I haven’t been posting too much over the past several months as things in our country continue to deteriorate at the usual pace, fast and un challenged!
The economy is fragile and the ‘medicine’ that Ben Bernanke is giving the ‘system’ will soon become the poison–it is inevitable. This is not just me spouting off at the mouth but several very good economists with pretty darn good track records as well.
Take a look at this article, read it and weep for what once was and what is coming soon.
Major Bank, Economists Agree: Market Collapse Will Strike in 2013
Wednesday, 09 Jan 2013 10:22 AM
By Christian Hill
According to a major bank, a pair of noted economists, and one controversial billionaire, 2013 will be a “year of terrible reckoning” for the stock market.
JPMorgan just released its outlook for the first quarter. Surprisingly, this regularly bullish company has reversed course and revealed an ominous chart that every investor needs to be alerted to.
As you can clearly see, stocks have retraced the pattern from the last two big market rallies (averaging over 100%), and now face a massive decline in 2013 (of over 50%).
JPMorgan isn’t alone in its stark predictions.
Economist and NYU professor Nouriel Roubini has said in recent interviews that there is a chance that an economic “perfect storm” will devastate global markets in 2013. He points to a worsening eurozone crisis, a hard landing for the Chinese economy, and a war in the Middle East that could push oil prices above $200 a barrel.
Agreeing with Roubini’s worrisome outlook is billionaire Jim Rogers. In a recent interview with Yahoo Finance, Rogers says regarding 2013, “You should be very worried, and you should prepare yourself.”
Rogers referenced a little-known economic cycle that proves the United States experiences a slowdown every four to six years (and 2013 marks four years since our last slowdown).
Perhaps most alarming of all are the predictions made by economist Robert Wiedemer.
In a recent interview for his New York Times best-seller Aftershock, Wiedemer says, “The data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation . . . starting in 2013.”
Editor’s Note: Watch the disturbing interview with Wiedemer. click here to view
Now before you dismiss Wiedemer’s claims as impossible or unrealistic, consider that he and his team of economists correctly foresaw the real estate collapse in 2006, the stock market crash of 2008, and the federal debt bubble plaguing America now.
And bear in mind, Sam Stovall of Standard & Poor’s has stated that Wiedemer “makes a compelling argument for a chilling conclusion,” and MarketWatch’s Paul Farrell called Wiedemer’s work “your bible.”
When the interview host questioned Wiedemer’s latest data, the author unapologetically displayed shocking charts backing up his allegations, and then ended his argument with, “You see, the medicine will become the poison.”
The interview has become a wake-up call for those unprepared (or unwilling) to acknowledge an ugly truth: The country’s financial “rescue” devised in Washington has failed miserably.
Wiedemer says blame lies squarely on those whose job it was to avoid the exact situation we find ourselves in, including current Federal Reserve Chairman Ben Bernanke and former Chairman Alan Greenspan, tasked with preventing financial meltdowns and keeping the nation’s economy strong through monetary and credit policies.
Shocking Footage: See the eerie chart that exposes the ‘unthinkable.’
At one point, Wiedemer even calls out Bernanke, saying that his “money from heaven will be the path to hell.”
But it’s not just the grim predictions that are causing the sensation; rather, it’s the comprehensive blueprint for economic survival that’s really commanding global attention.
Now viewed over 50 million times, the interview offers realistic, step-by-step solutions that the average hard-working American can easily follow.
The overwhelming amount of feedback to publicize the interview, initially screened for a private audience, came with consequences as various online networks repeatedly shut it down and affiliates refused to house the content.
Bernanke and Greenspan were not about to support Wiedemer publicly, nor were the mainstream media.
“People were sitting up and taking notice, and they begged us to make the interview public so they could easily share it,” said Newsmax Financial Publisher Aaron DeHoog, “but unfortunately, it kept getting pulled.”
“Our real concern,” DeHoog added, “is what if only half of Wiedemer’s predictions come true?
“That’s a scary thought for sure. But we want the average American to be prepared, and that is why we will continue to push this video to as many outlets as we can. We want the word to spread.”
