14 February 2009


The attempts to revive the banks will lead to desperate measures. The Obama Stimulus plan is not a good start. It is much more of the same failed junk tossed into a hasty package, founded on desperation, called urgent expedience. Little is designed to rebuild the US industrial base, which would provide a strong legitimate income source. Most economists fail to recognize this missing piece. The tax cuts are not permanent, thus will change little in spending propensity. The tax credit for home buyers will lift mainly the homebuilders, who need to go out of business. The pork amounts to 11% to 13% of the total spending bill. Little is done to alleviate the high corporate tax burden, where the US is not competitive. Sorry, but this is just another spending bill loaded with garbage and a few half-baked ideas that seem constructive.

By the way, the Aggregator (aka Bad Bank) concept was a very bad idea and was unceremoniously scrapped, an embarrassment to Geithner. The entire concept is insane and shows the high degree of desperation by the USFed. He is already looking like a green kid who cannot operate without the strings attached to Robert Rubin. The proposed idea was recognized as stupidity put to paper almost immediately, as described two weeks ago. The ultimate problem with the vacuum cleaner miracle worker Bad Bank is that its proper implementation would have destroyed the balance sheet of the majority of large US banks. So scrap the idea! Meredith Whitney of Oppenheimer believes “Simply removing ‘toxic’ assets from bank balance sheets will not directly cause banks to increase lending.” She favors having banks sell their ‘crown jewel’ assets to cover their own losses. That amounts to liquidation in my book.

Next we have a bizarre notion put forth by Treasury Secy Geithner that all banks must submit to a Stress Test on a mandatory basis. That sounds promising, except that the results probably will not be made public any more than the disbursal of the TARP funds. Why? Because the Stress Test will reveal the insolvency of the banks, and vulnerability to bankruptcy if proper accounting is inflicted upon their assets. That is what a stress test reveals. See the article on how regulators have invaded the big US banks (CLICK HERE). Nearly 100 federal banking regulators descended on Citigroup in New York on Wednesday morning. Dozens more entered Bank of America, JPMorgan Chase, and other big banks across the nation. These regulators could become the arbiters of American finance, as the Geithner Stress Test empowers them to decide which banks are strong enough to survive, and which must accept new bailouts from Washington with strings. These are not prosecutors or investigators, but rather accountants and analysts. The financial sector was anticipating far more than the rookie Geithner delivered last week. The original investments under the Troubled Asset Relief Program, or TARP, might soon be converted into bank common equity. Such a move will end the graft, private payoffs, and satisfaction of foreigner bondholders who (rumored) threatened Wall Street officials with violence last September. The litmus test might well be a Dow Jones and S&P500 stock response, as in new multi-year lows. The forward guidance from 80% of major companies is dreadful.

Karl Marx was an annoying man with some brilliant thoughts, whose work was like a football that Vladimir Lenin ran with. If his words prove correct, and the first few tenets seem right on the mark, then what follows in the Untied States will be anything but continued freedom. Calling it socialism might be a stretch. He wrote in “Das Kapital” the words:
“Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take on more and more expensive debt, until their debt becomes unbearable. The unpaid debt will lead to the bankruptcy of all banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism.”

Nobel laureate Joseph Stiglitz hated the Bad Bank concept designed to rid financial companies of toxic assets risks, since it would vastly expand the national debt. That amounts to swapping taxpayer money, as in cash for trash, in the words of Stiglitz. He spoke in a panel discussion at the World Economic Forum in Davos, Switzerland. He said “You should not chase good money after bad. We are talking about a national debt that is very hard to manage.” Stiglitz serves as a professor at Columbia University in New York. The Davos Forum was one of the gloomiest ever, but it did feature a big spotlight on Vladimir Putin. The blueprint put forth by Putin should be regarded as the ‘Post-US Blueprint’ and is built atop a energy foundation with many workable rules. The Untied States and Untied Kingdom are going to soon find themselves outside looking in concerning global commerce and banking. The Hat Trick Letter Crisis Update addresses and analyzes the Putin plan.

Nothing new here! But details need some exposure. JPMorgan received its first bailout funding from the New York Fed of $55 Billion, guaranteed by worthless assets from Bear Stearns, to prop up its own liquidity position and to buy Bear Stearns stock. JPMorgan also recently received another $25 billion in TARP payments from the Dept Treasury. That does not count the $138 billion received from highly suspicious fresh funds from the USFed in what has been called a RELOAD, from a decision made by a bankruptcy judge on a Saturday morning before dawn, to satisfy private Bear Stearns accounts. Focus on JPMorgan executives. Instead of receiving cash bonuses more easily detected, they received very large bonuses in the form of Stock Appreciation Rights (SARs) and Restricted Stock Units. These equity compensation securities are hard to value except by expert analysts. SARs are very similar to employee stock options, whereas Restricted Stock Units are very similar to Restricted Stock. These SARs were granted on 20 January 2009, the day that the JPMorgan stock reached its lowest in five years. The stock quickly rebounded.

Total value (2/6/2009) of SARs Granted = $81,405,000
Total value (2/6/2009) of RSUs Granted = $30,500,000
Total value (2/6/2009)of Grants to top 15 executives= $111,905,000

These totals greatly exceed those for the top Merrill executives as yearend bonuses in cash and equity. The New York Attorney General has begun investigation of Merrill’s executives for criminal wrongdoing. Merrill CEO John Thain has granted himself a mere $10 million while at least three JPMorgan executives exceeded that in equity compensation alone. JPMORGAN IS BEYOND REPROACH, AND SEEMS NEVER TO BE THE SUBJECT OF SCRUTINY. Why is JPMorgan immune from investigation? See the probing article with graphs (CLICK HERE).

