America Is Running Out Of Rope

America Is Running Out Of Rope
The Market Ticker ^ | 08/24/09 | Karl Denninger

Posted on 08/24/2009 12:45:45 PM PDT by FromLori

Oh no, we don't cheat:

Goldman Sachs Group Inc. research analyst Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman's traders the stock was likely to head higher, company documents show.

Nothing like selling bonds out the front door and shorting them on your prop desk, right? Oh wait, Goldman did that too!

Securities laws require firms like Goldman to engage in "fair dealing with customers," and prohibit analysts from issuing opinions that are at odds with their true beliefs about a stock. Steven Strongin, Goldman's stock research chief, says no one gains an unfair advantage from its trading huddles, and that the short-term-trading ideas are not contrary to the longer-term stock forecasts in its written research.

Riiiight. And I'm the Easter Bunny.

The tips usually go to top clients who have expressed interest in having the information and have short-term investment horizons, he says. Goldman doesn't want to overload other clients with information that isn't relevant to them, he says. "We are not in the business of serving thousands of retail customers," he says.

Let me guess: They also go to the proprietary (inside) traders that are gambling with the firm's money (and your "liquidity guarantee" as a taxpayer, since they're a BANK now.) Am I right?

Research-department employees prepare telephone scripts, then call top clients, typically several hours after the meeting has ended. Goldman says its in-house traders are prohibited from trading on the tips until after they've been relayed to clients.

Documents reviewed by the Journal indicate that anywhere from six to 60 clients are contacted, depending on the investment.

Oh, its even better. Let's see, we have a computer program that's engaged in a bit of "high frequency trading", and we have the guys that run our own trading (which includes that) that are in on the recommendations and they even know when these recommendations go out to the "select customers"!

There's nothing wrong with this, right? Nothing wrong with having a "slight edge' in knowing up front what's going to be said to these "good" (read: they have and swing around lots of money) customers?

Pull the other one boys.

Last year, the Financial Industry Regulatory Authority, the industry's self-regulatory body, proposed new rules meant to clarify existing disclosure obligations under the rule requiring "fair dealing" with all clients. Firms could issue contradictory ratings as long as clients were told that such inconsistencies were possible.

Yeah, ok. Shall we hire some more foxes to guard that henhouse?

What sort of scheme-laced system do we have here? These institutions have sold securities out the front door they're shorting out the back (subprime mortgage bonds), they're disseminating "short-term opinions" that differ from their published research reports, and even better, their own proprietary trading desks are in on the latter, so if and when the move starts they can get in on the action with their "high frequency trading" too!

You won't hear CNBS talking about this, I'll wager. Nor will you hear them talk about their parent company discuss their lobbying expenditures - the highest of any company in the first quarter at a mind-blowing $7.2 million dollars. Zerohedge has provided a copy of the disclosure form, which reads like a who's who of "how to screw the consumer", including issues such as the Credit Card Bill of Rights, the disapproval resolution on the second half of TARP, proposed TARP reform and accountability, the mortgage reform and anti-predatory lending bill and more.

The disclosure does not tell you which side or exactly what position has been taken by these paid hacks, but that's not hard to figure out - no corporation is going to lobby for something that would cost it money (while spending copious amounts of money), so the direction of these "contacts" is clear on their face. Nothing more need be said.

This is a serious issue for all Americans, since allegedly the "fourth estate", that is, the media, is supposed to be a check and balance on government (and corporate) behavior. But what happens when the media is the corporation? When conglomerates become entwined in the news system to the point that anything that would go against the corporation is suppressed by that very same media? When editorial independence is lost?

I have (as have others) heard CNBS anchors "slip" in the past and say things on the air that strongly hint (or outright state) that their producers don't want a certain slant covered. One wonders whether that producer just had their phone ring - and it was the executive offices of GE on the other end.

