workers have lost their jobs. It's not
just the American economy that needs to adjust to the new reality. The
rest of the world will have to re-examine just where growth comes from.
Ultimately, the global economy may find a road to more
balanced growth. Economies from Germany to China may need to rely less
on U.S. consumers and more on their own.
Wherever the road leads, the process will be wrenching and drawn out.
Rex Nutting, Washington bureau chief
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Re: Daily Digest - March 17

Aussie House Prices Face "Perfect

The Daily Reckoning Australia

France - Melbourne, Australia

Wednesday, 18 March 2009



From Dan Denning at
the Old Hat Factory:

--In the States overnight everyone went gaga over the news that construction of
new U.S. houses rose in February by 22% over the January rate. That's an annual
rate. So we'll see how it goes. It had been down six months in a row.

--Who knows why stocks really rally? But it probably wasn't the housing news.
Prices continue to decline in the U.S. market. Inventories are high. And there
is still the matter of millions of Option ARM loans that are still nestled deep
in the bowels of the global financial system. We'll get to them in a moment. Oh
yes we will precious.

--First, a bit of polly bashing. --"Every single job loss in Australia is
a human tragedy," Wayne Swan has said. "It impacts on families and
local communities, as well as the economy."

--Has the Treasurer never been fired? Job losses are indeed a cause for personal
distress. We've been through a few. You have to regroup, gather your wits,
tighten your belt, round up other useful cliches, and do what you can to

--But a human tragedy? That is utter nonsense. There are plenty of human
tragedies that happen every day. Children die of cancer. Orphans are hit by
trucks. Supermodels go hungry.

--Job losses are a normal part of the economy. Hopefully you have an economy
where new jobs replace the ones lost. This happens if you have a tax and
regulatory system that rewards initiative, hard-work, and risk taking. The
trouble with the emotional response to job losses, as much as it displays your
sympathy and compassion, is that it encourages you to try and build a system
where no one ever loses their job.

--If you do this, you end up with a system that creates fewer jobs and less
wealth. We won't go into it in more depth. But if you're keen on the subject,
we recommend this
by Charles Murray.

--What about the Aussie housing market, you say? Glad you asked...

--"The Australian housing market is facing the prospect of a 'perfect
storm' of financial pressures, including high mortgage debt, overvalued homes
and rising unemployment, which could see prices eventually fall by as much as
30 per cent, investors have been warned," reads a story in today's
Read it and weep.

--There is a lively debate in the comments
over at our website about Aussie house prices. We don't have much
to add. It's true the market has shown surprising resilience. The Canadian
research group that the Age report cites says it can't last.

--"The housing market is looking particularly vulnerable, with
over-inflated prices, deteriorating affordability and slowing household income
growth...There is an increasing possibility of a major housing bust in

--It does feel a bit like the eye of a hurricane, although we've never been in
one. The sky is blue. The sun is out. The wind is down. Let's have a picnic.
We'll bring the cricket bat and stumps, you bring the food and beer.

--On a more serious note, as we've written in the introductory article to the
March Diggers
and Drillers
(scheduled for release this week), the only
good news in all of this is that you have a pretty good idea of where all of
this is headed (huge inflation) and one way to prepare for it (metals and
energy shares).

--If more bank losses are head (see below) then monetary expansion is on the
cards to try and counter it. Deleveraging leads to lower asset prices. The Fed
wants to fight it. We're not saying it will be successful. But there's no doubt
Big Ben will try.

--"Bernanke May Need `Massive' Asset Purchases to Counter Deeper
Contraction," reports Bloomberg. "The Federal Open Market Committee,
gathering today and tomorrow in Washington, needs to redouble its efforts after
the central bank's balance sheet shrank 17 percent from a $2.3 trillion
December peak."

--Here's a thought though. The Fed may choose to expand its balance sheet by
buying Treasuries. But it may not prop up markets at all. As Peter Schiff noted
in a pod-cast
last week, the Fed may end up being the only large buyer of
Treasuries while everyone else sells. U.S. interest rates will rise and the
U.S. dollar will...not rise.

