October 1, 2014

SECRET TAPES – NY FED Helping Wall Street BANKSTERS – Matt Taibbi And Alexis Goldstein

Carmen Segarra, a former NY Fed regulator, went public on “This American Life” radio with secret recordings. The recordings raise questions over whether the Federal Reserve has gotten any tougher on the big banks it is supposed to regulate. With Matt Taibbi and Alexis Goldstein.

From ALL IN, MSNBC, Ari Melber in for Chris Hayes.
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September 30, 2014

The U.S. Government Is Borrowing About 8 Trillion Dollars A Year

I know that headline sounds completely outrageous.  But it is actually true.  The U.S. government is borrowing about 8 trillion dollars a year, and you are about to see the hard numbers that prove this.  When discussing the national debt, most people tend to only focus on the amount that it increases each 12 months.  And as I wrote about recently, the U.S. national debt has increased by more than a trillion dollars in fiscal year 2014.  But that does not count the huge amounts of U.S. Treasury securities that the federal government must redeem each year.  When these debt instruments hit their maturity date, the U.S. government must pay them off.  This is done by borrowing more money to pay off the previous debts.  In fiscal year 2013, redemptions of U.S. Treasury securities totaled $7,546,726,000,000 and new debt totaling $8,323,949,000,000 was issued.  The final numbers for fiscal year 2014 are likely to be significantly higher than that.
So why does so much government debt come due each year?

Well, in recent years government officials figured out that they could save a lot of money on interest payments by borrowing over shorter time frames.  For example, it costs the government far more to borrow money for 10 years than it does for 1 year.  So a strategy was hatched to borrow money for very short periods of time and to keep "rolling it over" again and again and again.

This strategy has indeed saved the federal government hundreds of billions of dollars in interest payments, but it has also created a situation where the federal government must borrow about 8 trillion dollars a year just to keep up with the game.

So what happens when the rest of the world decides that it does not want to loan us 8 trillion dollars a year at ultra-low interest rates?

Well, the game will be over and we will be in a massive amount of trouble.

I am about to share with you some numbers that were originally reported by CNS News.  As you can see, far more debt is being redeemed and issued today than back during the middle part of the last decade...

2013
Redeemed: $7,546,726,000,000
Issued: $8,323,949,000,000
Increase: $777,223,000,000
2012
Redeemed: $6,804,956,000,000
Issued: $7,924,651,000,000
Increase: $1,119,695,000,000
2011
Redeemed: $7,026,617,000,000
Issued: $8,078,266,000,000
Increase: $1,051,649,000,000
2010
Redeemed: $7,206,965,000,000
Issued: $8,649,171,000,000
Increase: $1,442,206,000,000
2009
Redeemed: $7,306,512,000,000
Issued: $9,027,399,000,000
Increase: $1,720,887,000,000
2008
Redeemed: $4,898,607,000,000
Issued: $5,580,644,000,000
Increase: $682,037,000,000
2007
Redeemed: $4,402,395,000,000
Issued: $4,532,698,000,000
Increase: $130,303,000,000
2006
Redeemed: $4,297,869,000,000
Issued: $4,459,341,000,000
Increase: $161,472,000,000

The only way that this game can continue is if the U.S. government can continue to borrow gigantic piles of money at ridiculously low interest rates.

And our current standard of living greatly depends on the continuation of this game.

If something comes along and rattles this Ponzi scheme, life in America could change radically almost overnight.

In the United States today, we have a heavily socialized system that hands out checks to nearly half the population.  In fact, 49 percent of all Americans live in a home that gets direct monetary benefits from the federal government each month according to the U.S. Census Bureau.  And it is hard to believe, but Americans received more than 2 trillion dollars in benefits from the federal government last year alone.  At this point, the primary function of the federal government is taking money from some people and giving it to others.  In fact, more than 70 percent of all federal spending goes to "dependence-creating programs", and the government runs approximately 80 different "means-tested welfare programs" right now.  But the big problem is that the government is giving out far more money than it is taking in, so it has to borrow the difference.  As long as we can continue to borrow at super low interest rates, the status quo can continue.

But a Ponzi scheme like this can only last for so long.

It has been said that when the checks stop coming in, chaos will begin in the streets of America.

The looting that took place when a technical glitch caused the EBT system to go down for a short time in some areas last year and the rioting in the streets of Ferguson, Missouri this year were both small previews of what we will see in the future.

And there is no way that we will be able to "grow" our way out of this problem.

As the Baby Boomers continue to retire, the amount of money that the federal government is handing out each year is projected to absolutely skyrocket.  Just consider the following numbers...

-Back in 1965, only one out of every 50 Americans was on Medicaid.  Today, more than 70 million Americans are on Medicaid, and it is being projected that Obamacare will add 16 million more Americans to the Medicaid rolls.

-When Medicare was first established, we were told that it would cost about $12 billion a year by the time 1990 rolled around.  Instead, the federal government ended up spending $110 billion on the program in 1990, and the federal government spent approximately $600 billion on the program in 2013.

-It is being projected that the number of Americans on Medicare will grow from 50.7 million in 2012 to 73.2 million in 2025.

-At this point, Medicare is facing unfunded liabilities of more than 38 trillion dollars over the next 75 years.  That comes to approximately $328,404 for every single household in the United States.

-In 1945, there were 42 workers for every retiree receiving Social Security benefits.  Today, that number has fallen to 2.5 workers, and if you eliminate all government workers, that leaves only 1.6 private sector workers for every retiree receiving Social Security benefits.

