April 30, 2012

Frontline’s Astonishing Whitewash of the Crisis

Several of my savviest readers wrote expressing disappointment and consternation with the Frontline series on the crisis, “Money, Power, and Wall Street.” The first two parts of the four part series have been released, and it’s probably safe to say that this program is far enough along to be beyond redemption.

It’s a recitation of conventional wisdom, with just enough focus on some of the numerous things the banks and the authorities did wrong so as to make it seem daring for mainstream TV. But anyone who has been on this beat will find the first two segments cringe-making (one advantage I had was that of reading the transcripts, which makes it much easier to parse the construction). Despite the obligatory shots of Occupy Wall Street protestors, displaced homeowners, and stymied officials, much of the story line is remarkably bank-friendly.

The first segment is particularly troubling. It heavily cribs from the Gillian Tett book Fool’s Gold, which to be blunt was not very well received by reviewers. Fool’s Gold discussed the development of the credit default swaps market from the perspective of JP Morgan executives and staffers, with the result that it verged on hagiography. Oh, those great, intrepid, innovative bankers who just wanted to make the world better, and maybe make a buck or two in the process.

The book at least explained that the reason for the creation of the CDS was to solve a rather big problem for JP Morgan, that it was carrying a ton of loan risk and could use a way to lay it off (the broadcast, by contrast, made it sound like this was a market just waiting to happen, as opposed to one JP Morgan, and later its competitors, cultivated).

And no one clearly explains that CDS, as currently used, are certain to produce periodic blowups of undercapitalized guarantors (the monolines and AIG are prototypical). Tett and pretty much everyone in the segment perpetuates the industry PR that CDS are derivatives. A derivative is an instrument whose price “derives” from an actively traded underlying instrument. CDS, by contrast, are the economic equivalent of unregulated insurance contracts. The pernicious feature of CDS is that the CDS protection writers (the guarantors) aren’t regulated for capital adequacy, the way other insurers are. They instead are required to post collateral to reflect the current value of the contract. But that is no guarantee that the CDS protection writer will be able to pay out. When a default or other credit event occurs, the price of the CDS spikes up, and the guarantor may not be able to make good on the new, higher collateral posting. And requiring CDS protection writers to put up enough margin to allow for “jump to default” risk would make the product uneconomical.

But none of this is explained. Tellingly, there are clips of Brooksley Born, but no mention of her failed effort to regulate CDS. It is instead presented as a benign product that JP Morgan understood (did they sponsor this broadcast? Blythe Masters gets a big promo) and no one else did:

MARTIN SMITH: Did top management at JP Morgan understand credit derivatives?

TERRI DUHON: Yes, they did. Absolutely, they did.

MARTIN SMITH: Did they at other banks?

TERRI DUHON: No, not all other banks. Certainly not.

It’s more accurate to say JP Morgan was once burned, twice shy. It took significant losses in the first test of the corporate CDS market, the bankruptcy of Delphi in 2005. That led it to pull its oars in just as the market for asset backed securities CDS was taking off. Fool’s Gold makes a great deal of noise about how JP Morgan couldn’t figure out how other banks were modeling the risks on mortgage-related CDS and presents that as the reason they were largely out of that market. That may be narrowly true, but I wonder if that sort of caution would have reigned had they not had to reassess the adequacy of their risk metrics in the wake of Delphi.

Similarly, the account hews to conventional lines in making Goldman out to be the poster villain in the CDO market, yet merely in passing, has Deutsche Bank CEO Joseph Ackermann admitting to being one of the banks that stuffed Landesbanken like IKB full of toxic debt. Crisis junkies know that Deutsche Bank trader Greg Lippmann was the most aggressive middleman in helping subprime shorts like John Paulson create and sell CDOs designed to fail (and they had their own program, Start, which was a synthetic CDO series just like Goldman’s better known Abacus trades).

Typical of the program’s attention to fine points, it manages to work in a reference to the formal dismantling of Glass Steagall without saying why it was important (answer: it wan’t, but the gutting of the rule over the preceding decade and a half was). There is also some interview material that is flat out wrong on product spreads and CDO structures. The segment provides anecdotes of the crazed subprime lending, but fails to explain how mortgage backed securities and CDOs were linked to lending (or most important, that CDOs came to drive demand for RMBS, which in turn drove demand to the worst loans). Here, Inside Job was vastly better in covering technical material (with one lapse, in confused RMBS and CDOs) and providing data in an accessible manner.

The next segment is even more troubling. It treats the crisis as if it started with the failure of Bear Stearns, when that was the third of four acute phases, and was in full There Was No Alternative mode. It repeated the thesis I believe, but I’ve never seen confirmed, that it was concern over Bear’s CDS exposures that led to the bailout. It also says that Hank Paulson thought Bear was an isolated case, which would explain why the officialdom went into Mission Accomplished mode rather than trying to get to the bottom of the CDS exposures, pronto (We pointed out in March 2008 that Lehman, Merrill, and UBS were next on the list. If we could see that, that meant it was bloomin’ obvious). But it ignores the fact that the Fed first offered a 28 day loan, which it then changed to overnight and the original loan also would have tided Bear over into having access to a new Fed facility. I’m not convinced that Bear would not have made it, and no one has ever explained why the Fed retraded the deal.

Incredibly, this segment also presents the idea that Obama was seriously interested in and campaigning on the economy. Huh? Obama was stumping on the issues of 2006. It also presents other pro-Obama propaganda in the form of the meeting McCain called to discuss the financial implosion-in-progress, which Obama wound up dominating. This has just about zero relevance in explaining the crisis, and strongly suggests that there were multiple agendas in producing this series.

But worse is the Lehman-AIG meltdown. The markets were tanking! The world was about to come to an end! The authorities had to Do Something! No mention of the Fed’s zillions of special facilities (or previous interest rate cuts). Instead we get the TARP, and the story makes much of Congresscritters sounding miffed at being asked to act over a weekend (as opposed to sign off on a soi disant bill that was all of three pages demanding $700 billion while putting the Treasury Secretary above the law). It also fails to mention the Treasury bait and switch, that while the bill did give the Treasury remarkable latitude, it was sold as being used to buy toxic assets (which we said at the time would never work under the parameters Treasury set forth), not a direct bailout to the banks.

We also get the lame excuse for Doing Nothing after Bear (“we lacked the authority”) when the officialdom had no compunction about bringing the banks to heel in October 2008 (note that there are several layers of kabuki here: as we described at the time, Paulson threatened the banks to take the TARP before revealing the terms, and the banks were quietly pleased when they learned how favorable the deal was. So the “forcing” was theater so the ones who wanted to pretend they didn’t need it could keep that story up. But even if this wasn’t a lot of play acting, this threat illustrates the sort of thing regulators have at their disposal but have become timid about using).

DICK KOVACEVICH, Chmn., Wells Fargo, 2005-09: I don’t know how much further we went before I was interrupted by Hank, who said, “Your regulator is sitting right next to me. And if you don’t take this money, on Monday morning, you will be declared capital-deficient.” I was stunned.

Aside: I also wondered if Wells Fargo sponsored this program. There was gratuitous statements by Wells that they were better lenders (not true if you limit it to banks, we’ve commented often on Wells’ sanctimoniousness).

The show defended the false dichotomy of bailout or disaster, when there were other options. Comments like these were throwaways, not taken up in a serious way:

SHEILA BAIR, Chair, FDIC, 2006-11: If the government hadn’t intervened, those counterparties would have taken huge losses, so there was some leverage there. At least tell them, you know, “You’re going to take 10 percent.” That just— that would have helped. But there was just willingness to kind of throw lots of money at the problem. And I don’t— I think we threw more money at the problem than we needed to. Absolutely….

ROBERT REICH, Secretary of Labor, 1993-97: They don’t have to modify any mortgages. They don’t have to put limits on their own salaries or their own compensation or their own bonuses. They don’t have to do anything differently than they were doing before. They don’t even have to agree to major regulatory changes. Basically, they are sitting fat and pretty and happy.

So thus far, we have some populist decorating of a profoundly pro-Establishment account. Yes, the system got really out of control, but whocoulddanode? It just got SOOO complicated no one could understand it, not even those super well paid top Wall Street executives. There isn’t a single mention of ideas like looting, bogus accounting (remember the fictitious Lehman balance sheet, or Merrill’s CDO-hiding Pyxis, or the $40 billion of Citi CDOs that appeared out of nowhere?) or abuses in other areas (like swaps sold to municipalities all over the world, or rapacious privatizations, the auction rate securities blow up, or chain of title abuses). Nah, it’s just a bunch of fundamentally good ideas taken too far. And they really expect you to believe that.

April 27, 2012

Spanish Economy Crumbles: Unemployment Nearly 25%

In a week that Spain can't wait to end, the country was just hit with the bad news bears Trifecta, starting with the Real Madrid loss, following with the second S&P downgrade of Spain's credit rating for the year last night (or is that now SBBB+ain?), and concluding with economic data released this morning which showed that the economy is in a free fall that is approaching that of Greece, after retail sales fell for the 21st consecutive month, while Q1 unemployment soared to, drumroll please, one quarter of the working population or 24.44% to be specific, trouncing consensus estimates of 23.8%, and up nearly 2% from the 22.85% as of December 31. Which likely means that the real unemployment is far higher, and confirms not only that the economy is in free fall mode, but that Moody's, which delayed its downgrade of the country's banks to May, will proceed shortly.

The BBG chart below can only invoke laughter.


And the same from Reuters:


From Reuters:

Spain's unemployment rate shot up to 24 percent in the first quarter, the highest level since the early 1990s and one of the worst jobless figures in the world. Retail sales slumped for the twenty-first consecutive month.

"The figures are terrible for everyone and terrible for the government... Spain is in a crisis of huge proportions," Foreign Minister Jose Manuel Garcia-Margallo said in a radio interview.

