Bank Fraud Revealed

Once again we find the Untied States of Goldman Sachs unravvling the financial world in what looks very much like a team effort to take everyone down in one big swell foop.  Sure, the recession is over, Cash for Clunkers worked, and we are all going to be very happy (homeless and unemployed) campers very soon.  Is anyone paying attention besides Karl?

Friday, October 30. 2009

I was wondering how long it would take before the threats really started to show up in earnest..

Kansas City Fed president Thomas Hoenig is circulating a book titled “The Balance of Power: The Political Fight for an Independent Central Bank.” Charles Plosser of Philadelphia said on Sept. 29, “we must preserve” the Fed’s structure.

Must?  That implies that there is an “or else” in there somewhere… let’s see…. can I find an “or else”?

U.S. stocks, bonds and the dollar would collapse if investors perceive Congress violating the independence of the policy-setting Federal Open Market Committee, said Former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC.

There it is!

Let’s see…. stocks and bonds eh?   Which stocks and bonds would be “threatened” if The Fed was forced to account for its actions, like, for instance, to show us all what it bought, with what it bought, and to provide us with CUSIP’s so we could look at the current market value (if any!) of these stocks and bonds?

Would that, per chance, be the stocks and bonds of banks that are holding hundreds of billions of dollars of HELOCs on their balance sheets at or close to PAR (100% of face value) when the first mortgage hasn’t had a payment made on it in a year, the house is worth 50% of the first mortgage’s outstanding balance, and the home is in BubbleVille, CA?

Or would it be the stocks and bonds of institutions that have (between them) well north of a trillion dollars of off-balance sheet “stuff” in a big black box labeled “good as gold”, when “gold” really refers to the fact that it is “used dogfood” and has the same color – but not the same mass or consistency?

Would it be all those myriad institutions that The Fed was (along with OTS, OCC and the FDIC) responsible for overseeing and enforcing the strictures of Prompt Corrective Action (12 USC Chap 16 Sec 1831o), a law that has been entirely ignored when it comes to the larger banks in the financial system for more than a decade?

Would it be the institution (Goldman Sachs) linked to the NY Fed who has had board members who also served as the former Chairman of the company that isn’t a commercial bank but managed to finagle itself a bank holding company charter – with the permission of the very same NY Fed?

The central bank has also come under fire for granting a waiver allowing a former Goldman Sachs Group Inc. chairman to remain on the board of the New York Fed after the company opted to come under Fed oversight.

What did Dodd have to say?

Allowing banks to select their supervisors is “absolutely backwards,” Dodd said this month, without mentioning Fed interest-rate policy.

Really Chris?  That didn’t seem to bother you for the last how many years?  Why now?  A bit short on campaign contributions this cycle?

Some legislators want to “make the institution more political, and I think that’s terribly unfortunate,” Hoenig, 63, Kansas City’s president since 1991, said in an Oct. 9 interview.

Oh, I disagree Mr. Hoenig.

If the process becomes more political it will be by your own hand, and that of the rest of the Fed Governors, and it will be a side effect, not an intended outcome.

You really ought to go stand in front of a mirror, along with Bernanke, Plosser and the rest, and glance thereupon.  There you will find the cause of this little mess.

Let’s see, shall we count the ways (although I’m sure I’ll miss some of them!)  I think so.

• Greenspan rubber-stamped a blatantly unlawful merger of Travelers and Citibank, then lobbied for the passage of Gramm-Leach-Bliley, retroactively making it legal.  That (bad) law was the first of the last line of nails in the coffin of bank regulation that had kept the system sound and functional for more than fifty years.

• Brooksley Born warned of the danger of an unregulated CDS market and was literally stomped into the ground by the rank derision of both Greenspan and Larry Summers.  She was right, they were wrong and this nonsense allowed the AIG mess to unfold – a mess that was effectively sanctioned by Greenspan and Summers.  Where are the apologies and corrections?  Missing – the obfuscation continues in this regard!