I urge you to take the necessary precautions as things could get rather weird in the coming days and months ahead! No one knows the exact moment, but many will point back in time and pick some arbitrary event that ’caused it all’. Ben Bernanke will most likely avoid ridicule. Many have been, are and will be responsible for our economy and none will be made responsible.
The demise of our global economy is not an event that will go in a straight line to the bottom. It will be up and down with lots of posturing on behalf of the ‘leaders’ of the ‘developed’ countries.
Today is yet another example of this political posturing as the European Central Banker came out and said he would do whatever necessary to preserve the Euro and the EC! Pray tell what that would be sir!
The only weapon that these guys have is the ability to print money into infinity. As we all know, infinite money chasing limited supply of products, goods and services means prices will eventually rise to the point where these prices can change on an daily if not hourly basis. Hyper inflation this is called. Something that we in this country have never witnessed.
We will see in the coming days more of the same as Greece exits the Euro and the EC, yields will go higher on the sovereign debts of the EC members that are in the most trouble which will result in the European Central Bank to print more money to buy their bonds to try and lower yields. At some point this type of strategy will simply cease to function as needed and collapse will follow, but not in a straight line.
Be very careful if you are in the markets now. I personally am and have been out for quite some time…Closed my account at PFG just in time! Stick to food, water, shelter, gold and silver if I were you…And pray for better days to come!
As if the European issues weren’t bad enough…Moodys is set to downgrade the Spanish bonds to junk status. This after downgrading all the Spanish banks by several notches. I suspect that this will not end well as Germany, the ‘giver’ of cash becomes more and more reluctant to dish it out to everyone that comes begging.
We still wait to see how all this will affect Italy and France while poor Portugal remains in the dumpster. All the ‘southern’ european countries are in big trouble, led of course by Greece!
Just wait there will be more news coming. Consider what might happen if there is some major catastrophe to add to the woes!
Spain Poised for Downgrade to Junk as Default Swaps Near Records
Spain is poised for a downgrade to junk by Moody’s Investors Service, according to investors who sent the cost of default insurance for the nation’s biggest banks and companies close to record highs.
Enlarge image Spain Poised for a Cut to Junk as Default Swaps Near Records (
Credit-default swaps on Banco Santander SA (SAN), the country’s biggest bank, jumped 23 percent this quarter to 454 basis points, compared with an all-time high of 474 in November. Banco Bilbao Vizcaya Argentaria SA (BBVA) rose 26 percent to 477, approaching May’s record 516, while phone company Telefonica SA (TEF) surged 70 percent to a record 540 basis points.
Moody’s downgraded 28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. The country remains on review for another cut by New York-based Moody’s after it sought a 100 billion-euro ($125 billion) international bailout for its banks and on speculation losses from its real estate industry will worsen.
“There’s more to come if Moody’s downgrades the sovereign as we expect in the next few weeks,” said Suki Mann, a credit analyst at Societe Generale SA in London. “A one-notch move to Ba1 will likely see all the country’s banking system in junk territory, with the possible exception of Santander.”
Spanish bank bonds are the worst performing among European financial companies this month, losing 0.75 percent on average, according to Bank of America Merrill Lynch’s Euro Corporates Banking index of 742 securities. Debt tracked by the gauge returned 0.53 percent overall, with Italian bank bonds earning 0.27 percent and German securities making 0.19 percent.
Santander’s credit-default swaps declined two basis points to 451 basis points today, and BBVA’s fell three basis points to 478 basis points.
Bond spreads are widening, signaling potentially higher borrowing cost for the country’s largest lenders. Santander’s 1 billion euros of 4 percent notes due 2017 are quoted at 559 basis points above the safest government bonds compared with a 553 basis-point spread yesterday, according to Bloomberg Bond Trader bid prices. BBVA’s 500 million euros of 4.875 percent bonds due 2016 are quoted at 578 basis points from 567 basis points yesterday.
