March 31, 2012

Pot Calls Kettle Black! Dallas Fed Claims Banks Too Big

From Big State a Call for Small Banks ... An annual report from a regional Federal Reserve bank is typically a collection of banalities and clichés with some pictures of local worthies who serve on the board. And so it is with this year's annual report from the Federal Reserve Bank of Dallas, whose pages are graced by the smiling, stolid portraits of board members who run local companies like Whataburger Restaurants. But the text is something else entirely. It's a radical indictment of the nation's financial system. The lead essay, which is endorsed by the president of the Dallas Fed, contends that despite the great crisis of 2008, a cartel of megabanks is still hindering the economic recovery and the institutions remain too big to fail. The country's biggest banks look much as they did before the 2008 financial crisis -- only bigger. They have "increased oligopoly power" and "remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation," Harvey Rosenblum, the head of the Dallas Fed's research department, wrote in the essay. – ProPublica

Dominant Social Theme: We, the Fed, the most powerful monopoly on the planet, are concerned about the "increased oligopoly power" of our distribution system.

Free-Market Analysis: The excerpt above is taken from a column that "monitors" financial markets in order to hold "companies, executives and government officials accountable for their actions."

OK. It's a well-written column, but it misses a main point, in our humble view. The Federal Reserve is a mercantilist (quasi public) facility apparently controlled by dynastic families out of the City of London and elsewhere. For an entity within this larger monstrosity to call parts of the US banking system "too big to fail," is rich, to put it mildly.

This is actually part of a larger elite dominant social theme, that central banks are a public good and that the quasi-private banking system beneath them is where the problems reside.

This simply isn't true, in our humble opinion. As we've often pointed out, the current Western banking system is nothing but a distribution channel for the elite's monopoly fiat money. That's why the world is so overbanked.

If the Dallas Fed honchos had written the following, it would be closer to the truth: "Go to any large city on the planet and observe that the largest skyscrapers are filled with headquarters of obscure banks you've never heard of. Travel to any country and observe that banking is a primary occupation ...

"Banking is the world's biggest bubble. We distribute our printed and digital money-from-nothing through large commercial banks and thus they are never allowed to go out of business. They are part of us and we would no more remove them from the body politic than we would cease to purvey our endless tidal wave of currency."

In other words, it's kind of hypocritical for the Dallas Fed to complain about the size of American central banks. To use another metaphor, it's kind of like an obese person pointing to his stomach and claiming that it ought to shrink. Sure, a big stomach is a problem, but it's not the WHOLE problem by any means. Here's some more from the article:

Having seen the biggest banks make risky bets, crush the economy and get rewarded leaves "a residue of distrust for the government, the banking system, the Fed and capitalism itself," Mr. Rosenblum wrote. It's one thing for the Occupy movement to point out how bailing out the biggest banks -- with little cost to their executives or shareholders and creditors -- has demolished credibility. It's quite another for top officials in the Federal Reserve system to put it in an annual report.

"We know under the current structure that the government would be called on once again," the president of the Dallas Fed, Richard W. Fisher, told me. He has been giving a series of speeches about the continuing problem of "too big to fail." ...

Unfortunately for our banking regulation system, critics in the regional Federal Reserve banks haven't had much influence on regulatory policy ... Mr. Fisher, the Dallas Fed president, has been one of the fiercest inflation hawks. He has dissented against the Fed's efforts to buy longer-term assets, known as quantitative easing, which was an effort to stimulate the economy. (He has been less worried about inflation more recently, arguing that unemployment is the top problem for the economy.)

"Sound money and sound structure go hand in glove," Mr. Fisher said ... The top bank regulators at the Fed, meanwhile, have embraced unorthodox monetary policies, but have also had scant courage and originality in challenging the current structure of the country's financial system. Not so with the Dallas Fed. Its report champions "the ultimate solution for TBTF -- breaking up the nation's biggest banks into smaller units."

The elite's central banking promotion is an endless one. We are constantly transported to the Church of Paper Money where a group of good, gray men administer the creation of trillions of dollars at the push of a button.

After creating a random trillion here and there, these same individuals saunter out to the platform (or stage) and address the waiting "financial reporters." They explain they are very worried about "inflation," never hinting that they'd just primed their digital printing presses with another trillion that very morning.

In truth, central banks are inflation factories. The inflation is aimed at the money supply and price inflation is the inevitable result when the money finally begins to circulate. The confusion between inflation and price inflation is purposeful as well. It is another sub dominant social theme: "inflation" has to do with prices. It does not, of course. It has to do with the amount of money in circulation.

There were very few central banks 100 years ago. Today there are 150, and most of them are quasi-public entities, controlled behind the scenes by the top dynastic families, it seems, that want to create world government and use the proceeds of monopoly money to do so.

The trouble with the elite's control of central banking in the modern era is that what we call the Internet Reformation has thoroughly exposed it. As we have pointed out in many articles, the Internet is like the Gutenberg Press before it. It is a magnifying glass, exposing questionable realities that went unnoticed in the 20th century when the elites controlled virtually all forms of formal communication.

Today, the average man – struggling to keep his home, family and job – is well aware that there are a few people who regularly distribute trillions to their cronies while his region withers from the ruin that results from an overabundance of ever-more debased money.

It is this MORAL revelation – a revelation of immorality actually – that is likely going to do in the central banking system. The top central bankers like Fisher are deliberately trying to take a moral position about the modern money system but it may already be too late.

The idea is to whip up resentment against the putatively private sector – to pretend that central banking itself is above the fray and that the problems of the financial world have to do with the structure and immorality of Wall Street and "too-big-to-fail" banks.

For this reason, we have predicted that eventually there will be neo-Pecora hearings in Washington, DC that will then set the tone for the rest of the Western world as well. The previous Pecora hearings back in the 1930s blamed the Depression on Wall Street greed and corruption and set up the SEC, NASD etc.

The new Pecora hearings, which are even now being planned, will deal a full death blow to what is left of the private capital-raising mechanism of the US. There is no question that Wall Street is thoroughly contemptible and corrupted, but after these new hearings take place, there will be nothing left of market capitalism in the US.

The country will have fulfilled the mandate of possible Rothschild agent Alexander Hamilton who wanted to ensure that the US system mimicked the dirigiste European system where people born into one class could never migrate to another.

But there is the Internet ... Finally, there is the Internet. These neo-Pecora hearings – if and when they come – will not take place in a vacuum. The powers that be can do all they want to pretend that the problems of Western society come from "big banks" but the evident and obvious truth is that the problems faced by the Western world come from the money system itself.

The world is drowning in money and banks. This plethora of monetary agents has been propounded by the elites themselves to create recessions, depressions and eventually wars – the building blocks of the coming world government. Out of chaos ... order.

It will not do anymore for the elites to pretend that central banks are the disinterested solution to the "larger" problems of private-sector cronyism and corruption. In fact, fiat-money monopoly printing IS the problem. The biggest of the too-big-to-fail banks are the central banks themselves.

Conclusion: If the honchos of the Dallas Fed want to break up banks, they should start with their own.

March 30, 2012

Peter Schiff: Market-Crushing Treasury Collapse To Hit Around 2013

Peter Schiff, the divisive investor and commentator that predicted the subprime/real-estate bubble, is forecasting a U.S. dollar and bond crisis over the next couple of years. Schiff blames intervened bond markets, where rates are artificially and excessively low, and expects the coming crisis to blow the 2008-9 financial crisis out of the water.

There is little doubt that the Federal Reserve, with Chairman Ben Bernanke at the helm, is holding markets by the hand. Bernanke, himself a divisive figure, has done all he can to push interest rates lower, using quantitative easing and Operation Twist once nominal rates had hit the zero-range. While many believe ultra-loose monetary policy is dangerous, Schiff thinks it will lead to a catastrophic correction.

“The more you delay it, the bigger it will be,” Schiff tells Forbes in a phone interview Tuesday, “so we need to raise interest rates during the recession to confront the inefficiencies.” Schiff, who runs Euro Pacific Capital and is seen by many as permanently bearish, argues that government-intervened bond markets are leading to massive distortions in capital allocation that have only been exacerbated as the Fed reacted to the last couple of recessions.

Recent market behavior supports his thesis that massive dislocations in bond yields distort reality. Ten-year Treasury yields had traded in a narrow-range for about four months, on the presumption that a weak economy would continue to count on Bernanke’s monetary support (particularly of the bond market). On March 13, the policy-setting Federal Open Market Committee (FOMC) acknowledged an improved recovery, but did not mention more quantitative easing, or bond purchases, were on the way, sparking a violent sell-off in Treasuries (exacerbated by JPMorgan’s dividend announcement the same day, which triggered a rally in financial stocks) as market players fled a bond rally they considered fixed by the Fed.

While Bernanke delivered calm to bond markets on Monday in a speech that promised “continued accommodative policies,” the violence of the sell-off speaks to Schiff’s argument. “We consume more than we produce and we borrow abroad, but we are never going to be able to pay them back,” says Schiff.

The controversial investor and commentator expects a massive crash over the next two to three years as a bond market bubble, coupled with the U.S. dollar, collapses under the weight of excessive debt. Schiff, like PIMCO’s Bill Gross, doesn’t believe in the current deleveraging cycle. While households have reduced their leverage, government debt has ballooned on the back of stimulus programs, but, argued Schiff, the government’s debt is the people’s debt, thus overall leverage has actually increased.

In CNBC interview Wednesday, Schiff called Bernanke “public enemy number one” and warned that banks would crash if the bond market collapses. While most major banks, including the likes of JPMorgan, Wells Fargo, and even Bank of America, passed the Fed’s strenuous stress tests, which stipulated a massive decline in equity and real estate prices, Schiff still believes they’re in trouble. “The Fed didn’t ask the banks to stress test a big drop in the bond market because that’s what coming, and the banks would fail that,” he said.

Schiff cites the rising price of gold as evidence that U.S. dollar debasement, and inflation, are higher than the Fed, and consumer price data, suggest. Following the Austrian economic tradition, Schiff believes that only a massive correction, via a deflationary recession, can set the system straight. “In a deflation, real wages will rise because the cost of goods will fall faster,” he says, adding that the government should accompany the correction by lowering taxes and cutting back on regulation.

While Schiff does suggest saving in gold, he understands the limitations of the investment. “If you invest in gold, then the economy doesn’t benefit from savings, I want investment to go to plants and equipment.”