-Right now, there are approximately 63 million Americans collecting Social Security benefits.  By 2035, that number is projected to soar to an astounding 91 million.

-Overall, the Social Security system is facing a 134 trillion dollar shortfall over the next 75 years.

-The U.S. government is facing a total of 222 trillion dollars in unfunded liabilities during the years ahead.  Social Security and Medicare make up the bulk of that.

Yes, things seem somewhat stable for the moment in America today.

But the same thing could have been said about 2007.  The stock market was soaring, the economy seemed like it was rolling right along and people were generally optimistic about the future.

Then the financial crisis of 2008 erupted and it seemed like the world was going to end.

Well, the truth is that another great crisis is rapidly approaching, and we are in far worse shape financially than we were back in 2008.

Don't get blindsided by what is ahead.  Evidence of the coming catastrophe is all around you.

September 29, 2014

"I Am Putting Everything In Goldman Sachs Because These Guys Can Do Whatever The Hell They Want"

When we first covered the Carmen Segarra lawsuit alleging the capture of the NY Fed by Goldman Sachs back in October 2013, we didn't have much hope for justice to get done. We said that "while her allegations may be non-definitive, and her wrongful termination suit is ultimately dropped, there is hope this opens up an inquiry into the close relationship between Goldman and the NY Fed. Alas, since the judicial branch is also under the control of the two abovementioned entities, we very much doubt it."

Sure enough, the lawsuit was dropped (and no inquiry was opened) but not before it became clear that the very judge in charge of the case, U.S. District Judge Ronnie Abrams, was herself conflicted, after it was revealed that her husband, Greg Andres, a partner at Davis Polk & Wardwell, was representing Goldman in an advisory capacity. Curiously, before she assumed her current office in March 2013, back in 2008 Abrams returned to Davis Polk herself as Special Counsel for Pro Bono. She had previously worked at the firm from 1994 to 1998. For the full, and quite amazing, story of how the "Judge" steamrolled Segarra's objections reads this Reuters piece.

As a result of this fiasco, some wondered just how far do Goldman's tentacles stretch not only at the money-printing (i.e., NY Fed) level, not only at the legislative level (see "With Cantor Down, Which Other Politicians Has Goldman Invested In?"), but at the judicial as well.

And then, on Friday, the Segarra case against the Federal Reserve branch of Goldman Sachs got a second wind, when as a result of another disclosure, ProPublica revealed "How Goldman Controls The New York Fed in 47.5 Hours Of "The Secret Goldman Sachs Tapes." That is to say, nothing new was revealed per se, because as anyone who has read this website for the past 6 years knows just how vast Goldman's network is not only at the Fed, but in that all important other continent too, Europe.

Sadly, just like a year ago, so this time too, we are reluctant to say anything will change. In fact, there is too much at stake, for Goldman to drop the reins and disassociate from the NY Fed: for pete's sake, the president of the NY Fed is a former Goldman employee - does it get any more conflicted than that?!

But, wait, Goldman will do penance by "prohibiting its bankers from buying stocks"... the horror. Luckily at least purchasing politicians and Fed presidents is still perfectly allowed.

In fact, what has become clear to everyone is that aside from yet another dog and pony show (led by, you guessed, it the head dog and ponier herself, Elizabeth Warren), not only will nothing change, but in fact the best way to take advantage of a broken, corrupt, sinking system, is to join it. And the best summary of just that sentiment was released over the weekend by Nanex' Eric Hunsader as follows:

Curious what made up Eric's mind? Then fast forward to minute 24 to hear what it sounds like when a top Fed official "questions" Goldman Sachs:

But before we put this topic to bed, here is Raúl Ilargi Meijer explaining why "The US Has No Banking Regulation, And It Doesn’t Want Any"

It is, let’s say, exceedingly peculiar to begin with that a government – in this case the American one, but that’s just one example - in name of its people tasks a private institution with regulating not just any sector of its economy, but the richest and most politically powerful sector in the nation. Which also happens to be at least one of the major forces behind its latest, and ongoing, economical crisis.

That there is a very transparent, plain for everyone to see, over-sized revolving door between the regulator and the corporations in the sector only makes the government’s choice for the Fed as regulator even more peculiar. Or, as it turns out, more logical. But it is still preposterous: regulating the financial sector is a mere illusion kept alive through lip service. Put differently: the American government doesn’t regulate the banks. They effectively regulate themselves. Which inevitably means there is no regulation.

The newly found attention for ProPublica writer Jake Bernstein’s series of articles, which date back almost one whole year, about the experiences of former Fed regulator Carmen Segarra, and the audio files she collected while trying to do her job, leaves no question about this.

What’s going on is abundantly clear, because it is so simple. The intention of the New York Fed as an organization is not to properly regulate, but only to generate an appearance – or illusion – of proper regulation. That is to say, Goldman will accept regulation only up to the point where it would cut into either the company’s profits or its political wherewithal.

What the ‘Segarra Files’ point out is that the New York Fed plays the game exactly the way Goldman wants it played. Ergo: there is no actual regulation taking place, and Goldman will comply only with those requests from the New York Fed that it feels like complying with.

In the articles, the term ‘regulatory capture’ pops up, which means – individual – regulators are ‘co-opted’ by the banks they – are supposed to – regulate. But the capture runs much larger and wider. It’s not about individuals, it’s a watertight and foolproof system wide capture.

