Defaulting banks - where will it stop?

[Jan Klimkowski]

It is indeed a bankers' coup, at the expense of taxpayers.

Goldman to make record bonus payout
Surviving banks accused of undermining stability

Phillip Inman The Observer, Sunday 21 June 2009

Staff at Goldman Sachs staff can look forward to the biggest bonus payouts in the firm's 140-year history after a spectacular first half of the year, sparking concern that the big investment banks which survived the credit crunch will derail financial regulation reforms.

A lack of competition and a surge in revenues from trading foreign currency, bonds and fixed-income products has sent profits at Goldman Sachs soaring, according to insiders at the firm.

Staff in London were briefed last week on the banking and securities company's prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever. Figures next month detailing the firm's second-quarter earnings are expected to show a further jump in profits. Warren Buffett, who bought $5bn of the company's shares in January, has already made a $1bn gain on his investment.

Goldman is expected to be the biggest winner in the race for revenues that, in 2006, reached £186bn across the entire industry. While this figure is expected to fall to £160bn in 2009, it will be split among a smaller number of firms.

Barclays Capital, Credit Suisse and Deutsche Bank are among the European firms expected to register bumper profits, along with US banks JP Morgan and Morgan Stanley following the near collapse and government rescue of major trading houses including Citigroup, Merrill Lynch, UBS and Royal Bank of Scotland.

In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year's payouts are on track to be the highest for most of the bank's 28,000 staff, including about 5,400 in London.

Critics of the bonus culture in the City said the dominance of a few risk-taking investment banks is undermining the efforts of regulators to stabilise the financial system.

Vince Cable, the Liberal Democrat treasury spokesman, said: "The investment banks more than any other institutions created the culture of excessive leverage, excessive risk and excessive bonuses that led to the downfall of the financial system. Now they are cashing in and the same bonus culture has returned. The result must be that we are being pushed to the edge of another crash."

Goldman Sachs said it reviewed its bonus scheme last year and switched from a system of guaranteed rewards that were paid over three years to variable payments that tied staff to the firm. It told employees last year that profit-related bonuses would be delayed by 12 months.

Until the release of its first quarter profits in April, it seemed inconceivable that a firm owing the US government $10bn would be looking to break all-time records in 2009.

David Williams, an investment banking analyst at Fox Pitt Kelton, said: "This year is shaping up to be the best year ever for investment banks, or at least those that have emerged relatively unscathed from the credit crisis.

"These banks are intermediaries in the bond markets where governments and companies are raising billions of pounds of new money. There is also a lack of competition that means they can charge huge sums for doing business."

Last week, the firm predicted that President Barack Obama's government could issue $3.25tn of debt before September, almost four times last year's sum. Goldman, a prime broker of US government bonds, is expected to make hundreds of millions of dollars in profits from selling and dealing in the bonds.

http://www.guardian.co.uk/business/2009/...s-payments

[David Guyatt]

Blind greed. Sooner or later the pubic boil over and will set about cutting the balls off bankers because of the sheer audacity and arrogance of these people.

[Jan Klimkowski]

Some interesting technical analysis of Goldman Sachs' latest gaming of the system from Zero Hedge & Karl Denninger:

Zero Hedge's piece with a clickable trading chart:

http://zerohedge.blogspot.com/2009/06/go...ns_26.html

Karl Denninger's analysis (I don't agree with all the detail, but the overall thrust of market gaming with our money and the expose of the ridiculous notion that an arb has limited risk is powerful):

Posted by Karl Denninger in Editorial at 10:28

Market Gaming: Pressin' Their Bets
Props to Zerohedge on tracking this:

Just released NYSE data indicate a 50% ramp up by Goldman's principal Program Trading unit. Whereas the prior week saw Goldman trading only 631 million principal shares on the NYSE, the most recent data indicate a massive rise to 977.8 million. Also notable is Credit Suisse's doubling in principal program trades to 586 million from 245 million. Zero Hedge is compiling materials to demonstrate the phenomenal gamble CS is taking by being the largest holder of the ETF-underlying pair trade. The ensuing implosion, once the market loses the invisible futures bid, will likely destroy Switzerland's second biggest bank and likely take down the country with it.

