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With only $24.5 billion left in FX reserves after valiantly defending major capital outflows since the Fed’s Taper announcement, the Kazakhstan central bank has devalued the currency (Tenge) by 19% – its largest adjustment since 2009. At 185 KZT to the USD, this is the weakest the currency has ever been as the central bank cites weakness in the Russian Ruble and “speculation” against its currency as drivers of the outflows (which will be “exhausted” by this devaluation according to the bank). The new level will improve the country’s competitiveness (they are potassium heavy) but one wonders whether, unless Yellen folds whether it will help the outflows at all. The Kazakhstan stock index is up 12% on the news…
The tenge, introduced in 1993 after the breakup of the Soviet Union two years earlier, weakened the most against the dollar last month since July. Kazakhstan devalued its currency by 21 percent in February 2009, as the biggest energy producer in central Asia spent billions of dollars to support the economy and bail out its biggest lenders following the collapse of Lehman Brothers Holdings Inc.
“The devaluation was a surprise for many people, considering the central bank’s assurances that the exchange rate is stable,” Damir Seisebayev, director of the analytical department at ?? Private Asset Management in Almaty, said by e-mail. “But you have to be realistic. What is the tenge? It’s the ruble rate multiplied by five. This is a tested formula.”
The Kazakhstan Stock Exchange gained 12 percent after the announcement, data on the bourse’s website show.
So it must be great news, right? Just as Venezuelan stock holders…
“The move reflects a combination of factors, including the steady deterioration in the current-account position, worries over the impact of weak growth in Russia and the ruble’s managed depreciation,” Tim Ash, chief emerging-markets economist at Standard Bank Group Plc. in London, said in a note today.
JPMorgan Sued For Crony Justice – Presenting “A Decade of Illegal Conduct by JP Morgan Chase” | Zero Hedge
Earlier today, the non-profit organization Better Markets did what so many others have only dreamed of doing – they sued JPMorgan.
Specifically, as they disclose in the fact sheet posted on their website, they are “challenging the historic and unprecedented $13 billion settlement agreement between the U.S. Department of Justice and JP Morgan Chase (“Agreement”). Better Markets alleges in its complaint that the DOJ violated the Constitution and laws of the United States by using a mere contractual agreement to resolve claims of historic importance without subjecting the Agreement to independent judicial review. In effect, the DOJ acted as investigator, prosecutor, judge, jury, sentencer, and collector, without any check on its authority or actions, even though the amount is the largest in the 237 year history of the United States. Because the DOJ has declared its intention to use the Agreement as a “template” in future similar cases, it is imperative that the DOJ’s unlawful and secretive approach in the settlement process be subjected to judicial review.”
We wish them the best of luck, as in a “crony jsutice” system as corrupt as this one – perhaps best described, paradoxically enough by the fictional movie The International – where the same DOJ previously implicitly admitted it will not prosecute “systemically important” firms like JPM to the full extent of the law and instead merely lob one after another wrist slap at them to placate the peasantry, any hope for obtaining true justice is impossible.
That said, the key aspects of the Better Markets lawsuit deserve attention. They are broken down as follows:
For years leading up to the financial crisis of 2008, JP Morgan Chase allegedly engaged in pervasive fraud in the packaging and sale of thousands of mortgage-backed securities to investors. Those securities were stuffed with subprime loans that failed to meet applicable underwriting criteria. Employees, managers, and potentially high-level executives of JP Morgan Chase knew that the securities were riddled with toxic loans, but they allegedly concealed the truth from investors when they marketed and sold the securities. Investors lost huge but still unknown sums of money as a result of the fraud, and the bank’s illegal conduct contributed directly to the biggest financial crash since 1929 and the worst economy since the Great Depression of the 1930s.
After negotiating the Agreement in complete secrecy, the DOJ announced the $13 billion deal on November 19, 2013, claiming that it was holding JP Morgan Chase accountable for its illegal activities. Under the Agreement, DOJ grants JP Morgan Chase broad civil immunity in exchange for a $2 billion civil penalty, along with $4 billion in “consumer relief” for the benefit of homeowners with problem mortgages. The Agreement also allocates $7 billion to eight other agencies or states to resolve their claims against JP Morgan Chase.
Key Allegations in the Complaint
The Agreement was struck under the most extraordinary circumstances. For example—
- THE HISTORIC CLAIMS: The Agreement resolved claims of pervasive fraud that contributed to the worst financial crash since 1929 and the worst economy since the Great Depression of the 1930s.
- THE LARGEST AMOUNT EVER: The settlement amount was the largest in U.S. history from any single entity by more than 300%.