The government picks a – private – regulator which has close ties to the banks. The government knows this. It also knows this means that its chosen regulator will always defer to the banks. And when individual regulators refuse to comply with the system, they are thrown out.

In one of the cases Segarra was involved in during her stint at the Fed, the Kinder Morgan-El Paso takeover deal, Goldman advises one party, has substantial stock holdings in the other, and appoints a lead counsel who personally has $340,000 in stock involved. Conflict of interest? Goldman says no, and the Fed complies (defers).

The lawsuit Segarra filed against the NY Fed and three of its executives was thrown out on technicalities by a judge whose husband was legal counsel for Goldman in the exact same case. No conflict of interest, the judge herself decides.

This is not regulation, it’s a sick and perverted joke played on the American people, which it has been paying for it through the nose for years, and will for many years to come. Sure, Elizabeth Warren picks it up now and wants hearings on the topic in Congress, but she’s a year late (it’s been known since at least December 2013 that Segarra has audio recordings) and moreover, it was Congress itself that made the NY Fed the regulator of Wall Street. Warren has as much chance of getting anywhere as Segarra did (or does, she’s appealing the case).

The story: In October 2011, Carmen Segarra was hired by New York Fed to be embedded at Goldman as a risk specialist, and in particular to investigate to what degree the company complied with a 2008 Fed Supervision and Regulation Letter, known as SR 08-08, which focuses on the requirement for firms like Goldman, engaged in many different activities, to have company-wide programs to manage business risks, in particular conflict-of-interest. Some people at Goldman admitted it did not have such a company-wide policy as of November 2011. Others, though, said it did.

Let’s take it from there with quotes from the 5 articles Bernstein wrote on the topic over the past year. To listen to the Segarra files, please go to The Secret Recordings of Carmen Segarra at This American Life.

One last thing: Jake Bernstein’s work is of high quality, but I can’t really figure why he says things such as the audio files show: “a New York Fed that is at times reluctant to push hard against Goldman and struggling to define its authority”. Through his work, and the files, it should be clear that just ain’t so. Both the Fed’s policy and authority are crystal clear and ironclad.

September 26, 2014

Central Banking Is The Problem, Not The Solution

Since the economic crisis of 2008-2009, the Federal Reserve — America’s central bank — has expanded the money supply in the banking system by over $4 trillion, and has manipulated key interest rates to keep them so artificially low that when adjusted for price inflation, several of them have been actually negative. We should not be surprised if this is setting the stage for another serious economic crisis down the road.

Back on December 16, 2009, the Federal Reserve Open Market Committee announced that it was planning to maintain the Federal Funds rate — the rate of interest at which banks lend to each other for short periods of time — between zero and a quarter of a percentage point. The Committee said that it would keep interest rates “exceptionally low” for an “extended period of time,” which has continued up to the present.

Federal Reserve Policy and Monetary Expansion

Beginning in late 2012, the then-Fed Chairman, Ben Bernanke, announced that the Federal Reserve would continue buying US government securities and mortgage-backed securities, but at the rate of an enlarged $85 billion per month, a policy that continued until early 2014. Since then, under the new Federal Reserve chair, Janet Yellen, the Federal Reserve has been “tapering” off its securities purchases until in July of 2014, it was reduced to a “mere” $35 billion a month.

In her recent statements, Yellen has insisted that she and the other members of the Federal Reserve Board of Governors, who serve as America’s monetary central planners, are watching carefully macro-economic indicators to know how to manage the money supply and interest rates to keep the slowing general economic recovery continuing without fear of price inflation.

Some of the significant economic gyrations on the stock markets over the past couple of months have reflected concerns and uncertainties about whether the Fed’s flood of paper money and near zero or negative real interest rates might be coming to an end. In other words, borrowing money to undertake investment projects or to fund stock purchases might actually cost something, rather than seeming to be free.

When the media has not been distracted with the barrage of overseas crises, all of which seem to presume the need for America to play global policeman and financial paymaster to the world at US taxpayers’ expense, the presumption by news pundits and too many economic policy analysts is that the Federal Reserve’s manipulation of interest rates is a good, desirable and necessary responsibility of the central bank.

As a result, virtually all commentaries about the Fed’s announced policies focus on whether it is too soon for the Federal Reserve to raise interest rates given the state of the economy, or whether the Fed should already be raising interest rates to prevent future price inflation.

What is being ignored is the more fundamental question of whether the Fed should be attempting to set or influence interest rates in the market. The presumption is that it is both legitimate and desirable for central banks to manipulate a market price, in this case the price of borrowing and lending. The only disagreements among the analysts and commentators are over whether the central banks should keep interest rates low or nudge them up and if so by how much.

Market-Based Interest Rates Have Work to Do

In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance. Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market. Market prices serve as an incentive for producers to supply more of a good when the price goes up and to supply less when the price goes down; similarly, a lower or higher price influences consumers to buy more or less of a good. And, finally, the movement of a market price, by stimulating more or less demand and supply, tends to bring the two sides of the market into balance.

Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods. This assures, on the one hand, that resources that are not being used to produce consumer goods are available for future-oriented investment, and, on the other, that investment doesn’t outrun the saved resources available to support it.

Interest rates higher than those that would balance saving with investment stimulate more saving than investors are willing to borrow, and interest rates below that balancing point stimulate more borrowing than savers are willing to supply.

There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage; that is, suppliers offer fewer hats than the number consumers are willing to buy at that price. Some consumers, therefore, will have to leave the market disappointed, without a hat in hand.

