Federal Reserve losing control

[ninakat]

[rrapt]

From Jim Kunzler's essay: " The shell game may run a few more weeks..."

There's quite a bit of disagreement in the comments over this timing point - a few seem to think the rot will steadily progress as in a dump until the place is fit only for rats.

I have seen the rate of decay increasing lately and I reckon it will accelerate more into a steep slide. I do agree with the author that the coming depression will be deeper than the one in the 30s, and perhaps longer too, but of course very different. Don't ask me for a likely outcome though; if I told ya I'd have to kill ya. Better answer: I got no idea.

[ninakat]

rrapt, I think Kunstler has the right idea too, but he shouldn't try and guestimate the timing. Ruppert had the right ideas too, be he also made mistakes in timing -- quite egregious mistakes, actually.

So I don't think it'll be a few weeks, although like you said "the rate of decay is increasing" and at some point it'll become logarithmic. I'm still hoping for a soft landing of sorts, although I do believe this downturn will be much deeper and longer lasting (as in forever, since the party's over as Richard Heinberg would say).

[isachar]

This appears to apply to insured revenue bonds and possibly only to shorter term issuances, but it is huge in terms of its implications for the larger mid-long term insured muni market:

Auction-Bond Failures Roil Munis, Pushing Rates Up (Update5)

By Martin Z. Braun

Feb. 13 (Bloomberg) -- Bonds sold by U.S. municipal borrowers with rates set through periodic auctions failed to attract enough buyers as banks including Goldman Sachs Group Inc. and Citigroup Inc. that run the bidding won't commit their own capital to the debt.

Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey, with bidding run by Goldman, soared to 20 percent yesterday from 4.3 percent a week ago, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque and New York state's Metropolitan Transportation Authority also experienced failures, officials said.

What began three weeks ago with too few bidders for auction-rate debt backed by relatively small entities, such as Georgetown University and Nevada Power, has widened in recent days to include large issues of state governments, such as New York state's Dormitory Authority. The auction failures provide new indication of Wall Street's unwillingness to commit capital amid $133 billion in credit losses and asset writedowns.

``It's the beginning of the end for the auction-rate market,'' said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. ``Banks have stopped supporting the market.''

Investor demand for the securities has declined on waning confidence in the credit strength of insurers backing the debt, and on reluctance by banks to submit bids and risk ending up with too many of the bonds. Local governments that have borrowed in the $300 billion auction-rate market confront the prospect of higher borrowing costs as economic slowing trims tax revenue.

Auction-Rate Bidding

Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in official statements issued at the initial bond sale.

Some borrowers paid higher rates, even if their auctions didn't fail. Wisconsin's 28-day auction yesterday of taxable bonds was set at a 10 percent rate, up from 4.75 percent for identical securities Feb. 7.

Frank Hoadley, Wisconsin's director of capital finance, said he had no advance warning from bankers about the jump in rates. ``We are making decisions'' about converting the auction bonds to different kinds of debt, he said.

About $8 billion to $12 billion of auction bonds are scheduled for bidding daily, so there are many more issues vulnerable in coming days, said Alex Roever, a JPMorgan Chase & Co. fixed income analyst.

Vermont Student Loans

Yesterday, $27.5 million of federally taxable student loan debt issued by Vermont's Student Assistance Corp. and insured by Ambac Financial Group Inc. reset at 18 percent, up from 5 percent as of Jan. 15. Ambac was the first bond insurer to lose its AAA credit rating.

Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they modify the bonds to some other kind of variable-rate debt or a fixed interest rate. Bankers and borrowers have been working on conversion plans for several weeks.

The 20 percent rate for the $100 million of Port Authority auction bonds will cost it $388,889 until the next weekly auction, up from $83,611 last week. Interest on the bonds is subject to federal income tax.

`Widening Spreads'

``We have seen widening spreads, reduced demand for certain auction-rate securities and failed auctions, including some auctions in which Citi acted as broker dealer,'' Danielle Romero-Apsilos, a spokeswoman at New York-based Citigroup, said in a statement.

