Market Savior? Stocks Might Be 50% Lower Without Fed

A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank.

Theoretically, the S&P 500 would be more than 50 percent lower—at the 600 level—if the bullish price action preceding Fed announcements was excluded, the study showed. Posted on the New York Fed’s web site Wednesday, the study sought out to explain why equities receive such a high premium over less risky assets such as bonds.

What they found was that the Federal Reserve has had an outsized impact on equities relative to other asset classes. For example, the market has a tendency to rise in the 24-hour period before the release of the Fed’s statement on interest rates and the economy, presumably on expectations Chairman Ben Bernanke and his predecessor, Alan Greenspan, would discuss or implement a stimulus measure to lift asset prices. Read more >>

As SEC Downloads More Cross-Dressing Porn, JPMorgan Lights the Fuse

Don’t worry your pretty little heads, JPMorgan Chase & Co. Chief Financial Officer Douglas Braunstein seemed to assure listeners on the bank’s quarterly earnings conference call last month. Regulators knew everything JPMorgan’s chief investment office was doing, he said.

In other words: Clearly there wasn’t a problem, because if there was, the regulators would have seen it. And of course, by all indications, they didn’t see it, even though they were embedded in JPMorgan’s offices. On May 10, JPMorgan divulged $2 billion of intra-quarter trading losses and said they might get worse. Once again, regulators seem to have been oblivious to huge risks at a bank they were supposed to be overseeing. To JPMorgan, however, they also have served a valuable purpose.

Having regulators around the clock at JPMorgan reinforces market expectations that the government has an obligation to stand behind the bank should it run into more serious trouble. Also, lest anyone forget, JPMorgan’s chief executive officer, Jamie Dimon, sits on the board of the Federal Reserve Bank of New York, even as the Fed is one of the agencies now investigating JPMorgan’s trading debacle. More...

Who "owns" the Federal Reserve

Image by Getty Images via @daylife

Federal Reserve Directors: A Study of Corporate and Banking Influence

Published 1976

Chart 1 reveals the linear connection between the Rothschilds and the Bank of England, and the London banking houses which ultimately control the Federal Reserve Banks through their stockholdings of bank stock and their subsidiary firms in New York. The two principal Rothschild representatives in New York, J. P. Morgan Co., and Kuhn,Loeb & Co. were the firms which set up the Jekyll Island Conference at which the Federal Reserve Act was drafted, who directed the subsequent successful campaign to have the plan enacted into law by Congress, and who purchased the controlling amounts of stock in the Federal Reserve Bank of New York in 1914. These firms had their principal officers appointed to the Federal Reserve Board of Governors and the Federal Advisory Council in 1914. In 1914 a few families (blood or business related) owning controlling stock in existing banks (such as in New York City) caused those banks to purchase controlling shares in the Federal Reserve regional banks. Examination of the charts and text in the House Banking Committee Staff Report of August, 1976 and the current stockholders list of the 12 regional Federal Reserve Banks show this same family control. More...

Bank regulators ignored recommendations for banks to accept losses on A.I.G. deals

Image by Eifachfilm Vacirca via Flickr

Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.

The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2008 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.

This month, the Congressional Oversight Panel, a body charged with reviewing the state of financial markets and the regulators that monitor them, published a 337-page report on the A.I.G. bailout. It concluded that the Federal Reserve Bank of New York did not give enough consideration to alternatives before sinking more and more taxpayer money into A.I.G. “It is hard to escape the conclusion that F.R.B.N.Y. was just ‘going through the motions,’ ” the report said.

About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners like Goldman and Société Générale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not A.I.G. More...

AIG’s mysterious Schedule A finally revealed

reuters.com
The heavily-redacted regulatory filing that spells out the details of the New York Federal Reserve’s controversial bailout of American International Group is a secret no more.

Reuters has obtained a copy of the five-page document the giant insurer and the New York Fed had asked the Securities and Exchange Commission to keep confidential. The effort by the New York Fed to keep the document under wraps has sparked a furor on Capitol Hill and was the subject of a hearing on Wednesday by House Committee on Oversight and Government Reform.

The unredacted version of the “Schedule A – List of Derivative Transactions” fills out some of the missing pieces in the AIG bailout, in which an entity set-up by the New York Fed effectively funneled tens of millions of dollars to 16 big U.S. and Europeans banks that had bought credit default swaps from the insurer.