This is ridiculous.

Someone needs to start listening to Volcker, who has strongly promoted returning to the Glass-Steagall separation of commercial banking and trading activity.

Program trading is now up to 40.4% of all NYSE volume - approaching half.

For those who aren't savvy in this stuff what's going on here is a pair trade between the underlying instrument(s) and the ETFs on the exchanges. This is an arb play and it works until it doesn't - for an example of "doesn't" in the single-name world witness what happened to VW/Porsche earlier this year when the arb speculators on their merger got rammed, or those hedgies who were playing the Citibank preferred-conversion arb earlier this year.

These are allegedly "hedged" transactions in that there is an alleged unbreakable correlation that protects the person doing it from loss.

In truth there is no such thing as an unbreakable correlation and the alleged "protection" against getting reamed is illusory. This is the same sort of "genius trade" that was run with AIG's CDS positions - remember the claim that "we're unlikely to ever see a loss"?

How'd that work out?

Here's the chart from Zerohedge (original source the NYSE itself; click for a larger version):



Someone has to get out in front of this and stop it before it blows up in everyone's face and we have yet another round of "banking problems", this time among so-called "investment banks" that in fact are now commercial banks since they converted and thus have an "Uncle Sam" backstop.

This sort of principal trading is outrageous and in this sort of volume amounts to market manipulation writ large. Like all manipulation it can only work for a certain (but impossible to determine in advance) amount of time, and when it fails it will inflict ruinous losses on the participants in the scheme along with anyone inside the blast radius (which includes you if you happen to be long the markets when it comes apart!)

I have no problem with speculators pressing their bets. I have a major problem with them doing it with taxpayer money and backstops, where the inevitable losses that will come when, not if it blows up will not be their loss, it will be our loss.

CONGRESS MUST PUT A STOP TO THIS CRAP RIGHT NOW, SINCE OUR SO-CALLED "REGULATORS" ARE CLEARLY REFUSING TO DO SO!

http://market-ticker.org/archives/1165-M...-Bets.html

[Jan Klimkowski]

Plus some serious insider grizzly bear behaviour:

SEVERELY Bearish Treasury Development
From Marketwatch:

NEW YORK (MarketWatch) -- Dresdner Kleinwort Securities has withdrawn from the Federal Reserve's primary U.S. government security dealers, the U.S. central bank said Friday.

The change is net neutral in terms of numbers as a new dealer just came online, but in general this is a major net negative for the Treasury market.

Why? Because being a primary dealer is, in general a license to print money. You get to field customer orders for Treasuries and make your spread, and you have a privileged trading position with The Fed.

There's only one fly in the ointment, and that is that the position comes with a requirement that you bid. This is distinct from most other nations where no such system exists, and essentially guarantees that there can never be a "failed" Treasury auction.

There was no reason cited for the withdrawal but one can surmise that the issue is that they're stuffed to the gills with Treasuries and are finding it difficult or impossible to earn their spread, think there is a material safety risk in their participation (e.g. getting stuck long with a deteriorating position), or both.

Either way there is no possible means to read this as bullish. While the issue may be with their liquidity demands and thus not reflect severely on the Treasury market with the issuance that has gone on this year and will for the foreseeable future I wouldn't take that bet.

The "Chosen" or "Protected" dealers will of course never withdraw but if the changes made to reporting of indirect bid are in fact concealing deteriorating demand and these folks have detected a potential problem in the offing we are fixing to get a severe spanking in our government debt issuance in the near future.

Beware.

http://market-ticker.org/archives/1167-S...pment.html

[Jan Klimkowski]

Graphs and charts at the Zero Hedge url:

http://zerohedge.blogspot.com/2009/06/co...gency.html

Saturday, June 27, 2009
The Collapse Of The Non-Backstopped Agency Market

Posted by Tyler Durden at 8:58 PM
Complete collapse in foreign interest for GSE debt: North American holdings of the latter have increased from 50% to 80% of total notional in one year!

Primary Dealers are selling corporates in droves in order to purchase Treasuries and MBS under the Fed's gun. Primary Dealers now have a record $368 billion in Corporate, Agency, MBS and Treasury inventory. And the vast bulk of PD holdings of agency debt has less than a 3 year maturity.