• Bernanke ran his “Depression Avoidance Playbook” to a “T” following the original subprime meltdown.  However, he has failed to explain how he can be excused for (1) claiming that house price appreciation was “a reflection of strong fundamentals” in light of the fact that it was driven by dangerous and even fraudulent lending, (2) the nation “was unlikely” to suffer a recession, and (3) failing to detect or get in front of any of the failures prior to them happening.  In fact, Bernanke and The Fed granted many Federal Reserve Policy Waivers (the infamous “23A” waivers) that in fact concentrated and increased risk while the crisis was unfolding.
• The policies of The Fed were allegedly to “help lending”; in point of fact what Bernanke missed is that while he can provide all the printed money he wants he cannot control where it goes.  And “go” it went, right into oil and other commodities first in late 2008 and then again in the summer of 2009, causing not one but two doubles of oil prices off the bottom – first from $70 to $140 and then again this spring and summer from $35 to over $80.  This, despite demand collapsing for oil and refined products.
• In the same light this “flood of liquidity”, instead of promoting economic growth, went into the stock market as well.  This has driven the S&P’s P/E to one hundred and forty (as of 9/30/2009), a level never before seen in the history of the stock market, and on a historical valuation basis some seven times expected price/earnings value and more than double the previous high of approximately 60 (just before the Tech Bubble collapsed.)  Should the stock market correct to a “somewhat reasonable” P/E of 50, the S&P 500 would trade at 375!  Should it correct to a “more normal” P/E of 20, it would trade at 150! Of course earnings could (and almost certainly will) improve, but even if they double this implies that “fair value” for the S&P 500 is something close to 300!  What are the societal and political implications of that collapse should it come, and how does Bernanke believe he can avoid mean reversion – when every other attempt to do so thus far has failed?  Bernanke has done nothing more than create more asset bubbles in a puerile attempt to avoid taking responsibility for the policy mistakes that led to this crisis in the first place.
• The Fed (along with the other regulators at the table) have been either willfully blind or intentionally complicit in the “valuation shams” of the last several years.  They, along with Congress, twisted FASB’s arm into formally allowing what amounts to mythical accounting to be used to “value” assets.  This, along with willful and intentional blindness (or worse) toward the requirements of Prompt Corrective Action allowed large banks, of which The Fed is one of their primary regulators, to find themselves in a negative real asset position compared to liabilities – that is, on an accounting basis, bankrupt.  Rather than take the institutions into receivership The Fed along with other regulators have looked the other way and “recapitalized” these institutions with taxpayer money via what amounted to locking Congressional leaders in a room and pointing an economic gun at their heads.  This isn’t the first time either – witness Citibank’s history during the Latin American Debt Crisis, LTCM and other episodes.  By some accounts several of these institutions have been broke more than once and yet “saved” by this “regulatory forbearance.”  The cost has been shoveled off to borrowers and the taxpayer generally.
• The Fed has arguably violated the black-letter law of Section 14 of The Federal Reserve Act.  Section 13(3) currently allows The Fed to make loans under “unusual and exigent circumstances” as it sees fit but nothing in Section 13(3) permits it to purchase assets by printing new bank reserves – that is, by printing money. That function is controlled by Section 14, and a plain reading of that section does not disclose any legal authority to buy Fannie or Freddie paper, nor the assets of Bear Stearns and AIG.  Yet all of these programs were in fact put in place and continue to this day.
• Who is the real holder of all the Treasuries in “Caribbean Banking Centers“?  You don’t actually expect me to believe that little islands like Antigua and Grand Cayman have the sovereign wealth to support holding nearly two hundred billion dollars of Treasuries, do you?  Is that a vehicle by which back-door monetization can (and has) taken place?  Germany, with a real economy and government, by contrast holds a mere $55 billion dollars, and even Russia (and Hong Kong!) have only $121 billion.

The Fed has promoted and in fact still is promoting through policy action the lie that credit can expand “forever” at a rate that exceeds GDP.  This is mathematically impossible and Bernanke knows it.  I do not accept that he is ignorant of this fact as he is clearly an intelligent man and in addition is a credentialed Professor with an advanced degree – therefore, I must conclude that this is not an error but rather an intentional lie. It is, in fact, the big lie upon which all others rest, and yet as I have repeatedly pointed out the mathematical facts are not subject to dispute.  To recap, here’s the graph:

And to recap on the averages:

GDP growth from the early 1950s onward has been 6.818% annually, debt growth 8.777%, for a spread of 1.959%.

From 1990 onward, GDP grew at 5.396%, debt at 7.907%, for a spread of 2.511%.

From 2000 onward GDP grew at 5.225%, debt at 8.495%, for a spread of 3.270%.

The spread is increasing and the chart above shows that mathematically it is inevitable that you WILL reach the point where debt service cannot be maintained so long as the spread either is maintained or increases.  This is the essence of the “Ponzi Finance Indicator” that I have posted before, to wit:

All of this data is from The Fed’s own Z1 release and the BEA’s GDP series.

You can’t argue with your own data!

The outcome of these policies is not in question, as that is a matter of mathematics.

Mathematics that The Fed has willfully and wantonly ignored.

Congress must put a stop to it before the economy and monetary system collapses – not due to “oversight” of The Fed, but rather due to The Fed’s own policies, obfuscation and willful disregard of mathematics.