Busted: Bankers and The Global Economy

February 17, 2009

Federal Reserve Gets Religious Vision

But don’t be quick to forget that the seeds of the current global financial crisis were sown by the near total breakdown of mortgage-lending standards and banking-industry oversight. Most of this can be laid squarely at the feet of arrogant economic and political theoreticians who viewed the borrowing public as little more than a bunch of statistics and a springboard for their next personal bonus or career move.

elizabeth-duke-governorNow the Federal Reserve Board has a new religious vision in the form of eager, bright-eyed and perhaps the naivety of Governor Elizabeth Duke. In her speech to community bankers in Phoenix, Arizona, yesterday, she revealed her vision like a campaign pledge:

* I believe that the banking business plays a special role in the economy and carries with it special responsibilities. These responsibilities come from the role of the financial system as the circulatory system of our economy. And with respect to insured depository institutions, given the federal safety net provided by deposit insurance, access to the payment system, and the availability of discount window borrowings, bankers have a responsibility to operate in a safe and sound manner.
* I believe that rigorous supervision and enforcement are necessary companions to regulation. One of the lessons we have learned in the current crisis is that different levels of supervision and enforcement can cause problems, even when institutions are ostensibly following the same regulations. Nowhere was this more evident than in the mortgage origination market, in which banking organizations and firms outside the banking supervision system were all originating mortgages but were subject to very different levels of oversight.
* I believe in the separation of banking and commerce. The lending policies of banks should have as their purpose the efficient channeling of savers’ funds to their most productive uses. The allowance of banks to affiliate with commercial firms threatens the ability of banks to continue to serve as efficient and objective intermediaries of credit and has the potential to expose banks to the operational, financial, and reputational risks of commercial affiliates. It also has the potential to extend to commercial affiliates the federal safety net afforded to banks in recognition of their role in the economy.
* I believe that a bank holding company should act as a source of financial and managerial strength to its banking subsidiaries. That is, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity, and it should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. The reasoning behind these functions is that a bank holding company derives certain benefits at the corporate level that result, in part, from the ownership of an institution that has access to the federal safety net, including deposit insurance. This principle is, naturally, very familiar to almost all bankers, since it is embedded in Federal Reserve regulation, but it is worth repeating from time to time.
* Finally, I believe that strict adherence to consumer protection is necessary to protect consumers and the financial system as a whole. We have now witnessed the severe consequences of inadequate consumer understanding of financial products and of lending to consumers without regard to their ability to sustain the payments. Reasonable regulations, such as the Federal Reserve’s recent rule changes for mortgages and credit cards, can help protect consumers and encourage responsible lending.

seeds-of-victorySure Ms. Duke is a banker-type. For a banker, her commitment in the face of the old cronies in the good old boys’ network of banking is a breath of fresh air, bordering on a religious outlook when we have a U.S. President that is similar in nature. Are the winds of change in the air? Is Ms. Duke the inspiration that ho-hum greedy bankers need? Will the Federal Reserve get the religion of financial literacy where people are concerned? Even more important, will they apply financial literacy to themselves? Are these the seeds of victory that we need or are we too late? Perhaps a little selfless vision never hurt anyone. Then again, do you believe it?

~ E. Manning

January 23, 2009

U.S. Employment and Recovery Dilemna

The U.S. government is in denial of classic facts the majority of the time. Even though Barack Obama has been reasonably honest concerning the immediate future, the figures he used before the inauguration to promote his plans to Congress are hopelessly underestimated and fail to add up on a mathematical level. In the meantime, Americans have the magic and charisma of a new president to chart the uncertain tragic waters of what will ultimately be a recovery given enough time. However the bad news and underlying economic factors coming out of 2008 do not speak of a speedy recovery on any level. When Barack Obama suggests that the American population in general will sacrifice, he isn’t kidding. Even the most optimistic reports paint “a bleak economic landscape ahead” with real unemployment approaching 18% with a sudden increase expected (see recent Digital Economy articles for more details).

Bankers have seen the massive destruction of their net worth and the ability to conduct business. As a result, so have we all. What was your hard-earned 401K last year? What was your net worth two years ago? The Bush administration had only seen to slowly respond to the crisis in addition to adding sweet Federal Reserve liquidity to keep failing institutions and most of the relevant power structure in place solvent. They used laissez-faire economics as an excuse to do little or nothing until their hand was forced by extreme circumstances and the national plight of total economic failure. Henry Paulson admitted his team’s inability to find and deal with the real scope of the national banking toxic-debt, instead choosing the easy course of simply recaptalizing bank with nationalized capital from taxpayers. As a confessed seasoned professional insider, Paulson was unable to determine or realize the full extent of the national collateral damage or he simply isn’t saying, which may be closer to the truth.