A $100 million Citibank-run auction of state-supported bonds of the New York Dormitory Authority failed yesterday, resulting in an interest rate of 6.26 percent, up from 3.12 percent a week earlier, according to Bloomberg data. Following the auction miss, the interest rate was set at twice one-month Libor, the London interbank offered rate for wholesale bank deposits, according to the official statement for the bonds.

Another failed Dormitory Authority issue, also backed by state appropriations, resulted in a fail rate of 4.69 percent, up from 3.15 percent a week earlier.

Dormitory Authority Auctions

The Dormitory Authority had five auctions for seven-day securities scheduled today and tomorrow for the City University of New York. The authority also reported failures of auction bonds sold on behalf of Memorial Sloan Kettering Cancer Center and the University of Rochester, according to Marc Violette, an agency spokesman.

At the Metropolitan Transportation Authority, the fail rate on a $100 million issue of auction bonds was 4.69 percent, according to Jeremy Soffin, a spokesman for the authority.

The turmoil in the auction-rate market is the latest fallout in a credit squeeze that began with the subprime mortgage market collapse last year.

Bidding by dealers is essential to the smooth functioning of auction securities and banks are now wary of loading their balance sheets with the bonds, said Roever of JPMorgan Chase.

``This market has been under a tremendous amount of stress,'' Roever said. ``Without the dealers providing an active secondary bid, it's very hard for these transactions to clear.''

Bond Insurers

The soured auctions in recent weeks are the first since September, when about $6 billion of auction debt failed on investor concerns that bond insurers may lose their AAA ratings, Roever said in a Feb. 8 report. The latest wave began as recently as Jan. 22, when auctions run by Lehman Brothers Holdings Inc. for Georgetown University and Nevada Power failed.

Presbyterian Healthcare in Albuquerque, operator of seven hospitals throughout New Mexico, had rates on $38.7 million of debt reset at 12 percent after an unsuccessful auction run by Goldman yesterday. Bob Davis, Presbyterian Healthcare's vice president for treasury services, confirmed the failure, declining further comment.

Michael DuVally, a spokesman at New York-based Goldman, declined to comment the failures.

Unsuccessful auctions have hurt companies that bought those variable-rate securities as short-term investments with excess cash, and are unable to sell their holdings. Bristol-Myers Squibb Co., the New York-based maker of the anti-clotting pill Plavix, announced on Jan. 31 a $275 million writedown of its holdings, which totaled $811 million at the end of 2007.

About a third of 449 companies polled in a survey last May for the Association for Finance Professionals said they permitted investment in auction-rate bonds.

http://www.bloomberg.com/apps/news?pid= ... refer=home

The municipal bond market is huge, and it is seizing up.

They (Fed, SEC, Treas, Wall St., etc.) must do something to bail out the bond insurers (monlines). Buffet is definitely looking to swoop in here. Looks like he's gonna just bide his time and pick over the carcasses.

I know of no other potential 'white knight' with the resources and know how to pull off the rescue/salvage (perhaps more accurately, carrion-feeding) of the bond insurers. Almost every major player is a zombie in terms of their own ratings and capability to back their policies.

[Sweejak]

Tracking U.S. Economic Indicators

The U.S. economy is faltering. Family debt is on the rise, benefits are disappearing, the deficit is skyrocketing, and the mortgage crisis has worsened. Conservatives have attempted to deflect attention from the crisis, by blaming the media’s negative coverage and insisting the United States is not headed toward a recession, despite what economists are predicting.

The Bush administration’s latest move is to simply hide the data. Forbes has awarded EconomicIndicators.gov one of its “Best of the Web” awards. As Forbes explains, the government site provides an invaluable service to the public for accessing U.S. economic data:

This site is maintained by the Economics and Statistics Administration and combines data collected by the Bureau of Economic Analysis, like GDP and net imports and exports, and the Census Bureau, like retail sales and durable goods shipments. The site simply links to the relevant department’s Web site. This might not seem like a big deal, but doing it yourself–say, trying to find retail sales data on the Census Bureau’s site–is such an exercise in futility that it will convince you why this portal is necessary.

