May 29, 2008
Elaine Meinel Supkis
Unbelievable numbers today! Even as the media and the central governments of the G7 nations struggle to pretend the banking crisis has been contained and all is well, out comes the news that the Fed's new, fancy window for handing out massive loans to banks in exchange for crummy, worthless CDOs! A whopping $225 billion worth! WOW. And the debt markets are still flashing red in the US and now, in Europe. The housing collapse has crossed the Atlantic. And now the bankers are launching a NEW risk-remover: a central clearing house for derivatives? HAHAHA. They think this will be the way to deal with the $500+ trillion Beast? I doubt this. Very much.
The Federal Reserve announced Thursday that it will make a fresh batch of short-term cash loans available to squeezed banks as part of an ongoing effort to ease stressed credit markets. Swap spreads are spreading wider and wider. Even as faith in the Libor rates collapse.
The Fed said it will conduct three auctions in June, with each one making $75 billion available in short-term cash loans. Banks can bid for a slice of the available funds. It would mark the latest round in a program that the Fed launched in December to help banks overcome credit problems so they will keep lending to customers.
The new round of auctions will be conducted on June 2, June 16 and June 30.
Also Thursday, the Fed -- in a separate program -- auctioned $16.4 billion in safe Treasury securities to investment firms, another effort aimed at easing credit problems. That operation drew bids less than the $25 billion being made available, which could be viewed as a sign of some improvement in credit conditions.
Let's get this straight: the Fed is feeding MORE MONEY in the form of taxpayer-backed Treasury securities...to INVESTMENT FIRMS? The same guys who have just bid up most world commodities to the heavens? And a sign that things are improving is, it was 'only' $16 billion? This news is right on the heels of announcing yet another rescue operation to keep our bankrupt banks running?
EACH of these auctions coming out of the brand new 'windows' poked into the Fed bank vault's walls is 'only' $75 BILLION @? This happens to be another $225 billion! Way back last summer, I predicted the amounts ladled out would be over a trillion and I was right, as usual. This $225 billion will be ladled out over the course of one month! Let's do some calculating: if this is done at this rate over the course of a year, it comes to $2.7 TRILLION.
It looks pretty obvious to me that the banking crisis, far from being over, is actually getting worse. Indeed, the housing markets which supposedly is the cause of this collapse is not doing well at all, is it? The rate of repos isn't climbing sky high only because the courts are utterly swamped with repo cases! So it is like a snake that ate a cow. Eventually the cow will be digested but the snake is still trying to swallow it. Far from being over, this process has barely begun.
I photoshopped a series of graphs from the Federal Reserve that tracks the 'Borrow' window they opened so wide this year. Click to enlarge:
This graph shows how the 9/11 bail out was pretty big. Bigger by far than any time in history. It was very unusual for the Fed to give even a billion back then. Seemingly, everything was fine after that spike. But was it?
We know that Bush told us to go shopping and Greenspan said, 'Here, have some free Funny Money™. The bankers went wild. The spread between mortgage amounts and what the Fed was giving them was humongous. One of the biggest spreads in banking history. So the bankers clamored to make more loans and to do this, they had to pass off the old ones because US savings had collapsed and the reserve ratios were really, really stinky.
In July, 2007, all was still seemingly well. Then, by the end of September, now that the Japanese carry trade was in a panic due to the dropping dollar and the rising yen, the Fed began to hand out loans to save the banking system. They, in turn, had to declare losses on the previous housing bubble they created. The BIS regulators had ordered the banks to price their loans realistically. And this was killing them. They had to cry to Bernanke and beg him for goodies. He opened the window to the Outer Darkness and began to churn out amazing amounts of Funny ™ in ernest.
Here is the BORROW chart from 12/12/2007, the seventh anniversary of the Supreme Court refusing to count votes in the 2000 election. We can see that things are going very, very badly suddenly! The money feeding into the bankrupt banking system. The amount is now over 4X greater than on 9/11/1.