The unredacted version of the Schedule A enables some to identify all of the 178 mortgage-related securities, or collateralized debt obligations, that AIG wrote insurance-like protection on.

It’s been known for months that Goldman Sachs and Societe Generale were the two banks who recieved the most money in the dea because they had insured the most CDOs with AIG. But the new information enables traders, investors and the general public to see just which deals the banks had purchased insurance on.

The new information also reveals that of the 178 tranches of CDOs that AIG insured, some 14% were on deals issued after 2005. That’s critical because in December 2007, former AIG Financial Products head Joseph Cassano had said AIG largely got out of the CDS business by the end of 2005.

The newly disclosed information also reveals that Goldman not only bought a lot of CDS from AIG to protect itself; the Wall Street firm also originated a good number of the CDOs that were in SocGen’s portfolio. Some of the Goldman deals in SocGen’s portfolio that AIG had insured includes CDOs with names like Adirondack 2005, Putnam Structured Product CDO 2002 and Davis Square Funding IV.

Janet Tavakoli, a derivatives consultant who has called the AIG bailout a gift to the Wall Street banks, said the issue isn’t just what deals AIG insured, but the underlying assets in those deals. She noted that a goodly number of the CDOs held by the banks also held pieces of other CDOs.

Goldman Sachs, Societe Generale, Deutsche Bank, Merrill Lynch and other banks sold their ailing collateralized debt obligations to the New York Fed-sponsored entity, Maiden Lane III. AIG then canceled out the CDS contracts it had sold as default insurance on those 178 CDOs.

“If all of this had come out in the public domain in late 2008, Goldman Sachs and Merrill would have been deeply embarassed and the Federal Reserve woudl have been questioned,” said Tavakoli.

In the process, the banks were made whole and AIG no longer had to pay out billions of dollars in cash collateral to the banks everytime the CDOs dropped in value.

Another toothless bank “reform” from Obama

Tom Eley and Barry Grey
Flanked by former Federal Reserve Chairman Paul Volcker, President Obama on Thursday announced new proposals that he claimed would limit the ability of the major banks to profit from risky speculative investments.

The brief appearance before the press corps, replete with bank-bashing demagogy, was a transparent effort to give his persona a populist gloss, two days after the Democrats suffered a humiliating defeat in the Massachusetts Senate election to fill the vacancy left by the death of Edward Kennedy.

Obama was vague on the precise content of the regulations he was proposing, which he said would complement the bank regulatory overhaul passed last December by the House of Representatives. That bill, drafted in close consultation between the White House, Congressional Democrats and Wall Street CEOs and further diluted after heavy lobbying by the banks, does nothing to limit, let alone end, the unregulated “shadow” banking system that played a major role in bringing the US and global financial system to the brink of collapse.

Obama specifically denounced commercial banks making use of government support to engage in speculative trading on their own behalf—a practice known as proprietary trading.

He suggested that he wanted to revive some aspects of the separation between commercial and investment banking that was a cornerstone of the bank reform laid down by the 1933 Glass-Steagall Act. The law was repealed in 1999 during the Clinton administration. Clinton’s treasury secretary at the time, Lawrence Summers, is now Obama’s chief economic adviser.

The announcement, hastily organized, was little more than a public relations stunt, designed to placate mounting popular anger over the administration’s subservience to Wall Street and its refusal to take any measures to address the jobs crisis and growing social distress. Obama is well aware that any measures that might seriously rein in the banks will be blocked in Congress or watered down to the point of irrelevance. He and his political advisers calculated that a populist gesture would, in practice, commit his administration to nothing.

He demonstratively did not call for breaking up the banking giants--such as JPMorgan and Goldman Sachs--which have grown bigger and more powerful as a result of the administration’s policies.

The presence of Volcker underscored the cynicism of the announcement. In recent months Volcker, the chairman of Obama’s Economic Recovery Advisory Board, has been publicly calling for measures to limit proprietary trading and other speculative practices by commercial banks, i.e., institutions that hold the deposits of ordinary people and are therefore afforded special protections by the Federal Reserve Board and the Federal Deposit Insurance Corporation. Of the major banks, these include JPMorgan Chase, Citigroup, Bank of America and Wells Fargo.

