Busted: Bankers and The Global Economy

September 9, 2008

Investor Confidence: History of Short Rallies

Since the current mortgage crisis has been officially publicly documented around July of 2007, investor profitaking has barraged the stock market under the pretense of confidence after each bailout. Each time the bailout grows larger. The market scores big gains followed by a drop “as reality takes hold.” The media circus and investors appeared to rejoice upon the bailout of Fannie Mae and Freddie Mac, but the joy has proved to be short-lived.

bailout fever

bailout fever

The federal government seems to enjoy playing the same game, now using Sundays as a day of economic rescue and salvation. Traders are in agony as they mourn the loss of another fall downward in the markets. Why can’t we just get the problems over with so we can get back to making money like we used to? That is the essence of Wall Street’s attitude about the economy, an attitude of frustration. These self-centered expressions are expected in a market that has no moral compass beyond profit.

investor dunce award

investor dunce award

Self-absorbed traders and profiteers shouldn’t need to ask. The bailout of Fannie and Freddie, like the bailout of Bear Stearns has prevented a complete meltdown of the economy, certainly saving the plight of every investor from the jaws of bankruptcy today. Considering the short-term mentality of investors, the bailout is good when you consider that investors can come to play another day.

~ E. Manning

September 6, 2008

Fannie & Freddie: It Was Going to Happen

the addiction of lady liberty

the addiction of lady liberty

After plenty of scuttlebutt and shuffling, the Treasury Department is close to finalizing plans to effectively take over beleaguered mortgage twins Fannie Mae and Freddie Mac. Both government-backed firms have lost 80 percent of their value.  When central bankers began to refuse investing in the twins, the writing on the wall became very clear. Central Bankers were not going to voluntary lose a penny. Confidence was down and out. Like most investors, they expect a solid investment. The original fantasy of the U.S. federal government and trust in their prowess was not going to do the trick. The imminent failure of the U.S. mortgage buyers, Fannie Mae and Freddic Mac, made them a very shaky bet indeed for investors that wanted a solid investment. What investor doesn’t want a solid investment? Point made.

Remembering the moral hazard that brought about the “major correction” of the U.S. mortgage industry and the failure of the entire banking and finance system as far as the world is concerned is important. Foreigners can easily see the folly after the fact and are going to limit how they buy into that folly. The nation of the United States is still trying to close its’ collective eyes in the hope that the reality of the disaster will go away. It’s too early for that now.

In mid-July, the Treasury Department and Federal Reserve announced their desire to make funds available to the Fannie and Freddie “if necessary.” Congress approved the proposals later that month. Fannie and Freddie have become the only source of funding for banks and other home lenders looking to make home loans even though many illegal home loans continue to be made by desperate bankers. Still, the ability of Fannie and Freddie to guarantee and finance is seen as crucial to the recovery of the battered home market and the broader U.S. economy. Otherwise, their is little hope of a nominal recovery by the admission of Feds.

The fact is that the nation and even the world has become addicted to securitized loans. Fannie and Freddie buy loans from banks and mortgage institutions and free them to seek more loans. The mortgage twins then attach a guarantee, selling securities backed by the loans’ income stream. The profits of compound interest in the industry just aren’t considered profitable enough. In the eyes of this writer, this behavior is little different than a dog going back to its’ vomit despite that pain and decline caused by the behavior: sharp decline in home prices and the rise in mortgage delinquencies and foreclosures. It is some of the most carnal and impulsive behavior seen to-date and a refusal to admit the reality of bad decisions and the very likelihood of more abuse. This is more than a financial issue. This is a character issue.

 ~ E. Manning

August 18, 2008

Will Global Confidence Cause a Chain Reaction?

Just a few weeks ago, U.S. Treasury Secretary Henry Paulson held that a bailout of Fannie Mae and Freddie Mac to be highly improbable, if not impossible. Now there is talk that an extraordinary Treasury capital infusion may be needed to restore faltering foreign demand for debt issued by Fannie Mae and Freddie Mac. The mortgage twins are the nation’s two top home funding sources that the government is willing to rescue to save the U.S. housing market.

Foreign central banks have dumped nearly $11 billion from the holdings of the “mortgage twins” in the last four weeks. They don’t plan to reinvest in force until the U.S. government is clear when it will back Fannie Mae and Freddie Mac.

Investors and foreign central banks may be concerned, but the reality of a bailout is academic. The entire fabric of the U.S. housing industry depends on the continued functioning of the mortgage twins. Unless foreign bankers and the Fed expect to pull out on their support of the U.S. economy, such paranoia is largely unwarranted. Obviously, the real concern for central banks is the value of the securities that the foreign bankers hold. Devalued securities diminish their investments; hence, their power. Monetary value has really come to be all about appearance and confidence. Central bankers won’t be caught holding any empty sacks in the name of tacit support. They are part of a chain reaction.