Now we go to January 1, 2008. The Fed and the G7 have begun to crow that the whole thing was fixed and there was no emergency. Obviously, they were wrong. For by that date, a mere 19 days after 12/12, look at the charts!
It has doubled yet again! Not even during a month, in half a month. This was done to fix Xmas so the US public could go on a wild spending spree. Lurking in the shadows was very real inflation that was preparing to take off with a vengeance. After all, the Fed was feeding Funny Money™ to speculators at an increasing rate! Note also that this chart stops at $50 billion while the previous ones were at less than $10 billion.
Now look at today! WOW. I added some lines to this graph in red to show us where we are going: TO THE MOON, MARS AND OUTER SPACE! Boom! This is ridiculous.
To accommodate future rescue operations, I enlarged the graph a tad, like more than doubled it in height. The red square is where we are today in this massive, UNPRECEDENTED rescue operation. And I am betting this will double in JUST ONE MONTH. This is a very, very bad sign. Any system that doubles at this speed ends up in infinity. The fact that it overwhelmed all previous amounts in history long ago, was a bad sign. To see it heading into Derivative Beast territory whereby it doubles and doubles and doubles...this is a sign of HYPERINFLATION TO COME. In other words, the central bankers are trying to fix a broken system by feeding it Funny Money™. This money is not real and based on nothing except the Fed promising to tax the American public...in the future, of course, for all eternity.
This is how all empires collapse: they promise money changers and bankers outside of the empire future taxes. 100 years, 500 years of future taxes! This is always a sign an empire is about to bust apart and die.
The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.
The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.
Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.
HAHAHA. No wonder Bernanke revved up his helicopter today and offered these goofballs another $225 billion in free Funny Money™! If the US had China or Japan's FOREX reserves, he could still do this and not cause global inflation. But alas, he doesn't and can't. So off they go. They want cheap money! I read in the news that these same evil clowns are demanding Russia pay higher and higher rates! But NOT THEM! They want LOW RATES! No matter what. So the Fed dropped its rates to only 2% and they will then keep a straight face while 'borrowing' money from the Fed at a ridiculous rate THEY DO NOT DESERVE. For they were very, very risky in the past and the losses they caused due to handing out loans to everyone and their monkey's uncles, means they are bankrupt.
BANK---RUPT. Dead as dodos. Lying on a highway to hell. I like the 'coast is clear' part of this news story. 'Hey, we can play in the highway again!' these bankers yelled and they ran outside and got run over by a diesel truck driven by a pissed off trucker.
"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."
Back in March, the Fed did something very, very stupid: they not only had the open window where the banks could come and dump garbage, they opened the doors and windows to the investment houses starting with Bear Stearns. Instead of dealing with the problem which was too much credit for too cheap, they ended up soaking up the excess lending of the previous 4 years! So the seeming good news back in March was merely 'more rate cuts by the Federal Reserve' and 'the Reserve will exchange junk CDOs for Treasuries.'
But the amounts that are at stake here are more than what the Fed can feed. So the temporary abatement of interest rates changed very little and we are again, right back where we were in January, in November and in August: the same banking collapse rises up yet again! The Fed, time and again, claimed 'Victory!' whenever they papered over this mess. They set out deliberately to force interest rates down in the teeth of raging inflation. This is akin to ordering the incoming tide to turn back. This is an elemental force which can't be fooled. The tricks and schemes being cooked up will fail for the simple reason, the alternative is infinity. They are trying so hard to make things drop to 0%. And this is causing infinity in the mirror world.
Both oil and gold are in retreat right now. I don't know if this is through strong arming the commodity traders in the big houses? I smell a conspiracy here. In other words, is the announcement of another $225 billion Santa Claus gift from Bernanke part of a secret back room deal? The biggest trading houses will funnel their funds elsewhere for the time being? And this is the pay off? Since all these things are done in strict secrecy, we won't ever know unless someone spills the beans.