The Fed has bought $103 billion in Agencies, almost half of which matures in the next 3 years. Amusingly, the roll coincides when roughly $1 trillion of CRE debt comes due. Good luck.

And just in case you are curious who it is that purchases all those low, low coupon MBS out there: the Federal Reserve has bought almost half a trillion at a coupon less than 4.5%. Does Ben Bernanke honestly believe that taxpayers generating a 4.5% return is enough to continue to finance the homeownership mania? With housing prices still collapsing, it is only a matter of time before taxpayers take collosal principal losses on all these MBS, compliments of yet another completely failed risk assesment by the Federal Reserve.

[Jan Klimkowski]

The bosses of ratings agencies such as S&P should all be in prison right now: their information is never objective.

The attack in the Torygraph article below on universal entitlement to healthcare and the pensions of ordinary working people is to be expected from capitalist ideologues.

Of course the financial elites who created this mess will keep their private healthcare, and their fatcat pensions and pension pots, whilst claiming that the NHS and the state pension are simply unaffordable.

The real meaning of the Torygraph article is that Britain should brace itself for what Naomi Klein has correctly termed "Shock Therapy".

Shock Therapy has been routinely applied to developing or Third World countries, and to east European economies - eg the rape and looting of Russia in the 1990s, the destruction of the Argentine economy by the IMF/World Bank/investment banks at the beginning of the C21st.

The logical next step of this current financial disaster is for Shock Therapy to be applied to First World countries.

S&P is clearly lobbying for Shock Therapy to be applied to Britain.

UK's debt will quadruple unless drastic steps are taken, says S&P


Britain's national debt will quadruple to peaks only ever seen in the wake of the Second World War unless the Government takes drastic steps to address the pensions and ageing crisis, Standard & Poor's has warned.


By Edmund Conway

Published: 10:30PM BST 27 Jun 2009

The ratings agency has calculated privately that the UK's public sector debt could quadruple from its current level of just over 50pc of economic output to 200pc or above within the next four decades as the cost of servicing public sector pensions, ballooning social security costs and healthcare burdens becomes overwhelming, The Sunday Telegraph has learned.

The warning is doubly sobering since S&P last month placed Britain's debt on to "negative outlook" – an explicit signal that it could soon be downgraded

Although the agency calculated two years ago that the effects of an ageing population, alongside high pensions and healthcare costs could push Britain's net debt up above 150pc by 2050, it now fears the added cost of the financial crisis means the debt mountain could in fact rival that in 1945, when the cost of fighting a world war pushed debt well beyond 200pc of GDP.

The warning coincides with research showing that the true size of the UK's unfunded public sector pensions deficit, which needs to be funded through taxpayer's cash, is now £1,177bn – a staggering £20,000 for every person in the UK. A study for the highly-respected British-North American Committee, written by former Bank of England economist Neil Record, finds that the UK shortfall is far more severe than in the US or Canada.

Moritz Kraemer, head of S&P's sovereign ratings in Europe, Middle East and Africa, said Britain was facing a double challenge – first, to mend its books in the wake of the financial crisis and then to overhaul its economy drastically to stifle the pensions crisis. He said Britain was facing deficits unlike any before in peacetime history.

"We don't think they are willing to look into this fiscal abyss without taking any action," he said. "Following the financial crisis, the proportion of the problem is significantly larger than we thought but the Government has time to react to address these issues." The shortfall may mean having to raise taxes, cutting public pensions or healthcare spending, he added.

The agency said that unless Britain and its fellow leading Western nations took action to stem these costs, "the ratings of the high grade sovereigns would be very different."

Although the UK is the only country on so-called "negative outlook", meaning the agency is considering stripping it of its AAA rating for the first time, Mr Kraemer said the gold-plated rating could be salvaged if the next Government proves it is willing to bring the public accounts back in order.

He added: "We take pre-election pledges with a pinch of salt; they don't always materialise. Actions speak louder than words. It's easy to come up with solutions on paper but difficult to make them stick."

http://www.telegraph.co.uk/finance/econo...SandP.html

[David Guyatt]

Never fear Jan, Cameron-man has been carefully positioned so that he can enact the necessary shock doctrine on us beginning May 2010.