America has this plight to look forward to in 2009 barring other unforeseen issues:
* A huge rush of residential housing mortgage failures due to ‘housing resets’, the blight of unemployment and the inability for Americans to qualify for loans because of tightening banking rules which were conveniently ignored previously.
* A tsunami of commercial mortgage foreclosures.
* Billions in credit card defaults that threaten to further decimate the banking system coupled with banking cutbacks in anticipation of the same.
* As unemployment skyrockets, a tsunami of auto repossessions and loan defaults.
* Economic decimation through toxic banking instruments and complex debt instruments combined with $500 trillion in unmanageable credit default swaps.

25% real unemployment is realistic by the summer of 2009, near the estimated high of depression unemployment charted in the 1930s.  Unhappily, the resulting fallout will simply get worse and the economy spirals downward as more unpredicted events occur. Some areas in close relation to the Big Three automakers could see unemployment much higher than that. This commentary just touches the beginning as municipalities and states sink into further debt this year. The nation that used to live on credit will truly be living on credit in order to sustain America on any level. The profitaking of the last decade coupled with predatory banking designs has truly taken its toll. The U.S. economy didn’t have enough energy to maintain a stagflation last year. Deflation will be the ultimate result as the nation pulls into recovery years down the road. These are likely the unpleasant facts unless central bankers have a better idea. That is unlikely unless they start thinking outside the box they have built. ~ E. Manning

credit-default-swap

November 23, 2008

Citigroup Saved by Federal Reserve and TARP

citigroup1In headier times a mere six months ago, Citigroup was discussing the sale of assets to raise cash flow and liquidity. With the stock market value of Citigroup plummeting, one of the larger international bank groups has now been saved this morning through the Federal Reserve. This is undoubtedly designed to build confidence in the markets this week as the economy continues to flag amid record job losses in America.

Citigroup is one of the world’s largest owners of toxic collateralized debt obligations (CDOs). This pool of bonds has created one of the largest victims in the financial crisis.

The U.S. Treasury and the Federal Deposit Insurance Corporation is providing liquidity against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate, which will remain on Citigroup’s balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the U.S. Treasury and FDIC.

The U.S. Treasury has invested $20 billion in Citigroup from the Troubled Asset Relief Program (TARP) in exchange for preferred stock with an 8% dividend to the U.S. Treasury. ~ E. Manning

October 26, 2008

Leadership Needed in U.S. Foreclosures

New statistics now share that 2700 Americans lose their homes every day due to the banking and mortgage debacle combined with a sharply declining United States economy. That number is up from 1200 a day one year ago. What do you think? Clearly, Americans are losing ground.

Digital Economy has shared a wealth of information and perspective regarding the foreclosure crisis consuming the American populace. Sheila Bair, head of the FDIC, says that the nation is way behind the curve on getting anything done about the foreclosure crisis. The do-it-yourself attitude of the U.S. government has been no help at all. I’m not sure why the FDIC would bother commenting on the foreclosure crisis, but hey, I’m game. What she said next is much more important: “We need to act quickly, and we need to act dramatically to have more wide-scale, systematic modifications.…”

Sheila Bair is voicing something that Americans and politicians have been mouthing for the last year with little results. Part of the problem is the opaqueness of the mortgage system coupled with that of the securitized and bundled loans so prevalent in the U.S. The Federal Reserve would tell you that rules are the problem. Yet, the truth is that there is no speedy way to deal with the crisis. The mortgage process is outdated and hopelessly compromised by the new age of banking greed. Expediency is important to politicians and as a result, the crisis gets nothing more than plenty of lip service.

Naturally, there are plenty of excuses why foreclosure resolution is so difficult:
Homeowners walking away
Job losses
Negative equity
Availability of credit for new loans
Investor speculation
Complex investment banking instruments (mortgage-backed securities)

The credit market is such that no homeowner is able to get a loan, especially from a competing bank. Bankers don’t want any more trouble from strapped homeowners than they already have. If Congress and the Bush Administration had acted faster with determinant action, much of the carnage could have been avoided. Instead, they have placated the public with voluntary programs such as the Hope Now Alliance. Hope Now isn’t bad, it just isn’t powerful enough or fast enough. No meaningful provisions have been adopted to force the mortgage and banking industry to hold more responsibility for the loans they created.