Yet the Bush administration has decided to shut down this site because of “budgetary constraints,” effective March 1:

http://thinkprogress.org/2008/02/13/economic-indicators

[slimmouse]

Legendary Funds Manager Julian Robertson Predicts Utter Global Collapse Stemming From Bursting of Property Bubble

In a recent interview on CNBC with Ron Insana, one of the “old-timer”funds manager, Julian Robertson, predicted “utter global collapse” as a consequence of the bursting of the world-wide property bubble.

Often called “Never Been Wrong Robertson”, the former head of Tiger Management (once the largest hedge fund in the world), is extremely worried about the speculative bubble in real estate.

Specifically, he is very worried about a world that is sustained by American consumer spending which is in turn 1/4 sustained by a property bubble. He predicts that 20 million people could lose their homes once the property bubble bursts.

Even more worrisome, he thinks central banks around the globe out of desperation will try to re-inflate the world economy with more liquidity that will create an inflationary spiral unseen in the economic history of mankind. “Where does it end?”, Insana asked Robertson. “Utter global collapse,” he answered. But not just economic collapse … collapse of epic proportions. Collapse and disintegration of all infrastructure, including government. Inflation will run into the double and triple digits. “Food production will fall. People will be carrying around U.S .

dollars in wheelbarrows like Germany,” he said.

There will be “total collapse of public infrastructure. Total collapse of medical care systems. All public pension plans, Social Security will collapse. All corporate pension plans will collapse.”

“The American consumer is effectively now supporting the rest of the planet,” he continued. “Consumption rates in all other nations are falling, have fallen to the point that the tax revenues to governments, that the business and industries those nation states are providing is now a net negative number relative to total debt service and public cost, that this exists in virtually every nation state on the planet now.”

And for much of this “doom”, interestingly, he blames the Bush-Cheney “regime”. “They have now consolidated power and money on the planet to the maximum extent possible. The planet’s net liquidity, that is its, net free cash flow. Is now a negative number. The planet is not simply sinking into a sea of red ink; it is already sunk. The people just don’t realize it yet,” he said.

According to Robertson, “the Bush-Cheney regime is preparing the nation for transition from democracy into dictatorship because a dictatorship will be necessary to control, in 5 years time, food and water riots.” He said “the federal government, that part of Patriot II Act, the internal exile, that the government is going to have to build now huge detention compounds on federal lands, probably in the West where the land is available, to potentially house 50 million or more citizens that will be in financial ruin.”

In 10 years time, whoever is left will be effectively starting again, he said. “More importantly, and I’m trying to think how we imply this or how we express this to the people, what extraordinary times we are living in and how the destruction of the planet has been engineered by the Bushonian Cabal from 1980 to 1992, and then from 2001 to present, which has effectively destroyed the economic liquidity of the planet,”

he said.

Robertson ended the interview by saying that he hopes he is not alive to see this. “The lucky ones are the ones who are my age now,” he said.




link ; http://fourwinds10.com/siterun_data/bus ... 1202785222

[ninakat]

slimmouse, that article about Julian Robertson is making the rounds on the internet, but apparently the transcription of the interview with Robertson was heavily doctored and/or faked.

from LATOC's breaking news page:

Correction/Retraction of Julian Robertson "Utter Collapse" Story

Editor's Note: I had this at the top of today's news page for about 4 hours, turns out the transcription of the interview was heavily doctored and/or faked. Robertson did make some rather doomeresque statements in an interview but did not say we're heading towards "utter collapse." An accurate summary of his interview is posted at MoverMike.com:

The things attributed to Julian Robertson and utter collapse are
not true. Robertson said he was more disturbed than at any time
in his life. He said the American consumer is out of gas and
involved in the housing bubble that puts his dwelling at risk. He
doesn't see any way out, when dollar weakens. He expects the
Fed to inflate way out of the problem.

[ninakat]

System Instability, Redundancy and the Domino Effect

[antiaristo]

.

The potential depths of decline, the dangers, are now appearing in the mainstream, even on TV. This, stolen from Shedlock:

Here is a synopsis of what Ron Insana said.

I am going to go way out on a limb here Maria. I think this credit crisis is viral and it's spreading quickly in all corners of the credit markets.

We talked earlier this week about auction rates on municipal bonds where we are having some failures on auctions taking place with banks unwilling to take the overflow when investors don't buy. We are going to have another crisis in munis beyond the bond auction issue.

