Banking Meltdown Melts Even More

March 25, 2008

Elaine Meinel Supkis

After everyone finished flapping their lips in support of the idea, again, that the financial crisis is over, we can plainly see, it continues onwards, barely pausing with each 'rescue.' The Federal Reserve LLP has yet again, handed out a huge sum of money to keep our banking system from total collapse. Only this was first reported in the Chinese news. We watch rioters in Tibet while they watch our bank account sink into the muck. Guess who gets the last bitter laugh? Sader! He has restarted the fighting in Iraq. Home prices continue to collapse and the worse in housing is yet to come. As I keep pointing out, housing bubbles take a minimum of 5 years to recover. Big ones cant take 20 years.

From Xinhau, the Chinese news service:

U.S. Fed auctions another $50 bln to banks

This was the central bank's eighth auction aimed at injecting more money into the U.S. banking system since mid-December 2007, when the Fed established its Term Auction Facility to deliver short-term funds to banks in need of liquidity.

The series of auctions so far have pumped 260 billion U.S. dollars into the banking system.

The latest auction produced an interest rate of 2.615 percent, lower than the 2.80 percent generated in the previous one, which was held on March 11 and also provided 50 billion U.S. dollars to banks.

There were 88 bidders for a slice of the latest 50 billion U.S. dollars in 28-day loans. Demand was high, with the Fed receiving bids for 88.9 billion U.S. dollars worth of loans.

Demand was high? Eh? What? This means the Central Bank is Grand Central Station. All trains terminate there, don't they? And of course, the Federal Reserve LLP has unlimited potential funds to draw on: the printing press, thanks to Guttenberg. Since the sky is the limit, the Fed isn't too worried yet. They have infinite faith in their godlike powers. Of course, they create global inflation with they use their powers and this is the only curb. One they drive over constantly, incidentally.

S&P/Case-Shiller Home Price Index Falls Record 10.7%

Home prices in 20 U.S. metropolitan areas fell in January by the most on record, a sign the housing recession is deepening, a private survey showed today.

The S&P/Case-Shiller home-price index dropped 10.7 percent from January 2007, after a 9 percent decrease in December. The gauge has fallen for 13 consecutive months.

Price declines will continue as foreclosures add to a glut of unsold properties, and stricter lending rules make it harder to get financing. Declining values leave homeowners feeling less wealthy and with less home equity to borrow against, undermining consumer spending and pushing the economy closer to a recession.

Deflation hits the housing market like a wrecking ball. Of course, inflation is OK so long as assets move up faster than the Fed LLC can print money. When assets fall faster and faster as the Fed LLP prints faster, this is a problem. Some people call this a 'liquidity trap'. If you try to liquidate assets, they fall in value due to everyone trying to do this as fast as possible as prices drop. The panic to rid oneself of an asset as it falls in value feeds more falls and a death spiral results as Bear Stearns learned the hard way.

People are still buying houses. There is still some sort of banking going on right now. But all are bargain hunters, not house hunters. Some of the goofy stories I read about people earning less than $60,000 a year bidding up prices of hovels to $500,000 in California still abound. They often bid up the price not due to competition but to get more money for the brokers who then shared the excess with the buyers and sellers. This should be sending people to prison since it is fraud. And it fueled the raging asset fires. The value of most housing sold last year was fake, not a true market. Just as the bull market on Wall Street and the commodities market climb was fake. Being based on loans, not savings, it drove up the value of things far beyond their true value.

This is the problem: all the investment systems and nest eggs depend ultimately on savings, not debt. When debts accumulate in any investment system, they cause rapid rises in 'values' but also tremendous drops when they have to do margin calls! This force accentuates any falls, often, fatally. This is why, for a few decades, such deals were illegal. The SEC couldn't stop people from running up debts on the value of their homes to play the markets. My neighbors who were much richer than I on paper lost their shirts in the Dot Com collapse and ended up vanishing and being replaced by neighbors who are much more careful, so far!