Now, the nation faces a global meltdown of epic proportions. Can you imagine 2700 houses a day being dumped on the U.S. housing market? The fact is that little real U.S. leadership has been shown. Along with the commensurate lack of leadership, bankers and mortgage servicers are still being allowed to run amok. So far, too little, too late is the result of laissez-faire economics that the Bush administration has adopted. Yet the same laissez-faire politicians are providing taxpayer money as bailout grist for bankers and businesses that they deem as too-large-to-fail. America needs something more than a hands-off approach to business/consumer regulations and relations. Americans need real leadership and action with real protection provisions in place. Even if some American citizens are dead wrong in how they have handled their finances, Big Government needs to step up to the plate and hold back the tide of banking greed and process, while forcing foreclosure resolution to work. It is all in the rules and how they are enforced. So far, your United States government has lacked the will to act strongly and decisively. America needs real leadership, not excuses. ~ E. Manning
Selling Short to Avoid Foreclosure
Good New for Cheated Homeowners
Selling Short to Avoid Foreclosure

September 30, 2008

Financial Collapse: Fear & National Resentment

monetary whirlpool

monetary whirlpool

Global reports state that the global credit crisis has deepened. Banks have stopped lending to one another. Britain and Europe are encountering many of the same problems as the United States. Central bankers are dumping cash onto the market and playing the same game as the Federal Reserve through auctions to keep commercial banks on life support. Who is to blame? Today, the blame is being cast on the collapse of Lehman Brothers, but the reality is a tragic loss of confidence brought on by bankers themselves. Some of the best educated men and women on the planet have been powerless to improve the situation.

Commercial bankers have locked up the market and the only option central bankers think they have is to dump money into banks, in effect, satisfying the “need for cash.” The need for cash and credit is a symptom of the larger problem: panic by bankers because of their poor choices.

Economists publicly expect the longest recession in a quarter century with or without a bailout plan to rescue the battered banking industry. Most say the next six months are going to be very difficult. Market scare tactics say that if a bailout is not approved, a depression is likely as credit freezes up and markets collapse. The global consortium of central banks dumped an additional $630 billion into the global financial system, which will fuel both inflation and devalue currencies simultaneously. Central bankers are doing the same thing with other major currencies, portending a global debacle in an effort to keep the cash and credit flowing. On the other hand, the central bankers don’t want to be caught holding devalued cash, so now is the time to cleanse their palates. Central bankers only collect and horde gold among themselves since that is how they settle their accounts against each other.

stormy economic skies

stormy economic skies

Whether disaster can be averted or not, the United States has a right to do nothing, even to fail. The reality is that this is already what has happened as politicians and money managers stubbornly cling to the hope of sustaining what currently exists in the current power structure. The problem remains as a global crisis that even central bankers are ill-prepared to deal with.

George Bush warned Congress that they must act or damage to the U.S. economy will be painful and lasting. Congress seems to have rejected that notion. What the nation really has is a credibility crisis. Authorities seem to be more interested in their reputations than possible solutions. Meanwhile, many American scrimpers and savers are in a panic and most American voters resent the bailout efforts, convinced that the rescue effort is for the good of Wall Street and not the average man in America. Considering the decline in the U.S. living standard over the last few decades, the popular opinion to let banks fail and allow the system to unwind naturally is seen as likely to have little effect on meaningful personal assets in the eyes of most Americans. The real problem that panics bankers and politicians lies in the market correction and pricing standards in a bankrupt economy as values fall through the floor, creating still more bankruptcy and poverty for business and citizens.

The correction in the U.S. housing market bore a decline of more than 16 percent in July 2008 alone as the accounting totals have come rolling in. Americans are quickly becoming “upside-down” on mortgages on their homes, encouraging more defaults and foreclosures, even as more Americans lose their employment from an already failing economy.

The public line is that business must have a huge amounts of credit available. Business, like consumers have become increasingly dependent on credit while overpaying executives and paying stockholders instead of reinvesting in themselves. With credit becoming increasingly tight, businesses may find it tough to obtain short-term loans to meet payrolls or purchase inventory. That may lead to job layoffs, which could ripple through the economy in a matter of weeks. The bottom line is that solvent businesses do not need large amounts of credit for everyday business. In the “old days,” business used to borrow for expansion purposes only. Business needs were met by the influx of cash coming in from clients and customers. Have business standards declined so dramatically in the name of personal profit taking or is this statement simply a political red herring to generate urgency?