The system, he argues, is as broken as it was before the financial crisis. Schiff, who was very prescient in his forecast and prediction of how the subprime debacle would filter through to the broader real estate market and thus bring down the economy, believes complacency is widespread. “All of the people who were 100% wrong [back in ‘08] are saying that everything’s OK [now]. I am telling them they didn’t solve the problem and are making it so much worse.”

Schiff, who knows how to build his case, concludes it thusly: “I didn’t get lucky, I just understood the problem, and we are going to get another big one coming soon.”

March 29, 2012

Goldman Ex-Prop Traders Flopping on Their Own

John Whitehead is being proven right.

The former Goldman co-chairman took the unheard of step of excoriating Lloyd Blankfein for Goldman’s “shocking” pay levels of 2006. As anyone who has been following Wall Street knows, compensation levels were even higher in 2007, 2009, 2010 and last year. Per an interview with Bloomberg:

“I’m appalled at the salaries,” the retired co-chairman of the securities industry’s most profitable firm said in an interview this week. At Goldman, which paid Chairman and Chief Executive Officer Lloyd Blankfein $54 million last year, compensation levels are “shocking,” Whitehead said. “They’re the leaders in this outrageous increase.”

Whitehead went even further, recommending the unthinkable, that Goldman cut pay:

Whitehead, who left the firm in 1984 and now chairs its charitable foundation, said Goldman should be courageous enough to curb bonuses, even if the effort to return a sense of restraint to Wall Street costs it some valued employees. No securities firm can match the pay available in a good year at the top hedge funds.

“I would take the chance of losing a lot of them and let them see what happens when the hedge fund bubble, as I see it, ends,” Whitehead, 85, said….

The Galtian traders who carry on as if they are solely responsible for their profits are being shown to be more dependent on the franchise, in particular, the concentrated information flows from dealing with lots of customers and counterparties, than they had persuaded themselves and management. Bloomberg today tells us that the prop traders who have decamped from Goldman, convinced that they’d be able to rack up stellar returns, are floundering. It isn’t just that they aren’t racking up huge wins; they are losing money and falling short of hitting the average for their trading strategy. As the report notes:

Ex-Goldman Sachs (GS) Group Inc. traders led by Pierre-Henri Flamand and Morgan Sze raised more than $4.5 billion for their own hedge funds..

So far, none of them has made money for clients.

The two are among at least six traders who have left Goldman Sachs’s biggest proprietary-trading group in the past two years, which the New York-based bank shuttered in response to new U.S. regulations. All, including Daniele Benatoff and Ariel Roskis, trailed this year’s stock market rally after losing money in 2011, investors said…

Flamand, 41, who was the global chief of Goldman Sachs’s principal strategies group before he quit two years ago to start Edoma Capital Partners LLP in London, has lost about 2.4 percent through February since his $1.8 billion hedge fund started in November 2010, according to investors.

Edoma is an event-driven fund, which invests in companies undergoing events such as mergers, spinoffs and bankruptcies. Such funds returned an average 3.9 percent in the same 16-month period…

Sze, 46, who ran Goldman Sachs’s principal strategies team in Asia before briefly replacing Flamand as global head, left the bank in 2010 to start Azentus Capital Management Ltd. in Hong Kong, hiring 13 former Goldman Sachs traders. His event- driven fund lost about 4.8 percent through February since its April 2011 inception, said a person with knowledge of its returns.

Event-driven funds declined 2.4 percent in the same period…

We’ve long been skeptical of the idea that big firm traders are worth their outsized pay packages. Of course, it nevertheless make sense for management to play along, since higher pay levels for traders justify robust pay for everyone senior to them in the hierarchy (yes, a top trader will often be paid more than the top brass, but it’s an anchoring issue. And pay in banks at the senior levels has become more hierarchical than it was in the 1980s and 1990s).

Long standing readers may recall the 2009 row over the pay level of Andrew Hall, the head of a Citigroup oil trading unit. He had made $100 million in 2008 on a long-standing pay arrangement that gave him a pay deal for his team that was just below 30% of profits, a level unheard of since Mike Milken at Drexel (and we all know how well that turned out). Kenneth Feinberg, Obama’s pay czar, refused to back down, leading to the predictable hue and cry as to how terrible it would be to break Hall’s contract (we pointed out that there were likely ways to do just that, that big producers like Hall were often guilty of expense abuses that would allow for termination for cause).

Consistent with the notion that Hall needed Citi more than he’d pretended earlier, he started negotiating with the bank (if he really was such a hot item, one would think he’d be able to decamp and raise money). As we pointed out at the time:

A LOT of Hall’s performance was due to cheap funding from Citi, and probably massive leverage too, conditions he could not replicate anywhere else. A risky, highly geared operation should pay an interest rate appropriate to the hazards it is taking, not the borrowing costs of its parent (this basic premise is widespread in financial firms, embodied in approaches like RAROC (Risk Adjusted Return on Capital), the Basel I and II rules, and Economic Value Added models.

And the denouement, from ECONNED:

Phibro, along with its richly paid chief, Andrew Hall, is leaving Citigroup for Occidental Petroleum. The price Oxy paid for Phibro was only the current value of its trading positions–liquidation value and not a brass razoo more. There was NO premium for the earning potential of Hall and his supposed money machine. It’s not hard to see why. Hall’s returns were heavily dependent on high leverage, cheap funding, and market intelligence from other trading desks, all huge subsidies from Citigroup. In turn, these concentrated capital and information flows do not come about naturally, but are the product of industry-favoring policies.

His example illustrates that the widely proclaimed view that highly profitable traders are worth their exorbitant pay is often a fiction. The fact that no other buyers, not a financial firm, commodities trader, or consortium, stepped forward when Citi was looking for a graceful exit shows that the business was worth very little on a stand-alone basis.

Instead of seeing the Hall episode as further evidence that industry pay practices are extractive, the media focused instead on “government interference” or how Citi would be harmed by losing the revenues from taxpayer-supported commodities speculation.

The problem, of course is that given how much traders and investors who appear to generate outsized returns (query at what risk and with what information advantages) are celebrated in their circles almost as much as sports stars. Their allure is fading bit by bit, but it will be quite a while before the ascendancy of traders is reversed.

March 28, 2012

Bernanke Claims That The Fed Has Averted A Second Great Depression By Bailing Out The Too Big To Fail Banks

Federal Reserve Chairman Ben Bernanke claims that the Federal Reserve averted a second Great Depression by bailing out the big Wall Street banks during the last financial crisis, and he says that if a similar financial crisis comes along that the correct "policy response" will be to do the exact same thing again. This was the theme of the lecture that Bernanke delivered to students at George Washington University on Tuesday. In previous lectures Bernanke has defended the existence of the Fed and detailed the history of Fed activities, but on Tuesday he addressed things that have happened since he has been at the helm of the Fed. And according to Bernanke, he has been doing a great job. Bernanke told the students that the "threat of a second Great Depression was very real" and that the Federal Reserve did exactly what needed to be done to fix the financial system. Unfortunately, the truth is that all Bernanke did was kick the can a bit farther down the road. You can't fix a debt problem with more debt, and the debt bubble we are living in today is far larger than it was in 2008. Will Bernanke still be trying to portray himself as a hero when this house of cards finally falls apart?

During his lecture to the students on Tuesday, Bernanke stated the following....

"I think the view is increasingly gaining acceptance that without the forceful policy response that stabilized the financial system in 2008 and early 2009, we could have had a much worse outcome in the economy."

So what did that "forceful policy response" entail?

Well, on slide 24 of his presentation to the students Bernanke tells us....

• On October 10, 2008, G‐7 countries agreed to
work together to stabilize the global financial
system. They agreed to
– prevent the failure of systemically important
financial institutions
– ensure financial institutions’ access to funding and
– restore depositor confidence
– work to normalize credit markets
Please note that not all financial institutions got bailed out.

In fact, hundreds of small and mid-size U.S. banks failed during the financial crisis.

It was only the "systemically important financial institutions" that got bailed out.

So who decided which financial institutions were important enough to be bailed out?

The Federal Reserve made those decisions. There were no Congressional votes and no input from the public. The Federal Reserve determined who the winners and the losers would be in secret and without any public debate.

Sure sounds "democratic", eh?

But we are told to trust them because they are supposedly the experts.

So once the Federal Reserve bailed out the "too big to fail" banks, what was the outcome?

On page 25 of his presentation to the students Bernanke claimed that the bailouts successfully prevented the global financial system from collapsing....

• The international policy response averted the collapse of the global financial system.

But it wasn't just big Wall Street banks that got bailed out. Bernanke says that AIG was also bailed out because the insurance company was deemed to be too "interconnected with many other parts of the global financial system" to be allowed to fail....

Because AIG was interconnected with many other parts of the global financial system, its failure would have had a massive effect on other financial firms and markets.

Once again, we see that it is the Federal Reserve who picks the winners and the losers.

AIG got bailed out and was then able to pay 100 cents on the dollar of what it owed to Goldman Sachs.

That sure worked out well for Goldman Sachs.

In all, the Federal Reserve issued a grand total of more than 16 trillion dollars in secret loans during the financial crisis.

The big Wall Street banks got showered with cash while hundreds of smaller banks were allowed to die like dogs.

The fact that the Fed greatly favors the big Wall Street banks has allowed them to grow massively in size and in power.

Back in 1970, the 5 biggest U.S. banks held 17 percent of all U.S. banking industry assets.

Today, the 5 biggest U.S. banks hold 52 percent of all U.S. banking industry assets.

The "too big to fail" banks just keep getting bigger and bigger and bigger.

Yet during his presentation to the students, Bernanke tried to talk out of both sides of his mouth by claiming that it is not a good thing for some banks to be "too big to fail"....

"But clearly, it is something fundamentally wrong with a system in which some companies are 'too big to fail.'"

So who is to blame for them being so big?

Well, the Federal Reserve is probably the biggest culprit.

Thanks Bernanke.

The big Wall Street banks are bigger than ever and they are also more unstable than ever.

According to the Comptroller of the Currency, the biggest U.S. banks have exposure to derivatives that is absolutely mind blowing. Just check out these numbers which have just been released....

JPMorgan Chase - $70.1 Trillion

Citibank - $52.1 Trillion

Bank of America - $50.1 Trillion

Goldman Sachs - $44.2 Trillion

So what is going to happen when that bubble pops?

Is Bernanke going to zap tens of trillions of dollars into existence to bail out that gigantic mess?

Meanwhile, the debt bubble that we are all living in just keeps exploding in size.