I think ultimately when it's all said and done, the Fed is going to have to be the bank of Japan and go to zero interest rate policy to reflate our way out of this thing.

This is far bigger, far more misunderstood, than anybody knows. This is a real crisis of historic proportions and still no one is paying full attention. In the immortal words of Casey Stengel "Don't nobody here know how to play this game?"

When Kudlow said "I disagree" Insana chimed in "What a shock!"

http://globaleconomicanalysis.blogspot. ... ading.html

When this thread began the mainstream was deep in denial. Now it is mainstream. But my God! how confusing it all is.

There is STILL an important part missing from the explanation.

Let me go back to basics....


The banks purchased mortgages and pooled them. They issued securities based on those pools (RMBS).

The same was done with commercial property, with car loans, with credit cards, with student loans.

Other banks then purchased a proportion of these RMBS and other types, and mixed up the geographic sources and types, creating another pool.

Based on THIS mixed-up pool the banks issued a new type of security called a collateralised debt obligation (CDO).

Now the logic was that by spreading thus the portfolio one reduced the overall risk.

Typically therefore 100% BBB- RMBS could be transformed into CDOs comprising 75% AAA, 20% BBB- and 5% unclassified. THAT was the "alchemy" of structured finance.

Now I could be crucified for putting it like this, but AAA debt is worth roughly twice what BBB- debt is worth.

By means of "financial alchemy" 100 units of BBB- had been transformed into 150 units of AAA (ie 75 worth double) plus 20 units of BBB- and zero of unclassified (5 worthless units).

That's a total of 170 units.

THAT's where Wall Street made their "profits".
170 minus 100 is 70 "profit".

ON TRILLIONS OF DOLLARS OF DEALS.

Do you see now why the banks were paying up to 110 percent of face value for packages of mortgages? Do you see now why it is impossible to open the mail without finding three new credit card offerings?

Not all was taken as capital. Much was taken in the form of fees and commissions and other types of skimming. Much was taken in the form of inputs into other CDOs (so called "CDO squared"). Some was taken as "enhancement" to so called "synthetic CDOs".

The point is, that 70 units has long gone.

And now the financial alchemy has collapsed.
Spreading the risk DOES NOT WORK.
When there is a systemic downturn, a recession, then everybody has a hard time.

If homeowners are having a hard time because of a bad economy, then SO IS EVERYBODY ELSE. Or, as they say in finance, correlations move towards one. Diversification is ineffective.

Nobody wants to buy these things because nobody else will buy them. Nobody wants to get stuck (as opposed to being a conduit-for-fee) with them because forty percent has been stripped out already (seventy out of 170 is forty percent).

All that slicing and dicing adds no value.

Now at the moment everybody is focussed at the mortgage end of the chain, which is AT BEST only half of the problem. The real problem is that potential mortgage losses are forcing the CDOs to be unwound.

All that "added value" on securitisation is going into reverse.

When the CDO is unwound 170 units of value revert back to 100 units of value. Which is a capital loss of 41 percent.

THEN, out of that 100 units of value there will be the mortgage losses. Let's say on average they lose 20 percent, so that 80 units of value is recovered.

The OVERALL loss is (170 - 80) on 170.
90 on 170 is 53 percent loss overall.

But notice only a minority, 12%, arises because of the mortgage end. The great majority, 41%, arises at the securitisation end.

IT'S THE CDO UNWINDINGS THAT WILL KILL WALL STREET.

And EVERYTHING coming out of Washington has one purpose, and one purpose alone. That is to prevent or slow down the unwinding.

[antiaristo]

Government Accountability Chief Resigns

By Elizabeth Williamson
Washington Post Staff Writer

Saturday, February 16, 2008; Page A07

One of government's chief internal watchdogs resigned yesterday, as Comptroller General David M. Walker, an outspoken gadfly and frequent witness on Capitol Hill, announced his plans to lead a new foundation focused on U.S. fiscal responsibility.

Walker has led the Government Accountability Office, Congress's investigative agency, for a decade.

Walker was an outspoken critic of the costs of the wars in Iraq and Afghanistan, Social Security, Medicaid and Medicare spending -- issues on which the Democratic-led Congress, and Republicans before it, have had trouble building consensus.

