The Market Ticker - Politics

"Liberal" Consensus On Dumping Geithner?

nospam@example.com (Karl Denninger) — Thu, 19 Nov 2009 08:06:00 -0500

Rep. Peter DeFazio (D-Ore.) said Wednesday that he and other liberal House members are becoming increasingly tired of Obama administration economic policies that they say are too focused on maintaining the stability of Wall Street firms and largely ignore "Main Street."

"A growing consensus in the caucus [believe that Geithner should be removed]," DeFazio said on MSNBC this evening, adding that some lawmakers are "considering questions regarding him and other economic advisers."

No, really?

What was your first hint Peter?

Was it that Timmy couldn't be bothered to pay his taxes? Was it that he was the Wall Street stooge who handed out billions of taxpayer money to the big banks through AIG via what I'd argue was a fraudulent scheme to pay off those CDS at par? Or is it Timmy's incessant prattling on about a "strong dollar"?

One has to wonder, given that there's really nothing different about any of Geithner's views and actions than Paulson's - except for the blatant tax cheating (that we know of.) Then again, being a tax cheat seems to be a requirement to be a Democrat official - shall we toll up the list both in the Obama Administration and Congress?

(The Dishonorable Chuck Rangel anyone?)

I find the faux populism of the Democratic Party particularly offensive. There is absolutely nothing in the Obama Administration's record to indicate that they have ever intended to proceed from any such viewpoint - not now, not ever.

The veteran congressman specifically mentioned last year's bank bailouts and the Geithner's handling of the collapse of insurance giant AIG. At the time, Geithner was head of the New York Fed in the Bush administration.

"We may have to sacrifice just two more jobs to get millions back for Americans," the congressman added.

This, of course, is why The Democrats were all for Geithner last winter. Remember that Peter? Where was your outrage at his appointment then?

Here's one of the articles I wrote at the time - just post-election.

How about you Tim (Geithner, at the NY Fed)? Is everything on the up-and-up over there in NY? If so, why don't you "bare all" and let us have a look-see?

Since it's our money you're playing with, in that we the taxpayer are the source of the wealth you shuffle around, we have every right to know what the hell you're doing with it and so does Congress.

If you refuse then I believe Congress should revoke your charter and subpoena everyone involved, including the Treasury Secretary's and both Bernanke's and Geithner's notes, phone records and meeting minutes, along with the details of every transaction taken by any of the above since August of 2007. Publish it all in The Federal Register and online via the web.

Funny how only now, after the looting has taken place, after the banks have rate-jacked Americans' credit cards to 29.9%, after Timmy funneled over $100 billion of taxpayer money through AIG to banks both foreign and domestic, and after Timmy has repeatedly refused to put a limit on what authority he wants to keep under TARP, now you bleat.

Here's reality:

This Administration, just as with the Bush Administration, is kneeling before Zod - the banksters that infest Wall Street - and selling out Americans.

Washington may be starting to panic about jobs - as well they should be. They should be in panic about the budget too - it has grown 30% in the last couple of years, and the claimed "5% reduction" that is being whispered around on The Hill will do exactly nothing.

Politically the reduction of government spending has simply never happened. We call it a "cut" when the rate of increase declines - and the lapdog American Public, most of whom failed 3rd Grade Math, nod in agreement. We then ladle on more public entitlement program spending, as was done with Medicare Part "D", which was sold as a sop to Seniors but which was really a sop to drug companies like Pfizer - who, I remind you, has pled guilty twice in the last few years to criminal felony charges for off-label marketing practices. Oh, and their putative head at the time then got a Federal Reserve Bank of NY Board seat. You Democrats wrote that bill (yes, I know, Bush signed it, fool that he was) but in fact it was not intended to benefit the public - it was simply (another) rip-off of Americans for the benefit of a handful of big pharmaceutical companies, who are one step (and only one step!) behind the banks when it comes to how badly they've screwed ordinary Americans.

Sacking Geithner would be a good first step, but only a first step. We also have to sack the entire OCC and OTS staff and tell Sheila Bair that the next bank she seizes - after a short grace period to go in and close ALL of the bankrupt banks NOW - that has more than a 5% loss on assets to the deposit fund better be accompanied by her resignation or she will be sacked as well.

The entire operation of The Fed needs to be examined by Congress and all of it peeled back in the open for all of America. Foreign exchange swaps, lending, improper buying of non-full-faith-and-credit "assets", circumvention of the rules through setting up LLCs like Maiden Lane(s), all of it.

Every financial firm that has lied to investors, regulators and buyers of their trash over the last decade must be investigated and, when appropriate, indicted. If convicted their charters must be revoked.

We need to either ban securitization entirely, impose strict liability for every transaction enclosed in a securitized loan package, or set a federal usury limit at some reasonable level over Fed Funds - not more than 10%. If you can't loan profitably at a 10% interest rate over Fed Funds, you're cheating - you're making loans you have every expectation will not be paid.

ALL off-balance sheet games must be stopped. Period. Hiding things off balance sheet should get you 20 years in "pound-me-in-the-butt" Federal Prison, not a fat bonus.

ALL lending in excess of collateral value (that is, "unsecured") must be backed by one dollar of capital for each dollar of loan outstanding. Oh, and it's a loan when you write a "credit default swap" (whether on interest rates or anything else) where you do not have hard reserves behind your commitment. The writing of CDS by AIGFP with no reserves was not one illegitimate act, it was two - first by AIGFP in claiming these policies were "good", and again by the banks who bought them and claimed to be "hedged" when their counterparty had no ability to pay.

The ugly reality is that we've wasted more than two years on trash "programs" and "fixes" that have done nothing more than blow over a trillion dollars of taxpayer money, enriching Wall Street (again) while millions of Americans lost their homes and jobs. Only the American consumer has been forced to eat the bad loans they took out - the lenders have been protected at taxpayer expense. The disincentive to make a loan you know or have reason to know won't be paid back only exists if making bad loans bankrupts BOTH the lender AND borrower.

Talk will no longer cut it.

Americans are a patient people, but it is my sense that the collective patience of this nation is nearing exhaustion.

Trust me on this Mr. DeFazio - if you and your ilk don't cut the theatrics and BS games you're going to eventually piss off the American public to a sufficient degree that they will spend their last $20 on this:

That day may be a lot closer than you think.

Senator Dodd's Bill - Copy

nospam@example.com (Karl Denninger) — Tue, 10 Nov 2009 13:59:00 -0500

This is the "Discussion Draft" of Dodd's financial reform bill.

Commentary will be forthcoming; Ticker posted so you have a place to obtain a copy "easily" if desired.

As this is another 1k+ page monster (1136 pages in this case) it may take a day or two for me to read it all.

The link above should open the PDF for you.

Here is the claimed "discussion points" that are allegedly addressed:

Senate Committee on Banking, Housing, and Urban Affairs, Chairman Chris Dodd (D-CT) Contact: Kirstin Brost/Justine Sessions, 202-224-7391

Summary: Restoring American Financial Stability – Discussion Draft

Create a Sound Economic Foundation to Grow Jobs, Protect Consumers,

Rein in Wall Street, End Too Big to Fail, Prevent Another Financial Crisis

Over the past year, Americans have faced the worst financial crisis since the Great Depression. Millions have lost their jobs, businesses have failed, housing prices have dropped, and savings were wiped out.

The failures that led to this crisis require bold action. We must restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them. We must create a sound foundation to grow the economy and create jobs.

HIGHLIGHTS OF THE DISCUSSION DRAFT

Consumer Financial Protection Agency: Creates an independent watchdog to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, while prohibiting hidden fees, abusive terms, and deceptive practices.

Ends Too Big to Fail: Prevents excessively large or complex financial companies from bringing down the economy by: creating a safe way to shut them down if they fail; imposing tough new capital and leverage requirements and requiring they write their own "funeral plans"; requiring industry to provide their own capital injections; updating the Fed’s lender of last resort authority to allow system-wide support but not prop up individual institutions; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Protects Against Systemic Risks: Creates an independent agency with a board of regulators to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the financial system. The agency could require companies that threaten the economy to divest some of their holdings.

Single Federal Bank Regulator: Eliminates the convoluted system of multiple federal bank regulators to increase accountability and end unnecessary overlap, conflicting regulation, and "charter shopping;" keeps in place the healthy dual banking system that governs community banks.

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and director nominations.

Closes Loopholes in Regulation: Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated - including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Protects Investors: Provides tough new rules for transparency and accountability from investment advisors, financial brokers and credit rating agencies to protect investors and businesses.

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at the expense of American families and businesses. 2

INDEPENDENT CONSUMER FINANCIAL PROTECTION AGENCY

The Consumer Financial Protection Agency will have the sole job of protecting American consumers from fraud and abuse and will ensure people get the clear information they need on loans and other financial products from credit card companies, mortgage brokers, banks and others.

American consumers already have protections against faulty appliances, contaminated food, and dangerous toys. With the creation of the Consumer Financial Protection Agency, they’ll finally have a watchdog to oversee financial products, giving Americans confidence that there is a system in place that works for them – not just big banks on Wall Street.

