The Fed Audit

New details were released this week with 0 media coverage, except for a few online blocks and publications, on how the fed led a $16,000,000,000,000 (that's trillion) bailout package to the world during the financial collapse here in the US. This information was revealed after the fed was audited by the US govt as part of the Wall Street Reform Act (what a joke) passed last year.

Senator Bernie Sanders of Vermont stated:

"As a result of this audit, we now know that the Federal Reserve provided more than $16 trillion in total financial assistance to some of the largest financial institutions and corporations in the United States and throughout the world," said Sanders. "This is a clear case of socialism for the rich and rugged, you're-on-your-own individualism for everyone else."

Ok, we know this...what's most interesting is his misunderstanding of the federal reserve itself. These are his exact words:

 "No agency of the United States government should be allowed to bailout a foreign bank or corporation without the direct approval of Congress and the president,"

Breaking news Bernie, the federal reserve is an INDEPENDENT bank..they are not accountable to the federal government in any way. They were setup in theory to keep the government in check but have now become a monster beyond the reach of anyone in government and act only to INCREASE THE RICHES OF THE WEALTHY

Alan Greenspan even admits it, when he says:

"Well, first of all, the Federal Reserve is an independent agency, and that means, basically, that there is no other agency of government which can overrule actions that we take. So long as that is in place and there is no evidence that the administration or the Congress or anybody else is requesting that we do things other than what we think is the appropriate thing, then what the relationships are don't, frankly, matter. "

European Central Bank Insolvency

With all these European bailouts I began to wonder, what kind of shape is the ECB in? I mean think about it. They have been taking on a lot of bad debt as collateral from Greece, Ireland, and Portugal in exchange for various forms of borrowing. If you assume that some of this debt is completely worthless, as it would be in a default, and that it's probably leveraged 30 to 1, then how vulnerable are they to a needing a bailout themselves?

There was a great article over the weekend in Barrons with and interview with Sean Egan. Sean's firm is an independent ratings agency meaning they are paid to do research on companies and countries, contrary to S&P and moodys who are paid by the issuer themselves. Here are a couple of interesting quotes from the article. Keep in mind that this guy was miles ahead of the financial crises back in 2008. He simply tells it like it is:

"We believe that American investors are severely underestimating the scale of the European sovereign-debt crisis. They overestimate the amount of debt that Greece, Ireland and Portugal can realistically shoulder, given the sorry state of their economies."

What does the ECB's balance sheet look like?

"On the asset side, in addition to €303 billion in assets, the ECB itself holds €113 billion in deposits of local banks and €150 billion in sovereign debt. The problem is that it has only €10 billion of equity, which would be eliminated by any reasonable write-down of the bank deposits or the sovereign debt. Little wonder that Jean-Claude Trichet, the ECB's head, has insisted that any bank bailout [won't] trigger charges for sovereign debt, which presumably would extend to the ECB. Reasonable investors would subscribe to the bank's needing an extra €90 billion in fresh capital. It can get that, but not quickly."

"..consider the shape that the ECB is in, with less than 3% of capital underlying its growing array of bad assets. The European Central Bank's capital levels are getting perilously thin. There's nothing backing the ECB but the guarantees of the euro countries—many hard-pressed themselves."

But don't worry, Bernanke will save the day with YOUR money

"All things being equal, the most likely source of support for the ECB is the U.S. via Ben Bernanke, who during the first signs of the crisis, ginned up more than $580 billion in dollar swaps in 2008 and 2009 with central banks around the world."

Can you feel the panic in the air...

It's almost everywhere you look, the white house to wall street. It's more of a confusion than a panic..what happened to all the green shoots? Why are world economies slowing down? Where did this inflation come from?

There was no recovery. The average American is going to deleverage from their current mountain of debt and we will have a slowdown, we HAVE to. You cannot accumulate debt forever, at some point you must deleverage. The signs are all here.

Go back and look at news headlines from July 2008-August 2008. The similarities to todays' are scary...we are on the verge of another recession, but this time there is no backstop/stimulus/Quantitative easing to ease the pain. We are more indebted now and therefore the risks to the downside are greater...

You want to see something interesting...

July 2008 - 1 month before absolute panic

Goldman Sachs: 20% chance of a full blown world recession

July 2011 - 1 month before ????

Goldman Economist Sees Rebound, but Risks of Recession Rising

"Goldman's Hatzius sees 15-20% chance of renewed recession"

Panic at the White House? Gloomy Goldman Sachs sees high unemployment, possible recession

"But the slowdown of recent months goes well beyond what can be explained with these temporary effects. … final demand growth has slowed to a pace that is typically only seen in recessions. .. Moreover, if the economy returns to recession—not our forecast, but clearly a possibility given the recent numbers … "

More thoughts on consumption and debt..