- THE BIGGEST BANK: JP Morgan Chase is the largest, richest, and most well-connected Wall Street bank in the United States.
- THE HIGHEST-LEVEL NEGOTIATORS: The Attorney General and other senior DOJ political appointees negotiated directly and entirely in secret with the CEO of JP Morgan Chase, someone who was considered a possible Treasury Secretary just a few years ago.
- THE $10 BILLION PHONE CALL: The cellphone of DOJ’s third highest ranking official rang with the “familiar” phone number of JP Morgan Chase’s CEO, who called to offer billions of dollars to stop DOJ from holding a press conference and filing a lawsuit in just a few hours. The call worked, and the press conference and lawsuit were both called off.
- THE UNPRECEDENTED AGREEMENT: DOJ gave complete civil immunity to JP Morgan Chase for defrauding thousands in exchange for $13 billion, via a contract that was negotiated and finalized in secret without any review or approval by a federal court.
?Notwithstanding the historic nature of the settlement, the Agreement was never subjected to judicial review, so there has been no independent evaluation of its terms. Furthermore, the vague settlement documents fail to disclose critically important information about every aspect of the deal. For example, the Agreement fails to identify or explain—
- THE LOSSES: How much did JP Morgan Chase’s clients, customers, counterparties, investors, and others lose as a result of its fraudulent conduct? $100 billion? $200 billion? More?
- THE PROFITS: How much revenue, profits, and other benefits did JP Morgan Chase receive as a result of its fraudulent conduct, and was it all disgorged? $10 billion? $20 billion? More?
- THE BONUSES: Who received what amount of bonuses for the illegal conduct?
- THE INVESTIGATION: What was the scope and thoroughness of the investigation that provided the basis for the Agreement?
- THE FRAUD: What are the material facts of the illegal conduct by JP Morgan Chase and the specific violations of law that were committed?
- THE CULPRITS: What exactly did the individual executives, officers, managers, and employees involved in the illegal conduct actually do to carry out the fraud, and do any of them still work for the bank?
- THE CORRECTIVE ACTION: Why did the contract fail to impose on JP Morgan Chase any obligation to change any of its business or compliance practices, which are standard conduct remedies that regulators routinely require? And how can the sanctions effectively punish and deter JP Morgan Chase, given its wealth and its extensive history of lawless conduct?
- THE LACK OF ADMISSIONS: Why are there no admissions of fact or law by JP Morgan Chase, and what, if any, are the concrete legal implications of their so-called “acknowledgment”?
By entering the Agreement without seeking any judicial review and approval, the DOJ violated the Constitution and laws of the United States.
- The Executive Branch, acting through the DOJ, violated the separation of powers doctrine by unilaterally striking a bargain with JP Morgan Chase to resolve unprecedented matters of historic importance, without seeking any judicial review and approval of the Agreement.
- The DOJ violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) by failing to commence a civil action in federal court so that the court could, among other things, assess the civil penalty.
- The DOJ acted arbitrarily and capriciously by, among other things, entering the Agreement without seeking judicial review and approval.
* * *
But perhaps the most informative aspect of the lawsuit fact sheet is simply stepping back and observing the relentless illegal transgressions by Jamie Dimon’s firm. Better Markets summarizes them best as follows:
Highlights From A Decade of Illegal Conduct by JP Morgan Chase
- United States v. JPMorgan Case Bank, NA, No-1:14-cr-7 (S.D.N.Y. Jan 8, 2014) ($1.7 billion criminal penalty); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-13-109 (Jan. 7, 2014) ($350 million civil penalty); In re JPMorgan Chase Bank, N.A., Dept. of the Treasury Financial Crimes Enforcement Network Admin. Proceeding No. 2014-1 (Jan. 7, 2014) ($461 million civil penalty) (all for violations of law arising from the bank’s role in connection with Bernie Madoff’s Ponzi scheme, the largest in the history of the U.S.);
- In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 14-01 (Oct. 16, 2013) ($100 million civil penalty); In re JPMorgan Chase & Co., SEC Admin. Proceeding No. 3-15507 (Sept. 19, 2013) ($200 million civil penalty); In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 13-031-CMP-HC (Sept. 18, 2013) ($200 million civil penalty); UK Financial Conduct Authority, Final Notice to JP Morgan Chase Bank, N.A. (Sept. 18, 2013) (£137.6 million ($221 million) penalty); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-2013-75, #2013-140 (Sept. 17, 2013) ($300 million civil penalty) (all for violations of federal law in connection with the proprietary trading losses sustained by JP Morgan Chase in connection with the high risk derivatives bet referred to as the “London Whale”);
