Defaulting banks - where will it stop?

[David Guyatt]

There's always room for humour Keith, even when it's an eensy-weensy bit wry (or do I mean cynical?).

[Jan Klimkowski]

Dumping $2 trillion in credit lines, or 45% of American consumer liquidity, should bring the edge of the cliff a little closer...

Credit-card industry may cut $2 trillion lines: analyst

(Reuters) – The U.S. credit-card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

"In other words, we expect available consumer liquidity in the form of credit-card lines to decline by 45 percent."

Bank of America Corp (BAC.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said.

Closing millions of accounts, cutting credit lines and raising interest rates are just some of the moves credit card issuers are using to try to inoculate themselves from a tsunami of expected consumer defaults.

A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said.

Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.

"We are now beginning to see evidence of broad-based declines in overall consumer liquidity."

"Already, we have witnessed the entire mortgage market hit a wall, and we believe it will, for the first time ever, show actual shrinkage over the next few months," she wrote.

The credit card market will be 18 months behind the mortgage market and will begin to shrink by mid-2010, Whitney said.

Whitney also expects home prices to continue falling another 20 percent hurt by lower liquidity. They are down 23 percent from their peak, she said.

"In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated November 30.

She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.

"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.

Most of the solutions to the situation involve government intervention, and all of them require more dilutive capital to existing lenders, she said.

"Accordingly, we continue to be cautious on our outlook on US banks."

http://news.yahoo.com/s/nm/20081201/bs_n...ppenheimer

[Magda Hassan]

Dumping $2 trillion in credit lines, or 45% of American consumer liquidity, should bring the edge of the cliff a little closer...

I'm thinking of doing my bit for the greater good.