Central Bank-Caused Imbalances and Distortions

In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken.

Investors who borrow the newly created money spend it to hire or purchase more resources, and their extra spending eventually starts putting upward pressure on prices. At the same time, more resources and workers are attracted to these new investment projects and away from other market activities.

The twin result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inflation and an initial investment boom, both of which are unsustainable in the long run. Price inflation is unsustainable because it inescapably reduces the value of the money in everyone’s pockets, and threatens over time to undermine trust in the monetary system.

The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.

The Central Bank Produces Booms and Busts

The unsustainability of such a monetary-induced investment boom was shown, once again, to be true in the latest business cycle. Between 2003 and 2008, the Federal Reserve increased the money supply by at least 50 percent. Key interest rates, including the Federal Funds rate, and the one-year Treasury yield, were either zero or negative for much of this time when adjusted for inflation. The rate on conventional mortgages, when inflation adjusted, was between two and four percent during this same period.

It is no wonder that there emerged the now infamous housing, investment, and consumer credit bubbles that burst in 2008-2009. None of these would have been possible and sustainable for so long as they were if not for the Fed’s flood of money creation and the resulting zero or negative lending rates when adjusted for inflation.

The monetary expansion and the artificially low interest rates generated wide imbalances between investment and housing borrowing on the one hand and low levels of real savings in the economy on the other. It was inevitable that the reality of scarcity would finally catch up with all these mismatches between market supplies and demands.

This was, of course, exacerbated by the Federal government’s housing market creations, Fannie Mae and Freddie Mac. They opened their financial spigots through buying up or guaranteeing ever more home mortgages that were issued to a growing number of high-risk borrowers. But the financial institutions that issued and then marketed those dubious mortgages were, themselves, only responding to the perverse incentives that had been created by the Federal Reserve and by Fannie Mae and Freddie Mac.

Why not extend more and more loans to questionable homebuyers when the money to fund them was virtually interest-free thanks to the Federal Reserve? And why not package them together and pass them on to others, when Fannie Mae and Freddie Mac were subsidizing the risk on the basis of the “full faith and credit” of the United State government?

More Monetary Mischief in the Post-Bubble Era

What was the Federal Reserve’s response in the face of the busted bubbles its own policies helped to create? Between September 2008 and June 2014, the monetary base (currency in circulation and reserves in the banking system) has been increased by over 440 percent, from $905 billion to more than $4 trillion. At the same time, M-2 (currency in circulation plus demand and a variety of savings and time deposits) grew by 35 percent during this time period.

Why haven’t banks lent out more of this huge amount of newly created money, and generated a much higher degree of price inflation than has been observed so far? Partly, it is due to the fact that after the wild bubble years, many financial institutions returned to the more traditional credit-worthy benchmarks for extending loans to potential borrowers. This has slowed down the approval rate for new loans.

But more importantly, those excess reserves not being lent out by banks are collecting interest from the Federal Reserve. With continuing market uncertainties about government policies concerning environmental regulations, national health care costs, the burden of the Federal debt and other government unfunded liabilities (Social Security and Medicare), as well as other possible political interferences in the marketplace, banks have found it more attractive to be paid interest by the Federal Reserve rather than to lend money to private borrowers. And considering how low Fed policies have pushed down key market lending rates, leaving those excess reserves idle with first Ben Bernanke and now Janet Yellen has seemed the more profitable way of using all that lending power.

Even under the heavy-handed intervention of the government, markets are fundamentally resilient institutions that have the capacity to bounce back unless that governmental hand really chokes the competitive and profit-making life out of capitalism. Any real recovery in the private sector will result in increased demands to borrow that would be satisfied by all of that Fed-created funny money currently sitting idle. Once those hundreds of billions of dollars of excess reserves come flooding into the market, price inflation may not be far behind.

Central Banking as the Problem, Not the Solution

At the heart of the problem is the fact that the Federal Reserve’s manipulation of the money supply prevents interest rates from telling the truth: How much are people really choosing to save out of income, and therefore how much of the society’s resources — land, labor, capital — are really available to support sustainable investment activities in the longer run? What is the real cost of borrowing, independent of Fed distortions of interest rates, so businessmen could make realistic and fair estimates about which investment projects might be truly profitable, without the unnecessary risk of being drawn into unsustainable bubble ventures?

Unfortunately, as long as there are central banks, we will be the victims of the monetary central planners who have the monopoly power to control the amount of money and credit in the economy; manipulate interest rates by expanding or contracting bank reserves used for lending purposes; threaten the rollercoaster of business cycle booms and busts; and undermine the soundness of the monetary system through debasement of the currency and price inflation.

Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.

September 25, 2014

5 U.S. Banks Each Have More Than 40 Trillion Dollars In Exposure To Derivatives

When is the U.S. banking system going to crash?  I can sum it up in three words.  Watch the derivatives.  It used to be only four, but now there are five "too big to fail" banks in the United States that each have more than 40 trillion dollars in exposure to derivatives.  Today, the U.S. national debt is sitting at a grand total of about 17.7 trillion dollars, so when we are talking about 40 trillion dollars we are talking about an amount of money that is almost unimaginable.  And unlike stocks and bonds, these derivatives do not represent "investments" in anything.  They can be incredibly complex, but essentially they are just paper wagers about what will happen in the future.  The truth is that derivatives trading is not too different from betting on baseball or football games.  Trading in derivatives is basically just a form of legalized gambling, and the "too big to fail" banks have transformed Wall Street into the largest casino in the history of the planet.  When this derivatives bubble bursts (and as surely as I am writing this it will), the pain that it will cause the global economy will be greater than words can describe.