--Peter's suggestion a much more rapid dollar crisis than seems possible at the
moment, given the casual way through which officials are waltzing through the
crisis. But this G20 meeting in London next month should be interesting. We
expect there to be social unrest and violence. We also expect that the world's
investors may realise the markets overseers have no freakin' clue what they're
doing. After that?

--Well, your guess is as good as ours. But we're looking to gold and oil. More
on that later this week.

--Now about those mortgages...You remember the good old Option ARM don't you?
That's the loan that allows you to choose the size of the payment you make on
your monthly mortgage. Typically the loan begins with a twelve month
introductory rate. After that, you can choose the minimum payment option.

--If you choose the minimum payment option, you actually pay less each month
that the interest on your loan. That interest is deferred, but it's added to
your principal. That means your principal is growing all the time. This is why
these loans were also referred to as negative amortisation (or neg am) loans.
You weren't paying it off. You were actually growing it.

--We hope you'll bear with us for a moment as we go through this. The reason?
There's a slight sense of relief in markets right now. Everyone is throwing
stones at AIG. And with the market putting a few good up days, people are
losing the sense that our financial system faces serious problems. But they are
trillions of dollars serious. And no amount of pleading by the U.S. Treasury
Secretary for bankers to lend will change that. More losses are head.

--But what size will the losses be? Another trillion? Another two trillion?
Well let's exclude commercial property and loans securitised with credit card
receivables or auto loans. Let's just look at Option ARMs.

--Remember, an Option ARM loan "recasts" after five years to a new
principal. The interest rate might even stay the same. But if the loan has been
negatively amortising (growing as deferred interest payment are added to the
principal), then the size of the loan is going to be much larger (an average of
30%, by some estimates).

--Even if you're paying the same interest rate, households at the margin are
going to have a much harder time making minimum payments on loans that are 30%
larger. And we're not talking a small amount here. The Washington Post reports
that between 2004 and 2007, over US$750 billion in Option ARM loans were
originated. The scary part is that, as of late December last year, 28% of those
loans were either delinquent or already in foreclosure.

--And that's before the "recasts" have even hit the borrowers. Most
"recasts" don't happen until five years down the track. That means
mortgage holders wouldn't confront the prospect of a higher monthly payment
until 2011 or 2012. The chart below from Credit Suisse shows the pig in the
python problem.

Source: Credit

has solved the interest rate problem for home buyers with adjustable rate
mortgages by slashing short-term rates to zero, effectively. What's more, he's
conducted purchases of mortgage backed securities by Fannie Mae and Freddie Mac
in an attempt to bring down mortgage rates directly.

--The looming trouble, however, is that negative amortisation ads to principal.
It does so at a time when home prices continue to fall and unemployment is
rising. Making a much higher payment is pretty shocking to begin with. It's
near impossible when you're out of a job.

--The trouble will hit sooner than the Credit Suisse chart suggests. Option
ARMs automatically recast at the higher principal level once a predetermined
loan to value ratio (LTV) is reached. For example, say you take out an Option
ARM at an 80% (LTV) and immediately begin making the minimum payment. Your loan
automatically recasts at an 85% LTV ratio. In other words, your loan recasts
sooner than the five years you expected because of negative amortisation.

--This is why the Credit Suisse chart shows a swelling amount of recasts
beginning in April of 2009 and peaking in December of this year. It turns out
many of those who took out Option ARMs chose the minimum payment. This led to
much faster growth in the loan principal, thanks to neg am. And now, it's going
to lead to a much sooner recast of the loan.

--As you may know, the current mortgage relief plans in the States, as feeble
as they are, do not allow you to refinance your home if you already have
negative equity. This means that in the coming months-starting next month-you
have millions of home owners who will face much higher monthly payments on
their mortgage.