- In re JPMorgan Chase Bank, N.A., CFPB Admin. Proceeding No. 2013-CFPB-0007 (Sept. 19, 2013) ($20 million civil penalty and $309 million refund to customers); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-2013-46 (Sept. 18, 2013) ($60 million civil penalty) (both for violations in connection with JP Morgan Chase’s billing practices and fraudulent sale of so-called Identity Protection Products to customers);
- In Re Make-Whole Payments and Related Bidding Strategies, FERC Admin. Proceeding Nos. IN11-8-000, IN13-5-000 (July 30, 2013) (civil penalty of $285 million and disgorgement of $125 million for energy market manipulation);
- SEC v. J.P. Morgan Sec. LLC, No. 12-cv-1862 (D.D.C. Jan. 7, 2013) ($301 million in civil penalties and disgorgement for improper conduct related to offerings of mortgage-backed securities);
- In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 12-37 (Sept. 27, 2012) ($600,000 civil penalty for violations of the Commodities Exchange Act relating to trading in excess of position limits);
- In re JPMorgan Chase Bank, N.A., CFTC Admin. Proceeding No. 12-17 (Apr. 4, 2012) ($20 million civil penalty for the unlawful handling of customer segregated funds relating to the bankruptcy of Lehman Brothers Holdings, Inc.);
- United States v. Bank of America, No. 12-cv-00361 (D.D.C. 2012) (for foreclosure and mortgage-loan servicing abuses during the Financial Crisis, with JP Morgan Chase paying $5.3 billion in monetary and consumer relief);
- In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 12-009-CMP-HC (Feb. 9, 2012) ($275 million in monetary relief for unsafe and unsound practices in residential mortgage loan servicing and foreclosure processing);
- SEC v. J.P. Morgan Sec. LLC, No. 11-cv-03877 (D.N.J. July 7, 2011) ($51.2 million in civil penalties and disgorgement); In re JPMorgan Chase & Co., Federal Reserve Board Admin. Proceeding No. 11-081-WA/RB-HC (July 6, 2011) (compliance plan and corrective action requirements); In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-11-63 (July 6, 2011) ($22 million civil penalty) (all for anticompetitive practices in connection with municipal securities transactions);
- SEC v. J.P. Morgan Sec., LLC, No. 11-cv-4206 (S.D.N.Y. June 21, 2011) ($153.6 million in civil penalties and disgorgement for violations of the securities laws relating to misleading investors in connection with synthetic collateralized debt obligations);
- In re JPMorgan Chase Bank, N.A., OCC Admin. Proceeding No. AA-EC-11-15, #2011-050 (Apr. 13, 2011) (consent order mandating compliance plan and other corrective action resulting from unsafe and unsound mortgage servicing practices);
- In re J.P. Morgan Sec. Inc., SEC Admin. Proceeding No. 3-13673 (Nov. 4, 2009) ($25 million civil penalty for violations of the securities laws relating to the Jefferson County derivatives trading and bribery scandal);
- In re JP Morgan Chase & Co, Attorney General of the State of NY Investor Protection Bureau, Assurance of Discontinuance Pursuant to Exec. Law §63(15) (June 2, 2009) ($25 million civil penalty for misrepresenting risks associated with auction rate securities);
- In re JPMorgan Chase & Co., SEC Admin. Proceeding No. 3-13000 (Mar. 27, 2008) ($1.3 million civil disgorgement for violations of the securities laws relating to JPM’s role as asset-backed indenture trustee to certain special purpose vehicles);
- In re J.P. Morgan Sec. Inc., SEC Admin. Proceeding No. 3-11828 (Feb. 14, 2005) ($2.1 million in civil fines and penalties for violations of Securities Act record-keeping requirements); and
- SEC v. J.P. Morgan Securities Inc., 03-cv-2939 (WHP) (S.D.N.Y. Apr. 28, 2003) ($50 million in civil penalties and disgorgements as part of a global settlement for research analyst conflict of interests).
Did we mention that nobody from JPM has gone to prison, and instead as of late last week, one of the biggest JPM culprits was set to become a member of the CFTC’s advisory panel before the people and not the regulators, were forced to step in? Why? #AskJPM
A classicial economist… and Harvard professor… preaching to the world that one’s money is not safe in the US banking system due to Ben Bernanke’s actions? And putting his withdrawal slip where his mouth is and pulling $1 million out of Bank America? Say it isn’t so…
From Terry Burnham, former Harvard economics professor, author of “Mean Genes” and “Mean Markets and Lizard Brains,” provocative poster on this page and long-time critic of the Federal Reserve, argues that the Fed’s efforts to strengthen America’s banks have perversely weakened them. First posted in PBS.