Total student loan debt in the United States is over 1 trillion dollars at this point. Consumer debt is rising. Millions of mortgages are past due.

The American people are not in better financial condition than they were during the last financial crisis. In fact, they are significantly worse off.

All over America, state and local governments are also drowning in debt. In fact, there have been several very notable municipal bankruptcies lately.

And the U.S. government is racking up debt at a pace that is almost unimaginable.

When the last financial crisis began, the U.S. national debt was about 10 trillion dollars.

Today, it has risen to 15.5 trillion dollars.

So Bernanke did not fix anything.

The best that can be said is that he kicked the can down the road a little bit and made our long-term financial problems a lot worse at the same time.

Bernanke can create money out of thin air and loan it to his friends all he wants, but he is not going to be able to prevent this house of cards from crashing down indefinitely.

So grab a bucket of popcorn and get ready. The next few years are going to be fascinating to watch.

March 27, 2012

John Corzine- An Insider Helping Out Fellow Insiders

Few men have a resume quite like Jon Corzine. Not only has Corzine served in the U.S. Senate and been governor of New Jersey, he has also been the CEO of Goldman Sachs and the recently imploded brokerage firm MF Global. The insider blood filtrated through cronyism and the endless squandering of the public dime flows heavily through his veins.

When MF Global went belly up back in the fall, Corzine was finally revealed for the inept, overly connected bureaucrat he really is. Corruption seemingly follows the former Senator, Governor, and banker like shadows on a sunny day. Earlier this week, New Jersey was declared the least corruptible state in the union much to the surprise of, well, everyone. But as the great Jonathan Weil pointed out, the methodology in the study conducted by the Center for Public Integrity was horribly flawed. New Jersey has historically been defined with corruption:

…this is a state where in 2009 three mayors, two assemblymen and five rabbis were among 44 charged in a single money-laundering and bribery sting by the Federal Bureau of Investigation. One of those mayors, Peter Cammarano, was from Hoboken, where I live. He was sentenced to 24 months in prison. Five years before his arrest, another former Hoboken mayor, Anthony Russo, pleaded guilty to corruption charges. His son now sits on the city council.

Corzine was of course acquainted with one of the mayors listed and a member of his own cabinet faced investigation by the FBI during the same time period. And that was only the man’s tenure as Governor. Anyone who spends their time horse-trading in Congress is instantly guilty of corruption by definition. Corzine was especially so as he coauthored the Sarbanes-Oxley financial regulatory bill which heaped another expense on start up businesses to the benefit of already established and politically favored firms.

Corzine’s political career was launched after his term heading the financial vampire squid known as Goldman Sachs which has its tentacles within practically every important or relevant governing authority around the globe. During his time at GS, he served on a presidential commission for Bill Clinton and a committee in the U.S. Treasury. In short, before his time heading MF Global, Corzine was an expert paper pusher whose connections in the political establishment were deeply rooted. That’s why he made the perfect candidate for a multinational investment firm on the up and up.

Not too long after Corzine went to MF Global, he visited the New York branch of the Federal Reserve in an attempt to expedite the process by which MF could received the coveted “primary dealer” privilege. This primary dealer position gave MF the ability to be one of the first financial institutions the NY Fed would purchase government securities and bonds from when the central bank wished to expand the monetary base. It is the ultimate position any banking insider looking to game the system seeks. Though an official from the NY Fed denies any special treatment was given to Corzine (as if they would own up to it in public anyway), as the Wall Street Journal explains, “the New York Fed doesn’t publicly discuss” decisions of granting primary dealership status, “but a source with knowledge of the process says that it sometimes takes several years for a firm to gain acceptance.”

And yet we are to believe that Corzine’s numerous connections didn’t help fast track this process?

It should be obvious by now how heavy a user Mr. Corzine is of the revolving door between Wall Street and Washington. Insiders are able to make a fortune by occupying public office and subsequently being offered a prominent position in an industry seeking to exploit regulation by hiring those who know it best. This often includes the authors of the regulations themselves. Corzine is not only an experienced alumni of this group but a practical valedictorian.

For someone so experienced in this utterly corrupt dynamic, it came as a surprise to see MF Global crash and burn as the European debt crisis escalated. Perhaps Corzine was betting on a more monetarily aggressive European Central Bank to bailout the profligate governments of the periphery? Whatever the case, Corzine and co. were caught red handed as the firm declared bankruptcy and $1.2 billion of money supposed to be secured in customer accounts went missing. At the time, Corzine pathetically told the Agricultural Committee in the House of Representatives:

“I simply do not know where the money is, or why the accounts have not been reconciled to date,”

As it turns out, Corzine should have known where at least some of the funds went. From Bloomberg:

Jon S. Corzine, MF Global Holding Ltd. (MFGLQ)’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in a brokerage account with JPMorgan Chase & Co. (JPM), according to a memo written by congressional investigators.
Edith O’Brien, a treasurer for the firm, said in an e-mail quoted in the memo that the transfer was “Per JC’s direct instructions,” according to a copy of the memo obtained by Bloomberg News yesterday. The e-mail, dated Oct. 28, was sent three days before the company collapsed, the memo says. The memo does not indicate whether that phrase was the full text of the e-mail or an excerpt.

In what will surely be labeled an unfortunate coincidence, a fellow NY Fed primary dealer was given a helping hand as the firm knowingly imploded.

Talk about friends with benefits.

Corzine may be subpoenaed by Congress and used as a punching bag by Republicans looking to score political points but the dominant culture of increasing centralization and cronyism which is an ever-present aspect of state will carry on unchallenged. Corzine will simply be the scapegoat of the political class looking to give off the mirage of integrity within government. God forbid politicians not “do something” in the wake of a controversy they themselves are responsible for.

As economist Freidrich Hayek taught, power centers attract and breed unscrupulous behavior. There is no institution more powerful than that of the state apparatus which feeds off the continual usurpation of authority and acts as the sole monopolizer of force over a given geographical area. Governments don’t minimize class divisions, they are the originator of stagnant social mobility. The Jon Corzines of the world feel entitled to their positions of prominence and will do anything to secure them as they blatantly skirt the law and protect their friends by any means necessary. The normal rules imposed on society don’t apply to them for they are the rule makers. The existence of central banks not bound by restraints on money creation and the backing of fractional reserve banking with taxpayer funds are simply extensions of the unceasing jackboot pressed down upon economic and social freedom. This is why Ben Bernanke’s Fed fought tooth and nail to not disclose the amount of money “lent” out to big banks during the financial crisis.

If there is one good thing to come about from the whole MF Global affair, besides putting a stake in the heart of Corzine’s reputation, it was the fact that the firm wasn’t bailed out by by the Treasury or Fed. The powers that be decided to let MF go as a possible sign that more of the public is becoming aware of the farce of a market the financial industry is which acts as a middleman between the government and the printing press. Market forces don’t decide winners and losers in today’s banking industry; the members of the elite class do.

March 26, 2012

On the Meaningless of Contracts and the New Optionality

An old saying is that contracts are only as good as the parties that enter into them. And the evidence is growing that when there is a meaningful power disparity between two parties to an agreement, the odds are high that the bigger player will elect to behave badly. This blog is rife with examples: pervasive contractual and regulatory violations in securitizations and foreclosures, banks exploiting not just ordinary consumers with “tricks and traps” but even billionaire clients; debt collection abuses; routine raiding of employee pensions while CEO pay and perquisites remain sacrosanct; and, of course, the pilfering of customer accounts at MF Global.

And conditions on the ground are even worse. Hoisted from comments:

LAS says:
March 23, 2012 at 10:41 am
I think you are on to something, Yves.
There’s no indication of improvement either.

For an example, our firm completed work for a major corporation last month (successfully) and they will not accept the invoice for our work. While we have had to lay out cash to perform the work, they have not. Although they came to us to do the work for them, they have shut down their procurement/accounts payable dept and they have kept it shut for about 2 months now. This is a major international corporation and I believe they are treating other suppliers like this, trying to make their Q1 performance look better than it is.

I consider this to be theft of service. Until they re-open their procurement/accounts payable system, they are in effect refusing to acknowledge that they owe anything.

Mel says:
March 23, 2012 at 1:38 pm
(Robert Reich wrote another post mentioning the “destruction of meaning”. Why can’t I find these things when I want references?)

Wait till you see their next move. They’re going to run Accounts Payable as a Profit Center. Because they can.

Lidia says:
March 23, 2012 at 7:43 pm
Is (isn’t) that how banks work?

As a small business person, I was shocked at the practices OF MY DEBTORS that pretended to keep me on the skids.

I was expected to be THEIR BANK, me! Someone who pulled in $50k, was fronting money to Siemans, Bard Medical and even larger, more obscure, companies whose names I now forget.


Planck says:
March 24, 2012 at 8:58 am
We saw this recently too…major corporations who don’t think they have to pay suppliers. Also, procurement officers who want 5% off the top of everything to justify their measily paper pushing jobs for profits that roll up to some Family Office somewhere.

Now LAS might have some creative routes for recourse (say drafting a press release from Concerned Big Multinational Suppliers expressing concern that the mysterious shuttering of the purchase department might be a sign that Big Multinational is in very bad financial shape because it is taking such desperate measures, faxing it to the corporate communications office from a Kinkos so as to disguise the source, with a list of financial websites and websites to whom it will be sent if checks are not forthcoming in a week. That might get their attention). But it is grotesque that we are even having to discuss taking extreme measures to get paid. LAS’s company is a victim of theft, period.

Guest blogger and author of On Value and Values Doug Smith took note of the LAS story and e-mailed:

It all reminded me of two things: specifically, the Morgan Stanley guy who is charged with stabbing the cab driver – and more generally a profoundly important shift that is already happening in society/capitalism/markets.

Business used to be based on cultivating critical relationships: with customers, employees, suppliers. Capitalism has not simply abandoned a relationship orientation, but has rapidly moved through “transactions” to “options.”

Today, everything is just an option. As deleterious as transaction orientation is to relationships, at least transactions have the constraints of obligations to follow through. But in our current raging and out of control homo economicus-as-options situation, not even that exists. There are no contractual obligations whatsoever.. there are only new negotiating positions tied to option values.

When the corporation in LAS’s initial comment above refuses to accept the invoice for services, it is merely exercising its option choice — likely under the belief that any cost (whether legal or otherwise) will be less than paying the invoice.