The problem is, the yen is again falling in value. This will destroy our own economy. When the dollar was weak, our export numbers improved. Now they will continue on the bad trajectory. The US, trying to please our trade partners who are reaming us out, in order to get the 'old' banking system that was based for the last 10 years on the fake 0% Bank of Japan carry trade, will resume that destructive activity, won't they?
Traders are starting to use alternative measures for borrowing costs as the British Bankers' Association struggles to keep the London interbank offered rate as the global standard.
Libor, the benchmark for 6 million U.S. mortgages and more than $350 trillion of derivatives and corporate bonds, has been called into question since the Bank for International Settlements said in March some lenders may have understated borrowing costs to keep from appearing like they are in financial straits.
One option growing in popularity is overnight indexed swaps, a gauge of expectations for central bank rates. The Federal Reserve uses the one-month OIS rate to set the minimum bid level when it lends cash to banks through its Term Auction Facility. The Fed has auctioned $510 billion through the TAF since December.
So, the amount the Fed auctioned since December is now $510 billion? Add the June amounts and this will be $735 billion. So, in exactly half a year, it is three quarters trillion dollars? If this keeps up, by next January, it will be around $1.5 trillion. This happens to be the size of the Chinese FOREX reserves. Interesting and possibly connected in an underwater sort of way. Also, the BBA Libor setting system is only 24 years old. It is one of the many destructive things set up in the wake of Volcker raising rates to kill inflation. The G7 bankers swore they would never allow that to happen again. But it seems to me that the alternative system they created has done nothing about what caused this inflation [war and oil making a toxic mix]. It seems this Libor system is from the Plaza Accords era and was created to 'fix' the things the Plaza Accords were trying to fix. I once linked to the original text for those Accords.
It seems the other nations signing this wanted the US to balance our budget and to cut back on our oil consumption! We did the exact opposite, of course.
``OIS rates have the advantage that they are set off the fed funds effective rate, which is an overnight rate based on a volume-weighted average of trades that occur each trading day through the major brokers,'' Eric Liverance, head of derivatives strategy at UBS Securities LLC in Stamford, Connecticut, wrote in report dated May 27. ``There is no guesswork involved.''
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events, such as changes in the weather.
Rates quoted by Libor members show discrepancies and have little correlation with their costs of insuring debt from default. UBS AG, whose default-insurance costs rose 919 percent between July 2 and April 15 as it racked up $38 billion of writedowns and losses, quoted dollar-borrowing costs that were lower than its rivals on 85 percent of the days during that period, according to data compiled by Bloomberg.
This is SO unstable! Note that the new replacement for Libor rate setting is something that literally is based on changes in the weather???? Wow. Talk about asking for wild swings! As I look through history, I notice that when an Empire is strong, the value of the currency, the relative value of rare metals, etc. are STABLE. The value of gold is set in stone, for example. The fact that the bankrupt bank, UBS AG, lied about their stupendous interest rates due to their losses means simply, the head of that bank should be arrested and charged with fraud. Not that we set up an even more insecure, uncertain and very changeable system.
Nobody was expecting an easy year for U.S. banks, but many observers thought the bulk of the industry's credit troubles would come in the first quarter. Now, it seems the rest of the year may be even worse. Case in point: A May 28 announcement from KeyCorp (KEY). Mounting loan losses at the regional bank company suggest the banking industry's troubles with bad loans are just beginning.
Cleveland-based KeyCorp, which holds $97 billion in assets, says the year's net loan charge-offs—a measure of how much bad debt the bank may have to write off—could almost double previous predictions for 2008. The bank expected charge-offs of 0.65% to 0.9% of total loans just three weeks ago, but now says they could be in the range of 1% to 1.3%.
Despite housing and credit troubles galore, banks such as KeyCorp have been able to attract investors with generous dividends. On May 28, KeyCorp sported a dividend yield of 6.9%, while Wachovia's yield was 6.1%. Yields from Fifth Third and Regions Financial were even higher, at 9.1% and 8.1%, respectively. Those high yields suggest some investors expect dividends to be cut so banks can hoard capital. Otherwise, an 8% or 9% return would be irresistible to most.