Let's be clear: These banksters have robbed well over $100 billion dollars from taxpayers and citizens via various schemes in the last decade. These scams have included securitizing loans that they either knew or should have known were laced with fraud, in some cases shorting them while selling them on to other people. It includes outrageously-complex and intentionally-obfuscated securities "packages" for municipalities which have resulted in huge losses for the town (and huge fees and profits for the bank.) It has included marketing "auction rate" securities which were claimed to be as liquid and safe as cash, when in fact nothing of the sort was true. The schemes and scams run the gamut but at their core was the intentional obfuscation of the true nature of the risk embedded in these instruments so that the dupe (that would be you, your town, your state) would wind up losing money all for their benefit: you would enter into a complex swap transaction you didn't understand, you'd buy a bubble house with an OptionARM after being told you "definitely" could refinance before payments would go up, your kid was sold an expensive educational loan package without being told that it was unable to be discharged in bankruptcy, you were given a credit card with 27 pages of fine print, and buried somewhere in there was vague language letting the company jack your interest rate to anything it wanted - including the 36% it did jack it to - if you missed an electric bill by three days.

Then, when the game of musical chairs ended and all this debt that could not possibly be paid off started to default these very same banksters went to Congress through Paulson and Bernanke, the chiefs of the bankster scam parade, and in my opinion literally committed economic terrorism: hand over $2 trillion dollars hiding all but $700 billion, or we detonate the entirety of the economy and everyone literally starves.

How does this differ from an old-fashioned Al-Quaida terrorist who calls in a nuclear bomb threat? "Hand over $2 trillion dollars or New York City will be vaporized."

Hmmmmm... sounds kinda like the same thing to me!

Now let's juxtapose this with the fact that every Congressperson took an oath to defend The Constitution against all enemies, both foreign and domestic.

So riddle me this my fellow Americans: How is it that Bernanke, Paulson, Geithner, and both Presidents Bush and Obama are still free men instead of being housed at GITMO? How is it that on that fateful night in September of 2008 when Bernanke and Paulson "briefed" Congress and demanded $700 billion in ransom and a blank check to back-door an unlimited amount in "guarantees" and "pass-throughs" to their banking buddies the Sargeant At Arms was not immediately called to place these goons under arrest pending indictment and prosecution?

The next question is equally obvious and leads one down some pretty disturbing paths: If there is NOT ONE man or woman Congress who will discharge THEIR oath of office, is there anyone left in this country who took an identical oath that will?

The worst part is that it didn't end with payment of the ransom. No, the banks didn't come clean, they didn't clear their balance sheets, they didn't take their losses using the backstop they had managed to secure through threat of imminent economic doom.

On the contrary: They lied some more! They in fact lobbied Congress and had them bring pressure on FASB, threatening to legislate legalization of accounting fraud, and twisted FASB's arm into issuing what amounted to an executive order making legal any and all lies about asset valuation! We now know this happened because in point of fact the amount of loss that has been seen in the form of write-downs when banks fail has roughly doubled from last year to this, and these are not small numbers: we're talking about going from roughly 15% to roughly 35!

Who eats that? You do. The FDIC is required to make your deposit whole, but they "assess" (tax) the banks. Who pays? You do, of course: your bank re-orders your deposits and withdrawals to generate nearly forty billion dollars in "overdraft fees" and similar penalties over the last year, they jack your interest rate to the moon and drop your CD rate to 1% and less.

In the meantime as I pointed out last week your personal "interest spread" has ballooned - more than doubling against you. In terms of GDP and economic activity this has brought a structural near-2% subtraction to GDP that will be with us until the banks either confess and are wiped out OR they "work it off", with the latter option requiring more than a decade. California's unemployment rate reflects the outcome of this idiocy, having risen to 11.9% - our largest state.

And before you believe the "green shoot" mantra on housing, you better pay attention to the California home start numbers: Permits for July were down a staggering 47.4% over the prior year.

Nor does the "good news" end here. This Friday, after the market closed (of course) the Obama Administration confessed to what the CBO had said earlier this year: Over the next 10 years the government will add $9 trillion dollars to our public debt, up more than $2 trillion from their previous claims.

Let's be clear about this: This is not a "80%" increase. Oh no, its much worse than that. You see, about 40% of the debt is in fact held in what are called "intergovernment holdings" - that is, the scams known as Social Security and Medicare (the subject of another recent Ticker.) The externally-held debt today totals about $6 trillion dollars, so this "admission" means we're going to try to add 150% to that.