Now to the Wall Street bailouts, the plan for the government to purchase preferred shares in banks, and the takeovers of Fannie Mae, Freddie Mac, and AIG, may be added the intention announced last night that the government will throw another $20 billion at Citibank, the nation’s largest financial institution.
The announcement came after Citibank’s stock fell 60 percent last week to $3.77 a share. Of course it won’t help the 50,000 people Citibank is laying off, but, what the hey, no plan is perfect.
Meanwhile, almost nothing has been done to help the consumers within the producing economy who have lost trillions of dollars in the stock market crash, seen the value of their homes fall in many cases below what they owe on their mortgages, and lost jobs or health benefits through the escalating recession. Fannie Mae, which over the weekend sponsored a Walk for the Homeless in Washington, D.C., an event that drew thousands of participants, had announced the previous day that it was placing a moratorium on further home foreclosures until after the Christmas and New Year’s holidays. Wow, thanks.
But what then? Everyone agrees that the recession will be long and deep, not only in the U.S. but in nations that export to us. The Federal Reserve can only go so far in cutting interest rates, because at a certain point nations such as China which have floated the Federal deficit will no longer lend.
Besides, what good are low interest rates if borrowers can’t even afford to repay the principle, which is the situation so many of us find ourselves in today? Japan found that out in the 1990s, leading to a recession that lasted a decade.
So what are ordinary people to do who have families to feed, rent or mortgages to pay that are still inflated from the collapsed housing bubble, unmet medical or insurance expenses, or may be trying to get their kids through college? Should we go deeper into debt when U.S. households, businesses, and government already owe in the neighborhood of $60 trillion (excluding federal unfunded debt liabilities), almost five times the GDP? Banks have cut back on lending anyway.
Then there are the jobs programs. The Senators who bowed down to Secretary of the Treasury Henry Paulson when he came to extort $700 billion for Wall Street scolded the Big Three automakers who came seeking help in salvaging an industry that still employees millions. But maybe by cutting worker wages and benefits the carmakers will be able to limp along a while longer.
Or maybe we should wait to see if president-elect Barack Obama gets his economic stimulus plan through Congress after he is inaugurated. Granted the plan may result in some new jobs a few years down the road once the additional federal borrowing to pay for it works its way through the economy. But will America still be alive by then?
Ladies and gentlemen, the financial system has destroyed America. And really and honestly, the folks in Washington, both those arriving and those departing, don’t know what to do.
I have argued in recent articles that the government should implement what I have modestly called the “Cook Plan,” whereby a dividend similar to the Alaska Permanent Fund would be paid to every U.S. citizen at the rate of $1,000 per month in vouchers for food, housing, and other necessities of life.
This dividend would be paid out of the U.S. Treasury, where I used to work, from an emergency self-financed account without recourse to taxes or government debt. The dividend would constitute each citizen’s fair share of the producing potential of the economy, as advocated by Social Credit reformers in the British Commonwealth nations for decades. The vouchers could then be deposited in a new network of community savings banks that would revitalize local economies through lending at zero-percent interest, charging only administrative fees and a small amount of lending insurance for access to capital.
Such a system would provide recompense for the vast amounts of money stolen from citizens’ pockets due to a lifetime of borrowing from financial institutions which are now looting our children’s and grandchildren’s heritage to pay for generations of abuse. This abuse has taken place under a debt-based monetary system by which banks create money out of thin air, then charge the rest of us interest to utilize it for survival. This system has operated for almost a century under the auspices of a Federal Reserve System accountable to no one.
The “Cook Plan” would bring real reform to a system that has collapsed. The plan would begin to correct the primary cause of the recession, which is the steep decline of consumer purchasing power.
Of course I am not so deluded as to believe Congress or the incoming Obama administration would implement it. Why would the politicians turn against a financial system which paid their way into office? As indicated by the announcement that Obama will appoint Timothy Geithner, president of the Federal Reserve Bank of New York , as his treasury secretary, it’s the banking system that will continue to oversee the government, not the other way around. Even so, I would be happy to explain the "Cook Plan" to Mr. Geithner - for free.
But the citizens must do something. How can we just sit and wait while the financial monopolists smother the economy to death in order to protect their wealth and privileges? The least they could do is declare a moratorium on debt payment until the economy is functioning again or cancel the most egregious types of debt-abuse, such as credit card or student debt.
But they are not likely to do this either. So citizens’ can be forgiven if they simply stop paying. Many home purchasers are already doing this—turning in the keys to their homes and driving away. Who can blame them?
But the worst of the debt may be credit card debt, where the controls on interest rates and penalty charges were lifted long ago and the government stopped providing a tax deduction for interest paid. In many cases, interest on credit cards is 28 percent or more, which means that even by making the minimum required payment, consumers see their balances grow each month. That the politicians could continue to allow such evil to exist is astounding but proves who their masters are.
So until real relief is forthcoming, citizens who are in distress should simply destroy their credit cards and stop paying the monthly bills. People are already doing this. Arrearages and defaults are climbing, and credit card debt is starting to be viewed as the next bubble to burst. But so what? If people have to use a credit card, that means they can’t really afford to buy whatever it is they think they want. If they can afford it, they should use a debit card instead.
Then tell the credit card company you cannot pay. Ask them to write off some or all of the debt, and if they want to take you to court, go on your own and defend yourself. You don’t need a lawyer, and you don’t need anyone’s permission. You also don’t need to go through the horrendous “reformed” bankruptcy system the credit card companies got Congress to pass in 2005. Failure to pay credit card debt is not, thank God, a crime in this country, and there are no debtors’ prisons—yet.
Besides, if people do not pay credit card debt, that money remains in circulation. So default is actually a form of patriotism in today’s trying circumstances. And the credit card companies really don’t lose anything, since the money didn’t exist before they lent it to people who are now broke.
Where I used to live in the country in rural Virginia, the story was going around about a farmer who fell down in the pen where he was feeding his pigs, and the pigs ate him. That is what has been happening in this country. The financial industry which is now swilling at the public trough has been eating alive a nation that was once “the land of the free and the home of the brave.”
Richard C. Cook is a former federal government analyst who writes on economic issues. His new book, We Hold These Truths: The Hope of Monetary Reform, is now available and may be ordered at http://www.tendrilpress.com (303-696-9227). His contact email is EconomicSanity@gmail.com.