Why Change Is Needed: The economic crisis was driven by an across-the-board failure to protect consumers. When consumer protections are handled by regulators whose primary responsibility is to safeguard the profitability of the companies they regulate, consumer protections don’t get the attention they need. The result has been unfair, deceptive, and abusive practices being allowed to spread unchallenged, nearly bringing down the entire financial system.

The Federal Reserve is the primary consumer protection rule-writer, but it has repeatedly failed to act despite repeated demands from Congress. The Federal Trade Commission is responsible for consumer protections for non-bank finance companies, but lacks the authority and capacity to examine them.

The Consumer Financial Protection Agency

 Consumer Protections in One Place: Consolidates consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation, the Federal Reserve, the National Credit Union Administration, and the Federal Trade Commission.

 Independent: Led by a 5 member board with an independent director. The Chairman of the Financial Institutions Regulatory Administration will have a seat on the board.

 A Watchdog with Real Teeth: Unites rule-writing, supervision, and enforcement for consumer protection in a single, stand-alone agency with broad authority to investigate and react to abuses as they develop.

 Able to Act Fast: With this agency on the lookout for bad deals and schemes, consumers won’t have to wait for Congress to pass a law to be protected from bad business practices.

 Educates: Creates a new Office of Financial Literacy.

 Regulates Shadow Banking Industry: Levels the playing field for insured banks by regulating the shadow banking industry, such as mortgage brokers and payday lenders, for the 1st time and ensures that companies offering customers the same products receive the same regulatory treatment.

 Accountability: Makes one agency accountable for consumer protections. With many agencies sharing responsibility, it’s hard to know who is responsible for what, and easy for emerging problems that haven’t historically fallen under anyone’s purview, to fall through the cracks.

 Tougher State Laws: Allows states to pass tougher consumer protections that apply to all lenders, preventing federal regulations from preempting stronger state laws.

 Works with Bank Regulators: Coordinates with other regulators when examining banks to prevent undue regulatory burden.

 Bases Supervision on Risk: Focuses resources on companies that pose the biggest risk to consumers - mortgage bankers, brokers, finance companies and the largest institutions.

ADDRESSING SYSTEMIC RISKS: THE AGENCY FOR FINANCIAL STABILITY

One financial institution should never be capable of bringing down the entire American economy.

The newly created Agency for Financial Stability is an independent agency responsible for identifying, monitoring and addressing systemic risks posed by large, complex companies as well as products and activities that can spread risk across firms. It will discourage companies from getting too large by imposing burdens on them as they grow and give regulators the authority to break up large, complex companies if they pose a threat to the financial stability of the United States.

Why Change is Needed: The economic crisis introduced a new term to our national vocabulary – systemic risk.

In July, Federal Reserve Governor Daniel Tarullo, testified that "Financial institutions are systemically important if the failure of the firm to meet its obligations to creditors and customers would have significant adverse consequences for the financial system and the broader economy."

In short, in an interconnected global economy, it’s easy for some people’s problems to become everybody’s problems. The failures that brought down giant financial institutions last year also devastated the economic security of millions of Americans who did nothing wrong – their jobs, homes, retirement security, gone overnight because of Wall Street greed and regulatory failures.

The Agency for Financial Stability

 Strong and Independent: Governed by an independent chairman, appointed by the President and confirmed by the Senate, to provide insulation from political manipulation. The board will have 9 members including the federal financial regulators and two independent members. The board members' diverse areas of expertise will strengthen the board’s ability to identify and respond to emerging risks throughout the financial system.

 Tough to Get Too Big: Writes increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity, imposing significant costs on companies that pose risks to the financial system.

 Break Up Large, Complex Companies: Gives the regulators the authority to break up large, complex companies if they pose a threat to the financial stability of the United States.

 Close Gaps in Regulation: Identifies unregulated financial companies that pose systemic risk and assigns them to a federal regulator for supervision.

 Lean and Mean: Expected to be staffed with a highly sophisticated staff of economists, accountants, lawyers, former supervisors, and other specialists. With just rule writing authority and no direct supervision, the agency can remain small but effective.

 Make Risks Transparent: Collects and analyzes data to identify and monitor emerging risks to the economy and make this information public in periodic reports and testimony to Congress twice a year.

 Oversight of Important Market Utilities: The Agency for Financial Stability will identify systemically important clearing, payments, and settlements systems to be regulated by the Federal Reserve.

ENDING TOO BIG TO FAIL

Preventing another crisis where American taxpayers are forced to bail out financial firms requires strengthening big companies to better withstand stress, putting a price on excessive growth that matches the risks they pose to the financial system, and creating a way to shutdown big companies that fail without threatening the economy.

Why Change is Needed: As long as giant firms (and their creditors) believe the government will prop them up if they get into trouble, they only have incentive to get larger and take bigger risks, believing they will reap any rewards and leave taxpayers to foot the bill if things go wrong.

Since the crisis began, a number of institutions previously considered "too big to fail" have only grown bigger by acquiring failing companies, leaving our country with the same vulnerabilities that led to last year’s bailouts.

Limiting Large, Complex Companies and Preventing Future Bailouts

 Discourage Excessive Growth: Imposes increasingly strict standards for companies as they grow larger, more complex, or more interconnected, including heightened capital, leverage, and liquidity requirements, that ensure these companies have greater resources to deal with financial shocks.

 Require Companies Provide Their Own Capital Injections: Requires institutions to issue long-term hybrid debt securities that will provide them with capital during a systemic crisis so failing institutions can provide their own life support.

 Funeral Plans: Requires large, complex companies to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and subject to restrictions on growth and activity as well as required divestment if they fail to submit acceptable plans. Plans will help regulators understand the structure of the companies they oversee and serve as a roadmap for shutting them down if the company fails. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily.

 Orderly Shutdown: Creates a mechanism for the FDIC to unwind failing systemically significant financial companies through receivership, but not open assistance. Costs of unwinding these companies will ultimately be charged to financial firms with assets of over $10 billion, not to the taxpayers.

 Limit Federal Reserve Lending: Updates the Federal Reserve’s 13(3) lender of last resort authority to allow system-wide support for healthy institutions or systemically important market utilities during a major destabilizing event, but not to prop up individual institutions.

CREATING A SINGLE FEDERAL BANK REGULATOR:

THE FINANCIAL INSTITUTIONS REGULATORY ADMINISTRATION

The Financial Institutions Regulatory Administration will eliminate the alphabet soup of multiple bank regulators that has led to weak, confusing regulation where it’s easy for problems to fall through the cracks and difficult to know who is responsible.

Why Change is Needed: Today, we have a convoluted system of bank regulators created by historical accident. There are 4 federal banking agencies that oversee national and state banks and federal and state thrifts. The result has been charter shopping, where firms look around for the regulator that will go easiest on them and fee-funded regulators go easy on those they regulate in order to keep their business, as well as a mess of overlaps, redundancies, and blurred lines of responsibility.

Experts agree that no one would have designed a system that looked like this. For over 60 years, administrations of both parties, members of Congress across the political spectrum, commissions and scholars have proposed streamlining this irrational system. The Financial Institutions Regulatory Administration will finally achieve that goal.

The Financial Institutions Regulatory Administration

 Independent: Headed by an independent chairman appointed by the President and confirmed by the Senate, a Vice Chairman experienced in state banking regulation, and a board including the chairmen of the FDIC and the Federal Reserve and two other independent members. It will be funded primarily by assessments on the industry.

 Single Focused Agency: Combines the functions of the Office of the Comptroller of the Currency and the Office of Thrift Savings, the state bank supervisory functions of the Federal Deposit Insurance Corporation and the Federal Reserve, and the bank holding company supervision authority from the Federal Reserve.

 Dual Banking System: Preserves the dual banking system, leaving in place the state banking system that governs most of our nation’s community banks.

 Separate Community Bank Division: Establishes a separate division within the new regulator to regulate community banks given the different supervisory issues they pose.

 Eliminates Charter Shopping: Stops financial institutions from choosing the easiest regulator, and stops fee-funded regulators from going easy on those they regulate to keep their business.

 Increases Accountability: Having a single regulator will mean an identifiable agency is held responsible for shortcomings in the banking system.

 Speeds Action, Increases Efficiency: Ends slow, cumbersome, coordinated rulemaking that creates extra red tape and inconsistent enforcement of the same rules by agencies. Overlaps impose unnecessary costs on regulated institutions and their customers.

 Focuses the FDIC and the Federal Reserve: The FDIC will focus on its jobs as deposit insurer and resolver of failed institutions, retaining backup examination authority over troubled banks and gaining additional authority to accompany the new agency on examinations of healthy banks and holding companies to ensure it has sufficient information to perform its insurance functions. The Federal Reserve will focus on monetary policy without being distracted by responsibilities for bank oversight and consumer protections. The Federal Reserve will continue to play a key role in assessing financial stability and have guaranteed access to financial institutions and any needed information.