I say "try" because this year's interest payments are likely to total some $400 billion or so, and against a GDP of $13 trillionish (down from the peak) that is roughly 3% of GDP for interest cost. Today.

The sustainability of this level of debt (today) requires that interest rates not rise, for if they do so will the payments. And that's a problem because historically (over the last 100 years or so) every time a nation has gotten to around 6% of GDP for interest payments both its monetary and political systems have imploded. Argentina anyone?

BUT IF WE ACTUALLY ADD 150% TO THAT $6 TRILLION IN DEBT, EVEN IF INTEREST RATES DO NOT RISE, WE WILL EXCEED THIS CRITICAL LEVEL OF INTEREST PAYMENTS BY MORE THAN 50%. INDEED, WE WILL CROSS THE 6% THRESHOLD, BY MY ESTIMATES, SOME TIME IN 2012, AND THAT EVENT HAS A HIGH PROBABILITY OF DESTROYING OUR NATION OUTRIGHT.

You might think that all these bailouts and handouts would have produced a stable banking system. You'd have thought wrong. Chris Whalen of Institutional Risk Analytics has updated his bank ratings for the second quarter: they now rate 1,882 banks as "failing" (or just "F" if you prefer) which is up a whopping 16.5% from the end of March - just three months ago. The number of banks with "A" or "A+" ratings fell by 21% during the same time.

The problem is that "hide the bad stuff" games (no matter what particular sort of fraud you're engaged in) doesn't change the outcome - it just changes the when. The "what" doesn't change. That which is dead and decomposing simply stinks up the place more, since you refused to throw it out.

The good news is that some banks have raised capital during these past few months of investor optimism. But a host of operational problems remains at many institutions. In addition to loan losses and rock-bottom recovery rates on assets they’re trying to unload, for example, banks also face rising expenses (because they’re paying to carry properties that generate scant — or zero — revenue). All of this cuts significantly into earnings, which banks desperately need to bolster their battered financial positions.

Optimisim? You mean a stock market rocketshot based on lies, right? After all, if the true condition of these institutions did not improve, then where did the "optimism" come from if not false claims of solvency and good times just ahead? Never mind the statistical nasty: the majority of the daily volume on the stock exchanges over the last couple of months has been centered in a half-dozen "liars stocks" such as AIG and Citibank. A healthy rally? Uh, no; where's the volume-based broad support? Missing, that's where.

Of course these institutions issued stock into that sort of market environment. Why not? There was no reason not to - FASB gave them a pass after being literally told to sanction lying and fraudulent reports of asset values by Congress, and they complied. This in turn let them issue "glowing" first quarter earnings that were based on nothing other than one-time gains and lightening loss reserves based on better-than-previous valuations.

The rude awakening is that the cash-flow from these "assets" does not change with the stroke of a pen, however. You can't fake a deposit ticket for very long, and a non-performing asset (for instance, a homeowner who is living free in his house because he's not paying his mortgage!) is still a non-performing asset. Nothing changes that other than actual performance, and yet that performance is and remains missing.

The so-called pundits put it this way:

Meanwhile, in the United States, the Federal Reserve said the world's largest economy appeared to be "leveling out" and many economists see a second-half rebound.

It all adds up to an improving picture ahead of an economic summit next month in Pittsburgh of the world's top 20 industrial and developing economies.

Really? May I politely ask "how"?

The entire cusp of this rests here:

But until American consumers begin spending again, and so long as jobs are still being lost, the durability of any recovery is questionable. Major retailers reported this week that U.S. consumers are continuing to rein in spending on all but basics.

Despite slight recent improvements in many U.S. economic statistics, many consumers have not seen a change in their lives.

Nor will they on a durable basis until the fraud and scamming stops because they can't. The interest spread between savings and spending, as I noted above, has been driven to historic wide levels as a means of grifting off billions of dollars from consumers to cover up the banksters frauds! That's not money the banksters bonus out and thus spend into the economy either - it literally disappears into the black hole of fraudulent accounting and coverups!

Thus far there has been no appetite for putting a stop to this in Washington DC, but the proletariat are starting to figure it out - they've been had. Had on "stimulus", had on "TARP", had on so-called "health care reform", had on their CD rates going to the floor and their credit card rates going to the moon, had on everything.