This is the world in which William Bryan Jennings operates. The driver’s account is credible, because it reflects this new business reality. When the cab pulled into the driveway, Jennings — just out of habit, routine and practice — treated the ‘agreed upon transaction amount’ as a mere option to be exercised through a new transaction/renegotiation. What the cabbie recalled as a contract for $204 became, if I remember, an option to pay $50.

In a world of relationships, those relationships had value beyond ‘just one damn transaction after another’…. and this goes missing in a world of transactions… but, in a world where every moment is just that moment’s options … not even previous promises have any stable value, let alone relationships …. and this is the dog now, not the tail.

Now there are settings in which not having a contract can work, but those are where relationships matter. When I worked with in Japan in the 1980s, the entire society was non-contractual. You’d have a vague understanding (Japanese is a vague language, being explicit is seen as tiresome and rude) and the two parties would keep arguing about what the deal was as they worked together. But there was a well understood, well shared set of norms, and it was a shame based culture, so word getting out that one party had been abusive would have led it to be hectored and shunned by others.

With a rise in an options-based view of business, it isn’t hard to see how a pernicious dynamic sets in. It used to be that only occasional scumbags would behave this way, and you’d write it off as bad luck and a reminder to do a decent amount of due diligence on new customers. But when this sort of behavior becomes common, the cost of doing business escalates since no one can trust anyone’s commitments. You can see this now in the way many types of contracts have changed. It used to be possible to do business with a short agreement. In many fields, they’ve now become excruciatingly long, since the odds of them being litigated is correctly seen as higher, so nailing down all sorts of possible outcomes is more important. And longer agreements means more protracted negotiations. It amounts to a tax on commerce.

And this pattern is particularly devastating to small businesses. It’s comical to see the Administration talk up the need to help entrepreneurs yet gut the rule of law to help banks. The last time I had to think about suing someone (more than 10 years ago), the rule of thumb was that it didn’t make sense to litigate unless the matter at hand was at least $300,000, between the hard dollar costs (you can get to $50,000 in legal and not be very far along) as well as the management distraction and emotional toll. Adjusting for inflation alone, the number has to be even higher now.

And the power imbalance does not have to be of the big company versus small one sort. It can be informational. As we wrote in ECONNED:

When the seller knows more than the buyer (or vice versa), commerce in the neoclassical framework becomes costly. One option is dealing only with vendors a buyer has used before successfully. Even then, he runs the risk that the seller pulls a fast one now and again, taking advantage of him in ways he cannot readily detect.

If sellers cannot be presumed to be trustworthy (and the dictates of maximizing self-interest say they in fact won’t be), consumers have to either spend money and effort to validate the quality of their purchase or accept the risk of being cheated.

Consider purchasing a computer in the neoclassical paradigm. The buyer has no way of being certain that the computer lives up to the vendor’s promises. So the consumer will have to bring an expert to test the computer’s functionality at the time of purchase (does it really have the memory and chip speed promised, for instance?). The seller will need to be paid in cash, otherwise the buyer could revoke payment.

And what happens if the computer fails in a few weeks? Assuming the vendor has not fled the jurisdiction, the only remedy is litigation, or an enforcer with brass knuckles.

But even that scenario is too simplistic. It assumes the buyer can evaluate the expert. But in fact, if you aren’t a computer professional, you can’t readily assess the competence of someone who has expertise you lack. And even if the person you hired is competent, he might arrange to get a kickback from the seller for endorsing shoddy goods. The same problem holds true in any area of specialized skills, such as accounting, the law, or finance. Many people judge service quality by bedside manner, which is not necessarily a good proxy for the quality of the substantive advice. And as we will see later, one of the factors that helped create the crisis was the willingness of investors to buy complicated financial products based on the recommendation of a salesman who did not have the buyers’ best interests at heart.

We can see the damage of the breakdown of the norms of commerce. The private label securitization market, which functioned fairly well when originators and servicers acted in accordance with their agreements with investors, is now dead. The securitization market, which was 60% private label prior to the crisis, is now effectively 100% government guaranteed (there was all of one private label deal last year). Various reform proposals have been suggested; some have been well thought out enough that past investors reacted positively. But of course, the sell side nixed anything far-reaching enough to make a real difference. The investors I know say there won’t be a private label securitization market ex root and branch changes for at least ten years.

So it looks like Marx is being proven correct, that capitalism sows the seeds of its own destruction, although not by the route he envisaged, that of a worker revolt. Instead, it comes about via the capitalists turning on each other to try to secure an even better deal.

March 25, 2012

WALL STREET CONFIDENCE TRICK: How "Interest Rate Swaps" Are Bankrupting Local Governments

The “toxic culture of greed” on Wall Street was highlighted again last week, when Greg Smith went public with his resignation from Goldman Sachs in a scathing oped published in the New York Times. In other recent eyebrow-raisers, LIBOR rates—the benchmark interest rates involved in interest rate swaps—were shown to be manipulated by the banks that would have to pay up; and the objectivity of the ISDA (International Swaps and Derivatives Association) was called into question, when a 50% haircut for creditors was not declared a “default” requiring counterparties to pay on credit default swaps on Greek sovereign debt.

Interest rate swaps are less often in the news than credit default swaps, but they are far more important in terms of revenue, composing fully 82% of the derivatives trade. In February, JP Morgan Chase revealed that it had cleared $1.4 billion in revenue on trading interest rate swaps in 2011, making them one of the bank’s biggest sources of profit. According to the Bank for International Settlements:

[I]nterest rate swaps are the largest component of the global OTC derivative market. The notional amount outstanding as of June 2009 in OTC interest rate swaps was $342 trillion, up from $310 trillion in Dec 2007. The gross market value was $13.9 trillion in June 2009, up from $6.2 trillion in Dec 2007.

For more than a decade, banks and insurance companies convinced local governments, hospitals, universities and other non-profits that interest rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools. The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels. This was not a flood, earthquake, or other insurable risk due to environmental unknowns or “acts of God.” It was a deliberate, manipulated move by the Fed, acting to save the banks from their own folly in precipitating the credit crisis of 2008. The banks got in trouble, and the Federal Reserve and federal government rushed in to bail them out, rewarding them for their misdeeds at the expense of the taxpayers.

How the swaps were supposed to work was explained by Michael McDonald in a November 2010 Bloomberg article titled “Wall Street Collects $4 Billion From Taxpayers as Swaps Backfire”:

In an interest-rate swap, two parties exchange payments on an agreed-upon amount of principal. Most of the swaps Wall Street sold in the municipal market required borrowers to issue long-term securities with interest rates that changed every week or month. The borrowers would then exchange payments, leaving them paying a fixed-rate to a bank or insurance company and receiving a variable rate in return. Sometimes borrowers got lump sums for entering agreements.

Banks and borrowers were supposed to be paying equal rates: the fat years would balance out the lean. But the Fed artificially manipulated the rates to the save the banks. After the credit crisis broke out, borrowers had to continue selling adjustable-rate securities at auction under the deals. Auction interest rates soared when bond insurers’ ratings were downgraded because of subprime mortgage losses; but the periodic payments that banks made to borrowers as part of the swaps plunged, because they were linked to benchmarks such as Federal Reserve lending rates, which were slashed to almost zero.

In a February 2010 article titled “How Big Banks' Interest-Rate Schemes Bankrupt States,” Mike Elk compared the swaps to payday loans. They were bad deals, but municipal council members had no other way of getting the money. He quoted economist Susan Ozawa of the New School:

The markets were pricing in serious falls in the prime interest rate. . . . So it would have been clear that this was not going to be a good deal over the life of the contracts. So the states and municipalities were entering into these long maturity swaps out of necessity. They were desperate, if not naive, and couldn't look to the Federal Government or Congress and had to turn themselves over to the banks.

Elk wrote:

As almost all reasoned economists had predicted in the wake of a deepening recession, the federal government aggressively drove down interest rates to save the big banks. This created opportunity for banks – whose variable payments on the derivative deals were tied to interest rates set largely by the Federal Reserve and Government – to profit excessively at the expense of state and local governments. While banks are still collecting fixed rates of from 4 percent to 6 percent, they are now regularly paying state and local governments as little as a tenth of one percent on the outstanding bonds – with no end to the low rates in sight.

. . . [W]ith the fed lowering interest rates, which was anticipated, now states and local governments are paying about 50 times what the banks are paying. Talk about a windfall profit the banks are making off of the suffering of local economies.

To make matters worse, these state and local governments have no way of getting out of these deals. Banks are demanding that state and local governments pay tens or hundreds of millions of dollars in fees to exit these deals. In some cases, banks are forcing termination of the deals against the will of state and local governments, using obscure contract provisions written in the fine print.

By the end of 2010, according to Michael McDonald, borrowers had paid over $4 billion just to get out of the swap deals. Among other disasters, he lists these:

California’s water resources department . . . spent $305 million unwinding interest-rate bets that backfired, handing over the money to banks led by New York-based Morgan Stanley. North Carolina paid $59.8 million in August, enough to cover the annual salaries of about 1,400 full-time state employees. Reading, Pennsylvania, which sought protection in the state’s fiscally distressed communities program, got caught on the wrong end of the deals, costing it $21 million, equal to more than a year’s worth of real-estate taxes.

In a March 15th article on Counterpunch titled “An Inside Glimpse Into the Nefarious Operations of Goldman Sachs: A Toxic System,” Darwin Bond-Graham adds these cases from California:

The most obvious example is the city of Oakland where a chronic budget crisis has led to the shuttering of schools and cuts to elder services, housing, and public safety. Oakland signed an interest rate swap with Goldman in 1997. . . .

Across the Bay, Goldman Sachs signed an interest rate swap agreement with the San Francisco International Airport in 2007 to hedge $143 million in debt. Today this agreement has a negative value to the Airport of about $22 million, even though its terms were much better than those Oakland agreed to.

Greg Smith wrote that at Goldman Sachs, the gullible bureaucrats on the other side of these deals were called “muppets.” But even sophisticated players could have found themselves on the wrong side of this sort of manipulated bet. Satyajit Das gives the example of Harvard University’s bad swap deals under the presidency of Larry Summers, who had fought against derivatives regulation as Treasury Secretary in 1999. There could hardly be more sophisticated players than Summers and Harvard University. But then who could have anticipated, when the Fed funds rate was at 5%, that the Fed would push it nearly to zero? When the game is rigged, even the most experienced gamblers can lose their shirts.