The charade continues. Both big banks are too important to the syndicates to fail. They hold up the highly fallacious fractured foundation to the US banking system, complete with credit derivative ramparts and illicit gold & silver suppression latticework. The bizarre props to Citigroup cannot stand any test of scrutiny. The reorganization into a commercial bank on one side and an investment bank on the other side is likely soon to result in a pair of bankruptcies. Without USGovt props, it would be dead. Without influence by Robert Rubin, it would be let go. Then we have the Citi naming rights up in air and its $400 million cost associated with the new New York Met Stadium. Bad timing!

In a maneuver possibly more to deflect public outrage, under public pressure to increase its lending, Citigroup says it will release $36.5 billion to issue mortgages, to make credit card loans, and to buy distressed assets from the credit markets. The decision arrives after the bank received $45 billion in capital from the USGovt in two installments late last year, not yet used in any visible manner. In highly dubious promises, CEO Vikram Pandit said, “Our responsibility is to put these funds to work quickly, prudently and transparently to increase available lending and liquidity. TARP capital will not be used for compensation and bonuses, dividend payments, lobbying, or government relations activities, or any activities related to market, advertising and corporate sponsorship.” My belief is that funds are fungible, and Pandit gave a complete list of precisely what TARP funds have enabled and will continue to enable. After considering $51.2 billion worth of proposals within its business segments, the bank said it approved $36.5 billion in total. That includes $25.7 billion in residential mortgages, $5.8 billion in credit card lending, $2.5 billion in personal and business loans, $1.5 billion in corporate loans, and $1 billion in student loans.

The Federal bailout has not fixed Bank of America, according to several industry analysts like David Henry, Matthew Goldstein, and Roben Farzad. My viewpoint is that BOA was bailed out in order to shore up a potential explosion in credit derivatives, no more, no less. They have become a gigantic tank to house toxic assets owned previously by Merrill Lynch and Countrywide. The entire merger was hastily cobbled in a time of desperation. The USGovt $138 billion rescue package of Bank of America is already failing. The bailout has amounted to little more than temporary medicine to help BOA digest its acquisition of brokerage giant Merrill Lynch, amidst great controversy. They could not permit Merrill to fail, so a clumsy merger was arranged that puts the larger BOA at heightened risk of failure. Worse, the USGovt approach to rescuing the big banks has been called a Band-Aid, even camouflage, as opposed to a real solution. My view is that many mergers were ordered by the USFed and higher powers who remain hidden. BOA will need another $80 billion to cover imminent losses and to rebuild its capital, estimates Paul J. Miller Jr., an analyst at research firm FBR Capital Markets. The ultimate costs to keep BOA afloat will be an order of magnitude greater.

The USGovt, complete with Dept Treasury henchmen from Goldman Sachs, and compromised USCongress committee wonks, still has not addressed the underlying problem: Billions of dollars of toxic securities and loans languish on banks balance sheets. The big banks are flailing, reluctant to make sharp writedowns, urging accounting boards to exclude mark to market methods, hiding assets off the balance sheets, anything to buy another day. In the meantime, the USEconomy suffers from credit seizures and basic deprivation. Much of the funds authorized for rescues, bailouts, and nationalizations have been squandered, not by waste, but in fighting credit derivative fires. These activities are not publicized for many reasons. Attention is not wanted on the flimsy foundation to the US banks. Attention is not wanted to reveal the location of financial nuclear bombs of great potential destructive force. One informed contact to the Hat Trick Letter expects at least $30 trillion and perhaps over $50 trillion to blow up eventually in credit derivatives, with uncertain consequences. Much has been discussed of the Credit Default Swaps that insure asset backed bond like mortgages and corporates. However, given the extreme pressures from near 0% rates, the Interest Rate Swaps have begun to blow up. The JPMorgan machine has abused the leverage of IRSwaps to force long-term interest rates down for a decade. The Bond Vigilantes pulled a disappearing act over that decade. With fresh fires in the IRSwap Laboratories, the same Bond Vigilantes might reappear, as rumor has indicated in just the last couple weeks.

The Institutional Risk Analyst follows such developments like a well-trained hawk. He writes, “By failing to enforce margin limits on CDS leverage while investing new capital in Citigroup, Bank of America, and other large banks via the TARP, the Fed and Treasury are essentially trying to fill up a bucket with a hole in the bottom… To fix the systemic risk issues with the CDS market permanently and also provide a much need additional buttress to the bank rescue efforts by the Fed and Treasury, here is what we would suggest. First, the Fed and Treasury should prohibit the writing of new CDS on any financial institutions that is participating in the TARP. Instead, the Fed and Treasury should interpose themselves as counter-parties for these names, writing CDS for any and all counter-parties and capturing the revenue for the US Treasury.” They make other suggestions regarding the legal configuration of CDS contracts themselves. They claim in summary, more like an urgent warning, that “Unless and until Chairman Bernanke and the other regulator are willing to tame the CDS tiger, there will be no success in bringing stability to the US banking system or foreign banking markets. And the longer Bernanke & Co refuse to say an emphatic NO to Goldman Sachs, JPMorganChase, and the other CDS dealers, the financial crisis affecting global banking institutions will continue to worsen.” See the analyst summary (CLICK HERE).


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