http://www.globalresearch.ca/index.php?c...&aid=11120

[Jan Klimkowski]

Hmmm - these claims about Senators having been threatened by martial law if they refused to sign the Wall Street bailout bill have been bubbling away for some time, but Sen James Inhofe has just added some meat to the bone:

"Looting America: Treasury Secretary Paulson Threatened Senators with Martial LawTuesday, December 2, 2008, 9:04 am, by cmartenson
Some people think of Hank Paulson as our Treasury Secretary. I think of him as a 19 year veteran of Wall Street banking.

At every turn of this entire bailout he has specifically advantaged banks over taxpayers, banks over industry, banks over homeowners, and banks over the future health and prosperity of this country.

Is this surprising for a banking veteran? No, not really.

But the tactics he used certainly are. Consider this:

Sen. James Inhofe (R-Ok.) said yesterday that it was Treasury Secretary Henry Paulson who personally told Congressmen that there would be martial law in America if they did not pass the bailout of the banks as demanded by the Bush Administration.

On Oct. 2, Rep. Brad Sherman (D-Calif.) said on the House floor that "Many of us were told in private conversations that if we voted against this bill on Monday the sky would fall, the market would drop two or three thousand points the first day, another couple of thousand the second day, and a few members were even told that there would be martial law in America if we voted no."

Now, Senator Inhofe, speaking on KFAQ radio station in Tulsa, has confirmed who it was that issued this threat.

The interview host Pat Campbell asked Infhofe, "Somebody in D.C. was feeding you guys quite a story prior to the bailout, a story that if we didn't do this we were going to see something on the scale of the depression, there were people talking about martial law being instituted, civil unrest. Who was feeding you guys this stuff?"

Inhofe replied, "That's Henry Paulson. We had a conference call early on, it was on a Friday I think--a week and half before the vote on Oct. 1. So it would have been ... the 19th of September, we had a conference call. In this conference call and I guess there's no reason for me not to repeat what he said, but he said, he painted this picture you just described. He said, This is serious. This is the most serious thing that we faced."

http://www.chrismartenson.com/blog/looti...l-law/9576

[Jan Klimkowski]

Insider market chatter:

We hear from a very well placed Buy Side investor with extensive business interests in the US and EU that three primary banking institutions in Europe, two French and one German, have such significant CDS exposure and other problems that they cannot even begin to fund the payouts anticipated over the next quarter.

The funding squeeze reportedly is exacerbated by a near-collapse among weaker players in the hedge fund market, who were accustomed to receiving loans from one large French institution, which then stupidly converted the loans into equity. That's right. This past summer, when the bank put out a call for redemptions of $4 billion in hedge fund investments, says the source, only $400 million was returned. And the French bank also used these same hedge funds and others to reinsure some of its own CDS exposure. Sound familiar? Yup, just like AIG.

Unlike the approach taken by Paulson and Geithner to bailout AIG and JPM (via the Bear Stearns rescue), however, the investor claims that EU officials are considering a moratorium on CDS payments by the three Euroland banks in question. The banks would be given ten years to write down their CDS and hedge fund exposures and would receive additional infusions of capital by their respective governments. The source claims that French banks have such huge exposure to both hedge funds and CDS, sometimes linked together, that the positions are beyond the ability of the EU governments to bail them out without a cessation of CDS payments.

The IRA was not able to obtain a comment from EU officials over the weekend about these allegations. We'll be making some calls Sunday night and Monday. But if this unconfirmed report turns out the be true, then the beginning of the end of the CDS market as we have known it will be at hand. And ironically, the catalyst for the final solution will come not from the failure of a US dealer, but instead by a moratorium on CDS payments by an EU bank.