Increasingly, Americans have become more and more detached from the wealth and prosperity of Corporate and Political America. They have become beasts of burden for the affluent. Considering the circumstances, it isn’t hard to see why many Americans don’t favor a bailout, even if they risk losing a few thousand in a retirement account they may never see anyway. There is an underground pessimism and resentment that has come to rest in much of mainstream America. ~ E. Manning

September 17, 2008

Bailout Fever Strikes U.S. Again

The world of insurance will never be the same. AIG, a major insurance corporation and the world’s largest insurer has averted the worst financial collapse in history by accepting an $85 billion Federal Reserve loan and giving the government a majority stake in the company. The U.S. Treasury was fearful of a “disorderly failure” that would lead to larger national failures.

American International Group was a wild card with failure creating an enormous and unknown measure of system risk to the entire economy. The federal government gets 79.9 percent take of the firm and senior managers give up their jobs.

panic on the street

panic on the street

Meanwhile, the Federal Reserve loan with a 2-year term will allow AIG (in theory) to divest itself of assets in a timely manner without creating an immediate crisis. Stockholders have been effectively squeezed out and are subject to losing any dividends.

AIG was huge in the credit default market, insuring contract guarantees that companies would not fail in large financial deals. A default contract buys protection against the threat of default by a company, municipality or a package of debt backed by mortgages. A buyer pays the seller a premium over a set term. The seller pays out if the default occurs. Defaults on mortgages and securitized bonds brought AIG to the verge of oblivion.

The complexity and global reach is huge, likely affecting every fund on the market in one fell swoop. Even with the loan in place to protect AIG for the short-term, Wall Street is reeling from the effects. A future bankruptcy would also play havoc on business contracts. There are reports that people are hording cash. Derivatives have been a highly profitable on Wall Street until now. The financial world is changing quickly as repercussions from the subprime mortgage crisis ripple across the globe.

~ E. Manning

September 11, 2008

The Con Game of Securitization and Wealth

crisis through securitization

crisis through securitization

According to Federal Reserve’s Vice Chairman Donald Kohn, “One reason for the loosening of standards was the expectation that house prices would continue to rise and even more certainly that they could not fall in all regions at the same time, supporting diversification through securitization.”

This small sentence combined with a summary of all the accumulated evidence maintained by the Federal Reserve shows the propensity for a lack of regard for economic concerns over the immediate concerns of profit.

“Rising prices would enable lenders to recoup their funds even if the borrower was unable to service the loan, mostly because the borrower would be able to obtain extra cash through refinancing. Expectations of house price appreciation facilitated and interacted with the increasing complexity of mortgage securities, including multiple securitizations of the same loan, which made it virtually impossible for ultimate lenders to monitor the creditworthiness of borrowers. This was a task they had outsourced to credit rating agencies. The absence of investor caution and due diligence was especially noticeable for the highest-rated tranches of securitized debt.”

securitized vomit

securitized vomit

Who started the securitization of loans to begin with? Give the government geniuses at Fannie Mae and Freddie Mac credit for the wunderkind of shaky banking ‘o so many years ago. That is why authorities in banking and in government are quite mum about the evil and deception of securitized bonds. What is worse, they have no intent to change a thing.

The Federal Reserve is still brainstorming new ways to “ameliorate systemic risk. That said, a host of difficult judgments are inherent in how we establish such a system.” That is the trillion dollar question. In the words of Donald Kohn; “How we can structure these requirements and other aspects of regulation to damp, rather than reinforce, the natural procyclical tendencies of the financial system?”

economic usury

economic usury

If the U.S. economy were equated to an automobile engine, we would be running on half the cylinders. The Federal Reserve and other surrogate economists don’t have a clue and are now discussing “solutions” among themselves. Global bankers long for a solution to the trillion dollar question and they want to continue doing the same old things as long as it makes them money for the short-term. The idea is not what is good for any economy, but what is good for quick profits for themselves. That is what banking around the world has come to represent: corporate profit behind the scenes and personal profit while that is possible. Never forget that the Federal Reserve and global central bankers are corporations bent on making a profit, part of a “franchise” of banks that loosely report to Swiss and Roman bankers. They live off of the world; therefore economies are simply tools for wealth. That is the danger nations, governments and peoples face.

Don’t fool yourself. Global bankers are running the world to your peril. However, the sophisticated United States government and others are all for making a profit while they can, oblivious to the danger or convinced that they will live forever while central banking pumps them dry. ~ E. Manning

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