Is your money safe at the bank? An economist says ‘no’ and withdraws his
Last week I had over $1,000,000 in a checking account at Bank of America. Next week, I will have $10,000.
Why am I getting in line to take my money out of Bank of America? Because of Ben Bernanke and Janet Yellen, who officially begins her term as chairwoman on Feb. 1.
Before I explain, let me disclose that I have been a stopped clock of criticism of the Federal Reserve for half a decade. That’s because I believe that when the Fed intervenes in markets, it has two effects — both negative. First, it decreases overall wealth by distorting markets and causing bad investment decisions. Second, the members of the Fed become reverse Robin Hoods as they take from the poor (and unsophisticated) investors and give to the rich (and politically connected). These effects have been noticed; a Gallup poll taken in the last few days reports that only the richest Americans support the Fed. (See the table.)
Why do I risk starting a run on Bank of America by withdrawing my money and presuming that many fellow depositors will read this and rush to withdraw too? Because they pay me zero interest. Thus, even an infinitesimal chance Bank of America will not repay me in full, whenever I ask, switches the cost-benefit conclusion from stay to flee.
Let me explain: Currently, I receive zero dollars in interest on my $1,000,000. The reason I had the money in Bank of America was to keep it safe. However, the potential cost to keeping my money in Bank of America is that the bank may be unwilling or unable to return my money.
They will not be able to return my money if:
- Many other depositors like you get in line before me. Banks today promise everyone that they can have their money back instantaneously, but the bank does not actually have enough money to pay everyone at once because they have lent most of it out to other people — 90 percent or more. Thus, banks are always at risk for runs where the depositors at the front of the line get their money back, but the depositors at the back of the line do not. Consider this image from a fully insured U.S. bank, IndyMac in California, just five years ago.
- Some of the investments of Bank of America go bust. Because Bank of America has loaned out the vast majority of depositors’ money, if even a small percentage of its loans go bust, the firm is at risk for bankruptcy. Leverage, combined with some bad investments, caused the failure of Lehman Brothers in 2008 and would have caused the failure of Bank of America, AIG, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and many more institutions in 2008 had the government not bailed them out.
In recent days, the chances for trouble at Bank of America have become more salient because of woes in the emerging markets, particularly Argentina, Turkey, Russia and China. The emerging market fears caused the Dow Jones Industrial Average to lose more than 500 points over the last week.
Returning to my money now entrusted to Bank of America, market turmoil reminded me that this particular trustee is simply not safe. Or not safe enough, given the fact that safety is the reason I put the money there at all. The market turmoil could threaten “BofA” with bankruptcy today as it did in 2008, and as banks have experienced again and again over time.
If the chance that Bank of America will not return my money is, say, a mere 1 percent, then the expected cost to me is 1 percent of my million, or $10,000. That far exceeds the interest I receive, which, I hardly need remind depositors out there, is a cool $0. Even a 0.1 percent chance of loss has an expected cost to me of $1,000. Bank of America pays me the zero interest rate because the Federal Reserve has set interest rates to zero. Thus my incentive to leave at the first whiff of instability.
Surely, you say, the federal government is going to keep its promises, at least on insured deposits. Yes, the Federal Government (via the FDIC) insures deposits in most institutions up to $250,000. But there is a problem with this insurance. The FDIC currently has far less money in its fund than it has insured deposits: as of Sept. 1, about $41 billion in reserve against $6 trillion in insured deposits. (There are over $9 trillion on deposit at U.S. banks, by the way, so more than $3 trillion in deposits is completely uninsured.)
It’s true, of course, that when the FDIC fund risks running dry, as it did in 2009, it can go back to other parts of the federal government for help. I expect those other parts will make the utmost efforts to oblige. But consider the possibility that they may be in crisis at the very same time, for the very same reasons, or that it might take some time to get approval. Remember that Congress voted against the TARP bailout in 2008 before it relented and finally voted for the bailout.
Thus, even insured depositors risk loss and/or delay in recovering their funds. In most time periods, these risks are balanced against the reward of getting interest. Not so long ago, Bank of America would have paid me $1,000 a week in interest on my million dollars. If I were getting $1,000 a week, I might bear the risks of delay and default. However, today I am receiving $0.
So my cash is leaving Bank of America.
But if Bank of America is not safe, you must be wondering, where can you and I put our money? No path is without risk, but here are a few options.
- Keep some cash at home, though admittedly this runs the risk of loss or setting yourself up as a target for criminals.