ADDRESSING SYSTEMIC RISKS POSED BY DERIVATIVES

Common sense safeguards will protect taxpayers against the need for future bailouts and buffer the financial system from excessive risk-taking. Over-the-counter derivatives will be regulated by the SEC and the CFTC, more will be cleared through centralized clearing houses and traded on exchanges, un-cleared swaps will be subject to margin and capital requirements, and all trades will be reported so that regulators can monitor risks in this large, complex market.

Why Change is Needed: The over-the-counter derivatives market has exploded in the last decade – from $91 trillion in 1998 to $592 trillion in 2008. During last year’s financial crisis, concerns about the ability of companies to make good on these contracts and the lack of transparency about what risks existed caused credit markets to freeze. Investors were afraid to trade as Bear Stearns, AIG, and Lehman Brothers failed because any new transaction could expose them to more risk.

Over-the-counter derivatives are supposed to be contracts that protect businesses from risks, but they became a way for companies to make enormous bets with no regulatory oversight or rules and therefore exacerbated risks. Because the derivatives market was considered too big and too interconnected to fail, taxpayers had to foot the bill for Wall Street’s bad bets. Those bad bets linked thousands of traders, creating a web in which one default threatened to produce a chain of corporate and economic failures worldwide. These interconnected trades, coupled with the lack of transparency about who held what, made unwinding the "too big to fail" institutions more costly to taxpayers.

Bringing Transparency and Accountability to the Derivatives Market

 Closes Regulatory Gaps: Provides the SEC and CFTC with authority to regulate over-the-counter derivatives so that irresponsible practices and excessive risk-taking can no longer escape regulatory oversight. Uses the Administration’s outline for a joint rulemaking process with the Agency for Financial Stability stepping in if the two agencies can’t agree.

 Central Clearing and Exchange Trading: Requires central clearing and exchange trading for derivatives that can be cleared and provides a role for both regulators and clearing houses to determine which contracts should be cleared. Requires the SEC and the CFTC to pre-approve contracts before clearing houses can clear them.

 Safeguards for Un-Cleared Trades: Requires traders post margin and capital on un-cleared trades in order to offset the greater risk they pose to the financial system and encourage more trading to take place in transparent, regulated markets.

 Market Transparency: Requires data collection and publication through clearing houses or swap repositories to improve market transparency and provide regulators important tools for monitoring and responding to risks.

HEDGE FUNDS

Hedge funds worth over $100 million will be required to register with the SEC as investment advisers and to disclose financial data needed to monitor systemic risk and protect investors.

Why Change is Needed: Hedge funds are responsible for huge transfers of capital and risk, but generally operate outside the framework of the financial regulatory system, even as they have become increasingly interwoven with the rest of the country’s financial markets.

As a result, no regulator is currently able to collect information on the size and nature of these firms or calculate the risks they pose to the broader economy. The SEC is currently unable to examine private funds’ books and records or take sufficient action when it suspects fraud.

Raising Standards and Regulating Hedge Funds

 Fills Regulatory Gaps: Ends the "shadow" financial system in which hedge funds and other private pools of capital operate by requiring that they provide regulators with critical information.

 Register with the SEC: Requires hedge funds to register with the SEC as investment advisers and provide information about their trades and portfolios necessary to assess systemic risk. This data will be shared with the systemic risk regulator and the SEC will report to Congress annually on how it uses this data to protect investors and market integrity.

 Independent Custody of Client Assets: Requires investment advisers to use independent custodians for client assets to prevent Madoff-type frauds.

 Greater State Supervision: Raises the assets threshold for federal regulation of investment advisers from $25 million to $100 million, a move expected to increase the number of advisors under state supervision by 28%. States have proven to be strong regulators in this area and subjecting more entities to state supervision will allow the SEC to focus its resources on newly registered hedge funds.

INSURANCE

Office of National Insurance: Creates a new office within the Treasury Department to monitor the insurance industry, coordinate international insurance issues, and requires a study on ways to modernize insurance regulation and provide Congress with recommendations.

Streamlines the regulation of surplus lines insurance and reinsurance through state-based reforms. 8

CREDIT RATING AGENCIES

Establishes a new Office of Credit Rating Agencies at the Securities and Exchange Commission to strengthen regulation of credit rating agencies. New rules for internal controls, independence, transparency and penalties for poor performance will address shortcomings and restore investor confidence in these ratings.

Why Change is Needed: Rating agencies market themselves as providers of independent research and in-depth credit analysis. But in this crisis, instead of helping people better understand risk, they failed to warn people about risks hidden throughout layers of complex structures.

Flawed methodology, weak oversight by regulators, conflicts of interest, and a total lack of transparency contributed to a system in which AAA ratings were awarded to complex, unsafe asset-backed securities - adding to the housing bubble and magnifying the financial shock caused when the bubble burst. When investors no longer trusted these ratings during the credit crunch, they pulled back from lending money to municipalities and other borrowers.

New Requirements and Oversight of Credit Rating Agencies

 New Office, New Focus at SEC: Creates an Office of Credit Ratings at the SEC with its own compliance staff and the authority to fine agencies. The SEC is required to examine Nationally Recognized Statistical Ratings Organizations at least once a year and make key findings public.

 Disclosure: Requires Nationally Recognized Statistical Ratings Organizations to disclose their methodologies, their use of third parties for due diligence efforts, and their ratings track record.

 Independent Information: Requires agencies to consider information in their ratings that comes to their attention from a source other than the organizations being rated if they find it credible.

 Conflicts of Interest: Prohibits compliance officers from working on ratings, methodologies, or sales.

 Liability: Investors could bring private rights of action against ratings agencies for a knowing or reckless failure to investigate or to obtain analysis from an independent source.

 Right to Deregister: Gives the SEC the authority to deregister an agency for providing bad ratings over time.

 Education: Requires ratings analysts to pass qualifying exams and have continuing education.

EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE

Strengthening Shareholder Rights

Giving shareholders a say on pay and proxy access, ensuring the independence of compensation committees, and requiring public companies to set clawback policies to take back executive compensation based on inaccurate financial statements are important steps in reining in excessive executive pay and can help shift management’s focus from short-term profits to long-term growth and stability.

Why Change Is Needed: In this country, you are supposed to be rewarded for hard work.

But Wall Street has developed an out of control system of out of this world bonuses that rewards short term profits over the long term health and security of their firms. Incentives for short-term gains likewise created incentives for executives to take big risks with excess leverage, threatening the stability of their companies and the economy as a whole.

Giving Shareholders a Say on Pay and Creating Greater Accountability

 Vote on Executive Pay and Golden Parachutes: Gives shareholders a say on pay with the right to a non-binding vote on executive pay and golden parachutes linked to corporate takeovers. This gives shareholders a powerful opportunity to hold accountable executives of the companies they own, and a chance to disapprove where they see the kind of misguided incentive schemes that threatened individual companies and in turn the broader economy.

 Nominating Directors: Gives shareholders proxy access to nominate directors. Providing shareholders a greater role in choosing directors can help shift management’s focus from short-term profits to long-term growth and stability.

 Independent Compensation Committees: Standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants in order to strengthen their independence from the executives they are rewarding or punishing.

 Clawbacks for Executives at Public Companies: Requires that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that don’t comply with accounting standards.

 SEC Review: Directs the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.

SEC AND IMPROVING INVESTOR PROTECTIONS

Every investor – from a hardworking American contributing to a union pension to a day trader to a retiree living off of their 401(k) – deserves better protections for their investments. Investors in securities will be better protected by improving the competence of the SEC, creating uniform standards for those providing customers investment advice, and giving investors the right to sue those who commit securities fraud.

Why Change Is Needed: The Madoff scandal demonstrated just how desperately the SEC is in need of reform. The SEC has failed to perform aggressive oversight and is unable to understand the very companies it is supposed to regulate. And investors have been used and abused by the very people who are supposed to be providing them with financial advice.

SEC and Beefed Up Investor Protections

 SEC Reforms: Mandates an annual assessment of the SEC’s internal supervisory controls and a biannual GAO study of SEC management.

 Uniform Standards for Advisors: Mandates uniform standards for anyone providing customers investment advice, eliminating different standards for broker‐dealers and investment advisers. Small investors should have uniform protections regardless of the title of the financial professional advising them has.

 Best Interest of the Client: Brokers who give investment advice will be held to the same fiduciary standard as investment advisers – they will be required to act in their clients’ best interest.

 Aiding and Abetting: Investors will be able to sue persons who help commit securities fraud.

 New Advocates for Investors: Creates the Investment Advisory Committee, a committee of investors to advise the SEC on its regulatory priorities and practices as well as the Office of Investor Advocate in the SEC, to identify areas where investors have significant problems dealing with the SEC and FINRA and provide them assistance.

 Funding: The self-funded SEC will no longer be subject to the annual appropriations process.

SECURITIZATION

Companies that sell products like mortgage-backed securities are required to retain a portion of the risk to ensure they won’t sell garbage to investors, because they have to keep some of it for themselves.