The yield premium on Spanish bank bonds jumped to 648 basis points, or 6.48 percentage points, relative to German government debt, from 433 basis points at the end of the March, the Bank of America Merrill Lynch data show. That compares with 291 basis points on average for debt tracked by the bank bond index.
Moody’s cut at least a dozen Spanish lenders to junk status, and in all cases the ratings remained under review for further downgrades, the ratings company said yesterday in a statement. Junk debt is graded below Baa3 by Moody’s and BBB- by Standard & Poor’s and Fitch Ratings.
The latest downgrades reflect the government’s reduced creditworthiness, which lessens its ability to support the lenders, as well as Moody’s expectation that losses linked to commercial property will keep rising, according to yesterday’s statement.
“We suspect that the sovereign will itself require a bailout, not just the Spanish banks,” said Olly Burrows, a London-based credit analyst at Rabobank International.
To contact the reporter on this story: Esteban Duarte in Madrid at firstname.lastname@example.org
Now we have the beginnings of the ‘Perfect Storm’ economically speaking if you ask me. What can you do to Prepare for the ‘new’ economy that might unfold?
With Greece wanting out of the EC and further economic woes hitting all the ‘PIGGS’, some are reporting that the Euro has collapsed, at least unofficially.
A bit of background: MSM has reported that there have been huge capital outflows from Greece, in the billions per day and now Spain. It isn’t like this is just falling from the sky unannounced. Remember Ireland, Italy and Portugal all have been in the news with bailouts of some sort over the past year or two. The press has played this well, sort of like the frog in water who slowly dies as the water begins to heat up and boil.
Now it appears we might have hit critical mass with the problems in the EC. The Bailouts will continue to happen as we see more and more capital outflows, they will continue to get larger and larger as the liquidity issues mount. Much like the U.S. the ‘quantative easing(printing money) will be to infinity.
Which brings me to the point of this piece, as more money is printed and less and less economic activity there to back it up we will begin to see inflation hit the goods and services that we use on a daily basis. Moreover, the typical assets like real estate will most likely not enjoy such price inflation as no one will have the buying power to afford such purchases and without buyers prices will not rise as will prices in basic commodities, such as food and gas.
The governments are trying to fill the financial hole created by the banks and their insane lending and ‘betting’(read derivative) practices which have still not come to full force. We have been given a small insight into the destructive power of these instruments in the recent JP Morgan debacle, losing 2 billion in one 3 month period. There are trillion upon trillions of these dangerous bets floating around the world. When the music stops, we will all pay!
How can you prepare for this catastrophe should it come to pass (again many are saying that it is coming to pass right now!)?
I for one own some gold and silver, probably not enough but some. Many survivalists disagree with this strategy saying you can’t eat or drink the metals. I agree there but also see them as a short term solution to the things that I might need but haven’t seen that need yet. I do own quite a bit of storable foods, all organic, non-GMO foods that are high in nutrition. I urge everyone to educate themselves on the value of nutrition versus calories. Both are necessary but good nutrition is critical. Water is another necessity and I am fortunate enough to live very close to a river and own a gravity filter system to clean it up.
I hope everyone is somewhat prepared, if not physically mentally for what appears to be coming over the horizon. Stay Strong!
As I have said many times in the past, Iceland stands out among all countries as the model for dealing with an economic/debt/housing crisis. At the very core it appears that their government, after a few crucial changes at the top, moved on behalf of their citizens and not with their core banks.
They nationalized them, a necessary step to rid the system of the wolves that were ready to eat their own children if necessary to make money, and then forgive a ton of debt of the citizens, especially those that had mortgages on homes that were out of balance with prices.
The results are a growing economy, 10 times the growth of the EU, and in general a satisfied populace, they know that they have the power to change the system now and will not forget it soon. Something that should have come out of the Occupy Wall Street movement.
Why Greece doesn’t do something similar, something that would fit into their particular situation is beyond me. Seems as if their government is all about becoming better serfs to the system and dragging all their citizens along with them.