- Put some cash in a safety box. There is an urban myth that this is illegal; my understanding is that cash in a safety box is legal. However, I can imagine scenarios where capital controls are placed on safety deposit box withdrawals. And suppose the bank is shut down and you can’t get to the box?
- Pay your debts. You don’t need to be Suze Orman to know that you need liquidity, so do not use all your cash to pay debts. However, you can use some surplus, should you have any.
- Prepay your taxes and some other obligations. Subject to the same caveat about liquidity, pay ahead. Make sure you only pay safe entities. Your local government is not going away, even in a depression, so, for example, you can prepay property taxes. (I would check with a tax accountant on the implications, however.)
- Find a safer bank. Some local, smaller banks are much safer than the “too-big-to-fail banks.” After its mistake of letting Lehman fail, the government has learned that it must try to save giant institutions. However, the government may not be able to save all failing institutions immediately and simultaneously in a crisis. Thus, depositors in big banks face delays and defaults in the event of a true crisis. (It is important to find the right small bank; I believe all big banks are fragile, while some small banks are robust.)
Someone should start a bank (or maybe someone has) that charges (rather than pays) interest and does not make loans. Such a bank would be a good example of how Fed actions create unintended outcomes that defeat their goals. The Fed wants to stimulate lending, but an anti-lending bank could be quite successful. I would be a customer.
(Interestingly, there was a famous anti-lending bank and it was also a “BofA” — the Bank of Amsterdam, founded in 1609. The Dutch BofA charged customers for safe-keeping, did not make loans and did not allow depositors to get their money out immediately. Adam Smith discusses this BofA favorably in his “Wealth of Nations,” published in 1776. Unfortunately — and unbeknownst to Smith — the Bank of Amsterdam had starting secretly making risky loans to ventures in the East Indies and other areas, just like any other bank. When these risky ventures failed, so did the BofA.)
My point is that the Federal Reserve’s actions have myriad, unanticipated, negative consequences. Over the last week, we saw the impact on the emerging markets. The Fed had created $3 trillion of new money in the last five-plus years — three times more than in its entire prior history. A big chunk of that $3 trillion found its way, via private investors and institutions, into risky, emerging markets.
Now that the Fed is reducing (“tapering”) its new money creation (now down to $65 billion a month, or $780 billion a year, as of Wednesday’s announcement), investments are flowing out of risky areas. Some of these countries are facing absolute crises, with Argentina’s currency plummeting by more than 20 percent in under one month. That means investments in Argentina are worth 20 percent less in dollar terms than they were a month ago, even if they held their price in Pesos.
The Fed did not plan to impoverish investors by inducing them to buy overpriced Argentinian investments, of course, but that is one of the costly consequences of its actions. If you lost money in emerging markets over the last week, at one level, it is your responsibility. However, it is not crazy for you to blame the Fed for creating volatile prices that made investing more difficult.
Similarly, if you bought gold at the peak of almost $2,000 per ounce, you have lost one-third of your money; you share the blame for your golden losses with Alan Greenspan, Ben Bernanke and Janet Yellen. They removed the opportunities for safe investments and forced those with liquid assets to scramble for what safety they thought they could find. Furthermore, the uncertainty caused by the Fed has caused many assets to swing wildly in value, creating winners and losers.
The Fed played a role in the recent emerging markets turmoil. Next week, they will cause another crisis somewhere else. Eventually, the absurd effort to create wealth through monetary policy will unravel in the U.S. as it has every other time it has been tried from Weimar Germany to Robert Mugabe’s Zimbabwe.
Even after the Fed created the housing problems, we would have been better of with a small 2009 depression rather than the larger depression that lies ahead. See my Making Sen$e posts “The Stockholm Syndrome and Printing Money” and “Ben Bernanke as Easter Bunny: Why the Fed Can’t Prevent the Coming Crash” for the details of my argument.
Ever since Alan Greenspan intervened to save the stock market on Oct. 20, 1987, the Fed has sought to cushion every financial blow by adding liquidity. The trouble with trying to make the world safe for stupidity is that it creates fragility.
Bank of America and other big banks are fragile — and vulnerable to bank runs — because the Fed has set interest rates to zero. If a run gathers momentum, the government will take steps to stem it. But I am convinced they have limited ammunition and unlimited problems.
What is the solution? For you, save yourself and your family. For the system, revamp the Federal Reserve. The simplest first step would be to end the dual mandate of price stability and full employment. Price stability is enough. I favor rules over intervention. We don’t need a maestro conducting monetary policy; we need a system that promotes stability and allows people (not printing presses) to make us richer.