Why Change Is Needed: Companies made risky investments, such as selling mortgages to people they knew could not afford to pay them, and then packaged those investments together, called asset-backed securities, and sold them to investors who didn’t understand the risk they were taking. For the company that made, packaged and sold the loan, it wasn’t important if the loans were never repaid as long as they were able to sell the loan at a profit before problems started. This led to the subprime mortgage mess that helped to bring down the economy.

Reducing Risks Posed by Securities

 Skin in the Game: Requires companies that sell products like mortgage-backed securities to retain at least 10% of the credit risk. That way if the investment doesn’t pan out, the company that made, packaged and sold the investment would lose out right along with the people they sold it to.

 Better Disclosure: Requires issuers disclose more information about the underlying assets and to analyze the quality of the underlying assets.

MUNICIPAL SECURITIES

Municipal securities will have better oversight through the registration of municipal advisers and increased investor representation on the Municipal Securities Rulemaking Board.

Why Change is Needed: Financial advisers to municipal securities issuers have been involved in "pay-to-play" scandals and have recommended unsuitable derivatives for small municipalities, among other inappropriate actions, and are not currently regulated.

Better Oversight of Municipal Securities

 Registers Advisors and Brokers: Requires SEC registration for financial advisers, swap advisers, and investment brokers – unregulated intermediaries who play key roles in the municipal bond market.

 Regulates Advisors and Brokers: Subjects financial advisers, swap advisers, and investment brokers to rules issued by the Municipal Securities Rulemaking Board and enforced by the SEC or a designee.

 Puts Investors First on the MSRB Board: Gives investor and public representatives a majority on the MSRB to better protect investors in the municipal securities market where there has been less transparency than in corporate debt markets.

CREATING A 21st CENTURY WORKFORCE FOR 21st CENTURY REGULATORS

This bill will take a look at a key hurdle for creating competent regulatory agencies: competent staff.

Why Change is Needed: The new proposals will create three new agencies – the Financial Institutions Regulatory Administration, the Agency for Financial Stability and the Consumer Financial Protection Agency – each posing staffing challenges that will determine the regulators’ success or failure.

A Better Work Environment to Attract Better Staff: The bill will set up a panel to look at the staffing needs of the three new agencies based on the successful panel that helped the IRS to improve their hiring practices. The advisory panel will last only three years to see that these agencies are able to attract, cultivate, and retain competent staff qualified to regulate complex, 21st century financial institutions.

Political Winds Shifting?

nospam@example.com (Karl Denninger) — Wed, 04 Nov 2009 08:38:00 -0500

Perhaps.

Two Democrats - governors - were ousted.

Why?

Taxes, lack of jobs, in short: It's the economy stupid!

The fiscal side of the picture is done. Those who are looking for some sort of fiscal stimulative posture out of DC? Forget about it. We had three of those (at least) which have been announced, and they have done nothing.

Now here's the challenge: The American People have had it with the job loss and with the vast and fast deterioration of their personal balance sheets and, more importantly, their cash-flow statements.

But these problems were two decades in the making with both Democrat and Republican governments. They are to a large degree the consequence of bogus and even fraudulent credit creation - practices that were not intended to help the economy along at all, but rather were designed to siphon off the wealth of ordinary Americans and hand it to a fistful of oligarchs.

This behavior has not only been tacitly approved by the silence of Washington DC it has been explicitly promoted and advanced by both Washington DC and The Federal Reserve - on both sides of the aisle.

Indeed, when it comes to Washington DC the government even went to court to block state laws that would have stopped a big part of the mess from happening - and succeeded.

Worse, the policies of both the Bush and Obama administrations have not addressed the problem nor forced the bad debt created by these policies out of the system - the millstone remains around the economy's neck!

You can't get away from the issues - "more taxes" isn't going to sell in a world of 10%+ unemployment and, whether the government claims it or not, high inflation in the prices charged for food and fuel over the last decade. The impact of this was masked by the fraudulent credit creation and asset bubble in houses, but now that's gone, laying bare the decimation of the average American's cash flow statement. The asset bubble intentionally blown in the stock market by Bernanke and his pals Geithner and Obama cannot make up for this; indeed, irrespective of the "big rally" the average American is still missing 30% or more of his money from the 2007 peak!

Yet now the budget deficits and fiscal debt of the government - the "big carpet" under which we shoved all the defaults of the private sector that should have bankrupted every large financial institution in the nation, now demands to be paid. You can either raise taxes dramatically or cut services dramatically, but in the end you cannot indefinitely grow debt faster than GDP, even if you're the government of the United States.

The bottom line is that the American People want "blood", and in fact they deserve it.

We the people, in the main, were scammed.

We didn't just make bad decisions, we were lied to.

We didn't just buy bubble houses, they were sold to us with outrageous misrepresentations of alleged "growth" in price to come; witness David Lereah's two books, and he was NAR's head economist!

We the people failed to understand the 6th grade math, but the banksters and government told us that there was no such thing as immutable exponential functions at work in the economy, and that this growth in a finite world - the world in which we live - was in fact possible.

The pain that is due to be taken has not been worked through the system, and in fact government has made the situation worse. Economic contraction is not over, despite the claimed "GDP" number - as I've said repeatedly if you go to the bank and borrow $20,000 on your credit card you are poorer, not richer, even though you might then spend that $20,000. Cook the books all you want but it won't change the average American's income - only a good job that pays enough to stay ahead of ramping mandatory personal spending does that.

Most of America has the true cost of health care ("insurance") hidden from them. Those who actually write the checks have seen those costs rise 10, 15, even 25% in a single year - every year for the last decade. You who are "W2" employees don't see it directly, but it in fact comes straight out of your pay, as employers do not offer you the salary increases you would otherwise receive - that money is instead diverted to your "free" insurance.

The Republican Party has a tough road here. They need to break up the oligarchs, and deal with the fact that the math is never wrong - and the sooner we deal with it, the better.

It won't be an easy sell, but if they fail to make it, or worse, win on the back Obama's refusal to deal with the banksters and then continue the "anything goes in ripping off America" policies that both Bush and Obama have countenanced and in fact explicitly endorsed, we will suffer a political and economic collapse unlike anything previously seen in the world - a catastrophe worse than Germany in the 1930s.

"May you live in interesting times" has new meaning this morning.....

"Doing The Same Thing Over And Over": War

nospam@example.com (Karl Denninger) — Sat, 31 Oct 2009 19:48:00 -0400

I wish this was about economics.

It is only tangentially so.

No, this is about the war in Afghanistan. The FT reports:

Some time in the next two weeks, Mr Obama is likely to bring months of agonised deliberation to a close when he decides how many more troops to send to Afghanistan. The number, which could be as high as the 40,000 recommended by Stanley McChrystal, the general in charge, will be analysed minutely for what it can achieve on the ground in Afghanistan.

But as Mr Cheney’s contrasting observations illustrate, the more influential war is being fought politically on the ground in America. Somehow, the compulsions of US politics have brought the candidate who electrified America by promising to pull out of Iraq to a position where many of his most ardent backers fear he may be about to get America into another Vietnam.

We have already done that.

We must as a nation choose whether we are going to prosecute this as a war, or leave.

We have not fought a war since WWII. None of the engagements we have entertained as a nation since with our military power have been wars, irrespective of what someone has called them.

There is only one way to fight a war. You commit your nation's resources - material and the most precious of all, human - to the complete obliteration of your enemy.

You mass those resources against each objective in turn, without reservation, without holding back, without care for collateral damage or world opinion.

You do so until your adversary sues for peace, not because it is the political thing to do, not for expedience, but for one and only one reason: they're tired of dying.

There is no "armistice" or "cease fire" in a war. There is only victory or defeat. There is only death or life. Collateral damage, including the loss of innocent life, is a known price that will be paid, although the toll is not of concern in that regard - only the certainty that it will occur.

If we are justified in utilizing military force - the last resort of any nation in the resolution of grievance - then we are justified in utilization of every bit of force we can muster, without mercy, without limit, without fear or favor.

If we are not justified in doing so we have no business placing our nation's resources, including and most especially the lives of our men and women in uniform, in harm's way, since each such excursion guarantees that some of them will not come home to their families and friends.

This nation once knew these facts. We fought two World Wars, the first of which was arguably without risk of invasion or damage to our territory, the second of which began the same way but escalated dramatically on December 7th, 1941. In both cases we mobilized not just our men and women in uniform but also every man and woman at home - we realigned factories to produce the machines of war, we rationed goods and services in our nation, we sacrificed. We applied the full force of this country and its people to the task at hand, and we were victorious. In the process we all honored those who fought, for behind each infantryman on the ground or airman in the sky there were a hundredfold more at home building the guns, ammunition and fighting machines - day and night - that they required. When each of those who died on the battlefield fell, they gave their life knowing that our nation and her resources - all of them - were behind each and every fallen soldier, without limitation or exception.

If we are to press a military engagement in Afghanistan or elsewhere we owe it to our fighting men and women to approach that engagement with no less vigor than we did in World War I and II.