SOS.

[Peter Lemkin]

The American Empire Is Bankrupt
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Posted on Jun 14, 2009
Wikimedia Commons

http://www.truthdig.com/report/item/2009..._bankrupt/

By Chris Hedges

This week marks the end of the dollar’s reign as the world’s reserve currency. It marks the start of a terrible period of economic and political decline in the United States. And it signals the last gasp of the American imperium. That’s over. It is not coming back. And what is to come will be very, very painful.

Barack Obama, and the criminal class on Wall Street, aided by a corporate media that continues to peddle fatuous gossip and trash talk as news while we endure the greatest economic crisis in our history, may have fooled us, but the rest of the world knows we are bankrupt. And these nations are damned if they are going to continue to prop up an inflated dollar and sustain the massive federal budget deficits, swollen to over $2 trillion, which fund America’s imperial expansion in Eurasia and our system of casino capitalism. They have us by the throat. They are about to squeeze.

There are meetings being held Monday and Tuesday in Yekaterinburg, Russia, (formerly Sverdlovsk) among Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization. The United States, which asked to attend, was denied admittance. Watch what happens there carefully. The gathering is, in the words of economist Michael Hudson, “the most important meeting of the 21st century so far.”

It is the first formal step by our major trading partners to replace the dollar as the world’s reserve currency. If they succeed, the dollar will dramatically plummet in value, the cost of imports, including oil, will skyrocket, interest rates will climb and jobs will hemorrhage at a rate that will make the last few months look like boom times. State and federal services will be reduced or shut down for lack of funds. The United States will begin to resemble the Weimar Republic or Zimbabwe. Obama, endowed by many with the qualities of a savior, will suddenly look pitiful, inept and weak. And the rage that has kindled a handful of shootings and hate crimes in the past few weeks will engulf vast segments of a disenfranchised and bewildered working and middle class. The people of this class will demand vengeance, radical change, order and moral renewal, which an array of proto-fascists, from the Christian right to the goons who disseminate hate talk on Fox News, will assure the country they will impose.

I called Hudson, who has an article in Monday’s Financial Times called “The Yekaterinburg Turning Point: De-Dollarization and the Ending of America’s Financial-Military Hegemony.” “Yekaterinburg,” Hudson writes, “may become known not only as the death place of the czars but of the American empire as well.” His article is worth reading, along with John Lanchester’s disturbing exposé of the world’s banking system, titled “It’s Finished,” which appeared in the May 28 issue of the London Review of Books.

“This means the end of the dollar,” Hudson told me. “It means China, Russia, India, Pakistan, Iran are forming an official financial and military area to get America out of Eurasia. The balance-of-payments deficit is mainly military in nature. Half of America’s discretionary spending is military. The deficit ends up in the hands of foreign banks, central banks. They don’t have any choice but to recycle the money to buy U.S. government debt. The Asian countries have been financing their own military encirclement. They have been forced to accept dollars that have no chance of being repaid. They are paying for America’s military aggression against them. They want to get rid of this.”

China, as Hudson points out, has already struck bilateral trade deals with Brazil and Malaysia to denominate their trade in China’s yuan rather than the dollar, pound or euro. Russia promises to begin trading in the ruble and local currencies. The governor of China’s central bank has openly called for the abandonment of the dollar as reserve currency, suggesting in its place the use of the International Monetary Fund’s Special Drawing Rights. What the new system will be remains unclear, but the flight from the dollar has clearly begun. The goal, in the words of the Russian president, is to build a “multipolar world order” which will break the economic and, by extension, military domination by the United States. China is frantically spending its dollar reserves to buy factories and property around the globe so it can unload its U.S. currency. This is why Aluminum Corp. of China made so many major concessions in the failed attempt to salvage its $19.5 billion alliance with the Rio Tinto mining concern in Australia. It desperately needs to shed its dollars.
“China is trying to get rid of all the dollars they can in a trash-for-resource deal,” Hudson said. “They will give the dollars to countries willing to sell off their resources since America refuses to sell any of its high-tech industries, even Unocal, to the yellow peril. It realizes these dollars are going to be worthless pretty quickly.”