From Bernanke’s infamous 2008 “not forecasting a recession” call to Fannie Mae CEO Franklin Raines 2004 “subprime assets are riskless” commentary, the following 10 “predictions” – as opposed to Wien “surprises” – will go down in infamy for their degree of errant-ness…
10) Ben Bernanke, 10th January 2008 – “The Federal Reserve is currently not forecasting a recession.”
A few months later, United States entered one of the wort recessions ever.
9) Herbert Hoover 1928: “The United States are nearer to the final triumph over poverty than ever before in the history of any land.”
The Great Depression started a year after. Stocks lost almost 80% under his presidency.
8) James Glassman & Kevin Hassett (writers of the book : DOW 36000), 1999: “Stocks are now in the midst of a one-time-only rise to much higher ground–to the neighborhood of 36,000 on the Dow Jones industrial average.”
According to their estimates, the Dow Jones was supposed to reach 36,000 points. The following years were marked by the Internet bubble, the Dow went down from 10,000 (book edition) to 7,200.
7) Georges W. Bush, 15th July 2008: “We can have confidence in the long-term foundation of our economy… I think the system basically is sound. I truly do.”
This sentence was pronounced exactly two months before the bankruptcy of Lehman Brothers.
6) Donald Luskin (US investment guru), 14th September 2008: “Anyone who says we’re in a recession, or heading into one—especially the worst one since the Great Depression—is making up his own private definition of ‘recession’.”
According to Luskin, Obama deliberately worsened economic figures to discredit McCain for the presidential election that took place two months later. Lehman Brothers filed for bankruptcy the next day.
5) Irving Fisher (economist), 15th October 1929: “Stock prices have reached what looks like a permanently high plateau.”
The crash of 1929 began the following week, the Dow Jones losing up to 85% of its value from the “permanent plateau”!
4) David Lereah (US economist), 12th August 2005: “I truly believe the housing market will continue to expand. But rather than the double-digit price appreciation we’ve seen, we might see that drop to a 5 or 6 percent appreciation sometime toward the end of next year.”
Real Estate prices fell sharper between 2006 and 2008 than during the Great Depression.
3) Joseph Cassano (Head of Financial Products at AIG), 2007: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these Credit Default Swap transactions.”
The following year, AIG was rescued by the government after huge losses. Especially on CDS positions…
2) Franklin Raines (CEO of Fannie Mae), 10th June 2004: “These supbrime assets are so riskless that their capital for holding them should be under 2 percent.”
The U.S. government intervened in 2008 to rescue Fannie Mae – in big trouble during the subprime crisis.
1) David Woo (Analyst, Bank of America), 5th December 2013 about bitcoin: “Our fair value analysis implies a price of $1300”
The future will tell whether it is reasonable to assign a “fair value” to this virtual currency. Meanwhile, the bitcoin still lost 46% of its value Friday…
The rock is reality. The squishy place is the illusion that pervasive racketeering is an okay replacement for an economy. The essence of racketeering is the use of dishonest schemes to get money, often (but not always) employing coercion to make it work. Some rackets can function on the sheer cluelessness of the victim(s).
Is it fair to suppose that money management is at the heart of the sort of advanced, complex economy that developed early in the 20th century? I think so. Money is the lifeblood of trade and of investment in productive activities that support trade. Of course, in order for money to have meaning, to function in such transactional relations, the people must be convinced that it legitimately represents its face value. Otherwise, money must be labeled “money” — that is, a medium of exchange suspected of false value. An economy that uses “money” — especially an economy of rackets — is an economy in a lot of trouble, and that is where ours is in December 2013.
The trouble reached escape velocity in the fall of 2008 when a particular brand of racket among the Wall Street kit-bag of rackets got badly out-of-hand, namely the business of selling securitized bundled mortgages and their “innovative” derivative “products” to dupes unaware that they were booby-trapped for failure which would, perversely, hugely reward the seller of such trash paper. These were, in the immortal words of Senator Carl Levin (D-Mich), the “really shitty deal[s]” propagated by the likes of the Goldman Sachs crypto-bank — so-called collateralized debt obligations — pawned off on credulous pension fund managers and other “marks” around the world greedy for “yield.”
It turned out that all the large banks trafficking in such booby-trapped contracts ended up choking on them when “the music stopped” — that is, when the derivative “swaps” payoffs at the heart of this particular racket began to fail, sending up a general alarm that all such “products” were primed to blow up the entire “banking” system. By the way, the quotation marks I so liberally resort to are necessary to denote that in such a matrix of rackets things are not what they appear to be but only what they pretend to be.