If derivatives trading is so risky, then why do our big banks do it?

The answer to that question comes down to just one thing.

Greed.

The "too big to fail" banks run up enormous profits from their derivatives trading.  According to the New York Times, U.S. banks "have nearly $280 trillion of derivatives on their books" even though the financial crisis of 2008 demonstrated how dangerous they could be...
American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them. But the 2008 crisis revealed how flaws in the market had allowed for dangerous buildups of risk at large Wall Street firms and worsened the run on the banking system.
The big banks have sophisticated computer models which are supposed to keep the system stable and help them manage these risks.

But all computer models are based on assumptions.

And all of those assumptions were originally made by flesh and blood people.

When a "black swan event" comes along such as a war, a major pandemic, an apocalyptic natural disaster or a collapse of a very large financial institution, these models can often break down very rapidly.

For example, the following is a brief excerpt from a Forbes article that describes what happened to the derivatives market when Lehman Brothers collapsed back in 2008...
Fast forward to the financial meltdown of 2008 and what do we see? America again was celebrating. The economy was booming. Everyone seemed to be getting wealthier, even though the warning signs were everywhere: too much borrowing, foolish investments, greedy banks, regulators asleep at the wheel, politicians eager to promote home-ownership for those who couldn’t afford it, and distinguished analysts openly predicting this could only end badly. And then, when Lehman Bros fell, the financial system froze and world economy almost collapsed. Why? 
The root cause wasn’t just the reckless lending and the excessive risk taking. The problem at the core was a lack of transparency. After Lehman’s collapse, no one could understand any particular bank’s risks from derivative trading and so no bank wanted to lend to or trade with any other bank. Because all the big banks’ had been involved to an unknown degree in risky derivative trading, no one could tell whether any particular financial institution might suddenly implode.
After the last financial crisis, we were promised that this would be fixed.

But instead the problem has become much larger.

When the housing bubble burst back in 2007, the total notional value of derivatives contracts around the world had risen to about 500 trillion dollars.

According to the Bank for International Settlements, today the total notional value of derivatives contracts around the world has ballooned to a staggering 710 trillion dollars ($710,000,000,000,000).

And of course the heart of this derivatives bubble can be found on Wall Street.
What I am about to share with you is very troubling information.

I have shared similar numbers in the past, but for this article I went and got the very latest numbers from the OCC's most recent quarterly report.  As I mentioned above, there are now five "too big to fail" banks that each have more than 40 trillion dollars in exposure to derivatives...

JPMorgan Chase
Total Assets: $2,476,986,000,000 (about 2.5 trillion dollars)
Total Exposure To Derivatives: $67,951,190,000,000 (more than 67 trillion dollars)

Citibank
Total Assets: $1,894,736,000,000 (almost 1.9 trillion dollars)
Total Exposure To Derivatives: $59,944,502,000,000 (nearly 60 trillion dollars)

Goldman Sachs
Total Assets: $915,705,000,000 (less than a trillion dollars)
Total Exposure To Derivatives: $54,564,516,000,000 (more than 54 trillion dollars)

Bank Of America
Total Assets: $2,152,533,000,000 (a bit more than 2.1 trillion dollars)
Total Exposure To Derivatives: $54,457,605,000,000 (more than 54 trillion dollars)

Morgan Stanley
Total Assets: $831,381,000,000 (less than a trillion dollars)

Total Exposure To Derivatives: $44,946,153,000,000 (more than 44 trillion dollars)
And it isn't just U.S. banks that are engaged in this type of behavior.

As Zero Hedge recently detailed, German banking giant Deutsche Bank has more exposure to derivatives than any of the American banks listed above...
Deutsche has a total derivative exposure that amounts to €55 trillion or just about $75 trillion. That’s a trillion with a T, and is about 100 times greater than the €522 billion in deposits the bank has. It is also 5x greater than the GDP of Europe and more or less the same as the GDP of… the world.
For those looking forward to the day when these mammoth banks will collapse, you need to keep in mind that when they do go down the entire system is going to utterly fall apart.

At this point our economic system is so completely dependent on these banks that there is no way that it can function without them.

It is like a patient with an extremely advanced case of cancer.

Doctors can try to kill the cancer, but it is almost inevitable that the patient will die in the process.

The same thing could be said about our relationship with the "too big to fail" banks.  If they fail, so do the rest of us.

We were told that something would be done about the "too big to fail" problem after the last crisis, but it never happened.

In fact, as I have written about previously, the "too big to fail" banks have collectively gotten 37 percent larger since the last recession.

At this point, the five largest banks in the country account for 42 percent of all loans in the United States, and the six largest banks control 67 percent of all banking assets.

If those banks were to disappear tomorrow, we would not have much of an economy left.

But as you have just read about in this article, they are being more reckless than ever before.

We are steamrolling toward the greatest financial disaster in world history, and nobody is doing much of anything to stop it.

Things could have turned out very differently, but now we will reap the consequences for the very foolish decisions that we have made.

September 24, 2014

“We Need A Banking Revolution”

“To inspire confidence, banks have tended to be housed in prestigious buildings. That has come to obfuscate their basic function and has given bankers an exaggerated sense of their own importance. Victorian sewage works and pumping stations were also housed in prestigious buildings, but there was no illusion about the stuff they were pumping. When it comes to banks, there is.”

