Saturday, June 30, 2012

Today's Links

1--The Dollar Rising, The Big Picture

2--The Greek economy is finished, Yanis Varoufakis

YANIS VAROUFAKIS: They cannot fix the Greek economy. The Greek economy is finished. The Greek economy is in a great, great depression. The growing social economy is in its long, long winter of discontent. There is no power, no force within the Greek economy, with Greek society that can avert – it’s like – imagine if we were in Ohio in 1931 and we were to ask: what can Ohio politicians do to get Ohio out of the Great Depression? The answer is nothing....

YANIS VAROUFAKIS: This is a our Great Depression. Not only in an economic sense, but also in a psychological sense. Greeks are in a catatonic state. One moment, in a state of rage, another, this is a typical case of manic depression. There are no prospects. There is no light at the end of the tunnel. There are sacrifices, but nobody gets a feeling that these are sacrifices that take the form of some kind of investment in turning the corner. This is the problem when you are stuck in a eurozone which is really badly designed, which is collapsing and which does not give opportunities to its flimsier parts to escape through some kind of redemptive crisis.

3--Barclays fine suggests Libor collusion, IFR

The Libor fixing scandal, which last week cost Barclays US$453m in fines to the US and UK authorities, highlights widespread industry collusion and a failure of corporate governance across the banking sector.

The FSA‘s damning report laid bare an open dialogue between derivatives traders and submitters as they sought to game the system to boost the profits on deals (and therefore their own remuneration). But more worrying are the clear attempts by the bank (and the industry as a whole) to submit artificially low Libor levels, at the height of the financial crisis, to ward off any negative attention on liquidity issues.

The episode casts a shadow over the reputation of Barclays’ management – CEO Bob Diamond in particular – as well as the credibility of one of the industry’s most important benchmarks.

“The lack of management control is breathtaking. Looking at the extent of the communication between submitters and traders, how on earth they [Barclays’ management] managed not to pick this up is completely shocking,” one senior banking adviser told IFR.

4--US Fears Mexico Vote Could Undermine Drug War,

There aren’t many times when running as the candidate looking for “bring down the death toll” can earn you international scorn. But Mexico seems to be facing that situation right now, as the US openly frets the frontrunner, former Governor Enrique Pena Nieto, for exactly that.

That’s because for the US, policy in Mexico is all about the drug war, and keeping it going no matter what the cost for the Mexican public. With an ugly level of drug war related violence nationwide, Pena Nieto’s promise to focus policy on “diminishing violence” is quite popular, and has him with a commanding lead in the polls.

5--The Global Slowdown Will Accelerate, credit writedowns

Slowing growth as well as deficit and debt problems in the Eurozone, U.S., China and the emerging nations increases the odds of a deflationary global recession and a renewed down leg in the ongoing secular bear market.

The Eurozone crisis is worsening as economic growth is being hit by front-loaded austerity measures that are exacerbating budget deficits and reducing tax revenues. The southern-tier nations, particularly Spain and Italy, cannot get credit as interest rate spreads have widened to unsustainable levels. Funds have been flowing out of the disadvantaged nations and appear on the verge of a full-fledged run if financial aid in some form is not provided in the very short term....
The U.S economy has been slowing in the last two or three months. Either downside surprises or actual declines have been reported in key economic indicators relating to consumer spending, new orders, production and employment. A number of major companies have either revised down their second quarter earnings estimates or reduced their guidance for the second half. As a result, second quarter earnings estimates for the S&P 500 have been declining and full-year estimates probably will drop as well. When we further consider the dysfunction in Congress, the "fiscal cliff", the prospective end of operation twist, the elections and the prospect of renewed fighting over the debt ceiling, the threats to an already fragile recovery are high....

The Chinese economy is slowing, perhaps by more than the official numbers show. The NY Times has reported that many local and provincial officials have been falsifying numbers to hide the true extent of the problems. China’s economic model is heavily dependent on capital investments and exports, while internal consumer spending remains a relatively small part of GDP. Although Chinese officials recognize the need to increase consumer spending as a percentage of GDP, that is a long-term solution. In the meantime, exports to Europe, China’s top customer, are falling now and cannot be offset, except by ordering the building of more plants that will produce goods for which there is no current market. All in all, it seems that it will be difficult to avoid a hard landing.

The slowdown in Europe, the U.S. and China is also impacting the economies of the emerging nations, which are heavily dependent on exports. Declining growth is also driving down commodity prices. Despite all of the talk of decoupling, it seems apparent that the economies of all nations are linked and that there is little prospect of an oasis of prosperity in an increasingly dependent world.

Unfortunately, the monetary and fiscal authorities are out of ammunition. With short-term rates near zero and the 10-year bond yielding 1.6%, there is not much more the Fed can do. At the same time fiscal stimulus is restrained by debt and deficits that are too high relative to GDP.