It's all one gigantic scam, and anger is seething beneath the surface, as it should be. Youtube is exploding with videos of demonstrations at "Town Hall" meetings, and those protests are not just about Health Care. I've watched over two dozen of them so far, and in virtually every one TARP and Bailouts are being discussed as well.

The people have figured it out - they said not just no but hell no back in September and October, and Congress ignored them. The people correctly surmised that this was in fact economic terrorism and correctly told their Congressfolk NOT to pay the demanded ransom. Now we're seeing our nation systematically looted and destroyed and again, Congress is ignoring the people.

The people want justice. They want the grift and fraud excised. They want those who blew these huge bubbles for their own personal aggrandizement and profit while ripping off the common man to get their just desserts - an indictment and a prison sentence, not another billion-dollar bonus.

Most Americans understand that they were gullible, they fell for it, and they're partly responsible as a consequence. They "get it" in that regard - they came, they saw, they bought - even though they knew they couldn't pay.

But their acts were not those of lone rangers. They were goaded on at every corner - "you can afford this house", "let's qualify you to see how many bedrooms you can buy", "let's work a deal on this car", "here's another credit card with a $10,000 line", "here's a 1% OptionARM refinance with a $10,000 cash-out."

All of these hucksters knew full well that the so-called "consumer" was in fact a patsy. They ran their credit, they ran their assets, they ran their employment. In many cases the brokers and bankers even falsified the numbers themselves; I've seen proof of it myself in documents sent to me where the handwriting doesn't match the signatory or the printing of the applicant's name on the income declared. Who filled it in? Not the applicant.

The people are willing to take their pain. But they demand, with solid justification, that those who ripped them off also bear their pain for what they have done.

Washington has gone tone-deaf to the facts - an intentional deafness engendered by millions of dollars of campaign "contributions" (read: bribes) being handed out like candy, all financed by the people who are being robbed!

The banksters not only ripped everyone off and got bailed out after doing it by threatening to blow up the economic world BUT THEY ARE STILL RIPPING EVERYONE OFF TODAY and using a small piece of the grift to continue to buy Congress at the same time!

Not a damn thing has changed, except that we are lurching closer and closer to the cliff of national insolvency and both economic and political failure as a nation. The inability to fund the operating expenses of our government is quite possible. Social Security and Medicare have gone into deficit years earlier than expected and these programs have no money - they have only "IOUs" and to turn them back into money Treasury will have to sell more bonds.

But who will buy them? The Chinese? Why? Bernanke is lying about monetizing the debt - in fact he lied under oath - but the currency markets are not fooled.

The dollar is in the toilet and threatening to break all support levels. If it does, it may collapse to as low as 40, which will in turn rocket oil north to $300 or more and gasoline to $10!

If that happens it is too late to stop it and too late to reverse course. What we now know as a middle class will be reduced to sheer destitution - literal destitution.

What are the odds that, under this scenario, some of the billions of rounds of ammunition that have been purchased and stockpiled by Americans who have gotten rather "uneasy" over where our nation is going find their way into unlawful use? Rather high I wager. After all, the banksters may have bought Congress and the White House but they don't own the guns, and a desperate, hungry man is a dangerous man, especially when he was formerly a middle-class American with a good job who had his future, and that of his wife and children ruined as a direct consequence of the lawless, conniving acts of a handful of "elites" who ripped him off twice - first with his "OptionARM" that gnawed his arm off and then again by going to Washington, extorting more than $12 trillion in bailouts, handouts and guarantees with which they paid themselves bonuses instead of clearing their balance sheets!

Over a year ago I started writing and calling Congress, including letters I faxed to all 535 members. In it I called for Congress to put aside $200 billion dollars - a big fat wad of money - to cover the potential need to house, feed and clothe one quarter of this nation for up to 12 months.

I meant it then and I mean it now.

We are not on the cusp of recovery, we are on the precipice of disaster. Whether we avert it is an open question but this much is certain - if we wait until external funding disappears it will be too late to prepare and too late to act in furtherance of our nation's interests. When gasoline is $10/gallon as is heating oil the price of food will more than double, heating costs in the northeast will quadruple and millions will either starve, freeze to death or both. At the same time the ability to fund Social Security and Medicare will vanish - at the precise moment when it can't.