In the event, as other governments around the world follow the very reasonable example of the EU, the OTC derivatives market will implode and these unfunded liabilities may very well force the nationalization/liquidation of C, JPM and AIG, among others. And in the event, Hank Paulson, Tim Geithner, Alan Greenspan, Ben Bernanke and other senior officials at the Fed in Washington are going to have a lot of explaining to do to the Congress, to a new President and the global financial community.

Tell us again, Chairman Greenspan and Chairman Bernanke, just why do you believe dealing in OTC derivatives and particularly CDS contracts are activities that are safe and sound for global banking institutions?

http://us1.institutionalriskanalytics.co...RAMain.asp

[Peter Lemkin]

Hmmm - these claims about Senators having been threatened by martial law if they refused to sign the Wall Street bailout bill have been bubbling away for some time, but Sen James Inhofe has just added some meat to the bone:

The interview host Pat Campbell asked Infhofe, "Somebody in D.C. was feeding you guys quite a story prior to the bailout, a story that if we didn't do this we were going to see something on the scale of the depression, there were people talking about martial law being instituted, civil unrest. Who was feeding you guys this stuff?"

Inhofe replied, "That's Henry Paulson. We had a conference call early on, it was on a Friday I think--a week and half before the vote on Oct. 1. So it would have been ... the 19th of September, we had a conference call. In this conference call and I guess there's no reason for me not to repeat what he said, but he said, he painted this picture you just described. He said, This is serious. This is the most serious thing that we faced."

http://www.chrismartenson.com/blog/looti...l-law/9576

Frightening stuff! While the immediate threat was theatre for pressuring the Congress to hand over the cash - "all your cash - and keep your hands above your head and move real slow, like - remember I've got this gun pointed right at your heart." - such a scenario is IMO in the medium-term possible and would be the worst of all possible scenarios. Beyond bad. Fatal for America, if we 'ain't already on the path to certain demise.... Reminds me of the way LBJ used to get persons to do his bidding and keep their silences after the JFK Assassination - threats of nuclear war. Where do they get these criminals they stock the government with?....

[David Guyatt]

Frightening stuff! While the immediate threat was theatre for pressuring the Congress to hand over the cash - "all your cash - and keep your hands above your head and move real slow, like - remember I've got this gun pointed right at your heart." - such a scenario is IMO in the medium-term possible and would be the worst of all possible scenarios. Beyond bad. Fatal for America, if we 'ain't already on the path to certain demise.... Reminds me of the way LBJ used to get persons to do his bidding and keep their silences after the JFK Assassination - threats of nuclear war. Where do they get these criminals they stock the government with?....

It's like one of those Sergio Leone spaghetti westerns, "A Fistful of Dollars", followed by "For a Few Dollars More" and finally "The Good, the Bad and the Ugly".

[Jan Klimkowski]

Ticker Forum's Genesis skewers Paulson, and get angry with the passivity of ordinary Yanks in the face of Wall Street looting:

Posted by Karl Denninger at 08:14
How To Create A Depression

We're starting today with AIG, which was reported now to be in a deal with the US Government to "terminate" some debt obligations.

"NEW YORK (Reuters) - American International Group Inc (AIG.N) and the U.S. government have reached an agreement to clear the insurer of its obligations on about $53.5 billion in toxic mortgage debt, the giant insurer said in a regulatory filing on Tuesday."

Now let's talk about how that was accomplished - because it sounds like magic.

What has actually happened is that the government (The Fed and Treasury) have purchased some $46 billion of the "assets" (mostly CDOs and similar things) that AIG wrote CDS against. Since the government now owns "both sides of the bet", the need to post additional collateral (or pay off in the event of a default) has disappeared.

But here's the problem - the loss still happened and still got eaten by government (that is, you), which is being "conveniently" ignored! See, while AIG might not need to pay the $53 billion in bets (the underlying), the reason they were under threat of having to pay out in the first place is that the underlyings - in this case all synthetic instruments with no actual asset behind them - were threatening to have an actual value of zero!