Mortgage bonds are trading poorly while investors wait for good news on Fannie and Freddie capital. Meanwhile, U.S. mortgage rates have climbed to their highest levels in a year in reaction to the contracting housing market. Both are part of a chain reaction.

Investors are momentarily in a mood of increasing nervousness about the global economy, with deteriorating growth in the United States, Europe and Japan now beginning to bite into “emerging markets.” There is a growing belief among investors that the world economy in general is at risk, and with it the emerging markets that have been a powerhouse of growth and investment gain over the past few years. The emerging markets cannot and do not stand on their own. At this stage of development, they are step-children of larger marketplace that isn’t all that sound to begin with. Investors are always ready to be nervous, especially in a time of volatility. They can be and usually are part a wild card in the chain reaction.

Oil commodities, which were up and making the world nervous are now down, making the world nervous. It would seem that the world is simply nervous and using oil as an excuse. Previously, oil was a great profit hedge. When the U.S. started openly discussing releasing a large portion of the Strategic Petroleum Reserve on the open market, investors backed off from the heady world of oil commodities. Naturally, they are taking it slow. Nobody wants to rock the boat too hard. This is part of the chain reaction.

Inflation is up, which has been blamed on Big Oil or at least on commodity futures through investment banks. Which came first, the chicken or the egg? While this topic is open for debate, global inflation is up after inflationary pressures shot up in the U.S. and the Middle East from overheated greenbacks. That doesn’t look to get better anytime soon, especially as long as the U.S. keeps stealing money from the taxpayers vis a vis the Federal Reserve. This is part of the chain reaction.

Global banker’s incessant worrying over their central bank interest rate is nonsense. Rates are so low as to have little effect in the real world. Commercial bankers are profiteering from borrowed central banking money as well as keeping their leaky banks afloat during this rough period. This is part of the chain reaction.

The single bright sector in banking remains in Islamic banking with a very different set of rules that bankers have yet to learn to exploit to full potential. In their worry, investors will look at this new hot market in hopes of developing new means of prosperity, which will likely mean a rise in power in Muslim nations. That is enough to worry many political persuasions worldwide as politics feeds into the monetary system. That is part of the chain reaction.

As economists, politicians, bankers, analysts and writers, we are always looking for an excuse, rationalization or explanation to meet a mindset. While most economists would tell you otherwise, it is not science, but rather a facet of human behavior. As such, economics enjoys the same ups and downs as human life does. That is part of the chain reaction.

August 10, 2008

Banks Eat Billions; Credit Crunch Expands

paranoid banking firms gamble on their importance

paranoid banking firms gamble on their importance

The Securities and Exchange Commission stepped in and decided that auction-rate securities have been improperly sold to the public. They haven’t said much else as they carefully watch over the fold of now paranoid bankers. Investment bankers have plenty of egg on their face with punitive action in the immediate future by the Feds.

Citigroup and Merrill Lynch have decided to buy back billions of dollars of securities without admitting liability officially because of state regulator pressure. Bank of America and Countrywide are firmly ensconced in trouble. Swiss giant UBS is in the throes of negotiating a payout that could be in the 25 billion dollar region. As private citizens and investors, we know the reality of the situation. Bankers have tried to play us for fools for the almighty dollar and perhaps investors bit off too much, too soon in the haste for profit.

In theory, when times get better larger investors and even banks should be able to sell off the securities once the markets ease and there’s more credit in the system. That is the public line, but the truth is probably altogether different. Selling off investments with major liquidity issues is a big maybe considering the quantity of these beleaguered banking instruments. Following the aftermath of the subprime mortgage debacle, this is yet another blow to the reputation of investment banks, who may struggle to sell such “sweet deals” in future times even at fire sale prices.

British banks are taking huge hits as a result of the credit crunch with increased pressure to perform for stockholders. Lloyds, Halifax and Alliance & Leicester have been fairly decimated profit-wise. Now RBS and Barclays are taking turns with profit thrashing. British banks haven’t found the credit crunch much easier than U.S. banks. Housing prices continue to drop in the U.S. and the United Kingdom. Foreclosures are a uniform blight in both economies while bankers and economies struggle to adjust. The U.S. market has lost nearly a million homes to foreclosure with more on the way: the worst since the Great Depression.

August 9, 2008

August 8, 2008

Bankers Seek to Buy Out Uncle Sam on Fraud

Regulators have been investigating Wall Street firms for their role in the sales and marketing of auction-rate investments.