6--Banker to the Bankers Knows the Numbers Are Lying, Bloomberg

The Bank for International Settlements, which acts as a bank for the world’s central banks, should know fudged numbers when it sees them. What may come as a surprise is how openly it has been discussing the problem of bogus balance sheets at large financial companies.

“The financial sector needs to recognize losses and recapitalize,” the Basel, Switzerland-based institution said in its latest annual report, released this week. “As we have urged in previous reports, banks must adjust balance sheets to accurately reflect the value of assets.” The implication is that many banks are showing inaccurate numbers now...

Unfortunately the BIS’s suggested approach is almost all carrot and no stick. “The challenge is to provide incentives for banks and other credit suppliers to recognize losses fully and write down debt,” the report said. “Supporting this process may well call for the use of public sector balance sheets.”

So there you have it. More than four years after the financial crisis began, it’s so widely accepted that many of the world’s banks are burying losses and overstating their asset values, even the Bank for International Settlements is saying so -- in writing. (The BIS’s board includes Federal Reserve Chairman Ben Bernanke and Mario Draghi, president of the European Central Bank.) It fully expects taxpayers to pick up the tab should the need arise, too...

To date, the task of propping up the economies in Europe and the U.S. has fallen largely to central banks. As the BIS wrote, easy-money policies also can make balance-sheet repairs harder to accomplish.

“Prolonged unusually accommodative monetary conditions mask underlying balance sheet problems and reduce incentives to address them head-on,” the report said. “Similarly, large- scale asset purchases and unconditional liquidity support together with very low interest rates can undermine the perceived need to deal with banks’ impaired assets.”

7--JPMorgan’s Other Big Gamble, Pam Martens, Wall Street on Parade

In 2007, Citigroup told investors it had $13 billion in subprime exposures, knowing the figure was in excess of $50 billion. It got caught and on July 29, 2010 paid $75 million to settle charges with the SEC. Its CFO, Gary Crittenden, was fined a puny $100,000 and the head of its Investor Relations Department, Arthur Tildesley, was fined an even punier $80,000. That sent a clear message to Wall Street, lying about the risks you are taking or what’s on your balance sheet results in a slap on the wrist and some chump change. Lying has now morphed into its own profit center....

“Since March 31, 2012, CIO [Chief Investment Office of JPMorgan Chase] has had significant mark-to-market losses in its synthetic credit portfolio, and this portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the Firm previously believed. The losses in CIO’s synthetic credit portfolio have been partially offset by realized gains from sales, predominantly of credit-related positions, in CIO’s AFS securities portfolio. As of March 31, 2012, the value of CIO’s total AFS securities portfolio exceeded its cost by approximately $8 billion. Since then, this portfolio (inclusive of the realized gains in the second quarter to date) has appreciated in value.

“The Firm is currently repositioning CIO’s synthetic credit portfolio, which it is doing in conjunction with its assessment of the Firm’s overall credit exposure. As this repositioning is being effected in a manner designed to maximize economic value, CIO may hold certain of its current synthetic credit positions for the longer term.”

Nothing in this statement suggests that a momentous event has occurred – momentous enough to bring in the Department of Justice, the FBI, three Congressional hearings and the shaving, at one point, of $30 billion off the market capitalization of the firm....

What the statement does not capture is the following: JPMorgan Chase was selling tens of billions of dollars of credit default insurance to hedge funds in return for a large up-front payment and a quarterly income stream. It sold that protection in an off-the-run (outdated) derivatives index that is illiquid. AIG Financial Products blew up the behemoth AIG Insurance selling credit default insurance. The U.S. taxpayer had to bail out AIG and pay off that insurance to Wall Street firms like Goldman Sachs and JPMorgan Chase. That was just a little over three years ago. Should Congress and the regulators be caught off guard once again, there will be hell to pay.

On May 10, 2012, the same day JPMorgan filed its 10Q with the SEC, JPMorgan Chairman and CEO, Jamie Dimon, said on a conference call with analysts that the existing credit derivative losses were $2 billion and could grow. What he did not mention was anything about an internal document existing at that time that said the losses could grow to $9 billion. The difference between $2 billion and $9 billion is a very material number.

On June 29, 2012, Jessica Silver-Greenberg and Susanne Craig reported in the New York Times that “In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.” The operative words in that sentence are “April” and “$9 billion.”

8--The Myth That Entitlements Ruin Countries, Busted in 1 Little Graph, The Atlantic

, we have a long-term healthcare spending problem. But that doesn't make us Greece. Heck, Greece isn't even Greece. At least not the "Greece" that's become such a political football. The evidence -- or lack thereof -- is in the chart below. It compares each country's average social spending since 1999, via the OECD, against its current borrowing costs. See the pattern?

There is none. Europe's biggest social spenders don't have any problems. And Europe's biggest problem countries don't spend that much on social programs. The death knell of the welfare state this is not.