The economy cannot survive another commodity shock - Roubini agrees, and he sees the possibility - but he calls the potential cause "speculation."

Nonsense: there is nothing speculative about money printing and intentional currency debasement. This is an intentional act being promulgated by our government for the express purpose of papering over what has been the largest fraud and scam ever run in the history of mankind. The banks are indeed using this "profit opportunity" to buy and stockpile oil along with other commodities via both physical delivery and futures contracts, but this is not speculation - a bet made on an uncertain outcome.

Rather, it is a bet made on a CERTAIN outcome that is being created by the government as a DIRECT CONSEQUENCE of the demand (which was and is being met!) by the very same banksters to legalize the fraud and deceit that got us in this mess in the first place!

On the point of "greenback emissions" Warren Buffett has it right but a prescription to fix what ails us is missing, so I'll supply it: we must detoxify the drunk and lock up the bartenders, extortionists and their accomplices - all of them.

This means the end of "stimulus", it means the end of subsidization of grift and fraud, it means prosecution of those who have scammed throughout the last ten years, it means the cancellation of the so-called "guarantees" for the banking sector and it means a relentless cadre of regulators who go bank-to-bank - literally, to each and every one of them, marking every asset to the market and closing every last insolvent financial institution, no matter how large or small, barring for life from any financial role and prosecuting to the fullest extent of the law any executive in any firm that is found to have fraudulently overstated asset valuations, no matter by how much.

It means biting the bullet and recognizing that we cannot borrow our way to prosperity, nor can we solve a "declined" credit card problem by opening another one - either individually or as a nation.

It means Congress must force The Fed to disgorge every MBS they hold that does not have a full-faith-and-credit guarantee, we must allow real rates to rise in the economy and we must allow housing and other asset prices to contract to where they are supported by the underlying economic activity.

Yes, this means homes will get cheaper - a lot cheaper. So what? Those who don't own a house now or who get foreclosed upon would certainly like to buy a house at a lower price, not a higher one!

It means that we must stop the looting and start prosecuting, we must put Glass-Steagall back in place, and we must force all of these super-conglomerates to split off any trading and asset activities from their regulated banking counterparts.

We must repudiate all CDS contracts that cannot be proved to have 100% asset backing on a nightly margin basis, without exception. That means central-counterparty surveillance and clearing for all such instruments - period.

We must add criminal and civil liability to all so-called "securitizations" so those who sell garbage through either willful ignorance or intentional deceit cannot avoid liability and neither can the purchaser claim "ignorance" and we must ban all off-balance sheet vehicles, without exception.

We must add an "or else" to every regulatory law, so that the "or else" for robbing a bank by intentionally overstating asset valuations is the same (20 years) as when you rob that same bank with a gun. We must put an "or else" into The Federal Reserve Act, the OCC and OTS' chartering documents, the enabling law for the SEC and all other agencies so that those who allegedly serve the public are held to account when they knowingly look the other way or even actively conspire with lawless action in the institutions they regulate.

The People have and continue to speak, and they're pissed. It is long past time for Congress to get off its ass and perform its job - to represent the will of the people, not the cadre of lobbyists who continually press for more grift, more fraud, more scams and more lies.

We have come to the end of our rope as a nation and we must climb back up, even though it will be difficult, even though those who stole, cheated and robbed must be imprisoned, and even though the economic fallout has been and will be harsh.

We have no alternative in that under us there is no more rope but there is an an active volcano, and if we let go, we will not only fall but be consumed by the lava below, and if we try to hang on here, without excising the fraud and grift we will slip and fall to our deaths as the monkey on our back continually increases in weight.

It is time for Americans to demand that our government do the right thing, and it is time for Congress and The Administration to shut up and listen instead of prattling on about this or that add-on to the scam of the day.

Health Care "reform" is a laudable goal, but we cannot waste our time on that or indeed any other priority until we truly stabilize this nation's currency and economic system.

TOPICS: Business/Economy; News/Current Events
KEYWORDS: corruption

1 posted on 08/24/2009 12:45:45 PM PDT by FromLori

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