Spain has slipped into its second recession in 3 years putting it back in the center of the Euro Zone debt crisis storm.

The government has already rescued a number of banks that were too exposed to a decade-long construction boom that crashed in 2008, and investors fear vulnerable lenders will be hit by another wave of loan defaults due to the slowing economy.

There is hope that things will change...

The government expects labor reforms passed in the first quarter that make it cheaper for firms to hire and fire to produce results next year. Many firms have taken advantage of new rules to lay off more staff.

"It's a very challenging situation. I don't think that the banks are cornered yet, but the government must come out soon to say how they will address them," said Gilles Moec, an economist with Deutsche Bank.

The downgrade put Spain's credit rating at the same level as Italy. S&P now has Spain on a BBB+ rating, which means "adequate payment capacity" and is only a few notches above a junk rating. Fitch and Moody's still rate Spain's sovereign with a "strong payment capacity".

S&P said it was likely the government would have to put more funds into banks and called on euro zone countries to better manage the sovereign debt crisis.

The government is considering whether to create a holding company for the banks' toxic real estate assets as investors have not been convinced by three rounds of clean-ups and consolidations in the financial sector.

But, as a reminder, there was hope that things in the US would also turn better nearly 4 years ago.

April 26, 2012

Music Stops for Wall Street Bankers

Wall Street's latest problem: too many bankers and not enough deals.

Amid new regulation, lower profits and a dreary market for mergers and acquisitions, several banks are planning to trim investment-banking units that were built for an era of deals aplenty.

Having already slashed bonuses, banks including Citigroup Inc., C +0.77%Goldman Sachs Group Inc., GS -0.11%J.P. Morgan ChaseJPM -0.28% & Co. and Morgan StanleyMS -1.49% are preparing to cut dozens of jobs, including some held by senior bankers, according to people familiar with the matter. As they pursue this targeted round of trims as soon as next month, they and rivals are also revisiting profit expectations for their advisory businesses, people familiar with the matter said.

Until recently, Wall Street's ax had largely fallen on trading desks, which shed thousands of jobs as business dried up due to regulations and lackluster markets.

But the cost-cutting focus is now expanding to deal makers and corporate advisers that have remained among Wall Street's most high-profile professionals even as their contributions to banks' bottom line has been dwarfed by traders. In addition to mergers-and-acquisitions advisory, investment banking includes raising capital through stock and debt.

"The whole paradigm of banking is changing so there is a lot of right sizing and that will continue throughout this year," said Michael Karp, managing partner at Options Group, a financial-services industry executive search firm. All of the top firms "have overcapacity," he added.

As is often the case in Wall Street's Darwinian culture, the culling is expected to affect the old and the weak. The job losses will target underperforming bankers and those nearing retirement age, according to people familiar with the situation.

The goal is to remove people who aren't "pulling their weight," said one investment-banking head at a major bank, adding that "banks are overbuilt" in relation to the work available. As compared with years past, banks are less willing to keep those employees on board in hopes of a near-term recovery.

While bankers insist that conditions remain ripe for deal action, a stubborn slump in transactions is eating into revenue. In the first quarter of 2012, global M&A revenue fell to $3.8 billion, a more than 17% drop from the same period a year ago and the lowest quarterly revenue total since the first quarter of 2010, according to Dealogic.

In last year's first quarter, top-ranked J.P. Morgan advised on $132.6 billion worth of deals in the U.S. This year, that figure fell to $46.2 billion. Second-ranked Goldman advised on $81.6 billion worth of deals in the U.S. during last year's first quarter, but only worked on $42.8 billion worth of deals in the first quarter this year.

The declines in activity come as pay has already fallen across Wall Street, with investment-banking bonuses for 2011 shrinking by as much as 30% at banks such as Citi, Credit Suisse Group AG CSGN.VX -3.66% and Morgan Stanley. The cuts reflect a tough environment for the industry, which has faced lower profits amid increased regulation and troubles stemming from the European debt crisis.

Bonuses have been cut for bankers of all levels, including junior bankers, whose pay many senior bank executives say is outsize given the new realities and how much business they bring in. Typically, analysts and associates who are at the bottom rung of the ladder earn base pay in the low six-figures, plus performance-based bonuses, according to industry participants.

The average managing director in investment banking makes around $400,000 in base pay, and high-performing bankers used to take home several million dollars in annual bonuses. But this year, Morgan Stanley generally capped cash bonuses at $125,000, while other banks put various restrictions on compensation.

Senior bankers say they are also being pushed to squeeze more revenue from clients, describing a world where maintaining long-term relationships with clients who only periodically reward a bank with business is no longer considered enough.

"There is a lot of soul searching going on among bankers," said one senior official at a large bank. "The squeeze on profits and the slow deals environment have made banking less fun and less fulfilling. People are asking themselves, 'is this worth it?"'

Some bankers are choosing to leave, perhaps as they anticipate a push or see colleagues departing. Goldman Sachs has seen several high-profile departures in recent months, including Yoel Zaoui, a co-head of global M&A, George Mattson, a senior banker in the global industrials group, and Milton Berlinski, a top private-equity banker. Some of them retired while others are still assessing their next move, according to people familiar with the matter.

For some, boutique investment firms have become popular vehicles to relaunch their careers. Four former Morgan Stanley bankers who were managing directors started their own firm, Dean Bradley Osborne Partners LLC, in February. It wasn't difficult to convince the team to branch out, said partner Gordon Dean, who was vice chairman of investment banking at Morgan Stanley. Many bankers, he said, are feeling "frustrated and underappreciated."

April 25, 2012

22 Red Flags That Indicate That Very Serious Doom Is Coming For Global Financial Markets

If you enjoy watching financial doom, then you are quite likely to really enjoy the rest of 2012. Right now, red flags are popping up all over the place. Corporate insiders are selling off stock like there is no tomorrow, major economies all over Europe continue to implode, the IMF is warning that the eurozone could actually break up and there are signs of trouble at major banks all over the planet. Unfortunately, it looks like the period of relative stability that global financial markets have been enjoying is about to come to an end. A whole host of problems that have been festering just below the surface are starting to manifest, and we are beginning to see the ingredients for a "perfect storm" start to come together. The greatest global debt bubble in human history is showing signs that it is getting ready to burst, and when that happens the consequences are going to be absolutely horrific. Hopefully we still have at least a little bit more time before the global financial system implodes, but at this point it doesn't look like anything is going to be able to stop the chaos that is on the horizon.

The following are 22 red flags that indicate that very serious doom is coming for global financial markets....

#1 According to CNN, the level of selling by insiders at corporations listed on the S&P 500 is the highest that it has been in almost a decade. Do those insiders know something that the rest of us do not?

#2 Home prices in the United States have fallen for six months in a row and are now down 35 percent from the peak of the housing market. The last time that home prices in the U.S. were this low was back in 2002.

#3 It is now being projected that the Greek economy will shrink by another 5 percent this year.

#4 Despite wave after wave of austerity measures, Greece is still going to have a budget deficit equivalent to about 7 percent of GDP in 2012.

#5 Interest rates on Italian and Spanish sovereign debt are rapidly rising. The following is from a recent RTE article....

Spain's borrowing rate nearly doubled in a short-term debt auction as investors fretted over the euro zone's determination to deal with its debts.

And Italy raised nearly €3.5 billion in a short-term bond sale today but at sharply higher interest rates amid fresh concerns over the euro zone outlook, the Bank of Italy said.
#6 The government of Spain recently announced that its 2011 budget deficit was much larger than originally projected and that it probably will not meet its budget targets for 2012 either.

#7 Amazingly, bad loans now make up 8.15 percent of all loans on the books of Spanish banks. That is the highest level in 18 years. The total value of all toxic loans in Spain is equivalent to approximately 13 percent of Spanish GDP.

#8 One key Spanish stock index has already fallen by more than 19 percent so far this year.

#9 The Spanish government has announced a ban on all cash transactions larger than 2,500 euros. Many are interpreting this as a panic move.

#10 It is looking increasingly likely that a major bailout for Spain will be needed. The following is from a recent Reuters article....

Economic experts watching Spain don't know how much money will be needed or precisely when, but some are near certain that Madrid will eventually seek a multi-billion euro bailout for its banks, and perhaps even for the state itself.
#11 Analysts at Moody's Analytics are warning that Italy has now reached financially unsustainable territory....

"Italy is already out of fiscal space, in our estimate." said Moody's. "Its debt levels relative to GDP already exceed a manageable level. The manageable limit for Italian 10-year bond yields is estimated at 4.2pc. As of Wednesday, Italian 10-year yields were 5.46pc."
#12 It is being projected that the Portuguese economy will shrink by 5.7 percent during 2012.

#13 There is even trouble in European nations that have been considered relatively stable up to this point. For example, the Dutch government collapsed on Monday after austerity talks broke down.

#14 The head of the IMF, Christine Lagarde, says that there are "dark clouds on the horizon" for the global economy.

#15 The top economist for the IMF, Olivier Blanchard, recently made this statement: "One has the feeling that at any moment, things could get very bad again."

#16 A recent IMF report admitted that the current financial crisis could lead to the break up of the eurozone....

Under these circumstances, a break-up of the euro area could not be ruled out. The financial and real spillovers to other regions, especially emerging Europe, would likely be very large.

This could cause major political shocks that could aggravate economic stress to levels well above those after the Lehman collapse.
#17 George Soros is publicly declaring that the European Union could soon experience a collapse similar to what happened to the Soviet Union.

#18 A member of the European Parliament, Nigel Farage, stated during one recent interview that it is inevitable that some major banks in Europe will collapse....

There are going to be some serious banking collapses and the impact of that on some sovereign states, will be serious. I’m afraid we’ve gotten to a point where we really can’t stop this now. We’re beginning to reach a stage where however much false money you create, the problem becomes bigger than the people trying to solve it. We are very close to that point.