In his book “Don’t Start From Here” with the subtitle “We Need A Banking Revolution” David Shirreff, a recently retired journalist of The Economist, has taken a long look at what has become of the much heralded banking reforms in the aftermath of the recent financial crisis and found them indigent. In his seventy page monograph – in this case less can truly be more – Shirreff analyses the promised reforms that have gone lost along the way and explains their exigency in a coherent and enjoyable read.

Having covered banks for years for The Economist Shirreff starts out reflecting upon the original purpose of these financial institutions and the massive financial and political power they have usurped in the current millennium. He goes forward systematically and unassumingly starting with the question of what banks do, or better said, should be doing.

Shirreff then leaps directly into the fray, citing the two “glaring failures” of banking reform since 2008: The failure to simplify the complexity (breaking banks up into smaller units) and the failure to change the culture that permeates the world of finance (the termination of a culture of entitlement by bankers), whereupon he proffers ten remedies.

This is root and branch stuff, ranging from “Simplifying the rules” and “Scrapping Basel 2 and 3” to “At least consider a financial transaction tax”. Shirreff has nothing against banks and speculation. He simply argues for a simplified regulation of the former, while the latter should be extruded into the non-regulated financial sector. There the casino world of finance can continue its existence, isolated from the taxpayer and small savers. Shirreff then goes on for a second round of bank reform recommendations, this time specifically for his native Britain.

Part 2 of the book is dedicated to the question of what went wrong – and still is: the tragic journey from Gramm-Leach-Bliley Act to the present. Shirreff dedicates a good part of this chapter to the European financial system. For readers in the United States surely an excellent insight into the financial crisis with regards to European banks, which might also be edifying for many Europeans, who think this has been all about US financial institutions.

Shirreff calls for “a revolution to reduce complexity in global banks, to split them into manageable chunks, and to change the self-serving nature of the culture that dominates them”. To popularize this Shirreff had admirably taken the complexity out of the subject matter, including a perspicuous glossary for the laymen. The book includes light-hearted topical cartoons by jack Coltman. Shirreff may not achieve the revolution he wishes for, but he certainly will get us once again focused upon necessary reforms to achieve sensible, if not existentially vital, financial regulation.

September 23, 2014

US Treasury Cracks Down On Tax Inversions

One of the key drivers of the recent spike in M&A deals (and sellside advisory fees) has been the surge in tax inversion transactions, deals in which a U.S. company reincorporates for tax purposes in a tax-friendlier country such as the U.K. or Ireland, while maintaining its real headquarters in the U.S. Traditionally such deals have involved a merger between a U.S. firm and a smaller foreign firm. The reason for such deals is simple: to lower the corporate tax payments by avoiding the venue of the one country with the highest corporate tax rate in the world: USA, and leave more cash available for distribution to private shareholders. And since every such deal lowers the cumulative tax that the US collects from corporations, Obama, helpless to change the legislation that ushered in these deals in the first place, came out a few months ago, with a heartfelt appeal to corporate patriotism, calling inversions "wrong", and demanding "corporate patriotism." He failed. Which is why moments ago the Treasury released its new rules meant to "Reduce Tax Benefits of Corporate Inversions."

Per the US Treasury: "Today, Treasury is taking action to reduce the tax benefits of — and when possible, stop — corporate tax inversions. This action will significantly diminish the ability of inverted companies to escape U.S. taxation.  For some companies considering mergers, today’s action will mean that inversions no longer make economic sense."

As the WSJ explains, in a multipronged attack, the administration took action under five separate sections of the tax code to make so-called inversions harder to accomplish and less profitable.
Three of the moves are aimed at blocking inverted companies from using techniques—sometimes known as "hopscotching"—to get access to their offshore cash without paying U.S. tax on it. Those would apply to deals closed on or after Sept. 22.

Another move makes it more difficult for U.S. firms to skirt current ownership standards in inverting. Still another move would make it harder for U.S. firms to spin off subsidiaries overseas.

Taken together, the administration's moves are likely to remove at least some of the economic appeal of inversions, which have become more common in recent years, particularly in the pharmaceutical industry. Noticeably absent, however, was a much-discussed idea to limit inverted companies' ability to ship U.S. profits overseas tax free.
Will it work? Hardly. After all it is the same corporations that have lobbied their favorite puppet politicians over the years that made inversions possible in the first place, and absent a change in the law it is difficult to see what authority the US Treasury has to make up rules on the fly. The WSJ agrees: "some experts have questioned how much authority the Treasury Department actually has in the area, and legal challenges to Monday's actions remain a possibility. The moves also seem unlikely to end inversions altogether, as even Treasury Secretary Jacob Lew has recently conceded, in part because the administration has little legal ability to block the most common type of inversion." Just in case there was any doubt who really calls the shots in the America...

Nonetheless, the inversion free for all is now likely over: "Monday's announcement was likely to chill many deals, at least for now. The Treasury Department also promised to continue looking for other regulatory steps to discourage inversions, and to review tax treaties."

Yet to think: the US government would have spared itself so much jawboning effort and fake work if all the Treasury did was promise that the 10 largest shareholders of the "unpatriotic inversion offender" would get the "tea party" treatment by the IRS. Then watch as inversions end with a thud, never to be heard of again.

And should the US government be taken to task for yet another despotic, "executive action" tactic, well, there are so many backupless hard disks in the US government that can and will fail at just the right time, that one is assured no trace of any decision process will ever exist.