Courts have dismissed complaints from aggrieved borrowers alleging securities fraud, ruling that interest-rate swaps are privately negotiated contracts, not securities; and “a deal is a deal.” So says contract law, strictly construed; but municipal governments and the taxpayers supporting them clearly have a claim in equity. The banks have made outrageous profits by capitalizing on their own misdeeds. They have already been paid several times over: first with taxpayer bailout money; then with nearly free loans from the Fed; then with fees, penalties and exaggerated losses imposed on municipalities and other counterparties under the interest rate swaps themselves.

Bond-Graham writes:

The windfall of revenue accruing to JP Morgan, Goldman Sachs, and their peers from interest rate swap derivatives is due to nothing other than political decisions that have been made at the federal level to allow these deals to run their course, even while benchmark interest rates, influenced by the Federal Reserve’s rate setting, and determined by many of these same banks (the London Interbank Offered Rate, LIBOR) linger close to zero. These political decisions have determined that virtually all interest rate swaps between local and state governments and the largest banks have turned into perverse contracts whereby cities, counties, school districts, water agencies, airports, transit authorities, and hospitals pay millions yearly to the few elite banks that run the global financial system, for nothing meaningful in return.

Why are these swaps so popular, if they can be such a bad deal for borrowers? Bond-Graham maintains that capitalism as it functions today is completely dependent upon derivatives. We live in a global sea of variable interest rates, exchange rates, and default rates. There is no stable ground on which to anchor the economic ship, so financial products for “hedging against risk” have been sold to governments and corporations as essentials of business and trade. But this “financial engineering” is sold, not by disinterested third parties, but by the very sharks who stand to profit from their counterparties’ loss. Fairness is thrown out in favor of gaming the system. Deals tend to be rigged and contracts to be misleading.

How could local governments reduce their borrowing costs and insure against interest rate volatility without putting themselves at the mercy of this Wall Street culture of greed? One possibility is for them to own some banks. State and municipal governments could put their revenues in their own publicly-owned banks; leverage this money into credit as all banks are entitled to do; and use that credit either to fund their own projects or to buy municipal bonds at the market rate, hedging the interest rates on their own bonds.

The creation of credit has too long been delegated to a cadre of private middlemen who have flagrantly abused the privilege. We can avoid the derivatives trap by cutting out the middlemen and creating our own credit, following the precedent of the Bank of North Dakota and many other public banks abroad.

March 24, 2012

Corzine Corzined - Congressional Panel Finds Former MF Global CEO Ordered JPM Fund Transfer

The only thing that could top today's epic market insanity and hilarity, would be that Corzine is himself about to be Corzined. Just released from Bloomberg:


And so we can now add perjury to felony embezzlement. Which means we now have to wait to find just which MF'er (and JPM'er) will be given a promise of untold millions if they only get Fab Tourre'd for a few years, and spend 5-7 in minimum security state prison instead of brave Jonny.

From Bloomberg:

Jon S. Corzine, MF Global Holding Ltd.’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in one of the brokerage’s JPMorgan Chase & Co. accounts in London, according to an e-mail sent by a firm executive.

Edith O’Brien, a treasurer for the firm, said in an e-mail sent the afternoon of Oct. 28, three days before the company collapsed, that the transfer of the funds was “Per JC’s direct instructions,” according to a copy of a memo drafted by congressional investigators and obtained by Bloomberg News.

O’Brien’s internal e-mail came as the New York-based broker found intraday credit lines limited by JPMorgan, the firm’s clearing bank as well as one of its custodian banks for segregated customer funds, according to the memo, which was prepared for a March 28 House Financial Services subcommittee hearing on the firm’s collapse. O’Brien is scheduled to testify after being subpoenaed this week.

“Over the course of that week, MF Global’s financial position deteriorated, but the firm represented to its regulators and self-regulatory organizations that its customers’segregated funds were safe,” said the memo, written by Financial Services Committee staff and sent to lawmakers.

Vinay Mahajan, global treasurer of MF Global Holdings, wrote an e-mail on Oct. 28 that said JPMorgan was “holding up vital business in the U.S. as a result” of the overdrawn account, which had to be “fully funded ASAP,” according to the memo.

Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was never returned to JPMorgan, the memo said.

The money transferred came from a segregated customer account, according to congressional investigators. Segregated accounts can include customer money and excess company funds.

Corzine testified that he never intended a misuse of customer funds at MF Global, and that he doesn’t know where client funds went.

“I did not instruct anyone to lend customer funds to anyone,” Corzine told lawmakers in December.

Steven Goldberg, a spokesman for Corzine, declined immediate comment.

Oops. Of course, in Jonny's defense there was no perjury here. The truth was merely rehypothecated.

Full memo below. And for those who say it is not a smoking gun, read last paragraph on page 4 and first paragraph on page 5. It appears the administration has turned on "JC"

March 23, 2012

Bank of America Launches Test “Mortgage to Lease” Program – Should We Be Impressed?

The Wall Street Journal and New York Times have reports on a pilot program at Bank of America to allow homeowners who are likely to default a graceful exit. The Charlotte bank will allow 1000 borrowers in New York, Arizona, and Nevada to turn in the deeds to their houses in return for a one year lease with a two one year renewal options at or below market rates. The program will be only with borrowers invited by the bank, which will target homeowners who are at least two months behind on payments but can demonstrate that they can pay the rent. The Journal cites an example of a Phoenix home with a $250,000 mortgage with payments of $1600 a month. It estimates the rent as $900.

This is clearly a preferable alternative for homeowners to foreclosure. They escape the credit score damage, stress, and indignity of the foreclosure process and save moving costs. They are also spared the difficulty of finding a landlord who will accept a tenant with a tarnished payment record. It isn’t clear how the program will handle the usual rental deposit. So what’s not to like?

The devil, as always, lies in the details. Even if the program turns out to be a positive experience for borrowers and the bank, it is not clear that it is a magic bullet for the foreclosure mess. The bank is conducting the pilot on loans it owns. It appears adhere the IRS rules governing REMICs, which limit leases to two years, so the hope is that this program would be rolled out to Countrywide mortgages, which were almost always securitized.

However, it is hard to imagine that balance-sheet-stressed Bank of America would include properties that had bank-owned second liens on them, since the second would be a total loss. Borrowers with second liens have much higher default rates than those with first liens only, so many borrowers in need of help are likely not to be invited to participate.

One open question is property management. Anyone who has had a bad or lazy landlord can tell you what an awful experience it is. Banks have done a terrible job of securing and maintaining foreclosed properties. How responsive will they be when a boiler fails or the roof develops a leak or a tree falls down in a storm and damages the house?

A second question is the appetite of investors. Bank of America maintains it has plenty of demand from big investors, and the Obama administration is separately keen to promote bulk sales of foreclosed properties. I don’t see the sort of investors being bandied about, namely private equity firms or distressed investors, being good candidates. They have high return requirements and can’t manage their way out of a paper bag. And being a landlord is operationally intensive, particularly when dealing with dispersed single family homes.

Consider two cautionary tales. One is the famed purchase of Stuyvesant Town, a large complex of middle income rentals in Manhattan with a lot of rent-regulated apartments. It is still a mystery to me how this deal got done. Tishman Speyer and Blackrock made the purchase at top of market prices, and the marketing pitch assumed that they’d be able to turn a very high percentage of units into condos and sell them. But that made no sense on these apartments. Any tenant that is current in a rent regulated apartment in New York City can’t be denied a lease renewal. The housing courts have seen every bad landlord trick in the book and have little patience with them. The new owners tried harassing tenants to get them to give up their leases. When the court ruled that the investors had brought apartments illegally out of rent stabilization, the owners defaulted.

The other is the behavior of Fortress, which happens to be the name most bandied about as a prospective bulk sales buyer. But the model for Fortress appears to be the Gagfah. Some cash-strapped German cities were privatizing housing, and Fortress-controlled Gagfah bought 45,000 rental units from Dresden. Gagfah agreed to give existing tenants the right of first refusal on any sale. It was also criticized in local media for neglecting repairs. Gagfah was sued for €1 billion by Dresden and settled for €40 million.

Mind you, both of these deals were far simpler from an operating standpoint than what investors in any Bank of America sold homes will encounter Sty Town and the Dresden apartments were large, compact complexes with seasoned property management in place. By contrast, any houses acquired will be dispersed and the new buyers will have to set up or contract out the property management, and it’s unlikely that there is a turnkey solution..

And if returns flag because investors underestimated operating cost or aren’t able to flip homes when the leases expire, what do you think they will do? They are certain to neglect upkeep. They are likely to jack up rents but presumably will be constrained by supply in the area. And who will investors sell these properties to when they realize that the prices they can get in 3-4 years don’t provide their target returns? Private equity firms are not interested in being long term managers; they want to get their money out as quickly as possible.

I’m not certain the appetite for these properties lives up to the curiosity level, unless PE investors somehow have convinced themselves that the real estate market will rebound strongly on their timetable. I suspect all the hype and a few cherrypicked deals will set up dumber money, like insurance companies and public pension funds, which will go into REITs or other securitized investment vehicles. But the big issue is that these deals being done in scale and working out well depends not just on banks figuring out how to make them work to salvage borrowers, but also addressing the property management challenge.

But the real driver came at the very end of the Wall Street Journal article:

Foreclosures have slowed sharply in some states amid heavy scrutiny of allegedly forged paperwork used by processing firms. Banks completed 860,000 foreclosures last year, down from 1.1 million in 2010, according to CoreLogic Inc.

“One of the outcomes of the ‘robo-signing’ scandal is that it is more difficult to foreclose,” said Mr. [Dean] Baker. “It’s more worthwhile for banks to pursue alternatives.”

In other words, banks are so badly hoist on their own petard that they have to consider doing the right thing. But given their track record, I wouldn’t bet on them pulling it off in the way the great unwashed public hopes they will.

March 22, 2012

10 Signs That America Is On The Verge Of A Horrible Municipal Debt Crisis

Is America on the verge of a horrible municipal debt crisis? Unfortunately, the answer is yes. From coast to coast there are an increasing number of cities, towns and counties that are rapidly going broke. Financial analyst Meredith Whitney took a lot of heat when her prediction of a municipal bond crash in 2011 did not happen, but she was not fundamentally wrong in her analysis. A horrifying municipal debt crisis is starting to unfold right in front of our eyes. It just did not happen as soon as she thought that it would. When most Americans think of our "debt problem", they think of the federal government. But the truth is that we have hundreds and hundreds of smaller "debt problems" all across the country. In 2012, cities such as Stockton, California and Harrisburg, Pennsylvania have already defaulted and a whole bunch of other cities and towns are headed down the exact same path. Once we see the first major wave of municipal defaults, creditors will become much tighter with their money and that will cause even more municipalities to get into financial trouble. This crisis could start spinning out of control at any time.