--Do you think they'll pay them? Can they afford to? What will happen to house
prices as this wave of neg am Option ARMs goes into default and foreclosure?
There could be some real bargains in the housing market.

--But for the banks, there will be some real pain. The banks, the insurance
companies, the usual suspects, these are the institutions that stand the most
to lose from losses on that $750 billion wave of Option ARM recasts. We're not
saying all those loans will go into default. But at the very least, the losses
are certain to be taken, even though no one knows how big they will be.

--Now maybe all this is "priced in" to bank shares and financial
stocks. It's pretty hard to price in what you don't know, though. What seems
certain is that banks would want to hoard capital in the coming months, not
lend it. They face hundreds of billions more in losses, and that's just from
residential real estate (not commercial real estate or corporate bonds).

--How will credit recover under those conditions? We reckon it won't. In fact,
the second contraction of the credit crisis could be worse than the first. You
should consider that as you ponder your decision to get in our out of the stock
market. Think of the number of companies that are already locked out of access
to capital and credit. Will that improve in the coming months?

--There's a very real chance it could get much worse. Of course we hope that's
not true. But if it is, it means all those clowns holding press conferences
about bailouts and recoveries are just whistling past the grave yard.

--If they were smart, they'd be storing up cash and keeping their monkey yaps
shut, or better yet, setting up a warehouse to settle all the CDS AIG has
underwritten so it doesn't continue to be a giant conduit between the American
tax payer and AIGs
(investment banks and commercial banks that bought CDS from

fujisan's picture
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Daily Digest - March 17 / UK - Bank debated level of quantitative easing


The Bank of England’s Monetary Policy Committee concluded after a lively debate on the right level of quantitative easing earlier this month that too small a boost to the economy could cause markets to lose confidence in its ability to boost demand at all.


“The initial programme of asset purchases needed to be on a scale large enough to demonstrate that the committee would do whatever was needed to boost nominal spending sufficiently to keep inflation at target in the medium term,” the minutes note.


The minutes also revealed that the committee voted unanimously to cut interest rates to 0.5 per cent but that there was considerable debate about whether a further half-point cut in the Bank rate was either desirable or useful, with some expressing concern about the impact on profit margins in the banking system.


Come on, come on ... (hyper)inflation !

FireJack's picture
Status: Silver Member (Offline)
Joined: Feb 8 2009
Posts: 156
Re: Daily Digest - March 17

-There's a very real chance it could get much worse. Of course we hope that's
not true. But if it is, it means all those clowns holding press conferences
about bailouts and recoveries are just whistling past the grave yard.


A chance?!?!?!?!   Now even in canada the greed is becoming apparent as bad loans and overpriced houses are suddenly seen as such.


I wonder is there other types of mortgages set to fail on mass? Seems there will be a lot of people who have othere types of mortgages who will no longer be able to pay also.  

CB's picture
Status: Gold Member (Offline)
Joined: Mar 18 2008
Posts: 365
Re: Daily Digest - March 17

Army reviews troop use after fatal Ala. shootings

Mar 18th, 2009 | SAMSON, Ala. -- The Army has launched an inquiry into whether federal laws were broken when soldiers were sent to an Alabama town after 11 people died in a shooting spree.

The Army confirmed Wednesday that 22 military police and an officer from Fort Rucker were sent to the nearby town of Samson after slayings last week. The town's tiny police force and county officers were stretched to the limit after a gunman killed 10 people and himself.

Authorization from the governor or president is typically required for the deployment of federal troops on U.S. soil. It's not clear who ordered the troops sent to Samson.

An Army spokesman says the military is trying to determine what happened. Among the questions is why the troops were sent and what they did while there.

Davos's picture
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - March 17

Hello FireJack:

You wrote "I wonder is there other types of mortgages set to fail on mass? Seems there will be a lot of people who have othere types of mortgages who will no longer be able to pay also.  "

Don't know if you have seen this yet....



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