Below is the fact sheet on the specific actions the Treasury will take starting today:
Today, Treasury is taking action to reduce the tax benefits of — and when possible, stop — corporate tax inversions. This action will significantly diminish the ability of inverted companies to escape U.S. taxation.  For some companies considering mergers, today’s action will mean that inversions no longer make economic sense.
 
Specifically, the Notice eliminates certain techniques inverted companies currently use to access the overseas earnings of foreign subsidiaries of the U.S. company that inverts without paying U.S. tax.  Today’s actions apply to deals closed today or after today.
 
This notice is an important initial step in addressing inversions.  Treasury will continue to examine ways to reduce the tax benefits of inversions, including through additional regulatory guidance as well as by reviewing our tax treaties and other international commitments. Today’s Notice requests comments on additional ways that Treasury can make inversion deals less economically appealing.
 
Specifically, today’s Notice will:
 
Prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans(Action under section 956(e) of the code)
  • Under current law, U.S. multinationals owe U.S. tax on the profits of their controlled foreign corporations (CFCs) although they don’t usually have to pay this tax until those profits are repatriated (that is, paid to the U.S. parent firm as a dividend). Profits that have not yet been repatriated are known as deferred earnings.
  • Under current law, if a CFC, tries to avoid this dividend tax by investing in certain U.S. property—such as by making a loan to, or investing in stock of its U.S. parent or one of its domestic affiliates—the U.S. parent is treated as if it received a taxable dividend from the CFC.
  • However, some inverted companies get around this rule by having the CFC make the loan to the new foreign parent, instead of its U.S. parent. This “hopscotch” loan is not currently considered U.S. property and is therefore not taxed as a dividend.
  • Today’s notice removes benefits of these “hopscotch” loans by providing that such loans are considered “U.S. property” for purposes of applying the anti-avoidance rule. The same dividend rules will now apply as if the CFC had made a loan to the U.S. parent prior to the inversion.
Prevent inverted companies from restructuring a foreign subsidiary in order to access the subsidiary’s earnings tax-free (Action under section 7701(l) of the tax code)
  • After an inversion, some U.S. multinationals avoid ever paying U.S. tax on the deferred earnings of their CFC by having the new foreign parent buy enough stock to take control of the CFC away from the former U.S. parent. This “de-controlling” strategy is used to allow the new foreign parent to access the deferred earnings of the CFC without ever paying U.S. tax on them.
  • Under today’s notice, the new foreign parent would be treated as owning stock in the former U.S. parent, rather than the CFC, to remove the benefits of the “de-controlling” strategy. The CFC would remain a CFC and would continue to be subject to U.S. tax on its profits and deferred earnings.
Close a loophole to prevent an inverted companies from transferring cash or property from a CFC to the new parent to completely avoid U.S. tax (Action under section 304(b)(5)(B) of the code)
  • These transactions involve the new foreign parent selling its stock in the former U.S. parent to a CFC with deferred earnings in exchange for cash or property of the CFC, effectively resulting in a tax-free repatriation of cash or property bypassing the U.S. parent. Today’s action would eliminate the ability to use this strategy.
Make it more difficult for U.S. entities to invert by strengthening the requirement that the former owners of the U.S. entity own less than 80 percent of the new combined entity:
  • Limit the ability of companies to count passive assets that are not part of the entity’s daily business functions in order to inflate the new foreign parent’s size and therefore evade the 80 percent rule – known as using a “cash box. (Action under section 7874 of the code) Companies can successfully invert when the U.S. entity has, for example, a value of 79 percent, and the foreign “acquirer” has a value of 21 percent of the combined entity.  However in some inversion transactions, the foreign acquirer’s size is inflated by passive assets, also known as “cash boxes,” such as cash or marketable securities. These assets are not used by the entity for daily business functions. Today’s notice would disregard stock of the foreign parent that is attributable to passive assets in the context of this 80 percent requirement. This would apply if at least 50 percent of the foreign corporation’s assets are passive. Banks and other financial services companies would be exempted.
  • Prevent U.S. companies from reducing their size pre-inversion by making extraordinary dividends. (Action under section 7874 of the code) In some instances, a U.S. entity may pay out large dividends pre-inversion to reduce its size and meet the 80 percent threshold, also known as “skinny-down” dividends. Today’s notice would disregard these pre-inversion extraordinary dividends for purposes of the ownership requirement, thereby raising the U.S. entity’s ownership, possibly above the 80 percent threshold.
  • Prevent a U.S. entity from inverting a portion of its operations by transferring assets to a newly formed foreign corporation that it spins off to its shareholders, thereby avoiding the associated U.S. tax liabilities, a practice known as “spinversion.” (Action under section 7874 of the code)  In some cases a U.S. entity may invert a portion of its operations by transferring a portion of its assets to a newly formed foreign corporation and then spinning-off that corporation to its public shareholders. This transaction takes advantage of a rule that was intended to permit purely internal restructurings by multinationals.  Under today’s action, the spun-off foreign corporation would not benefit from these internal restructuring rules with the result that the spun off company would be treated as a domestic corporation, eliminating the use of this technique for these transactions.