The architects of this new global exchange realize that if they break the dollar they also break America’s military domination. Our military spending cannot be sustained without this cycle of heavy borrowing. The official U.S. defense budget for fiscal year 2008 is $623 billion, before we add on things like nuclear research. The next closest national military budget is China’s, at $65 billion, according to the Central Intelligence Agency.

There are three categories of the balance-of-payment deficits. America imports more than it exports. This is trade. Wall Street and American corporations buy up foreign companies. This is capital movement. The third and most important balance-of-payment deficit for the past 50 years has been Pentagon spending abroad. It is primarily military spending that has been responsible for the balance-of-payments deficit for the last five decades. Look at table five in the Balance of Payments Report, published in the Survey of Current Business quarterly, and check under military spending. There you can see the deficit.

To fund our permanent war economy, we have been flooding the world with dollars. The foreign recipients turn the dollars over to their central banks for local currency. The central banks then have a problem. If a central bank does not spend the money in the United States then the exchange rate against the dollar will go up. This will penalize exporters. This has allowed America to print money without restraint to buy imports and foreign companies, fund our military expansion and ensure that foreign nations like China continue to buy our treasury bonds. This cycle appears now to be over. Once the dollar cannot flood central banks and no one buys our treasury bonds, our empire collapses. The profligate spending on the military, some $1 trillion when everything is counted, will be unsustainable.

“We will have to finance our own military spending,” Hudson warned, “and the only way to do this will be to sharply cut back wage rates. The class war is back in business. Wall Street understands that. This is why it had Bush and Obama give it $10 trillion in a huge rip-off so it can have enough money to survive.”

The desperate effort to borrow our way out of financial collapse has promoted a level of state intervention unseen since World War II. It has also led us into uncharted territory.

“We have in effect had to declare war to get us out of the hole created by our economic system,” Lanchester wrote in the London Review of Books. “There is no model or precedent for this, and no way to argue that it’s all right really, because under such-and-such a model of capitalism ... there is no such model. It isn’t supposed to work like this, and there is no road-map for what’s happened.”

The cost of daily living, from buying food to getting medical care, will become difficult for all but a few as the dollar plunges. States and cities will see their pension funds drained and finally shut down. The government will be forced to sell off infrastructure, including roads and transport, to private corporations. We will be increasingly charged by privatized utilities—think Enron—for what was once regulated and subsidized. Commercial and private real estate will be worth less than half its current value. The negative equity that already plagues 25 percent of American homes will expand to include nearly all property owners. It will be difficult to borrow and impossible to sell real estate unless we accept massive losses. There will be block after block of empty stores and boarded-up houses. Foreclosures will be epidemic. There will be long lines at soup kitchens and many, many homeless. Our corporate-controlled media, already banal and trivial, will work overtime to anesthetize us with useless gossip, spectacles, sex, gratuitous violence, fear and tawdry junk politics. America will be composed of a large dispossessed underclass and a tiny empowered oligarchy that will run a ruthless and brutal system of neo-feudalism from secure compounds. Those who resist will be silenced, many by force. We will pay a terrible price, and we will pay this price soon, for the gross malfeasance of our power elite.

TAGS: barack obama bush dollar economy government hedges history inflation intelligence iran media military money nuclear obama pentagon politics war

[David Guyatt]

The architects of this new global exchange realize that if they break the dollar they also break America’s military domination. Our military spending cannot be sustained without this cycle of heavy borrowing. The official U.S. defense budget for fiscal year 2008 is $623 billion, before we add on things like nuclear research. The next closest national military budget is China’s, at $65 billion, according to the Central Intelligence Agency.

The danger to my mind is that the Pentagon system will not go down without fighting, and I fear that a major war would be preferable to these people than losing a grip on their rice bowl.

[Jan Klimkowski]

The danger to my mind is that the Pentagon system will not go down without fighting, and I fear that a major war would be preferable to these people than losing a grip on their rice bowl.

Whose (archetypal) rice bowl? :hmmmm2:

The collective unconscious is buzzing...