I hope they don't fall for these lures. But when giant banking houses and financial organizations fell for this sort of scheme, we see a collapse of all our financial systems. And this came only after they maliciously and stupidly got Congress to get rid of laws forbidding this.

Bloomberg:

About $460 billion of adjustable-rate mortgages are scheduled to reset this year, according to analysts at Citigroup Inc.

Half a trillion mortgages must reset? This is why the Fed LLC is dropping rates like a rock! They have to rescue everyone with totally fake interest rates. Basically, the Fed said, 'We must throw the baby out with the bath water'. They will swamp our nation with the exact same stupid low-interest rate loans we just had back in 2005. All, in the hopes that $40,000 a year workers can buy more $500,000 hovels! The idea that these low-quality homes in bad neighborhoods that should be for workers should even be more than $50,000 is the question we should be asking.

Even if rates go to 1%, most of the people who got these loans can't afford them due to one simple fact: raging inflation in energy and food! What could be squeezed into back in 2005 is hopeless today! The fact of inflation has hammered the purchasing power of the working class. Yesterday, while in town, I read a sad story about a factory worker in the Deep South where the Japanese, Korean, German and Chinese are building factories. These pathetic non-union 'right to be slaves' states provide cheap labor.

The man working for Hyundai earned a pathetic $7 an hour. This is barely better than minimum wage. The cars, by the way, sell for about the same price as union-made cars here. And the profits are pure candy for the Korean owners who haul it out to their homeland. It does NOT stay here. Anyway, this poor man was using nearly all his extra income to buy gas! Since all the foreign colonizing powers build in cities, they always build in farmlands far from cities, people working there must commute up to 50 miles to work. And this is killing them.

The unionized jobs are vanishing rapidly and being replaced by $7 an hour workers who can't buy squat. So who will buy things? This is the classic headache of all capitalists. They try to fix this with cheap loans only they can't do this so they give out expensive loans. Credit for $7 an hour workers is around 15-30% per year which kills purchasing power relentlessly. After 20 years of adding more and more backlog debt, they end up broke and dead. And so does the economy.

Junk Bond Losses Top $35 Billion, JPMorgan Sees More

High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there's no recovery in sight.

Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes. Some funds managed by John Hancock Advisers LLC, OppenheimerFunds Inc. and Fidelity Investments are down more than 7 percent, showing that even the largest investors were caught off guard by the collapse.

While the Federal Reserve has slashed benchmark interest rates by 3 percentage points since September, it has been unable to get investors to increase their purchases of the riskiest assets. The declines are choking off financing for speculative- grade companies, boosting defaults. The debt is likely to ``struggle'' for months as the economy enters a recession, according to JPMorgan Securities Inc., the top high-yield research firm in Institutional Investor magazine's annual poll.

And how shall this be fixed? Why, pass all this to the new hedge fund from hell: the Federal Reserve LLP! Now, on to a speech made 2 weeks ago by one of the partners of this limited liability organization, Mr. Kroszner:

Governor Randall S. Kroszner

At the American Bankers Association Spring Summit Meeting, Washington, D.C

March 11, 2008

The Importance of Fundamentals in Risk Management

One of the most basic risk management challenges relates to concentration of risks. From the beginnings of banking, bankers always have had to be cautious to guard against, as the old adage says, "putting all their eggs in one basket." For example, Renaissance bankers learned the lesson--some of them the hard way--that they did better by lending not just to a few merchants active in one trade, but to a range of merchants active in a variety of trades. As risk management techniques grew over the centuries, bankers became more adept at identifying, measuring, and managing risk concentrations, but that does not mean the original problem presented by concentrations--that losses could occur all at the same time--has vanished. Indeed, some bankers occasionally forget that this challenge still exists, usually with unfavorable consequences.