When I talk about the threats and the risk that this thing could wind up in some kind of rebellion, some sort of awful social cataclysm, they (other European politicians) are now very worried indeed. They will talk to you in private, but in public, nobody dares utter a word.

I think the deterioration, in the last two or three weeks, in the eurozone is very serious indeed. It’s the bond spreads in Italy and Spain. It’s the fact that youth unemployment is now over 50% in some of these Mediterranean countries.

It’s riot and disorder on the streets. And yet a month ago I was here and there was Herman Van Rumpuy telling us, ‘We’ve turned the corner. Everything is solved. There are no more problems with the eurozone.’ What a pack of jokers they look like.”
#19 The IMF is projecting that Japan will have a debt to GDP ratio of 256 percent by next year.

#20 Goldman Sachs is projecting that the S&P 500 will fall by about 11 percent by the end of 2012.

#21 Over the past six months, hundreds of prominent bankers have resigned all over the globe. Is there a reason why so many are suddenly leaving their posts?

#22 The 9 largest U.S. banks have a total of 228.72 trillion dollars of exposure to derivatives. That is approximately 3 times the size of the entire global economy. It is a financial bubble so immense in size that it is nearly impossible to fully comprehend how large it is.

The financial crisis of 2008 was just a warm up act for what is coming. The too big to fail banks are larger than ever, the governments of the western world are in far more debt than they were back then, and the entire global financial system is more unstable and more vulnerable than ever before.

But this time the epicenter of the financial crisis will be in Europe.

Outside of Europe, most people simply do not understand how truly nightmarish the European economic crisis really is.

Spain, Italy and Portugal are all heading for an economic depression and Greece is already in one.

The European Central Bank was able to kick the can down the road a little bit by expanding its balance sheet by about a trillion dollars over the last nine months, but the truth is that the underlying problems in Europe just continue to get worse and worse.

It truly is like watching a horrible car wreck happen in slow motion.

The good news is that there is still a little time to get yourself into a better position for the next financial crisis. Don't leave yourself financially exposed to the next crash.

Sadly, just like back in 2008, most people will never even see this next crisis coming.

So do you have any other red flags to add to the list above? Please feel free to post a comment with your thoughts below....

April 24, 2012

EU Unraveling – Now It's Holland's Turn

The Dutch government's failure to reach an agreement in talks to achieve tough spending cuts could see ratings agencies cut the country's prized AAA-rating and nervous investors push up the country's borrowing costs, and it will also have wider implications for the euro zone as a whole, analysts said on Monday. Prime Minister Mark Rutte will meet the Dutch queen on Monday afternoon to tender the government's resignation, Dutch broadcaster RTL reported. – CNBC

Dominant Social Theme: This is only to be expected. Wars are not won in a day, and neither will be the battle to save the EU.

Free-Market Analysis: Like some kind of rolling contagion, the insolvency affecting the Southern PIGS is spreading northward toward the supposedly solvent part of the EU.

Now it's Holland's turn. We learn that austerity hasn't been a soft sell in Holland any more than it has been in Greece, Portugal, Spain or Italy. Or Ireland, for that matter.

Of course, we figure the elites orchestrated first the downfall of Europe, from what we can tell, and then the following austerity. But maybe it is not working out as planned.

True, there are elite apparatchiks running Italy and Greece now, but the public furor hasn't died down and in the case of Greece and Spain seems to be growing stronger.

We figure this is partially because of what we call the Internet Reformation. The STATED plan (the Euro-crats have admitted as much) is that a Euro-crisis would eventually bring greater union to the unruly empire-in-progress.

The Eurozone is extremely important to the one-world government that is apparently being built brick-by-brick by the dynastic families of Europe and America. But the Internet itself has evidently and obviously exposed these plans.

What was intended to have been built in secret is being exposed with regularity. And the economic woes that should have provided an implacable impetus for a closer union may be working against the very plans that created the rolling Euro-depression in the first place. Here's some more from the article:

Dutch Finance Minister Jan-Kees de Jager sought to reassure investors on Monday, telling CNBC in The Hague that the Netherlands had always displayed budget discipline and would continue to do so. "The perception of financial markets is always important...and that's why I also have the message for financial markets that for decades the Netherlands have shown a solid fiscal budgetary policy and this will not change. In any government we have seen in the past we have seen solid policy and this will remain in the future," de Jager said.

The talks between the Dutch multi-party coalition government and the right-wing "Freedom Party," or PVV, which supports it in parliament, dragged on for seven weeks. On Saturday, Prime Minister Mark Rutte announced the talks had collapsed and blamed PVV leader Geert Wilders for the failed negotiations ...

"With Saturday's decision, it looks likely that new elections will be announced shortly," Carsten Brzeski, senior economist at ING, said on Monday. Alastair Newton, political analyst at Nomura, said there may still be a possibility of an agreement; but, if so, "it looks to be a slim one at best given that PVV leader Geert Wilders has already openly called for elections."

Holland was committed to reducing its budget to the three percent limit demanded by the larger EU. But the "political will" apparently has vanished – and now the government is about to as well.

With a budget gap of closer to five percent than three, political parties in the Netherlands are already proclaiming that the target is unapproachable and must be formally changed.

The pols in Holland are not alone. In France, presidential candidate Francois Hollande intends to roll back budget-cutting measures as well, if he wins. Meanwhile, Greece is in flames, Spain simmers and the public temper is none-too-good in Portugal, Italy or even Ireland.

The notion being floated today within certain analyses via the mainstream media is that a formal agreement to lift budget deficits is the only way out for the EU. Maybe the target shall be closer to four or five percent than three.

But it is not so easy, is it? The European Central Bank will implicitly accept a decision to print more money were budget deficit reductions to be eased, but that would not sit well with the country that matters most, Germany.

The German public has its own resentments. It fears, in aggregate, being taxed either directly or via price inflation for the rest of Europe. These fears have already led to one constitutional crisis and could doubtless lead to a second one.

Conclusion: It is not so easy, therefore, simply to proclaim that the ECB will have to print more because Europe as a whole is not accepting "austerity." The ramifications, in fact, are enormous – and may have a significant effect on the euro, if it survives.

April 23, 2012

Suddenly Western Economies Are Threatened By 'Hot' Inflation

Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation.

Neither has occurred, and the question is, why not?

The answer is a ‘cold’ inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” inflation.

If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation.

Surely, this is an outcome that sovereign bond markets and stock markets are completely unprepared for. Indeed, by continually framing the inflation vs. deflation debate in extreme terms, market participants have created a blind spot: the risk of a conventional, but ‘hot,’ inflation.

The Fears of 2008

In the spring of 2008, on the back of the Fed’s easing program that began the previous summer, many global commodities were running to all-time highs. Agricultural commodities were in the headlines, and the high price of corn had caused riots in Mexico the year before. In many respects, the 2007-2008 period prefigured some of the food price pressures that would help drive the Arab Spring three years later, in 2011. Of course, the bulk of the headlines went to the master commodity, oil, which flirted with $90 twice before breaking above the $100 barrier.

Market sentiment understandably turned to inflation. Indeed, during a few Fed meetings, Jeffrey Lacker of the Richmond Fed actually called for rate hikes. And the yield on the 10-year Treasury, which declined into a low of 3.88% towards the end of March 2008, actually rose again to 4.32% over three months into the end of Q2, 2008. The Economist magazine, always ready to provide the cover story, produced a rather memorable offering to the inflation angst that spring.

From its May 2008 story, Inflation’s Back:

“Ronald Reagan once described inflation as being “as violent as a mugger, as frightening as an armed robber and as deadly as a hit-man.” Until recently, central bankers thought that this thug had been locked up for life. Thanks to sound monetary policies, inflation worldwide had stayed low in recent years. But the mugger is back on the prowl.”

Of course, we know how this particular story ended in 2008: badly. But not in the cloud of inflationary dust that the Economist magazine and hawkish members of the Fed envisioned. No, it ended “badly” with the most severe unleashing of asset deflation the United States had seen since the Great Depression, along with trillions of fresh credit dollars provided by the Federal Reserve needed just to stabilize the system during the long aftershock.

And the Deflationists Still Hold Some Cards

Four years later, the deflationists are still holding a few cards. True, actual recorded deflation was very brief and lasted only 6-9 months immediately after the crisis. And the deflationary spiral many predicted never did occur. Meanwhile, since 2008/2009, poor wage growth in the OECD and the continued supply of cheap labor from the developing world have ensured that one of the classic starter formulas for ‘traditional’ inflation — tight labor markets and rising wages — has failed to ignite.

Probably no market better expresses the ongoing, structural headwind to developed market inflation than the busted housing market. US households have indeed been working off their debt levels the past few years, but have only reduced those levels by a little more than 3%, from the 2007 highs. With so many Americans still unemployed or underemployed, and with debt levels that constrain purchasing power and also constrain mobility (i.e., the ability to move across country for a new job), it’s no surprise the US housing market remains trapped at levels far below its highs.


Of course, we know how this part goes.

The above chart comes from the February 2012 Economic Report of the President. The above chart (from Chapter 4 of the report) shows that the current bust, in real terms, has seen the worst price decline of all, compared to other historic declines over the past century. Indeed, that there is now little prospect that US residential real estate will ever recapture the old highs says a lot about structural shifts in everything from energy prices to our workforce, that the US faces at least until the end of the decade.

Stealthier Versions of Inflation

But wait a moment. Even if US residential real estate is fated never to be a recipient of inflation, owing to its dependence on oil prices and the automobile-highway complex, is it not the case that Americans have had to endure already a great loss of purchasing power for some time already? The US story of poor wage growth is now marked by some as far back as the 1970s. That is the longer timeline that is often used to explain the transformation from single-earning to double-wage-earning households. Moreover, health care, food, energy, and education costs have seen outsized gains the past 10-15 years.