The frightening thing is that all of this is happening at a time when we are supposed to be having an "economic recovery".

So what will things look like when the economy gets even worse than this?

If hundreds of cities, towns and counties are barely able to keep their heads above water financially right now, what is going to happen when the next recession hits?

That is frightening to think about.

The following are 10 signs that America is on the verge of a horrible municipal debt crisis....

#1 Moody's has downgraded Detroit's debt again. The following is from the Detroit News....

The city received a downgrade to B2 from Ba3 for its $553.1 million in outstanding general obligation unlimited tax debt and also a downgrade to B3 from B1 for the $486.4 million in outstanding general obligation limited tax debt. Both ratings fell two points.
#2 The city of Indianapolis is facing an unprecedented 75 million dollar budget deficit in 2012. City officials are warning that there may soon not be enough money to keep the streetlights on.

#3 Suffolk County in New York has declared a "fiscal emergency" after discovering that it is projected to take on a total of more than 500 million dollars of additional debt by the end of 2013.

#4 The city of Trenton, New Jersey is so broke that it has put off buying more toilet paper for city buildings. At last report, there were a total of 15 rolls remaining and after that those that use city restrooms will be on their own.

#5 Some cities are slashing expenses dramatically in an attempt to stay afloat. The following is one example from California....

Costa Mesa, a city of 110,000 south of Los Angeles, has slashed its payroll from 611 to 450. It is selling its police helicopters and has hired a neighboring city for air patrols. It's also pursuing a controversial effort to convert to a charter city from a general law city, which would give City Hall more power to outsource more work, said councilman Jim Righeimer.
#6 In New York, state officials are deeply concerned that city and local governments are paying their pension obligations by borrowing from the state pension fund. This is essentially like making your minimum monthly payment on a credit card by borrowing more money on that same credit card....

And now, their fears are being realized: cities throughout the state, wealthy towns such as Southampton and East Hampton, counties like Nassau and Suffolk, and other public employers like the Westchester Medical Center and the New York Public Library are all managing their rising pension bills by borrowing from the very same $140 billion pension fund to which they owe money.

Across New York, state and local governments are borrowing $750 million this year to finance their contributions to the state pension system, and are likely to borrow at least $1 billion more over the next year. The number of municipalities and public institutions using this new borrowing mechanism to pay off their annual pension bills has tripled in a year.
#7 Pension problems are catching up with a lot of cities all over the nation. For example, CBS News reported recently that the city of Central Falls, Rh0de Island has been forced to declare bankruptcy because of pension woes....

For years, city officials promised robust union contracts and pensions without raising revenue to pay for them. Last August, the math caught up with them. Central Falls was broke, its pension fund short $46 million. It declared bankruptcy.

"My daughters grew up here, went to school here. It's all gone," said Mike Geoffroy, a retired firefighter.

He said he could not make the payments on his house after his pension was cut by $1,100 a month.
#8 Last November, Jefferson County, Alabama filed for the largest municipal bankruptcy in U.S. history. At the time, they had accumulated a total of approximately 4.2 billion dollars of debt.

#9 Several other U.S. large cities have defaulted on their debts in early 2012 as a Bloomberg article recently reported....

The California cities of Stockton and Hercules, as well as Pennsylvania's capital, Harrisburg, have opted to default on some of their insured debt in recent months.
#10 In all, there have been 21 municipal defaults so far in 2012. The grand total of those defaults comes to 978 million dollars.

Of course a lot of state governments are experiencing massive budget problems right now as well.

For example, in California state government revenues for February 2012 were down by about 22 percent compared to February 2011. The state government is quickly running out of money once again, and nobody is quite sure how to fix California's rapidly deteriorating financial situation.

And we all know that the biggest debt problem of all is the U.S. national debt.

Professor Antony Davies of Duquesne University has put together a great YouTube video that shows how the U.S. national debt crisis could get wildly out of control if interest rates start going up by even just a little bit....

It is no wonder why so many Americans are so pessimistic about our future.

One new survey has found that 63 percent of all Americans believe that the U.S. economic model is broken.

Things did not have to turn out this way, but they did.

As a nation, we did not have to get absolutely addicted to debt, but we did.

Now we are going to pay the price and it is going to be extremely painful.

March 21, 2012

Ben Bernanke Tries To Convince America That The Federal Reserve Is Good And The Gold Standard Is Bad

Ben Bernanke has decided that he needs to teach all of us why the Federal Reserve is good for America and about why the gold standard is bad. On Tuesday, Bernanke delivered the first of four planned lectures to a group of students at George Washington University. But that lecture was not just for the benefit of those students. Officials at the Fed have long planned for this lecture series to be an opportunity for Bernanke to "educate" the American people about the Federal Reserve. The classroom was absolutely packed with reporters and just about every major news organization is running a story about this first lecture. So the Federal Reserve is definitely getting the publicity that it was hoping for. You can see the slides from the presentation that Bernanke gave to the students right here. It is pretty obvious that one of the primary goals of this first lecture was to attack those that have been critical of the Fed over the past few years. In doing so, Bernanke "stretched" the truth on more than one occasion.

The entire event was staged to make Bernanke and the Federal Reserve look as good as possible. Prior to his arrival, the students gathered for the lecture were actually instructed to applaud Bernanke....

The 30 undergraduates at George Washington University sent up a round of applause. It was, they'd been told beforehand, "appropriate, even encouraged, to politely applaud" Tuesday's guest lecturer.
But as noted above, this lecture was not for the benefit of those students. A USA Today article even admitted that "addressing the public directly" was one of the real goals of this lecture....

For Bernanke, the GW lectures serve a dual function:

They give him a chance to reprise the role of professor he played for more than two decades, first at Stanford and then at Princeton, where he eventually chaired the economics department.

And they give him a way to expand his mission of demystifying the Fed. As part of that campaign, Bernanke became the first Fed chief to hold regular news conferences and conduct town-hall meetings.

In addressing the public directly, Bernanke has also sought to neutralize attacks on the Fed, some of them from Republican presidential candidates.
So what did Bernanke actually say during the lecture?

Well, you can read all of the slides right here, but the following are some of the highlights....

On page 6 of the presentation, Bernanke makes the following claim....

"A central bank is not an ordinary commercial bank, but a government agency."
Well, that is quite interesting considering the fact that the Federal Reserve has argued in court that the Federal Reserve Bank of New York is not an agency of the federal government and that the various Federal Reserve banks around the country are private corporations with private funding.

So did the Federal Reserve lie to the court or is Ben Bernanke lying to us?

And what other "agency" of the federal government is owned by private banks?

It is even admitted that the individual member banks own shares of stock in the various Federal Reserve banks on the Federal Reserve website....

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.
The Federal Reserve always talks about how it must be "independent" and "above politics", but when they start getting criticized they always want to seek shelter under the wing of the federal government.

It really is disgusting.

On page 7 of the presentation, the following statement is made....

"All central banks strive for low and stable inflation; most also try to promote stable growth in output and employment."
Well, on both counts the Federal Reserve has failed miserably.

Right now, if inflation was measured the same way that it was back in 1980, the annual rate of inflation would be more than 10 percent.

And when you take a longer view of things, the inflation that the Federal Reserve has manufactured has been absolutely horrific.

Even using the doctored inflation numbers that the Federal Reserve gives us, the U.S. dollar has still lost 83 percent of its value since 1970.

The truth is that inflation is a "hidden tax" that is constantly destroying the value of every single dollar that you and I hold. Those that attempt to save money for the future or for retirement are deeply penalized under such a system.

As far as employment goes, the total number of workers that are "officially" unemployed in the United States is larger than the entire population of Portugal.

The average duration of unemployment is hovering near an all-time record high and almost every measure of government dependence is at an all-time record high.

So the Federal Reserve is failing at the exact things that Bernanke claims that it is supposed to be doing.

But instead of directly addressing many of the specific criticisms that have been leveled at the Fed, Bernanke instead chose to spend much of his lecture talking about the problems with adopting a gold standard. The following are statements that were pulled directly off of the slides he used during his speech....

-"The gold standard sets the money supply and price level generally with limited central bank intervention."

-"The strength of a gold standard is its greatest weakness too: Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions."

-"All countries on the gold standard are forced to maintain fixed exchange rates. As a result, the effects of bad policies in one country can be transmitted to other countries if both are on the gold standard."

-"If not perfectly credible, a gold standard is subject to speculative attack and ultimate collapse as people try to exchange paper money for gold."

-"The gold standard did not prevent frequent financial panics."

-"Although the gold standard promoted price stability over the very long run, over the medium run it sometimes caused periods of inflation and deflation."

-"In the second half of the 19th century, a global shortage of gold reduced the U.S. money supply and caused deflation (falling prices). Farmers were squeezed between declining prices for crops and the fixed dollar payments for their mortgages and other debts."

Bernanke spent more time on the gold standard during his speech than on anything else. At one point during the lecture, Bernanke made the following statement....

"To have a gold standard, you have to go to South Africa or someplace and dig up tons of gold and move it to New York and put it in the basement of the Federal Reserve Bank of New York and that's a lot of effort and work"
Bernanke even blamed the gold standard for the Great Depression. On a slide entitled "Monetary Policy in the Great Depression", Bernanke made the following claims....

•The Fed’s tight monetary policy led to sharply falling prices and steep declines in output and employment.
•The effects of policy errors here and abroad were transmitted globally through the gold standard.
•The Fed kept money tight in part because it wanted to preserve the gold standard. When FDR abandoned the gold standard in 1933, monetary policy became less tight and deflation stopped.

Bernanke seems to want to frame the debate over monetary policy is such a way that the American people are given only two alternative systems to consider: the Federal Reserve and a gold standard.

But the truth is that there are a vast array of both "hard money" and "soft money" systems that would not include a central bank or a gold standard at all.

So the truth is that the American people would have many different systems to choose from if they wanted to shut down the Federal Reserve and set up something new.

In the past the U.S. government has issued debt-free money and it could certainly do so again.

But in his lecture, Bernanke did not even mention how the Federal Reserve creates money or how whenever new money is created more debt is created.

Under the Federal Reserve system, the money supply is designed to continually increase, and whenever more money is created more debt is also created.