It is also important to note that concentrations in banking include not just basic lending, but also holding securities, trading complex instruments, providing liquidity facilities, engaging in off-balance sheet transactions, and conducting other financial activities. As banks have extended their range of activities and involvement in new markets, they must be particularly mindful of potential for concentrations of risk to arise for a number of reasons. First, any new activity will be less familiar and involve less data and experience for evaluating risk compared with long-standing activities or markets. Second, risk concentrations can be hidden during normal times and may only manifest themselves during times of stress when activities or instruments that might in normal times have little or negative correlation suddenly become correlated, such as with a market-wide increase in the demand for liquidity as we have seen recently. In other words, bankers may have far more eggs jostling around in the same basket, and each of those eggs may be more fragile than originally thought.

These eggs have all turned to scrambled eggs. And was this accidental? Or did the bankers deliberately break these eggs so they could never be unscrambled? Of course, we all know the answer to that: this was deliberate. The rotten eggs can't be separated from the fresh, wholesome eggs if they are all churned together into one big souffle! Alas, the souffle fell when the bankers took it out of the oven.

Now, if I were addressing these bankers, this would have made the news because of all the screaming, hair-tearing, me yelling, 'You are all UNDER ARREST for FRAUD!' And they would throw things at me and I would fling the podium at them in a fit of rage. I would grab one and scream, 'Do you realize, inflation is eating my income AND my savings gets NO VALUE thanks to you clowns?'

Yes, it would be amusing and newsworthy. This partner in the Fed LLP pretends the craven, evil bankers who stupidly destroyed our entire banking system don't know perfectly well, their crimes and their contributions to this disaster. He feels they didn't know what the hell these brilliant brains were doing. YEAH, RIGHT! They didn't understand the 'complex' instruments of monetary torture they devised?

Blame it all on the computer nerds! Yeah, that's the ticket! The ignorant fools running the banks were too stupid to understand the lower level nerds who are their dwarves. With little reward or pay, these dwarves live in deep caves and hammer away at the gold stolen from the Rhinemaiden strumpets. Yes, and the dwarves worked with the giants to make the Derivatives Beast, not the bankers! Like a room full of Wotans sitting in Valhalla, they shovel blame everywhere but where they sit. I want to spank all of them. Smack.

The Fed tries to explain to its reckless, idiot partners, how 'risk' works:

Effective risk management remains sturdy and durable only if supported by strong and independent risk functions that produce unbiased information. [Elaine: HAHAHAHAHA] Empowering independent risk managers results in clear, dispassionate thinking about the entire firm's risk profile, with no favoritism toward any business unit. [Elaine: HAHAHAHA...the plan to kill me via laughter still operative!] Senior managers should encourage risk managers to dig deep to uncover not only risks within each business unit, but also risk concentrations that can arise from the set of activities undertaken by the firm as a whole as well as latent risks--such as hidden risk concentrations that can arise from correlation of risk in times of stress. [Elaine: ARREST THEM!] Such risk management assessments should lead risk managers to point out cases in which certain business lines are assuming too much risk. [Elaine: isn't he a cute stand-up comedian?]

In other words, it is good to have a few people within the institution who--to paraphrase a former Federal Reserve Chairman--know when to take away the punch bowl. [Elaine: ROLL OUT THE BARREL, WE'LL HAVE A BARREL OF FUN!!!] Being the party pooper, however, can be very difficult in any organization,[Elaine: they are FIRED!] and that is why it is crucial for the risk manager to be known as an independent voice who is influential with top management and for top executives, of large or small firms, to set the appropriate "tone at the top" [Elaine: tossing the bosses out of the window without opening it may work here] with respect to the importance of independent and unbiased risk evaluation.

Wheew. Reading this section was a trial. My sides hurt. I wish I was there. My screams of laughter would have disconcerted these stone-faced creeps. So far, the US has been kept in the dark about the noisome activities of these greedy little monsters. People think these sharks are out to save them not strip our nation of everything. People seldom hear about offshore tax havens and offshore banking nor do they hear political speeches about this. Ron Paul has given some good speeches this last month. Crickets are louder at night. And even when Obama decided to commit suicide by suggesting we stop the pirates, note how his star has fallen rapidly from that point onwards.