For months, Volcker has been ignored or ridiculed by Obama administration officials for suggesting even a partial return to the limits on bank speculation imposed under Glass-Steagall. Now, in the wake of the political disaster suffered by the Democrats in Massachusetts, he has been brought forward to demonstrate the supposed “toughness” of Obama toward Wall Street.

Volcker, however, is hardly a fortuitous choice to symbolize the administration’s newfound determination to defend the public against the bankers. As Fed chairman from 1979, under Jimmy Carter, to 1987, under Ronald Reagan, he engineered a deep recession by raising interest rates as high as 20 percent. This was the centerpiece of an offensive against the working class that employed mass unemployment to beat back its militant opposition and impose wage cuts, attacks on benefits and speedup across the economy.

Volcker publicly supported the unionbusting and strikebreaking that characterized the 1980s, carried out with the collusion of the AFL-CIO. He famously declared that Reagan’s busting of the 1981 PATCO air traffic controllers’ strike and outlawing of the union was his greatest contribution to reining in inflation.

Acknowledging that the financial system is “still operating under the same rules that led to its near-collapse,” Obama declared that “never again will the American taxpayer be held hostage by a bank that is too big to fail.”

He continued: “We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the bank wins, but taxpayers foot the bill if the bank loses.”

Such statements have no credibility coming from a president who has presided over a vast expansion of the multi-trillion-dollar bailout of the banks and has opposed any restraints on bankers’ pay. If the banks are “still operating under the same rules” as before the crash of 2008, that is because his administration has refused to change the rules.

Obama’s phony bank-bashing was for public consumption. Next Tuesday, Treasury Secretary Timothy Geithner, who as president of the Federal Reserve Bank of New York played a key role in the bank bailout, will meet behind closed doors with more than 40 chief executives of financial institutions to reassure them and give them the real dope on Obama’s proposals.

Wall Street struck back at the mere suggestion of new regulations, driving down bank stocks and ending the trading day with the Dow down 213 points.

China Embarks on USTreasury Dumping

Image via Wikipedia

Jim Willie

While all manner of attention remains transfixed inside the United States on a remedy and recovery of its bank sector, once again Americans make dangerous assumptions. They tend to assume that the US Federal Reserve near 0% interest rates, Quantitative Easing (aka exploding Printing Pre$$ output), endless liquidity facilities (e.g. TALF), TARP funds (aka Wall Street slush fund), Stress Tests (rigged), bank stock sales (aided by FASB accounting fraud), bank carry trades (exploiting low short-term & higher long-term rates), and the passage of time can revive the US banking industry. They tend domestically to overlook the gradually worsening insolvency condition. Banks are bracing for a new wave of commercial mortgage losses, of prime Option ARMortgage losses, and credit card losses. The delinquency rate of prime Option ARMs is now higher than subprime home loans!!

Harken back to the summer 2007 when the hack USFed Chairman Bernanke called the bank crisis merely a subprime problem with upper limit potential for $200 billion in bank losses, and no risk of spilling over to the real USEconomy, and surely not the cause of any recession. Bernanke has understood next to nothing in advance, all forecasts hopelessly wrong, but is a great manager of the Printing Pre$$ Operation. So he is loved. This half blind man now is due for reappointment to USFed Chairman post, his past failure the qualifications for future service. The same is true of Treasury Secy Geithner, whose failure at the New York Fed was his qualification for current service. The approval of Bernanke is sure to cause a major rift with the Chinese credit masters. Their wishes and warnings have been ignored. Their vengeance is next.

The American perspective is almost always very limited in scope, due to chronic arrogance and delusions of grandeur. Their convenient parochial view tends to focus almost entirely within the United States, its bank leadership, its USFed monetary flexibility, its Wall Street syndicate influence, its federal tax latitude, its bank reserves management, and more. THE REAL THREAT TO US BANKS COMES FROM ENEMIES AT THE GATES, FOREIGN CREDITORS. The dangerous assumption made is that foreign creditors will remain firm and loyal. The arrogance extends from the continued belief that they have no choice, even if the trillion$ frauds on Wall Street occurred, even though such frauds were never prosecuted.