In a previous article I discussed how more money is created on the federal level....

For example, whenever the U.S. government wants to spend more money than it takes in (which happens constantly), it has to go ask the Federal Reserve for it. The federal government gives U.S. Treasury bonds to the Federal Reserve, and the Federal Reserve gives the U.S. government "Federal Reserve Notes" in return. Usually this is just done electronically.

So where does the Federal Reserve get the Federal Reserve Notes?

It just creates them out of thin air.

Wouldn't you like to be able to create money out of thin air?

Instead of issuing money directly, the U.S. government lets the Federal Reserve create it out of thin air and then the U.S. government borrows it.

Talk about stupid.
The designers of the Federal Reserve system intended to trap the U.S. government in a debt spiral that would expand perpetually.

So has their design worked?

Well, just look at the chart below....

Today, the U.S. national debt is more than 5000 times larger than it was when the Federal Reserve was first created.

So I guess you could say that the results have been spectacular.

The Federal Reserve system also greatly favors the big Wall Street banks that it is designed to serve.

When those big banks get into trouble, the Federal Reserve snaps into action.

According to a limited GAO audit of Fed transactions during the last financial crisis, $16.1 trillion in secret loans were made by the Federal Reserve to the big Wall Street banks between December 1, 2007 and July 21, 2010.

The following list is taken directly from page 131 of the GAO audit report and it shows which banks received money from the Fed....

Citigroup - $2.513 trillion
Morgan Stanley - $2.041 trillion
Merrill Lynch - $1.949 trillion
Bank of America - $1.344 trillion
Barclays PLC - $868 billion
Bear Sterns - $853 billion
Goldman Sachs - $814 billion
Royal Bank of Scotland - $541 billion
JP Morgan Chase - $391 billion
Deutsche Bank - $354 billion
UBS - $287 billion
Credit Suisse - $262 billion
Lehman Brothers - $183 billion
Bank of Scotland - $181 billion
BNP Paribas - $175 billion
Wells Fargo - $159 billion
Dexia - $159 billion
Wachovia - $142 billion
Dresdner Bank - $135 billion
Societe Generale - $124 billion
"All Other Borrowers" - $2.639 trillion

What about all the rest of us?

Did we get bailed out?

No, we were told that if Wall Street was rescued that the benefits would trickle down to the rest of us.

Unfortunately, that has not exactly worked out. In article, after article, after article I have detailed the horrible economic suffering that the American people are still going through.

But what Bernanke and the Fed have done is create inflation in commodities such as oil which is affecting the household finances of nearly everyone in America.

The average price of a gallon of gasoline in the United States is now up to $3.87. That is an all-time record high for the month of March.

So far in 2012, the price of gasoline in the United States has risen by 17 percent.

Thanks Bernanke.

Over the past several decades, every time there has been a major spike in gasoline prices in the United States, a recession has always followed. If you doubt this, just check out this amazing chart.

So will we soon see another recession?

If we are lucky. Hopefully the next downturn will not be a full-blown depression.

The truth is that the Federal Reserve does not help us avoid booms and busts. Rather, it creates them. The Fed was at the heart of the housing bubble which helped bring on the last financial crisis when it crashed, and the current ultra-low interest rate policies of the Fed are creating more bubbles which will have devastating long-term consequences.

So Bernanke does not have anything to be proud of, and his track record has been absolutely nightmarish.

Hopefully the American people will not believe the propaganda and will take an honest look at the Federal Reserve.

When you take an honest look at the Federal Reserve, there is only one rational conclusion: Congress should shut it down, lock the doors and throw away the key.

March 20, 2012

Greg Smith Isn't the First to Leave Goldman Sachs Over Morals

In last week's New York Times, a Goldman Sachs "executive director" named Greg Smith wrote what just about everyone on earth should - and probably did - already know: Wall Street puts its own interests ahead of its clients'. Far ahead. Smith claimed that Goldman's culture has deteriorated dramatically since his arrival a dozen years ago.

In the days since, snipers have taken shots at Smith's competence: not yet a "managing director" -- i.e., partner -- after fully 12 years with the firm?

At his tardy conversion: "Did Smith think," asked Lauren Collins on the New Yorker blog, "when he signed on with the bank, that he was joining a charitable organization?"

At his self-esteem: Smith boasts in his op-ed of getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel. His U.S. ping-pong rating was estimated at about 1800, "way below any serious competitive ability," Collins said.

But I haven't seen anyone, besides Goldman Sachs itself in its official response, suggest that Smith wasn't telling the truth. In fact, two years ago, we ran a series of stories on Goldman Sachs that detailed many of the points Smith made in his exit statement.

Watch: Is Taxpayer Money Behind Profits at Goldman Sachs?

Watch How Goldman Sachs Turned Tax Money Into Profits on PBS. See more from PBS NewsHour.

One of our key sources was Nomi Prins, who worked at Lehman Brothers for a decade, then Bear Stearns in London, and wound up as a managing director of Goldman Sachs in New York in the year 2000, responsible for elaborate trading strategies. She quit after Sept. 11 and became a journalist, reporting on Wall Street and finally writing a book that's bitterly critical of her former industry: It Takes a Pillage.

'Did Goldman have its clients' interests at heart?' we asked Prins. No, she said. They're primarily a trading firm, trading on knowledge that comes in with every trade a client asks Goldman to make on the client's behalf.

Former Goldman Sachs employee Nomi Prins.

"And just by evidence from the profits they make and where they make them, what divisions they make them in," said Prins, "they're not sitting on that knowledge. They are trading on that knowledge."

I followed up: "So they know somebody is going to buy a commodity or currency, so they either buy that commodity or currency first or a commodity and currency very much like it."

Prins: "Any information that you get, particularly if it's going to move the markets a lot, is going to filter into the trading positions you take."

Watch: Unraveling the Profit Puzzle at Goldman Sachs

But isn't this "front running" -- trading ahead of your clients (to profit from the price changes that will come from the clients' trades) for your own firm's benefit? And isn't that, strictly speaking, illegal? We put the question to David Stockman, President Reagan's former head of the Office of Management and Budget who went on to a long, successful and controversial career on and around Wall Street.

"The long and ancient secret of Wall Street," said Stockman, "is they've always been front running their clients! In other words when you're in the customer trading business and then you're in the proprietary business, which trade are you making first? I don't know. And if it's in milliseconds, how's anybody going to figure it out?"

One last part of our interview with Nomi Prins may be relevant to the Greg Smith situation, so we reprint it here for the first time:

PAUL SOLMAN: So you were what they called a "quant"?

NOMI PRINS: Yes, I was always a quant, always with numbers and math and analytics and I think that was a part of the allure of Wall Street, where could you go with that? And I sort of got into it and became hooked. Any Type A personality on Wall Street wants to do as well as they can in the environment that they're in, and I think that was part of how I rose through the ranks of different companies and ultimately became managing director of Goldman. But there was always a sense that the business of making money for the sake of making money isn't inherently soulful; it just isn't. It really does make you feel bad and I didn't like some of the transactions that we were doing.

PS: What was a discomforting deal?

NP: Well there was one deal, for example, about life insurance companies or health insurance companies who were losing money because they had effectively made bets that certain patients would die of AIDS sooner than they were dying, and so as AIDS medicine was becoming stronger and better and keeping more people alive longer//One company came to us to ask how they could structure some sort of a derivative or some sort of a deal in order to help them make money in the event that people would live too long.//I remember saying to the person in my group who brought it up to me: Do you see what's going on behind this? He was, like: So? I'm, like: It just feels wrong, it just feels wrong!

PS: Not a lot of people say that on Wall Street, do they?

NP: A lot of people don't say that on Wall Street and a lot of people, myself included, don't really think about the ramifications of the transactions they do. When trading emerging market bonds, you don't think about people in Third World countries who are suffering because all this debt is trading around at higher levels than they can ever possibly use to sustain their own existence.

You don't think about the ramifications that you are trading or packaging the debt or creating derivatives on top of Third World countries where those people aren't necessarily benefiting from anything you're doing. In fact, it's their increased debt and impoverishment that gives you the tools to work with to make money out of. You don't think of that because you're just looking at those tools, and everything is very short term and it's like: 'Well, we need to make money now, and we're competing with other firms, and they have this kind of product so we need to have this kind of product.' The question isn't, 'What does this kind of product do to people?' The question is: 'How do we sell more of this product than our competitors?'

It was Sept. 11 that made things clear to Prins. Her Goldman office was near the World Trade Towers.

NP: There was some smoke around from the hit. We didn't necessarily know it was a terrorist attack and the first instinct on the oil desk was: How do we trade this? Because anything that has to do with airlines has something to do with oil and so that's going to drive something up, so therefore we need to be on the right side of it.

PS: Not even: How do we get out of the building?

NP: Planes had hit; we had gone from a higher floor to a lower floor to basically aggregate, and that happened on the floor where the oil trading happens. We're all there and phones are dead to the World Trade Center and people were trying to make calls and figure out who was where. And around all of this, there also happened to have been trading going on and decisions being made about what type of trading should go on. //And even frankly after that, a couple of days later, there were police escorts and buses going down from the Upper East Side to Goldman so they could keep trading and keep markets open and they consider this to be a service, I suppose.

PS: So 9/11 was the final straw for you?

NP: I think that was a very final type of straw. The trading on the floor. The buses. Just the whole sort of attitude.

March 19, 2012

The U.S. Economy: Soul Crushing Total System Failure

No matter how often the pretty people on television tell us that the U.S. economy is getting better, it isn't going to change the soul crushing agony that millions of American families are going through right now. The stock market may have gotten back to where it was in 2008, but the job market sure hasn't. As I wrote about a few days ago, the percentage of working age Americans that are actually employed has stayed very flat since late 2009, and the average duration of unemployment is hovering near an all-time high. Sadly, this is not just a temporary downturn. The U.S. economy has been slowly declining for several decades and is nearing total system failure. Right now, many poverty statistics are higher than they have ever been since the Great Depression. Many measurements of government dependence are the highest that we have ever seen in all of U.S. history. The emerging one world economic system (otherwise known as "free trade") has cost the U.S. economy tens of thousands of businesses, millions of jobs and hundreds of billions of dollars of our national wealth. The federal government is going into unprecedented amounts of debt in order to try to maintain our current standard of living, but there is no way that they will be able to sustain this kind of borrowing for too much longer. So enjoy this bubble of false prosperity while you can, because things will soon get significantly worse.