I once told a boss, his company was going bankrupt. He said, 'We must have an emergency meeting!' Then, as I prepared a program to deal with cost overruns and misspending, he called me and said, 'Something important came up. The meeting in cancelled.' Then, a person much lower in the main office in Chicago slipped me a message, 'The boss and his son decided to go buy a new yacht.' They want off to play with toys! And they got rid of me. And I said, 'Everyone, look for new jobs, you aren't going to get your last month's pay.'

Three months later, boom. Gone! Some former co-workers called to thank me for warning them. The main thing is, they never give warning even if the top people know what is wrong. They either are insane or they don't care. Or they are criminals. This company's biggest selling point was their 'guarantee' which went down the river with them. Zero.

And so it is: the Fed banking authority should be yelling at these clowns. He shouldn't pretend they were clueless. They were most emphatically not. They were RISKY. They thought the scam would run forever.

More Fed LLP foppery:

Limits and controls can be useful tools for creating the right incentives and sending appropriate signals, but they of course need to be tailored individually to each firm. Problems can arise when incentives are not properly structured and appropriate "risk discipline" is not exercised--for example, when limits and controls are not set or, if they are set, when adherence to them is not monitored or enforced. Such controls provide incentives for business-line leaders to assume only the risks that the firm can absorb because they penalize those who try to take on excessive risk or inadequate mitigation in the name of maximizing short-term profit. This is just as true at large international firms as it is at community banks.

They REWARD excessive risk! This is where the profits lie! They don't want low-risk deals, they want the BBB deals that make lots and lots of extra money! Anyone practicing old fashioned banking cautious rules was FIRED! They were emphatically shown the door. And the people listening to this speech are the same clowns who ordered everyone to be as risky as possible.

How did they deal with the gigantic mountain of risk they created? Well, they turned to the Derivative Beast and parked it all there. And then said, 'There is no risk! Let's make even more money with even greater risks!' It is that simple. How on earth can anyone 'self-regulate' when the rewards for doing the worst things are greater than the rewards for being sober and careful?

Fed forges forwards:

Now I wish to consider the third fundamental. Liquidity risk management. Banks, of course, have been managing expected liquidity demands since the beginning of banking itself. Because of its central role in the business of banking, liquidity risk requires rigorous and effective management. Naturally, financial institutions both large and small must pay careful attention to liquidity risks, even if they manifest themselves in different ways.

Regarding recent events, a number of financial firms were surprised by the extent of market disruptions and were forced to take funding actions not anticipated in their contingency funding plans, including some decisions to support affiliates [Elaine: the hedges that all failed] that were based on reputational concerns rather than contractual obligations. At the same time, some institutions were able to avoid more serious problems from these events by aligning treasury functions more closely with risk-management processes and incorporating information from all businesses into global liquidity planning, including actual and contingent liquidity risk. They also made attempts to embed market liquidity premia or apply market liquidity haircuts in pricing models and valuations.
*snip*
As supervisors, we strive to achieve the appropriate balance, recognizing that supervision and regulation has costs and benefits that need to be weighed against one another. For instance, we need to be careful that lending is conducted on a prudent basis, and at the same time, take care not to stifle the provision of credit when it is done properly.

The costs of not regulating: the utter collapse of the entire banking system? Look, we know already, this is costing us over a trillion dollars. And it has barely begun. The toxic leadership failure/noxious banking failure mix is going to cost us not only many trillions of dollars, it will possibly destroy the entire world's economic systems. Now, that is a tremendous price to pay for lack of supervision! So what, if laws and regulations slowed things down?

We saw things speed uphill and now it is roaring downhill! This is unacceptable, to put it mildly. The utter failure of ANY of the banking/investment houses to supervise themselves proves that they need stark, harsh controls! If they don't have this, they end up raiding the bank, wrecking the economy and destroying all our systems. They can't help it! They are drunkards and greedy bastards!

The fact that the Fed still coddles them on this issue sickens me and we should disband the Fed since they are USELESS and let the Security and Exchange Commission run the joint instead.

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