Considering that most US pension funds, whether by plan or through individual retirement accounts, rely on the stock market, it seems fitting to mark the performance of the SP500 against a basket of commodities. After all, every retiree (and many an institution) eventually converts their financial capital into resources for living. One chart that I like shows the 15-year performance of the SP500 against the most preferred liquid energy in America: gasoline. (chart courtesy of FRED)


While tediously repetitive, the term Middle Class Squeeze still carries weight, as all of the previous components of the problem have only been exacerbated more recently by high energy prices. The purchasing power of the SP500 has literally crashed against oil. What’s particularly handy about the above chart is that when the SP500 was roughly at 1400 near the turn of the millennium, gasoline was indeed (briefly) around $1.00 per gallon. Now, over 12 years later, the SP500 once again trades near 1400, only this time, gasoline sells for 4 times as much, around $4.00 per gallon. But is this inflation?

The loss of purchasing power is certainly a form of inflation. However, what we’ve seen in the past decade is that many of the price changes affecting Western economies have not been driven by tight labor markets, wage inflation, or even reflationary policy — which the US has engaged for much of the past ten years. Instead, price level changes have emanated most strongly from the universe of natural resources, including everything from copper to oil, and, of course, agriculture. There is no question that cheap money policies from both the US and Japan have been driving speculative bubbles for some time. But housing and stock market inflation, as we have seen, have been transitory.

Structural Changes in Global Price Levels

Inflation has been running fairly hot in developing markets for some time. In regions like Asia, pressured to source food as growing populations bump up against limits to available arable land, the amount of capital devoted to food, shelter, and transportation remains high. However, if we think of lower-earning populations across the globe as a single class, there has been no protection from higher prices offered by developed economies to their poorer populations. The bottom two quintiles of US wage earners struggle with food and energy costs just as much as their counterparts across the globe.

These structural changes in price levels, along with the increasing inability of every population to endure them, have fallen into a statistical gray area. Headline measures of inflation in OECD countries churn out benign readings, while at the same time, poverty grows. But this is a particular kind of poverty, a food and energy poverty, which saps the power of consumers to spend disposable income on an array of other items.

This emerging resource poverty is going to drive further changes in price levels, and in particular it will restrain many forms of consumption, including real estate prices. Cities will find, for example, that with the price level of food rising and real estate prices stagnant with rising transportation costs, urban farming is going to advance very strongly. Note, for example, the resurgence in urban farming in places like Brooklyn, NY, where large tracts of industrial land have lain fallow for decades. Indeed, a classic pattern of ‘hot’ inflation is that it quickly begins to drive out spending for discretionary goods in favor of true basics, like food.

The Risk We Face

The United States currently enjoys reserve currency status, which enables it to borrow cheaply, and which keeps capital circulating through our government bond markets, which are the largest in the world. Given the backdrop to our post-credit-bubble environment, it is now the consensus view that we will cut a path similar to Japan’s as we oscillate from weak growth back to the stimulative rescue policies of the Federal Reserve.

There is therefore a sense of complacency about an escalation in prices.

In Part II: The Triggers That Will Spark ‘Hot’ Inflation, we explain how many of the factors which have restrained prices globally at colder levels will start to run hotter soon.

First, there are structural changes taking place in the developing world with regards to urbanization and the trajectory of labor markets. Can the supply of cheap labor in the non-OECD continue indefinitely?

Second, populations in the OECD are increasingly trapped in “safe” investments, such as government bonds, which currently restrain interest rates from moving higher. But this also creates a latent vulnerability for if perceptions of safety and loss of purchasing power were to shift hard. This shift in perceptions is ultimately more critical in any step-change to higher inflation than the supposed quantity of “money-printing” that’s been undertaken by global central banks.

Finally, we look at the assets that will benefit, as well as those that will suffer most, should a stronger inflation develop.

April 22, 2012

The European Stabilization Mechanism, Or How the Goldman Vampire Squid Just Captured Europe

The Goldman Sachs coup that failed in America has nearly succeeded in Europe—a permanent, irrevocable, unchallengeable bailout for the banks underwritten by the taxpayers.

In September 2008, Henry Paulson, former CEO of Goldman Sachs, managed to extort a $700 billion bank bailout from Congress. But to pull it off, he had to fall on his knees and threaten the collapse of the entire global financial system and the imposition of martial law; and the bailout was a one-time affair. Paulson’s plea for a permanent bailout fund—the Troubled Asset Relief Program or TARP—was opposed by Congress and ultimately rejected.

By December 2011, European Central Bank president Mario Draghi, former vice president of Goldman Sachs Europe, was able to approve a 500 billion Euro bailout for European banks without asking anyone’s permission. And in January 2012, a permanent rescue funding program called the European Stability Mechanism (ESM) was passed in the dead of night with barely even a mention in the press. The ESM imposes an open-ended debt on EU member governments, putting taxpayers on the hook for whatever the ESM’s Eurocrat overseers demand.

The bankers’ coup has triumphed in Europe seemingly without a fight. The ESM is cheered by Eurozone governments, their creditors, and “the market” alike, because it means investors will keep buying sovereign debt. All is sacrificed to the demands of the creditors, because where else can the money be had to float the crippling debts of the Eurozone governments?

There is another alternative to debt slavery to the banks. But first, a closer look at the nefarious underbelly of the ESM and Goldman’s silent takeover of the ECB . . . .

The Dark Side of the ESM

The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as Member States representing 90% of the capital commitments have ratified it, something that is expected to happen in July 2012. A December 2011 youtube video titled “The shocking truth of the pending EU collapse!”, originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length. It states:

The EU is planning a new treaty called the European Stability Mechanism, or ESM: a treaty of debt. . . . The authorized capital stock shall be 700 billion euros. Question: why 700 billion? [Probable answer: it simply mimicked the $700 billion the U.S. Congress bought into in 2008.] . . . .

[Article 9]: “. . . ESM Members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them . . . within seven days of receipt of such demand.” . . . If the ESM needs money, we have seven days to pay. . . . But what does “irrevocably and unconditionally” mean? What if we have a new parliament, one that does not want to transfer money to the ESM? . . . .

[Article 10]: “The Board of Governors may decide to change the authorized capital and amend Article 8 . . . accordingly.” Question: . . . 700 billion is just the beginning? The ESM can stock up the fund as much as it wants to, any time it wants to? And we would then be required under Article 9 to irrevocably and unconditionally pay up?

[Article 27, lines 2-3]: “The ESM, its property, funding, and assets . . . shall enjoy immunity from every form of judicial process . . . .” Question: So the ESM program can sue us, but we can’t challenge it in court?

[Article 27, line 4]: “The property, funding and assets of the ESM shall . . . be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.” Question: . . . [T]his means that neither our governments, nor our legislatures, nor any of our democratic laws have any effect on the ESM organization? That’s a pretty powerful treaty!

[Article 30]: “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them . . . and shall enjoy inviolability in respect of their official papers and documents.” Question: So anyone involved in the ESM is off the hook? They can’t be held accountable for anything? . . . The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity. There are no independent reviewers and no existing laws apply? Governments cannot take action against it? Europe’s national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU – a Europe devoid of sovereign democracies?

The Goldman Squid Captures the ECB

Last November, without fanfare and barely noticed in the press, former Goldman exec Mario Draghi replaced Jean-Claude Trichet as head of the ECB. Draghi wasted no time doing for the banks what the ECB has refused to do for its member governments—lavish money on them at very cheap rates. French blogger Simon Thorpe reports:

On the 21st of December, the ECB “lent” 489 billion euros to European Banks at the extremely generous rate of just 1% over 3 years. I say “lent”, but in reality, they just ran the printing presses. The ECB doesn’t have the money to lend. It’s Quantitative Easing again.

The money was gobbled up virtually instantaneously by a total of 523 banks. It’s complete madness. The ECB hopes that the banks will do something useful with it – like lending the money to the Greeks, who are currently paying 18% to the bond markets to get money. But there are absolutely no strings attached. If the banks decide to pay bonuses with the money, that’s fine. Or they might just shift all the money to tax havens.

At 18% interest, debt doubles in just four years. It is this onerous interest burden, not the debt itself, that is crippling Greece and other debtor nations. Thorpe proposes the obvious solution:

Why not lend the money to the Greek government directly? Or to the Portuguese government, currently having to borrow money at 11.9%? Or the Hungarian government, currently paying 8.53%. Or the Irish government, currently paying 8.51%? Or the Italian government, who are having to pay 7.06%?

The stock objection to that alternative is that Article 123 of the Lisbon Treaty prevents the ECB from lending to governments. But Thorpe reasons:

My understanding is that Article 123 is there to prevent elected governments from abusing Central Banks by ordering them to print money to finance excessive spending. That, we are told, is why the ECB has to be independent from governments. OK. But what we have now is a million times worse. The ECB is now completely in the hands of the banking sector. “We want half a billion of really cheap money!!” they say. OK, no problem. Mario is here to fix that. And no need to consult anyone. By the time the ECB makes the announcement, the money has already disappeared.

At least if the ECB was working under the supervision of elected governments, we would have some influence when we elect those governments. But the bunch that now has their grubby hands on the instruments of power are now totally out of control.

Goldman Sachs and the financial technocrats have taken over the European ship.
Democracy has gone out the window, all in the name of keeping the central bank independent from the “abuses” of government. Yet the government is the people—or it should be. A democratically elected government represents the people. Europeans are being hoodwinked into relinquishing their cherished democracy to a rogue band of financial pirates, and the rest of the world is not far behind.