The real threat comes from foreign creditors who must contend with challenges greater than ever experienced, such as:

• Shrinking or vanished trade surpluses during global slowdown
• Their own financial systems in tatters (banks, stock & bonds, currencies)
• Vast regional construction booms gone bust (e.g. Dubai)
• Numerous nationwide housing bubbles gone bust
• Gathering storm from the need to liquidate insolvent banks
• Reserves erosion due to over-weight in US$-based bonds
• Systemic problems extended from a generation of USDollar reliance.

UAE & CHINA

Take just two important examples, the Persian Gulf and China. Other regions bloated with USTreasurys exist, like Europe and Russia, eager to unload them in what soon could become a torrent. The regional construction boom in the Arab world has an epicenter in Dubai. Unfortunately, it has gone bust, and loudly so. If not for the prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai would have embarrassed them in front of the world. Instead, a new threat comes. The Abu Dhabi rescue next must contend with an indigestion problem, as USTreasurys and likely other US$-based bonds are flooding their banking system. They might own a considerable batch of US bank stocks, soon to be dumped. Ambition led to a whiff of hubris, as fantastic architectural design led to large scope, seen in the skyscrapers and bridges. Not shown are the spectacular communities designed as trees with branches and leaf petals, many empty, busted, and without investment income. But they overdid it, and now must deal with corporate failures and liquidation challenges. But the Persian Gulf bank failures represent the clear and present threat. The outsized projects have yielded to outsized rescues and next outsized indigestion to handle the funds in ways so as to avoid a string of national bank failures. Vast liquidations come, word comes from contacts.

A bank panic in the Persian Gulf could ensue very soon, a back door threat. It would clearly have origins in the United Arab Emirates, spread to the entire Persian Gulf like to Saudi Arabia, Kuwait, and elsewhere. From this global toehold, the bank panic could then spread to London, New York, and points in Europe. The UAE bankers must manage their situation. They are loaded to the gills with USTreasurys, the main currency used in the liquidations and rescues local to the UAE. They also have pet stock accounts in big US banks. As further liquidations occur, avoidance of bank failures seems a remote prospect. Watch the enemies at the gates, outside looking in, in urgent need of dumping USTreasury Bonds and other US$-denominated securities.

China must contend with some unique problems. From 2000 to 2005, they insisted on a rigid currency structure of the Yuan pegged firmly to the USDollar. In doing so, they became the 51st state, yoked firmly to the USEconomy and subject completely to the USFed monetary policy. Yet they had no voting rights on USDollar policy. Ironically, now they do as chief creditor nation. Nobody thought twice about accumulation of Chinese debt to replace US income. It was the insane movement known as the ‘Low Cost Solution’ at the time, a policy that the great majority accepted as the next chapter of progress in the Globalization movement, a policy based in corporate abandonment of US shores. Some, like the Jackass and other analysts on some of these gold journal websites, gave loud warning of a time bomb in construction certain to explode down the road. We are now down the road, reaping the bitter rotten harvest of the latest Economic Myth chapter.

China is experiencing a 40%+ decline in export trade. They have a mammoth $550+ billion stimulus plan that might have run its course. They have banks that are failing on a low level. Their stimulus might have found its way as much to their Shanghai stock market as to bank lending. Their industrial expansion is primarily linked to global trade and the export markets. As much as they would like to generate internal demand, it cannot prevent over 1000 industrial plants from shutdown, already done. More are to come. They respond with Yuan-based swap facilities in numerous foreign lands, but that can only accomplish so much in export markets. China is actively attempting to diversify its reserves. The reality (not a joke) is that they are trying to cobble together 2000 different $1 billion deals to secure hard assets in exchange for USTreasury Bonds, enough to dump their $2000 billion US$-based hoard at risk. They are acquiring stakes in foreign mining firms, stakes in mining projects, and entire properties. They are cutting fewer but larger energy deals, which include development of infrastructure and communities. The inescapable fact of life is that China has embarked on an USTreasury dumping initiative. They are even acquiring industrial property in Europe, unloading up to $10 billion per month in USTBonds. This aids the Euro Central Bank, stuck with too much bad debt from its southern member nations. They are dealing with the impaired debt from PIGS nations by means of vast commercial and industrial property sales. Discounts are being seen for both the USDollar and British Pound Sterling.