The zero is still happening, but now we're going to hide it in "Maiden III", yet another opaque LLC in which we the people (who paid the check to buy these so-called "assets" - at par, natch) can't look.

In other words, this is yet another rooking of the people, this time to the tune of over $50 billion, where we have essentially pissed into the hurricane of debt deflation and we're not even allowed to see what was bought or at what price.

Now this is, indisputably, bullish for AIG. But it is an outrageous subsidy for this company on the backs of the US Taxpayer, for which we have not been compensated, nor have the acts that led to this situation been punished under the law. The executives at AIG have not been forced to disgorge their bonuses and compensation, they have not been criminally charged, and no punishment has been levied against those who set up this outrageously overlevered mess in the first place.

Paulson continues to jawbone about "increasing lending"; this sort of idiocy from him, Mishkin on CNBC this morning, and similar bleating by Bernanke and others misses the point.

That point, by the way, is clearly illustrated here:

JK EDIT: there's a graph at the url of the article showing that in 1929, Total US Debt as a % of GDP was 299.8% and in Q2 of 2008 stood at 356.7%

Essentially all of the so-called "growth" since 1996 was in fact debt that was claimed to be growth!

This is exactly identical on a national scale to you borrowing more and more money over a period of more than ten years, spending it all, and claiming to be "enjoying unprecedented prosperity."

As total debt rises so does total debt service and this presents an ever-growing drag on growth (GDP).

Adding to total debt through bailouts, which must add to total debt as we do not have the money in the United States and must borrow it, simply adds to the negative impact on GDP and thus the drag on the economy!

There is no escaping this reality whether the government (or private parties) like it or not. These are mathematical facts and not subject to political whim; Paulson and Bernanke, both of whom are highly intelligent, understand this.

Unfortunately the American people do not, and it appears that we are instead going to be forced to recognize this reality as we continue to trying to play "borrow and spend" out of the hole, further depressing GDP.

This is how government causes economic Depressions; in the late 1920s and 1930s government did the same thing attempting to deal with a recession and created The Great Depression, and this time, attempting to prevent the excesses of the 1990s Tech Mess from being worked off through recession, it has done precisely the same thing.

Buckle up folks - it is only reasonable to expect that from the same actions will come the same result, and we the people have utterly failed in our most-recent elections to hold Congress to account in that we returned the vast majority of those who voted for the EESA/TARP to office.

Get up, go look in the mirror.

There is no conspiracy - the responsibility for this depression is in fact YOURS.

http://market-ticker.org/archives/672-Ho...ssion.html

[Peter Lemkin]

Ticker Forum's Genesis skewers Paulson, and get angry with the passivity of ordinary Yanks in the face of Wall Street looting:


http://market-ticker.org/archives/672-Ho...ssion.html

Not unexpected, but I heard Obama in the last few days say how America was 'going to have to tighten its belt' because of the 'financial situation'....hmmmm....certainly didn't tighten it to bail out the rich guys...I guess that really means the little people have to take-off and eat their belts and tighten the string they replace 'em with. When are the People going to get rid of this rotten, corrupt, undemocratic and killing top-down domination paradigm that passes for a government [to the naive]? Bankers and financiers unite! You have nothing to loose but your bad debts!

[Jan Klimkowski]

There are very strong rumours that China is about to devalue its currency by c30%. It's a logical - perhaps inescapable - move for the Chinese, and will have huge knock-on effects.

Ticker Forum's Karl Denninger has reached for the single malt, and spells out some of the consequences in his normal, um, colourful style. (The charts and videos referenced in the piece can be seen at the original url):

http://market-ticker.org/archives/674-Aw...Again.html

Aw Crap - Told You So (Again)

This was worth a glass of 18year single-malt.