Icelandic Anger Brings Debt Forgiveness
By Omar R. Valdimarsson – Feb 19, 2012 5:01 PM MT
Icelanders who pelted parliament with rocks in 2009 demanding their leaders and bankers answer for the country’s economic and financial collapse are reaping the benefits of their anger.
Since the end of 2008, the island’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population, according to a report published this month by the Icelandic Financial Services Association.
“You could safely say that Iceland holds the world record in household debt relief,” said Lars Christensen, chief emerging markets economist at Danske Bank A/S in Copenhagen. “Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”
The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates. It costs about the same to insure against an Icelandic default as it does to guard against a credit event in Belgium. Most polls now show Icelanders don’t want to join the European Union, where the debt crisis is in its third year.
The island’s households were helped by an agreement between the government and the banks, which are still partly controlled by the state, to forgive debt exceeding 110 percent of home values. On top of that, a Supreme Court ruling in June 2010 found loans indexed to foreign currencies were illegal, meaning households no longer need to cover krona losses.
“The lesson to be learned from Iceland’s crisis is that if other countries think it’s necessary to write down debts, they should look at how successful the 110 percent agreement was here,” said Thorolfur Matthiasson, an economics professor at the University of Iceland in Reykjavik, in an interview. “It’s the broadest agreement that’s been undertaken.”
Without the relief, homeowners would have buckled under the weight of their loans after the ratio of debt to incomes surged to 240 percent in 2008, Matthiasson said.
Iceland’s $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based OECD estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to November estimates.
Housing, measured as a subcomponent in the consumer price index, is now only about 3 percent below values in September 2008, just before the collapse. Fitch Ratings last week raised Iceland to investment grade, with a stable outlook, and said the island’s “unorthodox crisis policy response has succeeded.”
People Vs Markets
Iceland’s approach to dealing with the meltdown has put the needs of its population ahead of the markets at every turn.
Once it became clear back in October 2008 that the island’s banks were beyond saving, the government stepped in, ring-fenced the domestic accounts, and left international creditors in the lurch. The central bank imposed capital controls to halt the ensuing sell-off of the krona and new state-controlled banks were created from the remnants of the lenders that failed.
Activists say the banks should go even further in their debt relief. Andrea J. Olafsdottir, chairman of the Icelandic Homes Coalition, said she doubts the numbers provided by the banks are reliable.
“There are indications that some of the financial institutions in question haven’t lost a penny with the measures that they’ve undertaken,” she said.
According to Kristjan Kristjansson, a spokesman for Landsbankinn hf, the amount written off by the banks is probably larger than the 196.4 billion kronur ($1.6 billion) that the Financial Services Association estimates, since that figure only includes debt relief required by the courts or the government.
“There are still a lot of people facing difficulties; at the same time there are a lot of people doing fine,” Kristjansson said. “It’s nearly impossible to say when enough is enough; alongside every measure that is taken, there are fresh demands for further action.”
As a precursor to the global Occupy Wall Street movement and austerity protests across Europe, Icelanders took to the streets after the economic collapse in 2008. Protests escalated in early 2009, forcing police to use teargas to disperse crowds throwing rocks at parliament and the offices of then Prime Minister Geir Haarde. Parliament is still deciding whether to press ahead with an indictment that was brought against him in September 2009 for his role in the crisis.
A new coalition, led by Social Democrat Prime Minister Johanna Sigurdardottir, was voted into office in early 2009. The authorities are now investigating most of the main protagonists of the banking meltdown.
Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.
Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.
That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.
The U.S. subprime crisis sent home prices plunging 33 percent from a 2006 peak. While households there don’t face the same degree of debt relief as that pushed through in Iceland, President Barack Obama this month proposed plans to expand loan modifications, including some principal reductions.
According to Christensen at Danske Bank, “the bottom line is that if households are insolvent, then the banks just have to go along with it, regardless of the interests of the banks.”
To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik email@example.com.
I applaud the citizens of Iceland. They have shown the world what can be done when the people come together. Of course, they have the advantage of a relatively homogenous population that can agree on a single basic goal, criminal activity should never be rewarded and the good of the people trumps the ‘good’ of the corporate banksters.