Wall Street agreed to buy back more than $17 billion in securities that they fraudulently sold to retail customers paving the way for other banks and brokerage firms to do the same.

Merrill Lynch jumped ahead of regulator investigatory scrutiny, announcing that they will buy back about $10 billion in auction-rate investments that it sold to retail investors.

Citigroup reached a settled with state and federal regulators, agreeing to buy back about $7.3 billion of auction-rate securities that it sold to retail customers. As recompense for misconduct, Citigroup will pay a $100 million fine for its misconduct. The securities are essentially worthless, even though the buyers were told that the securities were safe and easy to cash in.

Even Bank of America is under attack with subpoenas related to securities sales. Taking on responsibility of bank instruments in bank bailouts has likely posed an additional headache.

At this time, institutional investors are still out in the cold, but both firms claim to be working on a resolution on problems with institutional investors in the hopes of avoiding more heat and gaining brownie points from the federal government. A rush of settlements are expected in the next few months as Wall Street aims to absolve itself.

Regulators are starting to pile on in a sort of informational and investigational bankers bloodletting. The Securities and Exchange Commission has elected to stay out the recent penalties as they expect to weigh in on their own investigation. From all appearance, Wall Street’s troubles have only just begun. Bankers know their guilt. Can they distract the investigations to avoid the embarassment as the propensity of their fraud is exposed to the nation? Seeking to buy out authorities may be seen as an easy way out as the financial onslaught on Wall Street and for banking in general continues.

August 5, 2008

Federal Reserve Betting on Banking Mojo

shell game banking

shell game banking

Kevin Warsh laid out much of the bad economic news as a result of the banking, finance and mortgage failure of the last year at the U.S. Department of the Treasury Press Conference. The Fed Governor spoke to Henry Paulson and bank supers, as poetic as a banker could be where innovation was concerned. It was what could be described as a banking innovation pep talk, an effort to drive inspiration for the latest money making banking creations while establishing a new securitized banking pool concept.

“the path to a new financial market architecture, however uneven and improvised, will not only be marked by the forces of retrenchment. The path should equally…be distinguished by the creative impulses that drive product and market innovation. It is perhaps too convenient to denigrate the attributes of …ingenuity…when the forces of innovation can disappoint and weaken the real economy. Policymakers and market participants alike should recognize that innovation–in our product markets, labor markets, and yes, our financial markets–is likely to prove a necessary net contributor to economic growth in the coming period. We should also be reminded that financial innovation need not be equated with product complexity.”

Creative impulses…market innovation…ingenuity…not…product complexity. Bankers just went through a peak period of massive banking innovation and have paid dearly…or rather some have paid dearly. On balance, the world has paid dearly with the exception of central bankers. Since the credit money isn’t real in their eyes anyway, nobody was really hurt. The insanity failed, apparently only because bankers weren’t financially literate enough. Warsh is ready to try a new kind of insanity again, fully recommending it as he pats his banker buds on the back and fully expecting a different result…or does the current Federal Reserve really care about the long-term results aside from their own corporate profits?

Warsh is suggesting research and testing for new banking innovation that can be exported to other economies to (gosh) profit bankers for rebuilding banking. This is a public admission that the morally bankrupt aren’t even hesitant to admit. They just cover it with big words and long sentences while the public ignore their public plans for profit at the expense of whole economies. But this time, the current crack Fed team is involved from the beginning and they are going to get it right.

The reality is that the Fed wants more of the same mortgage and bond medicine. They want a guaranteed bond framework to attract investors. They want greater access to mortgage credit created by “high quality assets” in a pool that banks will manage. These pools would rotate active mortgage securities. If a security were to become delinquent, it would be conveniently removed from the investment banking pool in a magic mojo shell game. “Newly issued covered bonds backed by high quality mortgage loans and issued by strong financial institutions may find a growing investor base in the United States.” Imagine that. Guarantee securitized bonds to make them desirable and they (the investors) will come in droves.

As if the United States and the world haven’t had enough banking innovation straight to economic disaster after years of abuse, the Federal Reserve is looking for new magic mojo banking prowess to bail out the world. They are thoroughly “unrepentant” of the past because there are no longer any ethics or morals in finance and banking. Bankers say, if we’d just done it a little differently, we would have succeeded.

This is all okay with Kevin and the Fed team because of “high quality” and properly understood financial innovation. The Federal Reserve seeks to encourage new and innovative sources of funding to secure its latest big mojo idea. Get ready for a brave new world of investment using a ball and golden shells on a table. You are sure to win the game over the bank, especially since they print the money anyway.

Who is going to guarantee the casino madness? Do you think the Fed is going to stand up as the guarantor on this one? ~ E. Manning

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