Here's the dirty little secret of the euro debt crisis. There is no euro debt crisis. There is a euro crisis. The debt is a symptom of the crisis of the common currency.* Europe's bailed out countries all saw piles of capital pour in during the boom, only to pour out during the bust. They were left with inflated, uncompetitive wages -- and that's sent them into deep slumps. That's been despite lower social spending than their northern euro neighbors. Germany, Austria, Finland, Finland, the Netherlands, Belgium and -- at least for now -- France have all been able to sustain more generous safety nets thanks to the magic of competitive wages.

9--A Huge Break in the LIBOR Banking Investigation, Rolling Stone
This is unbelievable, shocking stuff. A sizable chunk of the world’s adjustable-rate investment vehicles are pegged to Libor, and here we have evidence that banks were tweaking the rate downward to massage their own derivatives positions. The consequences for this boggle the mind. For instance, almost every city and town in America has investment holdings tied to Libor. If banks were artificially lowering the rates to beef up their trading profiles, that means communities all over the world were cheated out of ungodly amounts of money.

First there were huge bid-rigging settlements for Chase, UBS, Bank of America, GE and Wachovia. Now we’ve got a $450 million settlement for Barclays for Libor manipulation, and one imagines this won’t be the end of it. Anyway, more on this to come soon, and if you’re wondering, yes, there should be a lot more press on this.

10--Banks still withholding massive housing backlog, naked capitalism

Funny how there is nary a mention of the reasons banks have for wanting to draw out foreclosures: more servicing and late fees, deferral of recognition of losses on second liens. Nor is there any mention of how, in Las Vegas, I have been told by informed insiders that there are entire blocks in affluent areas where pretty much no one has paid their mortgage in over two years as of late 2010 with nary a foreclosure notice sent. Read that date: a lot of big ticket properties were being kept in limbo before the new law was passed. Similarly, Keith Jurow wrote in February:

In November 2011, posted my 30-page New York City Housing Market Report. The report included never-seen-before charts, graphs and data that revealed what has been going on there. The banks have not been foreclosing for the past three years. This started well before the robo-signing mess. On February 7, 2012 there were a total of only 242 repossessed properties on the active MLS in Queens according to This is a borough with a population of 2.2 million.

Because of this, the number of seriously delinquent properties throughout NYC has been soaring. Based on individual charts for each borough from the NY Federal Reserve Bank which I included in my report, there were roughly 80,000 properties where the mortgage had not been paid in more than 90 days as of June 2011...

Funny, Jurow debunked that in a May piece:

We hear that California markets are showing signs of revival and that prices are rising in certain markets. Let’s see. Here are the latest figures from

In Los Angeles, trulia reports that the average price-per square foot for homes sold in February through April was down 9.3 percent year-over-year for 3-bedroom homes and down 8.7 percent for 2-bedroom homes.

In San Francisco, allegedly one of the hottest areas in the nation, the 3-bedroom average price-per-square-foot was down 4.7 percent year-over-year and 1-bedroom price-per-square foot was down 8.1 percent.

Price-per-square-foot statistics are the best way to compare prices because it does not matter how large the house is. Median prices are skewed by square footage as well as by the percentage of distressed properties sold.

And that recovery in Arizona? Banks are holding properties off the market:

Take a good look at this revealing chart for Phoenix from

Bank repossessions in Maricopa County plunged from 3,159 in April 2011 to a mere 767 a year later. Clearly, the banks are gambling that this will help to stem the decline of home prices….

In April, only 17 percent of all homes sold in the Phoenix metro were REOs on the active MLS. Banks are hoping that this cutback of foreclosed properties for sale will steady home prices....

By contrast, look at how Wall Street Examiner’s Lee Adler characterizes the situation:

Meanwhile, the mortgage servicing bankster mafiosi have figured out that by holding rather than dumping massive numbers of foreclosed properties, and even by slowing down the foreclosure process while allowing a few cramdowns in the form of short sales, the market has begun to rebound on its own. The bankster mafia know that placing massive numbers of properties on the market at once would crash the market and destroy the value of their portfolios, and essentially crash the financial system. So they have made a wise strategic decision not to self immolate.

11--Federal Reserve, Regulators Arguing for More, Quicker Foreclosures, Dave Dayen, FDL
12--Bankers Are Responsible For the Housing Crisis, Abigail Field, Reality Check

Let’s be clear: The banks are responsible for shadow inventory and the underwater crisis. Not homeowners, not Due Process, not judges, not law enforcement....

Second, banks are manipulating housing market inventory, letting properties they own rot, not listing them for sale, and when auctioning them, sometimes outbidding third parties. Third, bankers’ securities fraud broke the secondary market for non-government backed mortgages. As a result, there’s a lot less capital to lend wannabe homeowners. Fourth, lender-driven appraisal fraud led to such inflated prices that the underwater problem is directly attributable to them....Banks are holding properties off the market all over the place.




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