In September, the administration and the military took issue with a bleak GAO assessment of progress in Iraq; the top military command in Baghdad described the assessment as flawed and "factually incorrect." Despite last-minute changes to address the criticism, the final report cast serious doubt on U.S. efforts to build a functioning democracy in Iraq.

At the time, Walker told the Senate Foreign Relations Committee: "Given the fact that significant progress has not been made in improving the living conditions of the Iraqis on a day-to-day basis with regard to things that all citizens care about -- safe streets, clean water, reliable electricity, a variety of other basic things . . . I think you'd have to say it's dysfunctional -- the government is dysfunctional."

Most of Walker's tenure was spent with Republicans in control of both the White House and Congress, and he has frequently irritated both bodies with his dire warnings on reining in spending.

During that time, "I would give Walker high marks for trying to stand up for GAO priorities even though he had a Congress that was trying to block him and which didn't want to know what the White House was up to," said Scott Lilly, senior fellow at the liberal-leaning Center for American Progress.

"He handled it as forcefully as he could, given that the Congress that was funding him was discouraging him."

The Walker-era GAO filed, but then declined to appeal, legal action to force Vice President Cheney to provide notes and information about meetings he held with energy companies while developing U.S. energy policy. A related suit wound up before the Supreme Court, which upheld the vice president's refusal to make the information public.

Walker's resignation takes effect March 12. He will lead the Peter G. Peterson Foundation, a new think tank whose mission, according to its Web site is "to enhance public understanding of the nature and urgency of selected key sustainability challenges that threaten America's future," including "unsustainable" growth in entitlement spending, and energy consumption.

The GAO's chief operating officer, Gene Dodaro, will serve as acting comptroller general until a successor for Walker is found.

"The one thing that bothers me the most, given this president's record on nominations: It's not likely we're going to get a new comptroller before next year," Lilly said.

"That's a very sad thing, given how much institutional leadership means toward improving oversight over government."

http://www.washingtonpost.com/wp-dyn/co ... eheadlines


OK. So he quit on one month's notice.

Nobody wants to touch Bush.

I'd say nobody wants to be the patsy for when everything collapses.

Some very ugly truths are about to enter the national consciousness.

The White House will blame Congress.
Congress will blame the White House.

Sorry to be a "doom merchant", but I think you have to look at what people are doing, rather than what they are saying.

[ninakat]

Thanks anti. I hadn't heard about David Walker resigning, and your assessment makes sense -- get out before the whole house o' cards comes down.

As to watching what they do and not what they say, that is the most critical thing people should be doing, but sadly most people just fall for the rhetoric. Of course, it doesn't help that the media skews everything and avoids the bigger picture. On purpose.

[Pazdispenser]

Anti -

I have yet to come across a more succinct, and emminently clear description of the financial mess than your post of Fri Feb 15th. This should be the template (though of course it shant) for any future explanations of the topic.

Here's the thing I dont understand: cui bono?

I run an independent financial planning firm after having extricated myself and my clients from one of those firms most in the news. Knowg what I know about my former employer, it wouldnt surprise me in the least that the underlings, purely driven by bonus incentives, would sell us (and ultimately themselves) right over the cliff. And while the recently fired CEO of my former employer would impress you by being so unimpressive, Im still struggling with the thought that he and the heads of the other banks and brokerage firms wouldnt see the inevitable end to this scheme. And in those ranks, of course I include the Sec of Treasury (and former CEO of Goldman Sachs) Hank Paulson.

So, either Ive completely misunderestimated the greedy stupidity of this cohort, or they are operating in pursuit of a different goal than the financial success of their firms. If it is the latter, Im really missing the punchline. How does the wholesale destruction of the American economy benefit these men (and they are all men)? Given the ruthlessness of Chinese business practices, why would they allow themselves to face a future where they have to answer to anyone, much less the Chinese? My mother thinks they are so arrogant as to think they can not only "handle" the Chinese, but leave them holding the bag with no consequence. If shes right, then I guess this would fold back into the greedy stupidity theory.....