The failure of Bear Stearns followed by the implosion of Lehman Brothers and the near-death experience of AIG alerted “civilians” outside Wall Street that the banks were linked in a web of fraud and insolvency and had to be “rescued” in order for the rest of America to keep its “way of life” going. The rescue remedy proved to be several new layers of fraud that have now matured into institutionalized rackets. The best known are the Siamese twins of “Quantitative Easing” and zero interest rate policy (ZIRP). The lesser-known racket was the 2009 rule change by the Financial Accounting Standards Board that allowed banks to make up whatever numbers they felt like in reporting the value of their holdings (“assets”).
Hence, these dishonest, regularized operations can be labeled a hostage racket with coercion at their core. The coercion comes in the form of the threat that any let-up in the stream of QE “money” enjoyed by the banks in the form of carry-trade “loans” and “primary dealer” premium cream-offs will send the economy back to the stone age. Overlooked in this equation is the ongoing destruction of ordinary citizens (a.k.a. the “middle class”) who have already lost their grip on the emblematic “way of life” Wall Street is working so tirelessly to defend. Politicians are, of course, deeply implicated and indeed directly involved in all these rackets, since these hired handmaidens make and execute the laws protecting Wall Street’s looting operations.
The catch to all this, lately, lies in the cognitive dissonance between the symptomatic euphoria of record stock market indexes versus the conviction of a few hardcore skeptical observers that the rackets are now so reckless and impudent as to be beyond any hope of control and on a trajectory to bring about hardships orders of magnitude above anything imagined in 2008.
So-called “health care” is also a hostage racket, since sick people are hardly in a position to bargain for anything, but it is only a sub-system of the larger matrix of rackets that have made this such an unusually dishonest society. My guess is that ObamaCare is sure to make it worse, and pretty quickly too, since the rules for ObamaCare were written by the hireling lobbyists of the industries that benefit from the racketeering.
The big mystery in all this remains: where are the people with some institutional power who might stand up and denounce all this perfidy? What has made us such a culture of cowards and cravens that the best we can do is produce a couple of comedians who speak truth to power in the form of jokes. Most of this is not that funny.
By the way, one reason for the vulgar orgy of “consumerism” that, in recent years, has turned the Thanksgiving holiday into a sort of grotesque sporting event, is to mount a crude demonstration that our “money” is a viable medium of exchange. The dumbest people in the land are induced to swarm through the merchandise warehouse stores and fight to exchange their “money” for hard goods offered at false “bargains.” I wonder how much of it is a dress rehearsal for what happens in a hyper-inflation?
Authored by John Taylor, originally posted at WSJ.com,
It is a common view that the shutdown, the debt-limit debacle and the repeated failure to enact entitlement and pro-growth tax reform reflect increased political polarization. I believe this gets the causality backward. Today’s governance failures are closely connected to economic policy changes, particularly those growing out of the 2008 financial crisis.
The crisis did not reflect some inherent defect of the market system that needed to be corrected, as many Americans have been led to believe. Rather it grew out of faulty government policies.
In the years leading up to the panic, mainly 2003-05, the Federal Reserve held interest rates excessively low compared with the monetary policy strategy of the 1980s and ’90s—a monetary strategy that had kept recessions mild. The Fed’s interest-rate policies exacerbated the housing boom and thus the ensuing bust. More generally, extremely low interest rates led individual and institutional investors to search for yield and to engage in excessive risk taking, as Geert Bekaert of Columbia University and his colleagues showed in a study published by the European Central Bank in July.
Meanwhile, regulators who were supposed to supervise large financial institutions, including Fannie Mae and Freddie Mac, allowed large deviations from existing safety and soundness rules. In particular,regulators permitted high leverage ratios and investments in risky, mortgage-backed securities that also fed the housing boom.
After the housing bubble burst the value of mortgage-backed securities plummeted, putting the solvency of the many banks and other financial institutions at risk. The government stepped in, but its ad hoc bailout policy was on balance destabilizing.
Whether or not it was appropriate for the Federal Reserve to bail out the creditors of Bear Stearns in March 2008, it was a mistake not to lay out a framework for future interventions. Instead, investors assumed that the creditors of Lehman Brothers also would be bailed out—and when they weren’t and Lehman declared bankruptcy in September, it was a big surprise, raising grave uncertainty about government policy going forward.