Rather than ratifying the draconian ESM treaty, Europeans would be better advised to reverse article 123 of the Lisbon treaty. Then the ECB could issue credit directly to its member governments. Alternatively, Eurozone governments could re-establish their economic sovereignty by reviving their publicly-owned central banks and using them to issue the credit of the nation for the benefit of the nation, effectively interest-free. This is not a new idea but has been used historically to very good effect, e.g. in Australia through the Commonwealth Bank of Australia and in Canada through the Bank of Canada.

Today the issuance of money and credit has become the private right of vampire rentiers, who are using it to squeeze the lifeblood out of economies. This right needs to be returned to sovereign governments. Credit should be a public utility, dispensed and managed for the benefit of the people.

April 21, 2012

How the Goldman Vampire Squid Just Captured Europe

The Goldman Sachs coup that failed in America has nearly succeeded in Europe—a permanent, irrevocable, unchallengeable bailout for the banks underwritten by the taxpayers.

In September 2008, Henry Paulson, former CEO of Goldman Sachs, managed to extort a $700 billion bank bailout from Congress. But to pull it off, he had to fall on his knees and threaten the collapse of the entire global financial system and the imposition of martial law; and the bailout was a one-time affair. Paulson’s plea for a permanent bailout fund—the Troubled Asset Relief Program or TARP—was opposed by Congress and ultimately rejected.

By December 2011, European Central Bank president Mario Draghi, former vice president of Goldman Sachs Europe, was able to approve a 500 billion Euro bailout for European banks without asking anyone’s permission. And in January 2012, a permanent rescue funding program called the European Stability Mechanism (ESM) was passed in the dead of night with barely even a mention in the press. The ESM imposes an open-ended debt on EU member governments, putting taxpayers on the hook for whatever the ESM’s Eurocrat overseers demand.

The bankers’ coup has triumphed in Europe seemingly without a fight. The ESM is cheered by Eurozone governments, their creditors, and “the market” alike, because it means investors will keep buying sovereign debt. All is sacrificed to the demands of the creditors, because where else can the money be had to float the crippling debts of the Eurozone governments?

There is another alternative to debt slavery to the banks. But first, a closer look at the nefarious underbelly of the ESM and Goldman’s silent takeover of the ECB . . . .

The Dark Side of the ESM

The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as Member States representing 90% of the capital commitments have ratified it, something that is expected to happen in July 2012. A December 2011 youtube video titled “The shocking truth of the pending EU collapse!”, originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length. It states:

The EU is planning a new treaty called the European Stability Mechanism, or ESM: a treaty of debt. . . . The authorized capital stock shall be 700 billion euros. Question: why 700 billion? [Probable answer: it simply mimicked the $700 billion the U.S. Congress bought into in 2008.] . . . .

[Article 9]: “. . . ESM Members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them . . . within seven days of receipt of such demand.” . . . If the ESM needs money, we have seven days to pay. . . . But what does “irrevocably and unconditionally” mean? What if we have a new parliament, one that does not want to transfer money to the ESM? . . . .

[Article 10]: “The Board of Governors may decide to change the authorized capital and amend Article 8 . . . accordingly.” Question: . . . 700 billion is just the beginning? The ESM can stock up the fund as much as it wants to, any time it wants to? And we would then be required under Article 9 to irrevocably and unconditionally pay up?

[Article 27, lines 2-3]: “The ESM, its property, funding, and assets . . . shall enjoy immunity from every form of judicial process . . . .” Question: So the ESM program can sue us, but we can’t challenge it in court?

[Article 27, line 4]: “The property, funding and assets of the ESM shall . . . be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.” Question: . . . [T]his means that neither our governments, nor our legislatures, nor any of our democratic laws have any effect on the ESM organization? That’s a pretty powerful treaty!

[Article 30]: “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them . . . and shall enjoy inviolability in respect of their official papers and documents.” Question: So anyone involved in the ESM is off the hook? They can’t be held accountable for anything? . . . The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity. There are no independent reviewers and no existing laws apply? Governments cannot take action against it? Europe’s national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU – a Europe devoid of sovereign democracies?

The Goldman Squid Captures the ECB

Last November, without fanfare and barely noticed in the press, former Goldman exec Mario Draghi replaced Jean-Claude Trichet as head of the ECB. Draghi wasted no time doing for the banks what the ECB has refused to do for its member governments—lavish money on them at very cheap rates. French blogger Simon Thorpe reports:

On the 21st of December, the ECB "lent" 489 billion euros to European Banks at the extremely generous rate of just 1% over 3 years. I say "lent", but in reality, they just ran the printing presses. The ECB doesn't have the money to lend. It's Quantitative Easing again.

The money was gobbled up virtually instantaneously by a total of 523 banks. It's complete madness. The ECB hopes that the banks will do something useful with it – like lending the money to the Greeks, who are currently paying 18% to the bond markets to get money. But there are absolutely no strings attached. If the banks decide to pay bonuses with the money, that's fine. Or they might just shift all the money to tax havens.

At 18% interest, debt doubles in just four years. It is this onerous interest burden, not the debt itself, that is crippling Greece and other debtor nations. Thorpe proposes the obvious solution:

Why not lend the money to the Greek government directly? Or to the Portuguese government, currently having to borrow money at 11.9%? Or the Hungarian government, currently paying 8.53%. Or the Irish government, currently paying 8.51%? Or the Italian government, who are having to pay 7.06%?

The stock objection to that alternative is that Article 123 of the Lisbon Treaty prevents the ECB from lending to governments. But Thorpe reasons:

My understanding is that Article 123 is there to prevent elected governments from abusing Central Banks by ordering them to print money to finance excessive spending. That, we are told, is why the ECB has to be independent from governments. OK. But what we have now is a million times worse. The ECB is now completely in the hands of the banking sector. "We want half a billion of really cheap money!!" they say. OK, no problem. Mario is here to fix that. And no need to consult anyone. By the time the ECB makes the announcement, the money has already disappeared.

At least if the ECB was working under the supervision of elected governments, we would have some influence when we elect those governments. But the bunch that now has their grubby hands on the instruments of power are now totally out of control.

Goldman Sachs and the financial technocrats have taken over the European ship. Democracy has gone out the window, all in the name of keeping the central bank independent from the “abuses” of government. Yet the government is the people—or it should be. A democratically elected government represents the people. Europeans are being hoodwinked into relinquishing their cherished democracy to a rogue band of financial pirates, and the rest of the world is not far behind.

Rather than ratifying the draconian ESM treaty, Europeans would be better advised to reverse article 123 of the Lisbon treaty. Then the ECB could issue credit directly to its member governments. Alternatively, Eurozone governments could re-establish their economic sovereignty by reviving their publicly-owned central banks and using them to issue the credit of the nation for the benefit of the nation, effectively interest-free. This is not a new idea but has been used historically to very good effect, e.g. in Australia through the Commonwealth Bank of Australia and in Canada through the Bank of Canada.

Today the issuance of money and credit has become the private right of vampire rentiers, who are using it to squeeze the lifeblood out of economies. This right needs to be returned to sovereign governments. Credit should be a public utility, dispensed and managed for the benefit of the people.

April 20, 2012

The Mother Of All Infographics: Visualizing America's Derivatives Universe

A month ago we presented the latest derivatives update from the OCC, according to which the Top 5 US banks held 95.7%, or $221 trillion of the entire US derivative universe (which in turn is just a modest portion of the entire $707 trillion in global derivatives as of June 30, 2011). And while the numbers of all this credit money, because that's what it is, and the variation margin associated with all these trillions in bets is all too real, appeared impressive on paper, they did not do this story enough service. So to present, visually this time, the US derivatives problem, we go to our friends from Demonocracy, who put the $229 trillion derivative 'issue' in its proper context. For those curious what a paper equivalent of bailing out the US derivatives market would look like, now you know.

April 19, 2012

FRONTLINE FOUR-HOUR INVESTIGATION GOES INSIDE THE EPIC STORY OF THE GLOBAL FINANCIAL CRISIS - MONEY, POWER AND WALL STREET

Since 2008, Wall Street and Washington have fought against the tide of the fiercest financial crisis since the Great Depression. Now, FRONTLINE’s veteran financial and political producers Martin Smith (College Inc., The Madoff Affair) and Michael Kirk (Inside the Meltdown, The Warning), team up to present the inside story of the struggles to rescue and repair a shattered economy, exploring key decisions, missed opportunities and the unprecedented and uneasy partnership between government leaders and titans of finance in Money, Power and Wall Street, a four-hour investigation airing Tuesdays, April 24 and May 1, 2012, from 9 to 11 P.M. ET on PBS (check local listings).

The revolution in modern finance began not in a Wall Street boardroom but at a luxury hotel in Boca Raton, Fla. There, in the summer of 1994, a team of 20-something bankers from JPMorgan pioneered an insurance product for loans called a credit default swap. “The defining problem was that banks were unable to adequately deal with their own credit risks,” says Bill Winters, the former co-CEO of JPMorgan’s investment bank. With the credit default swap, JPMorgan created a new marketplace in which banks could buy and sell risk. It fueled a golden era of profits for the banking industry and a boom in global investing.

In the first hour of Money, Power and Wall Street, FRONTLINE correspondent Martin Smith interviews leading bankers, government officials and journalists to chart the epic rise of a new financial order—and the trouble that followed. As Wall Street innovated, its revenues skyrocketed, and financial institutions of all stripes tied their fortunes to one another. Smith probes deeply into the story of the big banks—how they developed, how they profited, and how the model that produced unfathomable wealth planted the seeds of financial destruction.

With the real estate market booming, bankers successfully tweaked the credit default swap to bundle up and sell home mortgage loans to eager investors. “We were bullish on the mortgage market in general, and subprime, which was an element of it,” Deutsche Bank CEO Josef Ackermann tells FRONTLINE. But despite the money flowing into banks’ coffers, credit default swaps also loaded the financial system with lethal risk. “The basic business that they created was immensely profitable,” explains Satyajit Das, a consultant with more than 30 years of experience in the financial markets. “But there’s a problem with all of this. Most people in finance assume risk can be eliminated. It can’t. We were just moving the risk from one party to another party.”