September 22, 2014

Scam Alert: Hospitals All Over America Are Wildly Inflating Medical Bills

The next time you visit a hospital, it is your wallet that may end up hurting the most.  All over the United States, it has become common practice for hospitals to wildly inflate medical bills.  For example, it has been reported that some hospitals are charging up to 30 dollars for a single aspirin pill.  And as you will see below, some victims report being billed tens of thousands of dollars for a non-surgical hospital visit that lasts only a few hours.  When something is seriously wrong with us, most of us never stop to ask our health professionals how much it will cost to actually treat us.  In that moment, we are desperate and we just want someone to help us.  Many doctors and hospitals take full advantage of this by billing their "customers" as much as they feel they can possible get away with.  It is a legal scam that is bilking ordinary Americans out of billions of dollars every single year.

Over the weekend, the New York Times reported on one case that is a perfect example of the outrageous medical billing that I am talking about...
Before his three-hour neck surgery for herniated disks in December, Peter Drier, 37, signed a pile of consent forms. A bank technology manager who had researched his insurance coverage, Mr. Drier was prepared when the bills started arriving: $56,000 from Lenox Hill Hospital in Manhattan, $4,300 from the anesthesiologist and even $133,000 from his orthopedist, who he knew would accept a fraction of that fee. 
He was blindsided, though, by a bill of about $117,000 from an “assistant surgeon,” a Queens-based neurosurgeon whom Mr. Drier did not recall meeting. 
“I thought I understood the risks,” Mr. Drier, who lives in New York City, said later. “But this was just so wrong — I had no choice and no negotiating power.”
The practice known as "drive-by doctoring" has gotten completely and totally out of control.
All over America, doctors are popping into surgeries or are stopping by to talk to another doctor's patients for a few minutes and are charging thousands of dollars for this "assistance".

It is a morally reprehensible scam that needs to be stopped.

Another thing that needs to be stopped is the practice that many hospitals have of billing patients for emergency medications at a rate that is thousands of times over cost.

For example, just check out what happened when 52-year-old Marcie Edmonds went in to a hospital in Arizona to get treated for a scorpion sting...
With the help of a friend, she called Poison Control and was advised to go to the nearest hospital that had scorpion antivenom, Chandler Regional Medical Center. At the hospital, an emergency room doctor told her about the antivenom, called Anascorp, that could quickly relieve her symptoms. Edmonds said the physician never talked with her about the cost of the drug or treatment alternatives. 
Her symptoms subsided after she received two doses of the drug Anascorp through an IV, and she was discharged from the hospital in about three hours. 
Weeks later, she received a bill for $83,046 from Chandler Regional Medical Center. The hospital, owned by Dignity Health, charged her $39,652 per dose of Anascorp.
Did that hospital actually need to charge that much?

Of course not.

Hospitals down in Mexico only charge $100 per dose of Anascorp.

And anyone that has ever been in for major surgery knows how outrageous some of these hospital bills can be.

For instance, consider the experience of an NBC News reporter that chose to have neck surgery for degenerative disc disease....
Once I got my itemized bill, the grand total was a little over $66,013.40!   That was for a one night stay and a four level vertebrae fusion surgery.  The charges included $22 for one sleeping pill, $427 for one dissecting tool, and $32,000 for four titanium plates and ten screws. 
I brought it to Todd Hill, a fee based patient advocate who helps people decipher their medical bills. "The screws in your procedure were billed at $605 a piece for a total of $6050 dollars. We've seen those in our past research for $25 or $30," he said. "In this case, the markup is tremendous," he added.
One of the primary reasons why so many Americans die completely broke is because medical bills can run up to astronomical heights if you happen to have a terminal illness.
For example, a while back Time Magazine reported on one cancer patient in California that had run up nearly a million dollars in hospital bills before he died...
By the time Steven D. died at his home in Northern California the following November, he had lived for an additional 11 months. And Alice had collected bills totaling $902,452. The family’s first bill — for $348,000 — which arrived when Steven got home from the Seton Medical Center in Daly City, Calif., was full of all the usual chargemaster profit grabs: $18 each for 88 diabetes-test strips that Amazon sells in boxes of 50 for $27.85; $24 each for 19 niacin pills that are sold in drugstores for about a nickel apiece. There were also four boxes of sterile gauze pads for $77 each. None of that was considered part of what was provided in return for Seton’s facility charge for the intensive-care unit for two days at $13,225 a day, 12 days in the critical unit at $7,315 a day and one day in a standard room (all of which totaled $120,116 over 15 days). There was also $20,886 for CT scans and $24,251 for lab work.
The sad truth is that the U.S. health care system has become a giant money making scam, and all of us are the victims.

Those that work in this industry should be greatly ashamed for what they are doing to us.
Just consider the following numbers...

-It has been estimated that hospitals in the United States overcharge their patients by about 10 billion dollars every single year.

-Medical bills are the number one reason why Americans file for bankruptcy.  One study found that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt.

-According to a report published in The American Journal of Medicine, medical bills cause more than 60 percent of the personal bankruptcies in the United States.

-Health insurance is not nearly as much protection as you might think.  According to a report published in the American Journal of Medicine, of all bankruptcies caused by medical debt approximately 75 percent of the time the people actually did have health insurance.

-Hospitals are not shy about sending debt collection agencies after people with unpaid medical bills.  In fact, collection agencies seek to collect unpaid medical bills from approximately 30 million Americans every year.

-Back in 1980, less than 10 percent of U.S. GDP went to health care.  Today, about 18 percent of U.S. GDP goes toward health care.

If the U.S. health care system was a nation, it would be the 6th largest economy on the entire planet.

Does anyone out there have any doubt that the system is completely broken?

Please share this article with as many people as you can.  Hospitals all over America are brazenly ripping us off, and we need to stand up and say that enough is enough.