Baird's George said the tough credit trends mean KeyCorp probably won't earn enough in the second and third quarters to cover its dividend. However, he wrote, "It appears that [KeyCorp] has adequate capital to maintain its payout, provided the earnings challenges are temporary."
If credit troubles are brief, banks can afford to maintain their dividends. Bank investors might overlook a brief dip in earnings, however severe. However, the longer the credit crisis continues, the more questions are raised about whether they have enough capital.
Banks routinely misstated borrowing costs to the British Bankers' Association to avoid the perception they faced difficulty raising funds as credit markets seized up, said Tim Bond, a strategist at Barclays Capital.
``The rates the banks were posting to the BBA became a little bit divorced from reality,'' Bond, head of asset- allocation research at Barclays in London, said in a Bloomberg Television interview. ``We had one week in September where our treasurer, who takes his responsibilities pretty seriously, said: `Right, I've had enough of this, I'm going to quote the right rates.' All we got for our pains was a series of media articles saying that we were having difficulty financing.''
Just like the goofy news put out by the Fed back last Thanksgiving, they were opening a NEW window so bankrupt banks could borrow secretly. The central banks and all the other banks are terrified their stocks will fall and there will be a run on their banks. And if they told the truth, they got hammered. So everyone lied. Now, the fact that they are all lying bastards should be obvious. The ones who tried honesty couldn't complain that they were seen as in trouble for they WERE in trouble! Deep trouble! With a capital T. But instead of dragging out the other banks and telling the world, 'We are ALL bankrupt!' they retreated into their safe shells and began lying again.
Now what angers me the most is, the Fed is NOT supposed to enable lying. The Fed is supposed to protect the banking system, not help banks in default to fool savers and lure them into putting money where it is being destroyed! The bankers are supposed to be sober and careful! They are supposed to be protecting the interests of the savers who have only one tool in retaliation: withdrawal of savings! If a saver thinks a bank is making a profit and thus, will give him or her a return on these savings, they have nothing to fear. But if a bank is bankrupt, they can lose everything!
The fix set up by Roosevelt in 1933 was to create the FDIC which insured banks that followed certain strict laws and rules and he also set up the SEC that enforced these rules. Then and only then, could they operate! Now, all these FDIC banks have destroyed the banking system to thoroughly, they are ALL BANKRUPT simultaneously. And the Fed struggles to fix this with fake cures. The real problems have not vanished, they have been transfered to the Fed itself! Which is now asking our government that is $10 trillion in arrears, to fix this huge financial hole!
Efforts to tackle the risk surrounding privately negotiated credit derivatives will take a step forward on Thursday when 11 of the world's biggest investment banks announce the creation of the first central clearer for the opaque contracts by September.
The absence of a central clearer has made such contracts risky because there is no guarantee that parties will pay out.
This systemic risk has fuelled the global credit crunch, prompting regulators to step up pressure on banks to show they are trying to make the system more dependable.
Another stupid fix that fixes nothing at all! Nay, it MAKES IT WORSE. They want to isolate the $500+ trillion Derivatives Beast? HAHAHA. I seriously doubt this is possible. What they want is for it to exist, not die! And they will feed it and have it double in size every year till...INFINITY! Again, this is impossible. Instead of admitting this wretched system is fatally flawed, they want to contain it while using it as a risk sinkhole. Not only is there no guarantee the 'parties' will pay out, THEY CAN'T! This is obvious! Just to operate day by day, they are sucking up in Europe and the US far more than a trillion dollars and it is growing as fast as the Derivatives Beast. And this is no surprise, this IS the Derivatives Beast seen from behind! Namely, it is probably the same creature!