So anti, and any other awake mind, I ask you what is this all for? Is it just greedy stupidity? Is it Liz? even though The City (London's "Wall St" for those of you who dont know) seems poised to troubles at least as large as Wall St. Is it some Euro bankster led effort (hasnt Catherine Austin Fitts alluded to this?)? Is it the shadowy NWO looking to force through a North American Union with the Amero? Is it all of the above? Thoughts anyone?

[slimmouse]

Anti -

I have yet to come across a more succinct, and emminently clear description of the financial mess than your post of Fri Feb 15th. This should be the template (though of course it shant) for any future explanations of the topic.

Here's the thing I dont understand: cui bono?

I run an independent financial planning firm after having extricated myself and my clients from one of those firms most in the news. Knowg what I know about my former employer, it wouldnt surprise me in the least that the underlings, purely driven by bonus incentives, would sell us (and ultimately themselves) right over the cliff. And while the recently fired CEO of my former employer would impress you by being so unimpressive, Im still struggling with the thought that he and the heads of the other banks and brokerage firms wouldnt see the inevitable end to this scheme. And in those ranks, of course I include the Sec of Treasury (and former CEO of Goldman Sachs) Hank Paulson.

So, either Ive completely misunderestimated the greedy stupidity of this cohort, or they are operating in pursuit of a different goal than the financial success of their firms. If it is the latter, Im really missing the punchline. How does the wholesale destruction of the American economy benefit these men (and they are all men)? Given the ruthlessness of Chinese business practices, why would they allow themselves to face a future where they have to answer to anyone, much less the Chinese? My mother thinks they are so arrogant as to think they can not only "handle" the Chinese, but leave them holding the bag with no consequence. If shes right, then I guess this would fold back into the greedy stupidity theory.....

So anti, and any other awake mind, I ask you what is this all for? Is it just greedy stupidity? Is it Liz? even though The City (London's "Wall St" for those of you who dont know) seems poised to troubles at least as large as Wall St. Is it some Euro bankster led effort (hasnt Catherine Austin Fitts alluded to this?)? Is it the shadowy NWO looking to force through a North American Union with the Amero? Is it all of the above? Thoughts anyone?

Paz - I know you asked Anti the question. But did you ever wonder what all these "anti terror" laws and legislation are all about ?

I mean, we know full well that the lawmakers, or should I say those who pull the lawmakers' strings are also the hand behind "Al quaeda" - that is to say that this whole deal is bullshit - and yet take a good close look at those laws goddammit.

If, or probably when the shit hits the fan, I think things in the land of the free ( and anywhere else for that matter ) are gonna go in a way people cant even begin to imagine.

Where is Enki when you need him ? :s

[Pazdispenser]

Hi slim -

The question is not to anti alone, but to anyone who can add perspective.

To my mind, the reasons behind the "terror" state are self-evident. What is not so clear is why the financial elite would willingly risk annual incomes in the 10s and even 100s of millions to instigate a "shit hits the fan" scenario. Using financial parlance, the attendent return is, in no way, worth the risk. If we assume that it is not greedy stupidity (and again, Im not ruling that out), then the financial elite must have a goal other than the financial success of their firms and said large annual income. What goal could possibly be that attractive?

[ninakat]

Paz, I can only speculate, but perhaps the financial elite have known all along that the system they built isn't sustainable and that we're now approaching the end of the game -- the huge, long-term Ponzi scheme they knew couldn't last forever. And, as the title of this thread suggests, they can no longer control the game.

And I find it curious that the last big financial bubble (housing market) has coincided with all the laws and presidential directives that will allow for martial law (or some other form of lockdown). If one assumes that the financial elite are at the top of the powers-that-be, one can see how they could have orchestrated and directed much of our present day reality (war on terror, economic downturn). And, I do believe that they believe that energy resources are in decline (whether that's true or not is beside the point), and therefore created 9/11, the war on terror, the housing bubble (Greenscam's lowering of interest rates and encouragement of irresponsible lending practices) all as part of a way to capitalize further on the accelerating problems facing the world, many of which are directly related to energy, the economy, and population overshoot.

The part that puzzles me is how they seem to have total disregard for the environment. They have to live and breathe on the planet too, even if hidden away in Paraguay. Curious. Not very smart. Cunning, clever, and diabolical, but not very smart.