As the U.S. economy experiences total system failure, it will be imperative for all of us not to wait around waiting for someone to rescue us.

And I am not just talking about the government.

Today, millions upon millions of Americans are waiting around hoping that someone out there will hire them.

Well, the truth is that our politicians have made it so complicated and so expensive to hire someone that many small businesses try to avoid hiring as much as possible.

Businesses generally only want to hire people if they can make a profit by doing so. When our politicians keep piling on the taxes and the regulations and the paperwork, that creates a tremendous incentive not to hire workers.

Michael Fleischer, the President of Bogen Communications, once wrote an op-ed in the Wall Street Journal entitled "Why I'm Not Hiring". The following is how Paul Hollrah of Family Security Matters summarized the nightmarish taxes that are imposed on his company when Fleischer hires a new worker....

According to Fleischer, Sally grosses $59,000 a year, which shrinks to less than $44,000 after taxes and other payroll deductions. The $15,311 deducted from Sally’s gross pay is comprised of New Jersey state income tax: $1,893; Social Security taxes: $3,661; state unemployment insurance: $126; disability insurance: $149; Medicare insurance: $856; federal withholding tax: $6,250; and her share of medical and dental insurance: $2,376. Roughly 25.9 percent of Sally’s income is siphoned off by Washington and Trenton before she receives her paychecks.

But then there are the additional costs of employing Sally. In addition to her gross salary, her employer must pay the lion’s share of her healthcare insurance premiums: $9,561; life and other insurance premiums: $153; federal unemployment insurance: $56; disability insurance: $149; worker’s comp insurance: $300; New Jersey state unemployment insurance: $505; Medicare insurance: $856; and the employer’s share of Social Security taxes: $3,661.

Over and above her gross salary, Bogen Communications must pay an additional $15,241 in benefits and state and federal taxes, bringing the total cost of employing Sally to approximately $74,241 per year. Sally gets to keep $43,689, or just 58.8% of that total.

Are you starting to understand why so many businesses are hesitant to hire new workers?

The big corporations can handle all of the paperwork and regulations that come with hiring a new worker fairly well, but for small businesses hiring a new worker can be a massive undertaking. That new worker is going to have to almost be a miracle worker in order to justify all of the hassle and expense.

But the federal government just keeps piling more burdens on to the backs of employers. That is one reason why there is such an uproar over Obamacare. It is going to make hiring workers even less attractive.

These days, most small businesses are trying to get by with as few workers as possible, and many big businesses are trying to ship as many jobs as they can overseas.

Sadly, even if you do find a good job it can disappear at any moment.

The following is from a comment that a reader named Jeff recently left on one of my articles....

It’s sad what’s happening here in this country. So many lucky ones defend it. In America it’s not exactly about hard work anymore, it’s about who you know always. The ability to keep people stupid as well as in debt was established here well by corporations also. You cannot start a solid hiring business like you could years ago.

I know many of folks who don’t break a sweat and earn more money than I ever will in a week. The system is getting crazy only creating two extremes. I fought for this country right after 9/11 as a young naive person. Using my grandfather’s old stories to see the dream that this country was always suppose to have.

The company I still unfortunately work for (cause other places are worse), 4 years ago they froze our salaries. No raises yet, this is when the company was bought by an investment group for 500 million.

Now we are getting sold to Japan for 1 billion. A 500 million dollar profit. Sorry if I may be ignorant in this way of business. But it seems the only one who benefited from this is that group of investors. 400+ well skilled jobs lost, no raises or rewards, a whole lot more work and contract obligations to meet, and less contact with management when problems surface.

I just think the United States of America is becoming the world’s poker table.

I want out of this country so bad. I don’t even know what happen to people here. The younger generation scares me how dumb they are and everyone seems so easily bought with eyecandy.

Can you imagine that?

Can you imagine your boss walking in one day and declaring that the business has just been sold to foreigners and that you are about to lose your job?

In America today, it can be absolutely soul crushing to lose a job. It isn't as if you are going to run out and get another fantastic job in a week or two.

When you are unemployed, people look at your differently. It gets to the point where you don't even want to interact with other people because you know that your unemployment is probably going to be the number one topic of conversation.

When you are out of work for six months or more, it is easy to feel like a failure - especially when so many other people are looking at you as if you are a failure too.

But in most cases, individual Americans are not to blame for not being able to find work.

Rather it is the entire system that is failing all of us.

The U.S. economy is bleeding good jobs and the middle class in America has become a bizarre game of musical chairs. When the music stops each round you might lose your spot. You just never know.

Looking for work in the United States in this economic environment can be a demoralizing endeavor. For example, a recent Esquire article described what one unemployed man named Scott Annechino found when he attended a job fair in San Francisco....

A glass elevator carries him to the third floor, where the front-desk girl, who knows it's her job to be cheerful, told him the job fair is supposed to be.

A pasty kid, maybe thirty, in a too-big shirt and a cheap tie, greets him and tells him the companies are set up in rooms along the hall and that he should definitely visit all of them. Annechino, forty-four years old, wearing his best suit and shined black shoes, walks to the first exhibitor: Devcon, a home-security company. The door is closed, no one inside. Annechino looks around for an explanation. "Oh, I just got an e-mail from my contact there saying they wouldn't be able to make it today," the pasty kid says, fingering his BlackBerry.

A couple of other potential employers who were supposed to be here didn't make it, either — Konica Minolta, Santa Clara University. "Yeah ..." the kid says. Annechino moves to the next room. State Farm. They're looking for people who can put up fifty grand to start their own insurance agency. The Art Institute is next, mostly looking for people who might want to go to art school. New York Life. The U. S. Army, where men wearing fatigues and combat boots offer brochures.

That's it.

If you want to check out the rest of the sad unemployment stories in that article, you can find them right here.

But even if you do have a job, that doesn't mean that everything is just fine. Average American families are finding that the prices of the basic things that they need are rising much faster than their paychecks are.

According to one recent study, more than half of all Americans feel as though they are really struggling to afford just the basics at this point....

"Every retailer wants to think 'Everything I sell is worth it! Shoppers will love it', but the hard reality is 52% Americans feel they barely have enough to afford the basics," said Candace Corlett, president of WSL/Strategic Retail.

Just buying food and gas is a major financial ordeal for many families these days. On average, a gallon of gasoline in the United States now costs $3.83. Many Americans burn up a huge chunk of their paychecks just going back and forth to work in their cars.

So what is the solution?

Well, according to the Obama administration the answer is even more government dependence. The federal government is now actually running ads encouraging even more people to go on food stamps....

Can you believe that?

Apparently having 46.5 million Americans on food stamps is not enough. The federal government is spending our tax money on advertisements that try to convince even more Americans that they need to be on food stamps.

What the American people really need are good jobs, but those keep getting shipped out of the country.

Meanwhile, people are becoming increasingly desperate.

For example one Colorado man was recently caught stealing parts from toilets in public restrooms....

Donald Allen Citron, 48, faces 18 charges, including burglary and theft. He’s accused of stealing toilet parts from several locations, including Southwest Plaza Mall, University of Denver, and Craig Hospital.

Most of the crimes happened in just a few minutes, but police Citron is a plumber and all he needed was a wrench and a screw driver to steal pipes and the plumbing in toilets. The items he’s accused of stealing are valued at around $6,400.

They are calling him "the crapper scrapper".

Other Americans are not willing to stoop to crime and instead suffer quietly and anonymously.

A reader named Katie recently left the following heartbreaking comment on one of my articles....

I’m almost homeless. Through no fault of my own I’d like to point out. I don’t drink, smoke, or do drugs. I don’t even eat fast food unless I have too.

Four years ago I had a house, car, family, stuff, an IRA, and really everything that people in this country aspire to. I had a great job that I enjoyed so did my boyfriend. Even our relationship was great.

We didn’t get hit by the economy right away. We were in Katrina damaged parts of the country and there was still a lot of construction going on and the economic boom that comes with it.

Then I got laid off. Doesn’t seem to matter that I go to interview after interview. I use indeed, monster, craigslist, and newspapers to search for jobs even outside my area.

Now my boyfriend has passed away suddenly, and his family got everything. I personally have only a living father left, who hasn’t the room but I’m camping in his yard. All my friends say they don’t have the room either. Which makes me wonder just how much of friends they are. Considering if the situation was reversed I have in the past and would open my home to anyone that needed help.

If something happens to him I really don’t know what I’m going to do. I need to get on my feet and I know that jobs are hard to come by. I’m sick of the people who have jobs saying ‘get a job you lazy bum’. I’m hardly lazy and I’m trying desperately to be employed; not being homeless would be rather awesome in my opinion. I’m not picky, regardless of my degree I’ll pick up trash or clean toilets. McDonald’s, Taco Bell and the other fast food places don’t even bother with a call back. And when I call to inquire about my application it’s always the same, ‘we will call you when we make a decision’. Such a cop-out.

So no. In my (granted meaningless opinion) the economy is not getting better. To even suggest that when unemployment is so high or the rate of food stamps. Is utter ludicrous at best. I notice that those talking heads on the cable news and radio never seem to mention that the homeless shelters have a higher occupancy level than ever before. Nor would they mention the fact that we have those shelters in abundance now across the country in comparison to the Great Depression.

I’m getting real tired of hearing how great the economy is doing. When obviously it’s not. All you have to do is open your eyes and see. Business are not coming back yet and foreclosed homes sit empty everywhere. The unemployment rate only counts the people who are getting unemployment benefits. So the people who fall off the unemployment benefits don’t get counted. Because the must have gotten a job, right? Hardly. In fact the homeless in this country are almost never counted correctly. It’s too hard to count them all, or at least that’s the excuse.

I know it’s meaningless, especially to those who see homeless and immediately have a bias, but that’s my opinion on the current state of our economy. You can count me in the 80%. Only a fool would see this as a recovery.

Please say a prayer for Katie and the millions of other Americans just like her. It can be absolutely soul crushing to lose everything that you ever worked for and not see any light at the end of the tunnel.

Unfortunately, the U.S. economy is not going to be improving in the long run. What we are experiencing right now is about as good as it is going to get. The truth is that it is pretty much downhill from here.

It is fairly simple to figure out what is happening to us as a nation.

You can't keep buying far more than you sell.

You can't keep spending far more than you bring in.

You can't keep running up debt in larger and larger amounts indefinitely.

The U.S. economy is running on borrowed money and on borrowed time.

At some point, both are going to run out.

Are you ready for that?