I look at things through a mythological mirror. This enables me to cut through the mess to figure out relationships and to foretell the future. In this case, the fact that all the major banks in the West are bankrupt is crucial. Once we accept this fact, a lot of other things come clear, too.
Gold has been beaten down yet again, back into the mid-$800 level. This is psychological. The Chinese are not buying gold right now, they have a massive earthquake to deal with! And the Indians are being hammered by inflation so they can't put free loot into gold, either. And the major investment banks promised the Fed they would not buy gold and oil in huge amounts, either. So as I warned people, the closing of all exits is part of the deal when the banking system collapses. This is why the main tool remains political action. And the US and Europe are far from ready to do this. Everyone wants a return to the messed up status quo still.
This graph shows the collapse in value in the official Markit credit default system set up last year to track and reveal the real value of those various hack and slash real estate deals sold by all the pirates on Wall Street. The AAA tranche has collapsed in value from 100% to barely 50% and this, only because the Fed rescue of Bears Stearns filled the marketeers with the hope that they will be saved by Bernanke. So prices went up a bit. Only we can see the decline is resuming and accelerating.
Now to the A and BBB tranches: into the deepest depths they dive! The A ABX.HE numbers are at a miserable and obviously unsustainable 10% and dropping. Not far from the absolute bottom. And the BBBs are below 5%. This is beyond a miserable return. Remember: these things lose more than 'absolute' value on the way downwards. People holding these things lose a LOT of money! Especially since this is part of the system set up to remove 'risk' and thus is attached in many ways to other things that are also collapsing.
Bring on the Alt-A downgrades: Standard & Poor’s Rating Services said Wednesday evening that it had slashed the ratings of 1,326 Alt-A residential mortgage-backed securities, after recent data is proving performance of Alt-A loans originated in 2006 and 2007 to be particularly problematic. The downgrades affect $33.95 billion in issuance value and affect Alt-A loan pools securitized in the first half of 2007 — roughly 14 percent of S&P’s entire Alt-A universe in that timeframe.
Perhaps more telling were an additional 567 other Alt-A classes put on negative credit watch by the ratings agency.
A review of affected securities by Housing Wire found that all of the classes put on watch for a pending downgrade are currently rated AAA, suggesting that S&P’s confidence in thin overcollateralization typical of most Alt-A deals is quickly waning. The total dollar of potential downgrades to the AAA classes in question would dwarf Wednesday’s downgrades, which affected only mezzanine and equity tranches.
Basically, there are far fewer AAA stuff now. Far from the losses ending, they are increasing. It is getting much, much worse. The hopes of the big banking houses that these losses would be made good via the Derivatives Beast pouring trillions of dollars back into empty bank vaults is fading. They are only now just beginning to realize, the Beast is pretend. A legend, not real. It is mythological, not rational. It will vanish in a puff of smoke when they stretch out their hands, begging it to hand over trillions of dollars.
If 14% of the Alt-A universe is pretty much gone, we know that much of the bad stuff was intermixed within the supposed AAA classes. So they will, like a ship with a hole blasted in the hull, sink. And if this 'dwarfs' the $34 billion downgrade, we must assume the amount is around $2 trillion? After all, this is close to the amount the central bankers poured down this huge hole from their new windows.
Brazilian President Luiz Inacio Lula da Silva said Monday that South American nations will seek a common currency as part of the region's integration efforts following the creation of the Union of South American Nations (Unasur) last week.
"We are proceeding so as, in the future, we have a common central bank and a common currency," said Lula in his weekly radio program, noting that this process will "not be fast."
Asia, the OPEC oil Arabs and the Asians are all discussing this very same thing. This is because the US dollar no longer is the world's main currency. It is dying rapidly and not due to falling in value. The BANKS are dying. And this is killing the dollar. I don't know if any of these frightened countries will succeed. But the fact that ALL the parts of the planet are discussing this right now is a sign that our days are certainly numbered. It is only a matter of time when the Fed has to give it up. But I fear we may try to start a war with Iran. Which would be our death sentence.