When the housing bubble burst, the credit default swaps—originally designed to stabilize the financial system—brought the global economy to its knees. Regulators, who had often stood on the sideline and allowed Wall Street to police itself, watched in horror as the consequences rapidly unfolded before them. Federal Reserve governor Daniel K. Tarullo notes, “It was quite clear to me that a number of really quite large financial systems had not had the kind of management information systems which allowed them even to know what all their risks were.”

Today, questions remain as to how the chiefs of global finance failed to manage the risks on their own books and those to the system. As Former Wells Fargo CEO and Chairman Richard Kovacevich argues: “For people to say no one could have seen this is a total mistake. It shouldn’t have happened. Most of our financial crises in the past [were] due to some macroeconomic event—an oil disruption, war…. This was caused by a few institutions, about 20, who in my opinion lost all credibility relative to managing their risk.”

In the second hour, FRONTLINE producer Michael Kirk investigates how the American government confronted the crisis while dealing with sharp internal divisions and a relationship with Wall Street marked by mistrust and dependence, mutual interests and competing goals. The investigation charts the largest government bailout in U.S. history, a series of decisions that rewrote the rules of government and fueled a debate that would alter the country’s political landscape.

Beginning with the government bailout of the collapsing investment bank Bear Stearns in the spring of 2008, the film tells the story of how the country’s leaders—Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and New York Federal Reserve President Timothy Geithner—struggled to respond to a financial crisis that caught them by surprise. Decades of deregulation kept the government’s top officials in the dark about the complicated financial products that drove the meltdown. “One of the most striking parts of the story is … how little people in charge of our system knew and/or did in the wake of the oncoming crisis,” says Phil Angelides, the chairman of the Financial Crisis Inquiry Commission.

In September 2008, the decision to allow the investment bank Lehman Brothers to fail spread financial contagion across the globe. Paulson, Bernanke and Geithner believed they had no choice but to initiate a massive government bailout of the financial system and pump billions of dollars into the very Wall Street banks that had caused the crisis. “It was what had to be done,” says Assistant Treasury Secretary Michele Davis. “There was no choice in the matter. The markets would never regain confidence unless the united government was working together to solve the problem.”

In hour three, airing May 1, Kirk goes inside the Obama White House, telling the story of how a newly elected president with a mandate for change inherited a financial crisis that would challenge his administration and define his first term. From almost the very beginning, there was a division inside the administration’s economic team over how tough the White House should be on the banks that were at the heart of the crisis. In a dramatic meeting, Obama’s top economic adviser, Larry Summers, and the chair of the Council of Economic Advisers, Christina Romer, pushed for strong action against the banks, including a possible government takeover of a major bank. “Larry Summers and I were both on the side of we needed a definitive cleanup of the financial system,” Romer says. “The question was if somebody really wasn’t solvent, do you need the government to put in capital, realize the losses, clean it up and then put it back into private hands?”

On the other side of the debate was Timothy Geithner, the New York Federal Reserve president who Obama had brought on as his Treasury secretary. Geithner warned that taking on the banks in the midst of the crisis could backfire. “The first rule is, to borrow from medicine, the Hippocratic Oath, first do no harm. And there were a lot of ideas out there, frankly, that some us thought might do harm,” Geithner’s deputy Lee Sachs tells FRONTLINE. In the end, the president sided with Geithner, and the administration delayed taking decisive action against the banks. The result, some on the losing side of the argument say, is that Wall Street was able to avoid the type of reform that would prevent the next crisis.

“Here we are three years-plus after, and very little has changed,” says Angelides. “In many respects, the financial crisis never ended.”

In the fourth hour, Smith takes the investigation into the present, probing into a Wall Street culture that remains focused on making risky trades. Bankers left an ugly trail of deals extending from small American cities to big European capitals. For more than three years, regulators have tried to fix an industry steeped in conflicts of interest, excessive risk taking, and incentives to cheat. New rules and regulations are being written, but can they fend off the next crisis?

April 18, 2012

The Too Big To Fail Banks Are Now Much Bigger And Much More Powerful Than Ever

The Democrats, the Republicans and especially Barack Obama promised that something would be done about the too big to fail banks so that they would never again be a threat to destroy our financial system. Well, those promises have not been kept and the too big to fail banks are now much bigger and much more powerful than ever. The assets of the five biggest U.S. banks were equivalent to about 43 percent of U.S. GDP before the financial crisis. Today, the assets of the five biggest U.S. banks are equivalent to about 56 percent of U.S. GDP. So if those banks were "too big to fail" before, then what are they now? They continue to gobble up smaller banks at a brisk pace, and they continue to pile up debt and risky investments as if a day of reckoning will never come. But of course a day of reckoning is coming, and when it arrives they will be expecting more bailouts just like they got the last time.

The size of these monolithic financial institutions is truly difficult to comprehend. They completely dominate our financial system and everywhere you look they are constantly absorbing more wealth and more power. The following comes from a recent Bloomberg article....

Five banks -- JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc., Wells Fargo & Co. (WFC), and Goldman Sachs Group Inc. -- held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to central bankers at the Federal Reserve.

Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy
Despite all of the talk from the politicians, they just keep getting bigger and bigger and bigger.

So why isn't anything ever done?

Well, one reason is because these gigantic financial entities funnel huge quantities of cash into political campaigns.

For example, Barack Obama gives nice speeches about the dangers of the too big to fail banks, but he is also more than happy to take their campaign contributions. Goldman Sachs, JPMorgan Chase and Citigroup were all ranked among his top 10 donors during the 2008 campaign.

So do you really expect that Barack Obama is going to bite the hands that feed him?

Of course he is not going to do that.

The truth is that the Obama administration and the Federal Reserve have done everything they can to make life very comfortable for the big Wall Street banks.

During the last financial crisis, the too big to fail banks were absolutely showered with bailouts.

Meanwhile, hundreds of small and mid-size banks were allowed to die.

When representatives from those small and mid-size banks contacted the federal government for help, often they were told to try to find a larger bank that would be willing to buy them.

Sadly, the last financial crisis simply accelerated the consolidation of the banking industry in the United States that has been going on for several decades.

Today, there are less than half as many banks in the United States as there were back in 1984.

So where did all of those banks go?

They were either purchased by bigger banks or they were allowed to go out of existence.

This banking consolidation trend has allowed the big Wall Street banks to absolutely explode in size.

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.

So where will this end?

That is a good question.

The funny thing is that Federal Reserve Chairman Ben Bernanke and other Fed officials keep giving speeches where they warn of the dangers of having banks that are "too big to fail". For example, during a recent presentation to students at George Washington University, Bernanke made the following statement about the U.S. banking system....

"But clearly, it is something fundamentally wrong with a system in which some companies are 'too big to fail.'"
So does that mean that Bernanke is against the too big to fail banks?

Of course not.

The truth is that he showered those banks with trillions of dollars in bailout money during the last financial crisis.

The amount of money in secret loans that some of the big Wall Street banks received from the Federal Reserve was absolutely staggering. The following figures come directly from a GAO report....

Citigroup - $2.513 trillion
Morgan Stanley - $2.041 trillion
Bank of America - $1.344 trillion
Goldman Sachs - $814 billion
JP Morgan Chase - $391 billion

Bernanke has shown that he is willing to move heaven and earth to protect those big banks.

So what did those banks do with all that money?

They certainly didn't lend it to us. Lending to individuals and small businesses by those big banks actually went down immediately after those bailouts.

Instead, one thing that those banks did was they started putting massive amounts of money into commodities.

One of those commodities was food.

Over the past few years, big Wall Street banks have made huge amounts of money speculating on the price of food. This has caused food prices all over the globe to soar and it has caused tremendous hardship for hundreds of millions of families around the planet. The following is from a recent article in The Independent....

Speculation by large investment banks is driving up food prices for the world's poorest people, tipping millions into hunger and poverty. Investment in food commodities by banks and hedge funds has risen from $65bn to $126bn (£41bn to £79bn) in the past five years, helping to push prices to 30-year highs and causing sharp price fluctuations that have little to do with the actual supply of food, says the United Nations' leading expert on food.

Hedge funds, pension funds and investment banks such as Goldman Sachs, Morgan Stanley and Barclays Capital now dominate the food commodities markets, dwarfing the amount traded by actual food producers and buyers.
Goldman Sachs alone has earned hundreds of millions of dollars in profits from food speculation.

Can you imagine what kind of mindset it takes to do this?

Can you imagine taking food out of the mouths of hungry families on the other side of the world so that you and your fellow employees can pad your bonus checks?

It really is disgusting.

But that is the way the game is played.

It is set up so that the big guy will win and the little guy will lose.

The other day I wrote about how this is particularly true when it comes to our system of taxation.

Well, since that article I have discovered some new numbers that were just released by Citizens for Tax Justice. Some of the things that they have uncovered are absolutely amazing....

Between 2008 and 2011, Verizon made a total profit of $19.8 billion and yet paid an effective tax rate of -3.8%.

Between 2008 and 2011, General Electric made a total profit of $19.6 billion and yet paid an effective tax rate of -18.9%.

Between 2008 and 2011, Boeing made a total profit of $14.8 billion and yet paid an effective tax rate of -5.5%.

Between 2008 and 2011, Pacific Gas & Electric made a total profit of $6 billion and yet paid an effective tax rate of -8.4%.

So why should middle class families continue to be suffocated by outrageous tax rates when hugely profitable corporations such as General Electric are able to get away with paying nothing?

Our current tax system is an utter abomination and should be completely thrown out.

But as is the case with so many other things, our current system is going to persist because the "big guys" really enjoy the status quo and they are the ones that fund political campaigns.