The government then passed the Troubled Asset Relief Program which was supposed to prop up banks by purchasing some of their problematic assets. The purchase plan was viewed as unworkable and financial markets continued to plummet—the Dow fell by 2,399 points in the first eight trading days of October—until the plan was radically changed into a capital injection program. Former Treasury Secretary Hank Paulson, appearing last month on CNBC on the fifth anniversary of the Lehman bankruptcy, argued that TARP saved us. Former Wells Fargo CEO Dick Kovacevich, appearing later on the same show, argued that TARP significantly worsened the crisis by creating even more uncertainty.
In any case, the crisis ended, but rather than simply winding down its short-term liquidity facilities the Fed continued to intervene through massive asset purchases—commonly called quantitative easing. Many outside and inside the Fed are unconvinced quantitative easing is meeting its objective of spurring economic growth. Yet there is a growing worry about the Fed’s ability to reduce its asset purchases without market disruption. Bond and mortgage markets were roiled earlier this year by Chairman Ben Bernanke’s mere hint that the Fed might unwind.
The crisis ushered in the 2009 fiscal stimulus package and other interventions such as cash for clunkers and subsidies for first-time home buyers, which have not led to a sustained recovery. Crucially, the actions taken during the immediate crisis set a precedent for giving the federal government more power to intervene and regulate, which has added to uncertainty.
The Dodd-Frank Act, meant to promote financial stability, has called for hundreds of new rules and regulations, many still unwritten. The law was supposed to protect taxpayers from bailouts. Three years later it remains unclear how large complex financial institutions operating in many different countries will be “resolved” in a crisis. Any fear in the markets about whether a troubled big bank can be handled through Dodd-Frank’s orderly resolution authority can easily drive the U.S. Treasury to resort to another large-scale bailout.
Regulations and interventions also increased in other industries, most significantly in health care. The mandates at the core of the Affordable Care Act represent an unprecedented degree of control by the federal government of the activities of businesses and individuals, adversely affecting incentives to hire and work and eventually worsening the federal-budget outlook.
Federal debt held by the public has increased to 73% of GDP this year from 41% in 2008—and according to the Congressional Budget Office, it will rise to more than 250% without a change in policy. This raises uncertainty about how the debt can be brought under control.
Despite a massive onslaught of legislation and regulation designed to foster prosperity, economic growth remains low and unemployment remains high. Rhetoric aside, many both inside and outside the government quite reasonably seek to return to the kinds of policies that worked well in the not-so-distant past. Claiming that one political party has been hijacked by extremists misses this key point, and prevents a serious discussion of the fundamental changes in economic policies in recent years, and their effects.
- John Taylor Says It Was Obama’s Fault that the Tea Party Forced Republican Legislators into the Debt-Ceiling and Shutdown Debacles… (delong.typepad.com)
- The cause and cure according to John Taylor (longandvariable.wordpress.com)
- The dignity of John Taylor (cafehayek.com)
Jim Grant Warns America’s Default Is Inevitable | Zero Hedge (FULL ARTICLE).
“There is precedent for a government shutdown,” Lloyd Blankfein, the chief executive officer of Goldman Sachs, remarked last week. “There’s no precedent for default.”
How wrong he is.
The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.
Default means to not pay as promised, and politics may interrupt the timely service of the government’s debts.The consequences of such a disruption could — as everyone knows by now — set Wall Street on its ear. But after the various branches of government resume talking and investors have collected themselves, the Treasury will have no trouble finding the necessary billions with which to pay its bills. The Federal Reserve can materialize the scrip on a computer screen….
- 12 Very Ominous Warnings About What A U.S. Debt Default Would Mean For The Global Economy (rinf.com)
- A Suddenly Nervous China Tells The US To “Earnestly Take Steps” To Avoid A Default (zerohedge.com)
- Lehman’s lessons How to cope when disaster strikes (nzherald.co.nz)
- ZeroHedge: Lehman Brothers… Where Are They Now? (silveristhenew.com)
- “You work for Lehman? I thought that went bust” (uk.reuters.com)
- Hedge funds emerge as winners after Lehman’s fall (thetimes.co.uk)
- Banks are still ‘too big to fail’, says SNB chairman (news.yahoo.com)
- Top Ten Lessons from the Lehman Collapse (forexlive.com)
- Ex-Citi CEO John Reed: We Need To Break Up The Big Banks (huffingtonpost.com)
- Banks are still “too big to fail”, says SNB chairman (uk.reuters.com)
- Five years after Lehman, all tickety-boo? (bbc.co.uk)
- Why Didn’t Anyone at Lehman Get Pinched? – Bloomberg (bloomberg.com)
- How one bank’s fall from grace triggered our economic crisis (independent.ie)
- Five Years After Lehman, We’re Much Safer (realclearmarkets.com)
- Lehman’s morbid legacy five years after its collapse (thestar.com)