No one understands. Why would Italy be a target of the "bond vigilantes"? They aren't close to defaulting on their debt, they are a $2 trillion economy. My personal opinion is that people think that being able to "afford" something = being able to make the monthly payment. Look at the US, why would we default? Even running the deficits that we do, we can easily afford the "monthly payment" on our debt...

In the developed world we have been trained that "debt is not bad". It has positive tax implications (ie mortgage/interest deductions) and it allows us to afford things that we want NOW rather than waiting until we can actually afford them...by "afford them" I mean write out check and own the asset with 0 debt. How many of us would buy a $30,000 SUV if we had to pay all cash for it? How many people do you know with $30,000 cash sitting in their checking account..yet, I see thousands of these vehicles every day. Why? People can afford the $450 a month payment, but if they had $30,000 in cash would they spend it all on a stupid car...? Probably not.

Also, think about the tax structure of this country. We can deduct interest against our income...think about that. How crazy is this idea, that if we borrow money to buy "things" we can deduct it off of the money we owe the gov't. I understand the premise in terms of a business, because it would stimulate business capital investment, and in in return create jobs somewhere. However, in terms of the public, the incentive to borrow only destabilizes the entire economy buy creating credit bubbles and false wealth.

We are trained to consume, given opportunities to consume (ie easy car loans, 5% down mortgages, credit cards), and then rewarded when we do consume (tax code).  How much of this economy is consumer spending you ask? 70%. That is why we must continue to consume, that is why we are rewarded to consume, the world economy depends on it...

Debt.....nothing else matters

They say a picture is worth a thousand words...I think this one works in terms of explaining the developed world today. It's the only thing that matters...if you take out debt, recessions aren't scary anymore, slow downs can be absorbed, and interest rates are irrelevant.

On the flip side if you look at the current situation in Europe, the US, and Japan..recessions are a doomsday scenario, slow downs are catastrophic because you won't be able to pay for your liabilities, and interest rates are the ONLY thing that matters on a day to day basis...

U.S. Downgraded to 'Near Junk' by Weiss

Moodys and S&P are not the only ratings agencys out there. I find it fascinating that both republicans and dems are missing the entire point of the ratings agencies warnings. S&P said last night that in a comprimise is reached in which there are less that 4.5 Trillion in cuts over the next few years the US will still be downgraded.

Here's a comment from Weiss Ratings agency basically saying the same thing as S&P

Weiss had initiated its sovereign debt ratings in April, with an investment-grade rating for the U.S. of "C," saying at that time that low rankings in the categories of debt burden, international stability and economic health, were partially offset by the nation's "ability to borrow in the global marketplace."

The new "C-minus" rating translates roughly to investment-grade ratings of "BBB-" at Standard & Poor's and "Baa3" at Moody's, both of which are one notch above junk status.

China's main rating agence Dagong, put the US on negative watch:

China Dagong Rating agency Chairman: US Debt On Negative Watch

BEIJING (Dow Jones)--Chinese rating agency Dagong Global Credit Rating Co. said Thursday it is putting U.S. sovereign debt on negative watch for a possible downgrade, in a move that echoes Moody's Investors Service's latest warning on the U.S.

The ability of the U.S. to repay debt has shown a trend of continuous decline, its economic growth is likely to slow and it will continue to post high fiscal deficits, Guan Jianzhong, chairman of Dagong, told Dow Jones Newswires.

"The U.S. federal government's debt repayment ability is falling," Guan said.

 

Couple of US banks with exposure to Europe vs 2008 Exposure in Housing

The banks insisted during the summer of 2008 that they were well capitalized and able to withstand substantial write-downs from the housing market. Although we don't know the exact exposure to the PIIGS it looks to me that it's enough to cause some damage should a haircut occur on some of those bonds. This would explain the very poor performance of the financials over the past 2 months.

2008 JP Morgan
As of June 30, 2008 JPMorgan held $19.5 billion of prime and Alt-A mortgage exposure, $1.9 billion of subprime mortgage exposure, and $11.6 billion of commercial mortgage-backed securities (CMBS)
----for a grand total of $32 Billion

2011 JP Morgan

The firm also has about $15 billion in exposure to troubled euro zone nations Spain and Italy, which are struggling under mountains of debt.
----no mention of exposure to any of the other PIIGS, HMMM

2008 Citi
---cant' find exact $$$'s of exposure in 2008 but they did take $57 billion of write downs in 2008 alone

2011 Citi
---Citigroup Estimates It Has $22 Billion at Risk in Five European Countries