It would be bad enough if the "big guys" were beating us on a level playing field.

But the truth is that the game has been dramatically tilted in their favor and they know that the politicians are going to take care of them whenever they need it.

So what is going to happen the next time the too big to fail banks get into trouble?

They will almost certainly get bailed out again.

Unfortunately, the big Wall Street banks continue to treat the financial system as if it was a gigantic casino. The derivatives bubble just continues to grow larger and larger, and it could burst and absolutely devastate the entire global financial system at any time.

According to the New York Times, the too big to fail banks have complete domination over derivatives trading. Every month a secret meeting that includes representatives from JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup is held in New York to coordinate their control over the derivatives marketplace. The following is how the New York Times describes those meetings....

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.
When the derivatives market fully implodes, there will not be enough money in the world to bail everyone out. According to the Comptroller of the Currency, the too big to fail banks have exposure to derivatives that is absolutely outrageous. Just check out the following numbers....

JPMorgan Chase - $70.1 Trillion

Citibank - $52.1 Trillion

Bank of America - $50.1 Trillion

Goldman Sachs - $44.2 Trillion

So what happens when that house of cards comes crashing down?

Well, those big banks will come crying to the federal government again.

They will want more bailouts.

They will claim that if we don't give them the money that they need that the entire financial system will collapse.

And yes, if several of the too big to fail banks were to collapse all at once the consequences would be almost unimaginable.

But of course all of this could have been avoided if we would have made much wiser decisions upstream.

Our financial system is more vulnerable than it ever has been before, and the too big to fail banks just continue to grow.

The lessons from the financial crisis of 2008 have gone unheeded, and we are steamrolling toward an even greater crash.

What a mess.

April 17, 2012

Eurocalypse Now: I Love The Smell Of Repatriation In The Afternoon

Sniffing around the moves in today's market suggest one very strong trend - that of European bank repatriation flows gathering pace. We pointed this out during the day as it occurred but looking back now, and remembering our critical analysis of these same flow patterns back in October of last year as the crisis was surging to crescendo, brings back some concerning memories. Today's cross asset-class price action had five very clear phases with the period around the European close and the afternoon in the US day session most directly evident of the generalized selling of USD-based assets and repatriating EURs in whatever format can be found. A picture paints a thousand words (perhaps more if it's scratch'n'sniff) and this one smells like forced selling - which combined with ECB margin calls and the rapidly worsening EUR-USD basis swap (funding issues) paints a rather concerning picture for (already collateral starved) European banks. As Europe faces bank downgrades (collateral calls) and auctions (real-money needed to bid in the reach-around), we suspect we will see more repatriation of EUR and understanding the flows these movements may cause will help make sense of the markets' movements during the day

Today's market action in USD (DXY Inverted - green), TSY yields (red), S&P 500 futures (blue), and Gold (gold) broke into 5 specific phases...


Phase 1 - markets were drifting until the release of the major US macro data (retail sales beat and empire manufacturing missed). The better-than-expected retail sales data spurred risk-on and Treasuries were sold and Stocks bought as the USD was reflexively sold (on correlations) and gold rallied (a little odd but looked like modest high USD beta move). Consistent

Phase 2 - US markets opened and started to slide, only helped by a notable miss on NAHB and commentary - risk-off. This Long USD, Short Stocks, Long Treasuries, Short Gold move all fit as bad news is bad news (no longer good enough to prompt a pre-emptive QE3 hope trade). The move was nicely in sync and these risk-off flows petered out after the first hour or so of the day-session. Consistent

Phase 3 - From mid-morning to the European close, markets generally drifted sideways but the sniff of USD selling was apparent and picking up. Consistent

Phase 4 - From the close of Europe's equity markets to shortly after their FX market closed (and notably market sweeps and funding needs are comprehended), the USD was sold hard and aggressively. The reflexive move of this forced USD selling / EUR repatriation flow was to push risk-assets up (as correlation algos reacted). The significant thing is that stocks moved on little volume (algos not flow) and the selling in FX was heavy and rapid (we need these EUR now). Inconsistent

Phase 5 - After the European markets had closed is when the effect of the real asset selling and repatriation flows hits the US markets. The need to bring EURs home in a hurry likely meant European banks traded away their US stocks and US Treasuries but this selling pressure was held back by the algos reacting to USD weakness. As soon as the FX trades were done and the USD stabilized the buying pressure disappeared at the margin and so Treasuries and equities sold off as the marginal algo buyer had gone and all was left was the flow of the EUR-based sellers left with dealers trying to unwind their positions. Also note that there was no flow back to Gold or the USD safety as USD-assets sold off (as they had already been shifted and were now being reracked by dealers offloading). Inconsistent

The selling of US equities and US Treasuries simultaneously and on a pick up in volume (and block size) even after the USD selling had abated strongly suggests US dealers had soaked up some of the selling pressure (knowing full well stocks would get a lift in the USD-correlation-sense) and then sold into that strength.

We will be watching for similar flows this week and keeping a close eye on the EUR-USD basis swap - especially ahead of auctions and possible downgrades (both of which need real money to make a difference - bids at auction for Spanish banks and higher collateral calls on downgrades). Is that the smell of napalm in the morning repatriation in the afternoon?

April 16, 2012

The Latest SEC/Goldman Sachs Sweetheart Deal Is the Worst One Yet

The sweetheart deals just keep coming. Lawbreakers at one bank after another are let off the hook as their shareholders write a check. And then they go out and repeat the illegal behavior they promised not to do in the last settlement.

It shouldn't be surprising that this keeps happening over at the SEC -- especially as long as Robert Khuzami continues to serve as Director of the Commission's Division of Enforcement.

But while each of these deals has been shameful, destructive, and outrageous, the $22 million agreement with Goldman Sachs which the SEC announced today -- another one in which the guilty party "neither confirms nor denies wrongdoing" -- looks like the worst one yet.

The SEC has the power to shut Goldman Sachs down for what it did, and the offenses it describes are felonies. But they just gave out another slap on the wrist -- no, make that a pat on the wrist -- with today's announcement.

The Worst Thing

It's not just the fact that the SEC continues to ignore the public's outrage by letting bankers off scot-free. And it's not just that this kind of irresponsible behavior ensures that the lawbreaking will continue. Its not just that crooked bank executives are allowed to "neither admit nor deny wrongdoing."

It's not even the fact that this time around the SEC has worded its announcement in a clumsy attempt to obscure the criminal behavior of Goldman's employees -- although that's one of this agreement's worst features.

No, what makes this deal the worst we've seen in a long while is the timing. Most of the other recent sweetheart deals dealt with crimes that led up to -- and created -- the 2008 financial crisis. But this time Goldman Sachs is walking away from crimes its bankers committed as recently as last year.

That's been the SEC's pattern under both the last president and the current one. The number of repeat offenses compiled by the New York Times for these SEC deals is mind-blowing.

No wonder the SEC didn't appear before reporters to announce this latest settlement, choosing instead to announce in an an email. Cowardly -- but then, would you want to show your face in public after signing a deal like this?

The Crime

What crimes did Goldman Sachs employees commit this time around? They pressured their top analysts to share confidential information in meetings called "huddles," exchanging "high conviction" rating changes the analysts planned to make but hadn't announced yet. These changes were then shared with what the SEC called "a select group of Goldman's top clients" under a program called the "Asymmetric Service Initiative," or "ASI."

Goldman Sachs had "means, motive, and opportunity":

Means. From the SEC: "Between January 2007 and August 2009, there were hundreds of instances when a ratings change occurred within five business days after the stock was discussed at a huddle, referenced in a huddle script ..."

They leaned on their guys to get it done. The SEC's report says that, "Analysts' contributions to huddles and ASI, such as increased commissions generated from ASI clients, were discussed in analysts' written performance reviews and in other documents used in connection with analyst evaluations."

Anybody who's worked on Wall Street knows what that means: Come up with information and get results with it -- or else.

Motive. From the SEC again: "The huddle and ASI program was part of a concerted effort ... to improve or maintain the broker votes of Goldman's highest priority clients, including ASI clients, and accordingly, generate greater trading commissions."

Opportunity. How useful could it be to know in advance what Goldman Sachs analysts think? Consider this headline from Bloomberg News: "Staples falls after Goldman Sachs downgrades stock." Then read the first sentence of the article: "Staples Inc., the world's largest office-supply retailer, fell the most in more than two months after Goldman Sachs Group Inc. downgraded the shares to 'sell' from 'neutral."

Then look up some similar articles about stock prices for Whole Foods. Or Patriot Coal. Or Intel. Or Meritage Homes. Or Colruyt.

Patriot Coal stocks fell by six percent the day after Goldman's announcement, and Staples fell by nearly as much that morning. An "asymmetrical" client could execute a quick $1,000,000 trade and walk away with sixty grand before lunchtime. That kind of information is very lucrative ...

The Punishment

... and very illegal. It's a violation of Section 15(b) of the Securities and Exchange Act and is punishable as a felony. It's so illegal, in fact, that Goldman Sachs could be closed down entirely, either temporarily or permanently, "in the public interest."

That sounds right. But everybody on Wall Street knows that's not going to happen.

And as long as there's no real downside -- no prosecutions, no big fines coming out of a banker's personal pockets -- there' s no reason to stop.

The Perp

But then, that's Goldman's way of doing business -- sleazy, preferential, and highly illegal. These charges resemble "spinning," the practice of letting preferred clients by into an IPO at inside-the-deal prices so they could immediately sell them off -- usually at a big profit.

(It was that corrupt practice that eventually ended Meg Whitman's membership on Goldman's board and led to a lawsuit from shareholders of eBay. That's the company whose CEO chair made Whitman a desirable client at the time. The suit was settled for $3 million.)

The Cover-Up

In the SEC's words, the "huddle" and "ASi" processes "created a serious and substantial risk that analysts would share material, nonpublic information... Goldman did not establish, maintain, and enforce adequate policies and procedures to prevent such misuse."