We dishonor those who serve in our uniform when we ask them to fight and die with less than a full commitment of our national resources to the task we set before them.

These fighting men and women, each and every one of them, takes an oath to uphold not an office, nor a person, but our Constitution - the defining difference between America and all other nations.

We must honor them in return, in that when our President and Congress determine that the use of military might is our right and duty as a nation, we the people must demand and our President and Congress must make a full declaration of war and the commitment of every resource within our nation, both military and civilian, without reservation.

President Obama, do what your predecessors did not in Korea, Vietnam, Kosovo and Iraq.

Either fully commit our nation to war with all of her resources or bring our troops home.

Ending "Too Big To Fail"?

nospam@example.com (Karl Denninger) — Wed, 28 Oct 2009 08:17:00 -0400

The WSJ reports:

WASHINGTON -- A deal between the Treasury Department and a key House Democrat would give the government sweeping new powers to police the country's largest financial companies, including the ability to seize and break up failing companies and order large firms to shrink.

Uh huh.

The proposal would require financial firms with more than $10 billion of assets to pay for the unwinding of a collapsed competitor. The measure would also give the Federal Reserve the power to direct any large financial holding company to sell or transfer assets or stop certain activities if the central bank determined there could be a "threat to the safety and soundness of such company or to the financial stability of the United States." This suggests the Fed would win new authority to order companies to shrink.

The Fed.

The same Fed that ignored the subprime lending fiasco? The same Fed that gave a rubber stamp to a black-letter unlawful merger between Citi and Travelers, then lobbied for retroactive passage of Gramm-Leach-Bliley to legitimate it? The same Fed that permitted primary dealers and other large financial institutions under its supervision to transact credit default swaps with AIG despite the fact that AIG's financial products group was inadequately capitalized (by a factor of 50 or more) to cover those transactions?

The Hill of course sees it differently:

The Financial Services Committee and the Obama Administration are committed to ensuring that the taxpayers are never again called upon to take responsibility for Wall Street’s business decisions. The bill creates a strong, inter-agency council to monitor and oversee stability of the financial system and address threats to that stability. The bill provides strengthened supervision for large, interconnected financial firms to prevent failure. A new resolution regime will ensure that firms that fail despite these measures will do so in a way that minimizes impacts on taxpayers, the health of the financial system and the overall economy.

Let's not mince words - there is good in here. Among the good parts of this bill are that "too big to fail" will become formally invalid as public policy.

It requires the failed firm's creditors and shareholders to bear "first loss", and, if the brief is to be believed, only if they are entirely wiped out and there remains a shortfall will assessments be laid - on other large financial institutions, not the taxpayer. This should result in large amounts of "social pressure" to stop stupid actions, since the risk of them can fall on other large market participants.

It requires that securitized products retain 10% of the risk (which can be reduced to 5% but not lower by regulators) of any product so securitized, stopping the "pass it all on and watch the bomb go off on the back of the fool who you sold it to" game.

And finally, it requires approval of the Treasury Secretary for The Fed's employment of 13(3) authority - the blanket "we can lend to anyone" authority that The Fed has cited (and in my opinion both abused and exceeds the limits of) during this crisis. In addition, it prohibits "special facilities" entirely - that's a real improvement.

Left unanswered is whether there are criminal penalties imposed for violations. My expectation is that like the rest of the "toothless tiger that roared" games out of Washington DC the critical "or else" is missing, but we'll see once the markup is complete.

I cannot endorse this as written, but I can say that it is a vast improvement over what we have now, and what has happened to date. For The Fed to have that primary seat at the table and the "final backup authority" they must be subject to regular and comprehensive audit, so as to insure that the people can see they are complying with the strictures of law - otherwise any so-called "restrictions" are nothing other than a joke.

In addition it is critical that this law include criminal penalties for violations as any failure to follow the constraints laid down will of necessity expose the taxpayer to enormous loss (as has occurred in this instance), and as there is no reasonable civil penalty available in such a circumstance, severe federal criminal penalties are appropriate.

We must not only end "too big to fail" we must also end "too bribed to give a damn", which has permeated the entirety of Washington DC over the last three decades.

The bill being debated in committee hearing today (and presumably being marked up soon) is a good start, but without the addition of full "sunshine" and criminal penalties for violations to the mix it will remain merely a set of suggestions that can and will be ignored when it suits the "rich and powerful", just as has been "Prompt Corrective Action" and the existing bevy of alleged "laws" that supposedly prohibit and should have prevented the outrageous practices that led us into this mess.

Heh Dodd You TWIT!

nospam@example.com (Karl Denninger) — Mon, 26 Oct 2009 13:02:09 -0400

WTF is wrong with this clown?

WASHINGTON (MarketWatch) - Senate Banking Committee Chairman Christopher Dodd on Monday introduced legislation that would immediately freeze credit card interest rates on existing balances after he complained that financial institutions weren't supporting a new credit card act that is scheduled to take effect in February. "And no sooner had it been signed into law, but credit card companies were looking for ways to get around the protections this Congress and the American people demanded," said the Connecticut Democrat. "This bill would end those abuses and further protect customers today."

Dodd has been giving Dirty Sanchez's to the banking lobby for a very long time and this is just more BS "hue and cry".

Freeze balances NOW? This after Citibank has jacked huge numbers of people to 29.9% for both default and non-defaulted balances without regard to whether they're late? You know, this notice that I have received a flood of copies of?

If Dodd wanted to actually help consumers what he would propose and insist be pased is a federal usury law that provided for a hard cap on interest rates.

Cap all rates at Fed Funds + 10% - period.

Dodd .et.al. would also force an immediate and permanent mark-to-market system upon the banks, ending immediately and permanently the 20, 30, 40, even 50% losses the FDIC is taking as a direct consequence of BS "aggressive" accounting that has led these institutions to outrageously overvalue their so-called "assets."

If you can't make money as a bank on a ten percent spread between "borrow short, lend long" in a market-priced world for your assets you're either (1) an idiot and deserve to fail due to stupidity or (2) trying to force those who are responsible users of credit to pay for those who are deadbeats - that is, those NON-CREDIT WORTHY customers who you gave credit to ANYWAY, smug in the knowledge that you could rip SOMEONE off, whether it be the taxpayer or your other customers, to paper over your "decision."

Which do you think it is folks?

A real solution is not on the table as "Dodd's Legislation" because Chris Doddering and Bwarney Frank continue to kneel before Jamie Dimon .et.al. and perform obscene acts, selling you, I, and the rest of America down the river at every opportunity in exchange for another bribe, er, campaign "donation", directly or via some lobbying interest.

To The Republicans: Stop Lying

nospam@example.com (Karl Denninger) — Tue, 15 Sep 2009 14:49:00 -0400

Or should I be far more rude?

WASHINGTON (MarketWatch) - Republican lawmakers on Tuesday gathered on Capitol Hill to promote their financial regulatory reform legislation seeking to expedite the bankruptcy process and create an independent trust to oversee American International Group Inc., General Motors and other large bank bailout recipients. "We need to end the bailouts once and for all," said Rep. Spencer Bachus, R-Ala. Bachus and other GOP House members expressed concern that the Obama administration plan and efforts under way by Democratic lawmakers on Capitol Hill to reform the financial system will enshrine a culture of continued bailouts

Oh really?

Where is the legislation to re-instate Glass-Steagall?

To claw back the more than $100 billion passed to banks outside of regulatory and legal authority via AIG and The Federal Reserve?

To punish the decade-long fraud practiced in the "securitization" of trash along with the knowing sale of same - now evidenced not only by Goldman (which it has been reported repeatedly was shorting securities it was selling to customers) but, as I have recently outlined, an active lawsuit against a bank with an active and "good standing" US Charter which called something they were selling at the time (privately, of course) "Vomit"? (Fraud is still supposed to be illegal; we need no NEW laws to put a stop to that crap.)

To force the current charade of "extend and pretend" being practiced by the financial industry to end and those who have huge embedded (and/or off-balance sheet) losses to own up to them and, if it bankrupts them, so be it? (Again, fraud remains illegal - I think!)

To end the practice of buying "agency securities" by The Fed, the disgorgement of same, and the mark to market that this forces - and, if The Fed is in fact holding trash and thus is rendered insolvent, to force their dissolution?

To audit, in full and to the line item, each and every item claimed to have been loaned, bought, sold or otherwise transacted through any and all Fed programs, with the data being released to the public?

To fix both Fannie/Freddie and FHA/VA lending programs so they do not grant approvals with "back end" ratios over 36%, to require 20% down payments for all Fannie and Freddie paper, and meaningful cash (not "home buyer credit" or other dodges) down payments for FHA and VA? (You are aware that the FHA's current delinquency/default rate is over 20% and these agency computer-based underwriting programs will approve loans with 50% and higher DTIs, yes?)

To force banks to hold one dollar of actual capital against every dollar of unsecured lending?

This is just more mealy-mouth BS.