This evening a rumor showed up on the forum that China and another nation (Korea?) are going to intentionally devalue their currencies within days by 30-35%.

I was wondering how long it was going to take for the Chinese to decide how to deal with Paulson for what he did to them.

See, back on September 30th I wrote a ticker in which I reproduced the portion of an interview on CNBC in which it was disclosed by Mr. Sherman of California that the TARP/EESA was intended to bail out Chinese investors who our bankers screwed (along with everyone else) by selling them trash securities that were claimed to be "AAA" grade paper.

I even did a short video on it on October 2nd, which I an reproducing here, once again:

Now of course Paulson, it appears, was lying not only to Congress, but also to The Chinese!

Congress is spineless. Paulson counted on them (and the media) failing to raise sufficient hell to agitate the American people prior to the bill's passage, and he also counted on The American People being a nation of sheep who would not descend on Washington DC and demand that he resign immediately, refusing to leave town until he did.

But did Paulson and Bernanke ever intend to actually pay off the Chinese, never mind that our government has no business covering the outrageous (and even possibly unlawful) actions of private banks?

Or was Paulson and Bernanke's original intent to use any possible excuse to get their hands on a crapload of money to pay off their buddies in the banks, while screwing everyone they promised they would help, including the Chinese?

You decide; here's a video I put up on the 15th of November:

Now it would appear that the Chinese are rather pissed off. See, China's Central Bank chief made an "unscheduled" trip to America yesterday, while Paulson was in China himself.

Who did he come to see?

Perhaps, did he come to deliver notice to America?

Was his message a gigantic "screw you America", perhaps?

What say you Congress, and The American People, now?

Let me put this in stark relief - there is absolutely nothing that we (or the Japanese, who will get screwed to Mars by this as well) can do about this. Well, nothing other than play "Smoot Hawley", or worse, "Cowboys and Chinese."

Don't think some bright folks will not think about one (or both) of those options folks. They will. Either would of course be an absolute disaster, but that's nothing new for our political elite.

Why is this such a big deal? Because this sort of intentional devaluation is the precise "beggar thy neighbor" policy that was followed in the 1930s and was in no small part responsible for accelerating the deflationary spiral downward into hell on a global basis.

If there's anything to this you can kiss off what's left of our export market and further destruction of the American Wage Base. Oh, and while we're at it, would anyone like to take a bet on these same nations unloading into our government's tampering with the Treasury and Agency markets "while the getting is good", then telling us to bite it on future purchases of those securities too? How do you spell "bond market dislocation"?

This, if true, is massively deflationary on a global scale and there isn't jack that we can do about it.

I have said for over a year that the right thing for America to do is to force all of the bad debt into the open, default that which must default, and then go after each and every individual involved in any part of this massive fraud, no matter who they are and who they work for. While this would not have prevented the losses (indeed, it would have forced them to the forefront) it would have demonstrated to the world that (1) we are a nation of laws, and lawlessness will not be tolerated, and (2) it would have provided a buffer (foreign and domestic victims could go after the malfeasors both personally and corporately) against any argument that our government was officially sanctioning these acts.

Instead, Ben and Hank did in fact sanction the outrageous actions of these firms and individuals, and since they are speaking as officials of The United States Government their actions in this regard have now caused other nations - those aggreived - to search for ways to punish not the executives of Wall Street firms who did these evil things but rather The United States as a whole.

Once again Ben Bernanke and Hank Paulson have demonstrated their arrogance in believing that they can act unilaterally in America, lying to people for years by allowing the commission of financial fraud, then hide behind the trappings of their power when the music stops.

Every action Bernanke and Paulson have taken since this crisis began has broken new records in outrage and arrogance.

Now the leaders of other nations may be about to "give something back" to America for its actions against them - and it is not going to be pretty.

We should have locked up the bankers instead of bailing them out - including Paulson and Bernanke.

Pray this rumor proves incorrect, or you'll see a one-line Ticker very soon:

"I hate it when I'm right"