But those are weasel words. If you read the SEC brief in detail, it's clear that Goldman didn't just "create a serious and substantial risk" that insider information would be illegally shared. The SEC's records make it pretty clear that information was illegally shared.

And they tried to cover it up. Ideas from the huddles were tracked on spreadsheets called "Records of Ideas," but they were later withheld from Goldman's own surveillance analysts. The SEC report then notes that, "Even when alerts regarding trading ahead of research changes were triggered by Goldman's surveillance system, all but one were closed with no further action after only a limited review."

And even when the surveillance system showed evidence of insider trading, despite the cover-ups -- activity like a big buy or sell right before a major announcement -- Goldman did nothing to follow up. Senior Goldman officials knew what was going on and did nothing, as you can tell from sentences in the SEC's report like this one: "During 2007, members of Goldman's Compliance Division drafted a proposed insert concerning huddles for the ... Global Policies and Procedures Manual, but no such policy was ever implemented."

The "Enforcer"

And yet the strongest words we heard from Director of Investigations Khuzami was that "Higher-risk trading and business strategies require higher-order controls."

He added (in writing, of course; he didn't face reporters) that "despite being on notice from the SEC about the importance of such controls, Goldman failed to implement policies and procedures that adequately controlled the risk that research analysts could preview upcoming ratings changes with select traders and clients."

In other words, they promised not to commit this crime anymore so we let them off with a warning. Now they've done it again -- and we're letting them off with a warning.

But don't worry. "Respondent (Goldman) has agreed that "it shall cease and desist from committing or causing any violations and any future violations of Section 15(g) of the Exchange Act."

Well, alrighty then!

Asymmetrical Warfare

You know who got screwed in this deal? Pension funds and other groups of "ordinary" investors who have placed their assets with Goldman Sachs, but weren't considered part of that "select group of top clients" that were given access to this "asymmetrical" information -- even though in many cases they were investing far more through Goldman than most individual clients.

That was probably prudent on Goldman's part, since institutional investors might have blown the whistle on their illegal activity.

The net effect of Goldman's "asymmetrical" illegality is to further enrich the already-wealthy while playing the rest of us for suckers. Our money -- whether it's our pension, our IRA, or any other institutional funds the most fortunate among us are clinging to -- loses value in this game, while others profit from insider trading.

The Evidence

Fortunately there are some promising leads. Those "Record of Ideas" spreadsheets look like a goldmine. It shouldn't be difficult for diligent criminal investigators to tie these spreadsheets to subsequent Goldman-managed trades. And those internal surveillance reports -- the ones that were ignored by Goldman's senior management -- could be extremely useful in identifying potentially criminal acts by individual Goldman Sachs employees.

A thorough review of the email traffic among Goldman's executives, starting at the very top, should tell investigators who in senior management might also be a candidate for prosecution. While they're doing that they can contrast the public and private communications conducted by Goldman's CEO and CFO while they were affirming under Sarbanes-Oxley that they've personally reviewed the company's procedures for identifying and preventing fraud.

But we haven't heard word one from the Justice Department about any pending criminal investigation. But then they're not answering our media inquiries down there nowadays, so citizens will have to ask them -- or the White House -- themselves: Where are the indictments?

April 15, 2012

Debt Crisis Plotted to Deliver the Euro to the IMF?

Spanish bailout 'impossible' for eurozone, says prime minister Mariano Rajoy ... The eurozone is not equipped to bail out Spain, the country's prime minister Mariano Rajoy has admitted, as global traders continued to punish the nation's stocks and bonds. Mr Rajoy said it was "not possible to rescue Spain" but insisted his country did not need a Greek-style international bail-out anyway ...Christine Lagarde, the boss of the International Monetary Fund (IMF), also warned that Europe's rescue mechanisms were not enough to restore confidence to global markets but said the IMF could provide a "global firewall". Speaking in Washington on Thursday, Ms Lagarde, who is seeking to raise $500bn (£313.4bn) in extra funds for the IMF from the G20, warned risks to the global economy "remain high; the situation fragile". "We need a broader approach – and a stronger global firewall – if we are to push back this crisis. The IMF can help. But to be as effective as possible, we need to increase our resources." – UK Telegraph

Dominant Social Theme: What is needed is a global currency.

Free-Market Analysis: We've long since come to the conclusion that the EU's sovereign crisis is a manufactured one. This article supports such a conclusion, in our view.

One has to keep in mind the artificiality of the current economic construct. The economy of the world is run via monopoly fiat/paper money printed by central banks. It is this system that has seemingly crashed half of the world's economy and is well on the way to delivering China into the same situation.

If China's economy folds – and it seems well on the way – there will likely be a global depression. The elites, in our view, are preparing to offer up the International Monetary Funds' SDRs as an alternate currency. The IMF is increasingly active as the "lender of last resort" throughout the world (see article excerpt above).

The EU crisis itself, as we have often pointed out, started when certain poorer countries were given large amounts of money by Brussels to "equalize" the economy. These funds were supposed to allow the bureaucracies to address native imbalances and create fiscal health.

Of course, this money was nothing but a kind of bribe. The elites of the given nation pocketed the funds and then made sure their countries entered the EU. After this occurred, further lending took place via the elite's top, European commercial banks.

After the 2008 crash, it became clear that the EU's PIGS couldn't repay the loans. This was likely the plan all along. After this realization set in, the power elite that orchestrates this sort of thing ensured that the solution to this manipulated dilemma was "austerity."

The idea is evidently and obviously to make people so miserable that they will eventually welcome world government and world money. The power elite orchestrating this has been using what we call directed history for at least a century and probably closer to three – within the context of the modern globalist conspiracy.

These elites, based out of the City of London it seems, with arms in Washington DC, Rome, Tel Aviv and elsewhere, have been working steadily toward world government and used fear-based promotions to achieve it.

These dominant social themes are generated to frighten people into seeking or at least accepting globalist solutions. These themes are usually accompanied by artificial crises – in this case, economic crises created by the boom/bust monopoly central banking system.

There is no doubt that "austerity" is not helping solve the apparently ginned-up economic crisis in Spain, Greece or Italy. Here's more from the article excerpted above:

"To talk about a bail-out for Spain at the moment makes no sense," he told reporters. "Spain is not going to be rescued; it's not possible to rescue Spain, there's no intention to, it's not necessary and therefore it's not going to be rescued." Despite his comments, the Madrid bourse fell and the yields on the country's benchmark bonds remained stubbornly high. While other European markets soared on Thursday following strong gains in America, Spain's Ibex index lost 0.5pc.

Politicians in Rome tried to counter the markets' view that Italy was in the same predicament as Spain.Vittorio Grilli, Italy's deputy finance minister, said "markets are very nervous" but added: "We cannot talk about a derby between Italy and Spain." Analysts at Bank of America Merrill Lynch said: "Although Spain and Italy face very different economic and fiscal issues, their yields are largely moving in tandem."

Meanwhile, the Greek unemployment rate rose to 21.8pc, according to fresh figures from the national statistics office. During 2011, the average annual jobless rate soared to 17.7pc from 12.5pc the year before, revealing the toll of the crisis and resulting austerity measures that have seen one-in-10 jobs destroyed. One-in-five Greeks is now jobless, including 50.8pc of those aged under 25. The rate is twice as high as the eurozone average.

Various EU countries were manipulated into joining the EU, after which time a central-banking led economic crisis created a global meltdown. Then austerity was initiated to counter the "sovereign debt" crisis in Europe. The PIGS are now suffering from this faux-solution.

Even the name PIGS (PIIGS) is suspect. Developed years ago by a Goldman Sachs banker, the name denotes greed and has been applied to nation-states characterized in this way. It seems to us that this is all part of a larger manipulation. Directed history – from the nomenclature on down.

Meanwhile, the IMF continues to receive high-profile coverage in the elite controlled mainstream media. This high profile is being constructed within the context ongoing efforts to build up SDRs as a mainstream currency.

A good article on the moves being made to build this currency is entitled "The Triffin Dilemma Will Create a 3-G World" and was posted at Goldseek. In it, author Richard Mills points out the following:

In the wake of the financial crisis of 2007–2008, Zhou Xiaochuan the governor of the People's Bank of China, said that a national currency is unsuitable as a global reserve currency ... In a speech titled "Reform the International Monetary System" Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes' bancor.

Calling Keynes's bancor approach "farsighted" Xiaochuan proposed strengthening existing global currency controls through the IMF by the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a global reserve currency. When Special Drawing Rights were originally created in 1969 one SDR was defined as having a value of 0.888671 grams of gold, equal to the value of one US dollar at that time. After the breakdown of the Bretton Woods system the SDR was redefined in terms of a basket of four currencies.

From January 1 2011, the IMF has determined that the four currencies will be assigned revised weights based on their roles in international trade and reserves. Due to varying exchange rates, the relative value of each currency varies continuously and thus the value of the SDR fluctuates. The IMF fixes daily the value of one SDR in terms of US dollars based on the exchange rates of the constituent currencies.

We've speculated that the elites want to create some sort of formalized gold standard in the past. But more and more the logic is inescapable: The elites are opposed to gold at every level (except for themselves). They hate the idea in fact that the common man owns either gold or silver. Monopoly fiat/paper offers much more control.

Having spent a century building up monopoly central banking, all the way to 150 central banks, the power elite seems in no mood to back-peddle. The IMF is apparently their chosen vehicle to create an international monopoly fiat currency, and it continues to have a high profile.

Conclusion: The IMF is presented as the "firewall" that can contain the European conflagration. Eventually the IMF's SDR "currency" shall be elaborated on, perhaps sooner rather than later. The European crisis is a kind of shadow play and the IMF and its money are likely being positioned as a solution ... if not THE solution.