I'll get impressed when I see indictments, clawbacks, honest balance sheets, the end of unsustainable housing lending by Fannie, Freddie and the FHA, a bill to reimpose Glass-Steagall, the enforcement of anti-trust laws already on the books and more.

All I see so far from you is more lies and deceit - exactly what Obama and his administration are peddling.

Wake the hell up - America told you loud and clear on September 12th that this sort of "business as usual" and "a different color on the same policy" WILL NOT DO.

Do we need to bring TWENTY MILLION Americans next time - and refuse to leave until you ALL resign?

Republican Dirty Tricks

nospam@example.com (Karl Denninger) — Fri, 11 Sep 2009 09:48:00 -0400

I'm rather annoyed this morning.

Last night I was sent the following link: http://www.republicanassemblies.org/outrage-healthcare-propaganda-on-congressional-switchboard/

with the claim that "NFRA called the Congressional switchboard."

The number dialed was an 800 number.

The problem?

Congress doesn't maintain an 800 number!

Is the message as described and taped? Yep. Guess what - that 800 number is owned by an organization called "Families USA." Who are they? Hell if I know, but they're a DC-based "organization" that is obviously involved in the Health Care crusade on the Democrat side of the table.

For those who are unaware, "800" numbers are not really "free." The owner pays.

Does it matter? Nope. The real Congressional switchboard, 202-224-3121, is answered by a live person with no "recording" first: "US Congress how can I help you?"

How do I know this is the real number? Because I've called it dozens of times over the last year and a half when I wanted to reach a specific Congressional office and didn't have the phone number handy, hollering about this or that connected to the financial meltdown, and because it is printed at the bottom of the http://www.house.gov, the official web site of the United States House of Representatives.

This sort of "in-your-face lying" must STOP.

To the Republicans and their "affiliated" organizations such as NFRA: I have a health care reform plan that will actually work, and I don't want credit for it - just do it, damnit.

(By the way, I have had a conversation with the NFRA - they admit this was an error and are "correcting it.")

There has been zero interest or thought from Congress on a plan that will actually increase competition and hold down costs. That's because both sides of the aisle are working from the scripts handed to them by their campaign contributors from both the AMA and "Big Pharma", neither of which want real competition and both of which are hell-bent and determined to screw you to Mars with various cross-subsidization schemes, scams and outright rip-offs.

America pays for the development of every new technology that has come down the medical pipe in the last 20 years. All of them. We pay, the rest of the world gets to use for "free." Then the drug companies get laws passed banning "re-importation" so that the free market is prevented from doing what it's supposed to do - arbitrage the sort of price-fixing that is found in places like Canada so costs come down here.

But no! These companies sell a drug in the US for $20/pill and $2/pill across the border, then get a law passed to prevent anyone from buying at the $2 price and selling here for $3, applying a free market discipline to the sort of discriminatory conduct that every single medical device and drug maker relies on to gouge people.

You can argue that "we wouldn't have those drugs otherwise."

Is that a sound argument?

Perhaps, but that's for the market to decide.

The drug companies are free to charge Canadians $2 for a pill they charge $20 for here. But the doctrine of a "true sale" says that once a Canadian buys that pill for $2 they should be free to sell it to anyone they want, for any amount of money they want, no matter where they live.

"True Sale" is a capitalist, free market doctrine. Once I buy a thing its MINE.

Would you tolerate a car company telling you that you can't sell your Chevy for less than you paid for it, thereby destroying its value to anyone but you? Of course not. How about your pair of shoes? Can't be resold or given away. Your boat? Your house?

No, no, no and no.

The drug companies and other health-care-related organizations, including the AMA who rations the number of doctors that can be "licensed" to guarantee scarcity (and thus prop up the price), the device and drug makers (who intentionally obstruct free-market principles by getting laws passed that in any other field would be deemed an illegal restraint of trade and contrary to the doctrine of sale) and the trial lawyers (who want to claim that we can call something "practicing" medicine yet use a strict liability standard for resolving bad outcomes) are all pushing "answers" that are intended to screw you, the common American, while benefiting only their constituencies, using the threat of YOUR DEATH if they don't get their way.

Don't fall for it, and definitely don't fall for the Republican TRASH that is publishing and promoting an outrageous lie in an attempt to derail an honest debate on the issues.

An Address To Our Schoolchildren

nospam@example.com (Karl Denninger) — Tue, 08 Sep 2009 08:34:00 -0400

My Fellow Americans.

Today you heard from our President, Barack Obama. Some of your parents voted for him, and most of the rest of the country voted for his opponent, John McCain.

What you heard from President Obama today was a plea for you to pay attention in school and finish your education.

What you did not hear from President Obama today was that your government, together with your school, has refused to provide you with the knowledge necessary for you to understand what has happened to this nation and its economy over the last 30 years.

This is not an accident.

In math class you are taught "the power function", which you think of as squares, cubes, and similar. It is written as 4^2, or, expanded, as 4 x 4.

But what you're not taught is how this applies to finance, even though every household and every American has their own financial challenges, and every person in America should understand how finance works.

Neither Republicans or Democrats want you to see this graph. This is how much each American, from 1970 to today, is in debt because of our government's policies:

2009's "fiscal year" (that is, the year for accounting purposes) doesn't close until the end of this month. But as of today, this graph is correct (and will only get worse in the next three weeks.)

Let me be clear: In the last two years your mother, father, school teacher, grandma and grandpa have stuck each and every American with $10,000 in personal debt, and since 2000 the amount of debt you have had forced upon you has doubled.

This debt was forced upon you not because of the need to defend this country from a foreign invader such as occurred on December 7th 1941 or because of the War on Terrorism, but rather because a bunch of greedy men and women on Wall Street and Washington DC, both Democrat and Republican, lied, cheated and stole money from ordinary Americans for more than a decade.

You have undoubtedly been taught that stealing is wrong, and indeed, that if you steal you can go to jail. But you need to understand that the law applies only to "little people" like you. If you work on Wall Street, own a fancy suit and private airplane, and steal millions and millions of dollars from people worldwide, instead of going to jail you will be rewarded with a huge bonus and be able to buy a really big boat, while the cost of your stealing will be forced on the children - and unborn - throughout America.

That's you, by the way.

You need to understand that this is not a "Democrat" or "Republican" thing. Indeed, both Democrats and Republicans in Washington DC know about this and both are equally responsible for letting it happen. Both Democrats and Republicans voted for a law called "TARP" and allowed The Federal Reserve to take actions over the last two years that were responsible for you having to pay that extra $10,000. They voted for this law even though ordinary Americans just like you told them not to vote for it - in fact, for every person who called their offices or sent an email to tell them to vote "yes", 100 people called, faxed or emailed and told them to vote "no".

They voted "Yes" anyway and as a result you must pay that $10,000 in the future, whether you want to or not, so that those who robbed, cheated and stole can have their yacht and your parents can lose their house to foreclosure.

President Bush signed that law and President Obama refused to step in and stop it when he became President. President Bush is a Republican and President Obama is a Democrat. Do not be deceived - both major political parties are equally responsible for this outrage - and for forcing you to pay.

The worst part of the graph above is that this is not all of the debt you must pay. In fact your "share" of the debt is five times what's shown on that graph.

That's right my fellow Americans - you are in debt for more than $200,000 - each and every one of you, including every school child in America.

Why?

Because our government is lying about how much everyone owes. See, our government has promised everyone free medical care and free retirement money. But our government doesn't have the money to pay for that, since every penny that the government has must come from either borrowing or taxing, and the government isn't forced to follow the law when it comes to honest accounting - that is, honest math.

When you cheat on your math test in school you get an "F".

But when the government cheats on its math they get re-elected, because our schools refuse to teach students just like you how math applies to finance, and as a result 95% of Americans don't understand that they're being screwed to the tune of $200,000 each.

That's because the schools are run by the government, and for that reason the government controls what you learn - and what you don't.

Our debt is supposedly $11 trillion dollars. But the money the government must have in the future to pay for those free benefits, Social Security and Medicare, doesn't exist. The former Comptroller of the Currency of America (that's a fancy word for the chief guy who keeps track of the books), David Walker, has said that the real debt is more than $53 trillion dollars, or almost five times what you see in the graph above.

Why was this allowed to happen?

It really is quite simple:

They're big, and you're small. They're right, and you're wrong.

Just because they said so.

While you were out playing in the back yards and playgrounds of America both Democrats and Republicans were making promises they could not keep. Instead of raising taxes right now for whatever they wanted to promise they instead decided to send you the bill, and your parents went along with it.

So when you come home from school this afternoon say "Thanks" to your Mom, Dad, Grandpa and Grandma for selling you into slavery.

For obligating you to pay for the stealing that has gone on for nearly ten years on Wall Street and in Washington DC.

For allowing those very same lies to cost your family (or that of someone you know and love) their house, their job, and their future.

And finally, make sure you thank your Teachers and Principal for not teaching you the math you need to be able to understand what is really going on with your government, so you don't get mad enough to put a stop to it - or demand that your parents do so.

After all, they're right and you're wrong.

They're big and you're small.

They, including your school teachers, principals and school boards, won't teach you about how math applies to all of this, because if they did, they couldn't lie to you any more and you might revolt (quite literally) - either now or later.

So sit back and enjoy your childhood; your time to become a slave, when you leave school and start having to pay that $200,000 by having it taken from you in the form of taxes will be here soon enough.

Wall Street and the politicians, both Democrats and Republicans, thank you for quietly accepting your role as a slave to pay for their yachts, along with the lies, cheating and stealing that have been going on literally every day for more than ten years.

Now sit down at your desk, shut up and behave while your teachers show you only what the government wants you to know.

Wall Street and Washington DC are relying on you, our nation's youth, refusing to demand the truth.

They're sure you won't disappoint them.

An Ill Wind Blows From Japan

nospam@example.com (Karl Denninger) — Sun, 30 Aug 2009 13:23:00 -0400

Bloomberg (and everyone else) is reporting that The LDP of Japan has suffered a crushing defeat, calling it a "bloodless revolution":

Hatoyama, who quit the LDP in 1993, has pledged to revive an economy emerging from its deepest recession since World War II by boosting child-care spending, cutting taxes and curtailing the power of bureaucrats. His grandfather founded the LDP in 1955 and became the first of that party’s 22 prime ministers.

“This election has been all about changing the government,” Hatoyama said in a nationally televised press conference. “Everything starts now.”

Indeed it does.

Before the election The Democratic Party of Japan had talked assiduously about the avoidance of US Debt Hegemony (read: Japan may stop buying or even sell US Treasuries) and in addition they made noises unthinkable just a few years ago - their stance towards China, long thought of as an arch-enemy of Japan, is quite friendly and cooperative.

While Bloomberg and others seem to be reporting that the Japanese debt and stock markets will cheer this win, that is not necessarily something that I would be inclined to chase in our markets if indeed it translates over here at all.

There is a tremendous amount of contradiction out in the marketplace in regards to what this means. I have seen articles over the last two months claiming that this win would mean dramatic increases in bond issuance, and then others claiming that the party is adverse to bond issuance. Which is the truth? Who knows - but what has come through loud and clear is an unmistakable tenor that the DPJ is well-aware of that the policies of the last twenty years, adopted on the back of the Nikkei's and Japan's property market crash (gee, anyone see parallels?) have not worked and have instead stagnated the Japanese economy for close to two decades.

The DPJ has audacious goals in terms of social spending. One way to meet them could be to sell some or part of their US Treasury holdings to raise cash (oops!), which would have dramatic and immediate impact in our Treasury market. It could also do interesting things to the Yen/Dollar balance, but between that and trying to sell huge quantities of additional debt into the Japanese market, I suspect the former, rather than the latter, would be the wiser policy - for them.

More ominously a link-up between the Yen and Yuan, unthinkable with the former government, now looks possible. Create a basket-of-currency settlement system over in Asia with the Yen and Yuan as the core elements and the US immediately loses control of the game we've been trying to run with the banksters and fraud-laced credit games in the United States.

That which cannot continue forever won't, and I suspect we're about to get a lesson in reality from our friends over in Japan and China - a lesson we may not like at all.

Time is drawing short for The US to clear The Bezzle on a voluntary basis, lest we be forced to as a consequence of US Debt rejection by the Asian nations that have, thus far, enabled us to continue this charade.

Without Comment (None Necessary)

nospam@example.com (Karl Denninger) — Sun, 23 Aug 2009 20:30:43 -0400

This is called "school", and there will be a final exam at the end of the class. Ignore the lesson doled out if you wish, but don't say you weren't warned.

Anyone who thinks this is just about health care has rocks in their head. Try this on for size:

This is not a new phenomena. In fact, U.S. bank-lying was found to have severely aggravated their last “banking crisis” in the 1990's through also consistently under-estimating/under-reporting the deterioration of their “assets”.

Given this context, it makes it even more obvious how utterly ludicrous and irresponsible it was for the U.S.'s accounting “cop” to create new rules to greatly facilitate lying about assets. If you want a heroin-addict to stop using heroin, then you shouldn't hand that person a jumbo-pack of syringes. Clearly this politically-motivated change in U.S. accounting rules had nothing to do with “more accurate” accounting – which was the false pretext of the banksters, and the media propaganda-machine which serves them.

The changes had two, and only two goals: allowing the weaker, Wall Street fraud-factories like Citigroup and AIG to pretend to be solvent, while for the slightly stronger members of the U.S. financial crime syndicate it was a “green light” to loot the same corporate treasuries which had just been stuffed full of U.S. taxpayer dollars.

People are waking up.

He goes on....

Throughout this decade, the Wall Street banksters plundered more than $100 BILLION in fantasy “profits” from their global Ponzi-scheme – and then needed roughly twenty times that amount in government hand-outs to avoid a sector-wide collapse last fall. Then, as soon as that crisis (temporarily) passed, they began to immediately loot the taxpayer hand-outs, as well. At the same time, all of these fraud-factories have slashed their dividends to shareholders, adding to the massive losses of these investors from the melt-down in share prices.

Yep.

Now go read the last three paragraphs in that last cite.

Sit down first.

USPS Threatens Health Pension Default

nospam@example.com (Karl Denninger) — Sat, 15 Aug 2009 16:59:26 -0400

Now this is interesting....

Anyone remember my commentary about a year ago regarding pension plans - including public pensions - being in serious trouble and ultimately being at risk of insolvency?

Weeeeeelllllll?

What happens when you have no money coming in but still have obligations going out? Specifically in this case, pension obligations regarding health care benefits for retired Postal Workers?

Gee, I wonder if the Obama Administration's push to put everyone into a situation where they can obtain Medicare might be related to this? Perhaps - just perhaps - this is one way they can stave off the implosion of one of the more-important public-sector benefit groups?

Perhaps.

By the way, USPS is reporting a 13% reduction in mailed volume, and I'm willing to bet that a huge part of that is from bulk (junk) mailers who have had their business implode or simply have had to slash marketing budgets. Less junk mail, less revenue, and with a bloated bureaucracy you can guess what comes next.

I have to wonder what the APWU (the largest postal-workers union involved, an affiliate of the AFL-CIO) along with the NALC, NRLCA and NPMHU (the other major unions involved) will think of this, and whether their memberships, along with the folks in civil service side, will consider that a year ago or thereabouts I issued a rather plain-spoken warning to union members everywhere outlining that exactly this sort of problem was soon to show up.

Oh, for some scale, these unions represent some 700,000 workers; this is not exactly "small potatoes."

I hate it when I'm right.

To The RNC: WAKE UP

nospam@example.com (Karl Denninger) — Tue, 11 Aug 2009 12:39:00 -0400

I just received one of the famous "fundraising calls" from the RNC.

They were soliciting people to give them money (and tried for slightly over $3k!) to "stop Obama's Health Care plan that will cost $1 trillion."

Oh boy did that poor sap get an earful.

I "explained" that:

$1 trillion is a lot of money. $12 trillion is a lot more, and that's how much the RNC has allowed to be pissed away backstopping and rewarding people who have stolen from the American people through bailouts and handouts, all of which have gone to the very people doing the stealing!
John McCain, to whom I gave a significant campaign donation, returned my favor by suspending his campaign to push through the EESA/TARP, a bill that by 300:1 margins the American People opposed.
If the Republicans are the party of the people why is it that they are allowing these bankers to steal over $30 billion dollars by re-ordering transactions to generate the MAXIMUM in overdraft fees? That's FRAUD and yet it was under a REPUBLICAN administration that this happened.
The Republicans have for years presented themselves as "conservatives" and the party of "family values." Why is it that "conservative" doesn't include calling for EACH AND EVERY ONE OF THESE SCAMMERS TO BE THROWN IN PRISON and WHY IS IT THAT I KEEP HEARING ABOUT SOME FLOOZY SCANDAL FROM THESE SO-CALLED "FAMILY VALUES" CHAMPIONS?
The ONLY difference between the RNC and DNC is that the DNC tells me up front that the Democrats intend to gang-rape me at the outset. The Republicans claim to intend to protect me, but then after I lower my guard I am violated from behind without warning. This is unacceptable but if I am forced to choose between being warned first and being lied to I'll take the warning thank you very little.

I made clear to THE RNC that if they want one thin dime from me they can call again when every Republican Senator and Representative masses together on the steps of the Capitol and states in one loud, clear voice for all in America and every TV Network:

We will do no more work nor vote for any other action until each and every one of the banksters, scammers and frauds that destroyed our American economy is under indictment and facing charges for their criminal acts, and the improperly granted bailout funds - all of them - are CLAWED BACK from these frauds to the maximum possible extent.

We will do no more work until the banks are required to process transactions in the order they come in and are PROHIBITED BY LAW from charging "overdraft fees" under any other than an existing, voluntarily-subscribed and OPTED IN overdraft LINE OF CREDIT.

We will do no more work until the scammers currently dumping garbage into the FHA are STOPPED AND PROSECUTED and the FHA program is reworked to require 20% DOWN PAYMENTS, 36% DTI maximums and FULL UNDERWRITING with CRIMINAL PENALTIES for false submissions irrespective of who makes them.

We will pledge to shut our pie holes about "family values" until each and every one of us can keep our penis in our pants, except when used to urinate or have sexual congress with our WIFE or SIGNIFICANT OTHER, and the HYPOCRITES in this regard have RESIGNED - all of them - forthwith.

I was a dyed-in-the-wool Republican since I first gained the franchise in 1981. I voted for Ronald Reagan, both Bushes and straight-ticket in state and local races for nearly 30 years.

The Republican Party is supposed to be the party of fair dealing, capitalism, honesty and supporting the effort of individual Americans to get ahead through their own hard work, living within the rule of law.

It has instead become the party of kleptocracy, the party of jackbooted corporatism abusing its power to stomp on the neck of the lower-income American, the party of fraud, the party of hypocrisy and the party of theft-at-gunpoint from every American in support of all of the above.

None of this is acceptable; the RNC's "core values" as practiced (as opposed to as-stated) read more like something out of Nazi Germany than anything I can reasonably associate with a legitimate political party in The United States.

If the Republican National Committee wants one dollar or more importantly, one vote from here on, those are my terms and conditions, and due to the blatant lies from their mouths over the last decade I will no longer accept promises of future action - instead, I demand that I see the action from the RNC and the Republican Caucus FIRST.

How To Make A Bad Mistake Worse (FNM/FRE)

nospam@example.com (Karl Denninger) — Thu, 06 Aug 2009 10:38:00 -0400

It has been reported that the administration is mulling over splitting Fannie and Freddie into a "good bank/bad bank" structure, or otherwise "taking" the bad part of their book onto the government directly (rather than implicitly):

The bad debts the firms own would be placed in new government-backed financial institutions -- so-called bad banks -- that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.

I cannot possibly over-emphasize how bad of an idea this is.

These two institutions currently hold some $6 trillion of mortgages - some 40% of the market. They have been riddled through with fraudulent accounting and outrageously-thin capitalization for years, and now, with defaults on so-called "prime" mortgages going parabolic, they threaten to exhaust even their "enhanced" $400 billion (combined) credit line through Treasury.

Fannie and Freddie need a permanent resolution. Unfortunately the government seems to think that the most logical form of that resolution is to protect those who invested in the trash paper issued by these institutions when they were engaged in dubious (at best) lending and underwriting by transferring the risk (and realized losses) to the taxpayer.

This is dead wrong, and perhaps disastrously so.

The Government needs to approach this in the following way:

Cut the existing firms loose including their debt. That is, leave it to the market. These firms never had an explicit backstop or guarantee, and providing one now is to reward the outrageous behavior of the firms and those who purchased recklessly from them.
Restructure and make possible enhanced issue from Ginnie Mae, the only GSE with an explicit government guarantee.
Force all loans issued through Ginnie to be limited to no more than 80% LTV, 36% DTI (or "back end" ratio), fully-documented for income and assets.
If the private market wishes to support high-LTV and high-DTI loans, let it - without any government support or backstop.

Yes, I realize this will cause the housing market to immediately correct to a rational price point in every market area in America. It will also cause those who purchased Fannie and Freddie paper without doing their own due diligence on their underwriting practices to recognize losses - quite possibly (for those who bought recent issues) very large losses.

So what?

Capitalism requires that you lose when you do foolish or even criminal things; without the market punishing bad decisions we don't have capitalism, we have kleptocracy.

Further, the CBO has already agitated to consolidate Fannie and Freddie onto the Federal Balance Sheet, so far without success. A formal program to take assets onto the Federal Government will trigger such a consolidation with certainty and will likely have a nasty impact on borrowing costs across the curve, and may even extend to a sovereign debt downgrade aimed at The United States.

IF the economy is truly improving then it is time for the market to recognize proper pricing for houses and mortgage money. Indeed, it is quickly becoming impossible for the outcome to be otherwise.

Should government attempt to continue to play "stuff the bad debt under the rug" through some sort of hybrid bad/good bank scheme the outcome is likely to be a breakout north in the longer end of the Treasury Curve, which will instantly trash mortgage pricing, irrespective of attempts to do otherwise, and inexorably tighten credit across the spectrum, instead of containing the damage to the housing market.

Government's approach to housing so far has been "extend and pretend" in the hope that housing would bottom first in 2008 and now in 2009. This strategy is now known to have failed, and it is time for our government to accept that housing prices must correct to historical mean values in order for our economy to recover on a durable basis.

We are quickly reaching the end of our rope as "bailout nation."

Politicians: Wake The Hell Up

nospam@example.com (Karl Denninger) — Fri, 31 Jul 2009 10:51:00 -0400

From Yahoo News:

On the eve of the August recess, members are reporting meetings that have gone terribly awry, marked by angry, sign-carrying mobs and disruptive behavior. In at least one case, a congressman has stopped holding town hall events because the situation has spiraled so far out of control.

“I had felt they would be pointless,” Rep. Tim Bishop (D-N.Y.) told POLITICO, referring to his recent decision to suspend the events in his Long Island district. “There is no point in meeting with my constituents and [to] listen to them and have them listen to you if what is basically an unruly mob prevents you from having an intelligent conversation.”

Really?

Well Tim, guess what: you work for your constituents, not the other way around.

It would appear to this commentator that the Reps and Senators who feel "besieged" by their constituents in town hall meetings might have paid better attention in September and October when they were told by 300:1 margins not to pass the EESA/TARP bill.

Or when they were told repeatedly to NOT try to advance amnesty for illegal aliens and refuse to enforce our immigration laws.

Or when they were told repeatedly to quit bailing out the irresponsible, looking the other way while the populace is looted systematically by those in the banking and other "coddled" industries.

There are a whole host of issues like this, and Congress seems to think (because it has gotten away with it for years) that ignoring the voters is not only acceptable, but is indeed a good idea.

Let me remind Mr. Bishop, along with the other Congressfolk, that the entirety of our government serves at our pleasure, not the other way around. Specifically, let me cite The Declaration of Independence:

....That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness....

Loud voices of dissent and sign-waving constituents are an unmistakable sign that our government has pressed the line of tolerance, and may, if it does not reverse course, exceed it.

And before someone claims that I am some sort of "right-wing nut" or similar, let me point out that the above text is not mine - they are the words of the founders of our nation, who believed that absent consent government does not exist - that's tyranny, not government.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

How close to the line has our government come?

I have no idea, but this much I do know: I do not want to discover that the line has been crossed.

Again:

Stop the looting and start prosecuting. The bankers, lenders and others in the "bizness side" have been literally robbing the people for over two decades. This includes both so-called "captains of the banking industry" and government officials who have looked the other way and in some cases (e.g. OTS) actively conspired to conceal the truth. Taxpayers have lost hundreds of billions as a consequence yet nobody has gone to prison for it nor are there even outstanding indictments. There is no reason on God's Green Earth why Goldman Sachs should be allowed to keep the roughly $13 billion in AIG pass-through money, nor why they should, having elected to become a bank holding company, be able to keep using their "VaR" risk model (instead of the more-stringent BANK risk limits.) There are dozens of examples; Goldman is hardly alone in this regard.
Quit voting FOR bills you did not read - end to end! There's no excuse for this. The Stimulus Bill, EESA/TARP and more - this is absolutely common behavior and it's outrageous. Sorry, there is no emergency that demands passing a 1,000 page bill until every member has read it from one end to the other, personally. If you need to pass something fast then it needs to be simple enough that it can be read in the hour you get before the vote! I don't care what the emergency is - if you haven't read the bill cover-to-cover the only acceptable vote is NO.
Quit spending more than you make. We are here because we have turned into a nation of Madoffs, and nowhere is it more evident than in Washington DC. We cannot have a sustainable economic recovery until the debt-to-GDP ratio is restored to a rational and sustainable ratio. This means much less spending; promising that which cannot be paid for is how we got into this mess.
Represent your constituents and TELL THE TRUTH. We're tired of being lied to, and government has done a LOT of lying. The idea that "the economy is improving" is just one example; go ask your unemployed constituents what they think of this claim. Fact: The economy stinks and it stinks because Washington DC conspired to blow a bubble after the 2000 tech implosion. You're culpable; take responsibility and do the right thing instead of trying to blow air into a popped balloon!

Our government has become an unacceptable and unaccountable den of liars and thieves, and the people are getting damn tired of it. The evidence of extreme dissatisfaction, which may rise beyond the soapbox and ballot box if this trend is not reversed and soon, is clear. Nobody with a shred of intelligence wants to see the inevitable outcome of a government that refuses to follow the law itself, refuses to prosecute criminal wrongdoing by favored parties, and refuses to listen to the electorate on the issues of the day, instead mollycoddling those who have committed massive fraud upon the public and giving them hundreds of billions of dollars in hand-outs funded by the very people they ripped off in the first place!