The article below list some of the scary facts about the U.S. debt. I would also like to point out the scariest fact of all, that we have politicians up the the District of Criminals that are supposed to represent ‘We The People’ yet they continue to shirk their duties to this country and it’s peoples by spending more than they take in.
Part of the responsibility for this scandalous affair lies directly with us, the people of this country that continue to take all the BS these guys hand out with little to no voice about how bad this really is…You might say well we can always throw the bums out if they don’t do as they say. Great in theory yet these rascals continue to behave poorly and pass laws that are quite frankly treasonous.
Read and weep!
As President Obama unveiled the 2013 fiscal year budget, the nation’s financial situation came back into sharp focus. Experts say partisan gridlock in Washington means the budget will probably go nowhere.
Considering this is an election year, however, expect politicians to harp on facts, figures and terms that most Americans weren’t taught in high school. To help out, it’s time to dredge up lots of scary facts to make you pay attention.
Before we get going, a quick primer on the number TRILLION:
$1 trillion = $1,000 billion or $1,000,000,000,000 (that’s 12 zeros)
How hard is it to spend a trillion dollars? If you spent one dollar every second, you would have spent a million dollars in 12 days. At that same rate, it would take you 32 years to spend a billion dollars. But it would take you more than 31,000 years to spend a trillion dollars.
And now, some scary facts about the debt and the deficit — some basics:
Deficit = money government takes in — money government spends
2012 US deficit = $1.33 trillion
2013 Proposed budget deficit = $901 billion
National debt = Total amount borrowed over time to fund the annual deficit
Current national debt = $15.3 trillion (or $49,030 per every man, woman and child in the US or $135,773 per taxpayer)
[Also see: Who Benefits From the Safety Net]
OK, let’s get started!
1. The U.S. national debt on Jan. 1, 1791, was just $75 million dollars. Today, the U.S. national debt rises by that amount about once an hour.
2. Our nation began its existence in debt after borrowing money to finance the Revolutionary War. President Andrew Jackson nearly eliminated the debt, calling it a “national curse.” Jackson railed against borrowing, spending and even banks, for that matter, and he tried to eliminate all federal debt. By Jan. 1, 1835, under Jackson, the debt was just $33,733.
3. When World War II ended, the debt equaled 122 percent of GDP (GDP is a measure of the entire economy). In the 1950s and 1960s, the economy grew at an average rate of 4.3 percent a year and the debt gradually declined to 38 percent of GDP in 1970. This year, the Office of Budget and Management expects that the debt will equal nearly 100 percent of GDP.
4. Since 1938, the national debt has increased at an average annual rate of 8.5 percent. The only exceptions to the constant annual increase over the last 62 years were during the administrations of Clinton and Johnson. (Note that this is the rate of growth; the national debt still existed under both presidents.) During the Clinton presidency, debt growth was almost zero. Johnson averaged 3 percent growth of debt for the six years he served (1963-69).
5. When Ronald Reagan took office, the U.S. national debt was just under $1 trillion. When he left office, it was $2.6 trillion. During the eight Regan years, the US moved from being the world’s largest international creditor to the largest debtor nation.
6. The U.S. national debt has more than doubled since the year 2000.
Under President Bush: At the end of calendar year 2000, the debt stood at $5.629 trillion. Eight years later, the federal debt stood at $9.986 trillion.
Under President Obama: The debt started at $9.986 trillion and escalated to $15.3 trillion, a 53 percent increase over three years.
7. FY 2013 budget projects a deficit of $901 billion in 2013, representing 5.5 percent of GDP, down from a deficit of $1.33 trillion in FY 2012, which was the fourth consecutive year of more than $1 trillion dollar deficits.
8. The U.S. national debt rises at an average of approximately $3.8 billion per day.
9. The US government now borrows approximately $5 billion every business day.
[Also see: States with the most homes in foreclosure]
10. A trillion $10 bills, if they were taped end to end, would wrap around the globe more than 380 times. That amount of money would still not be enough to pay off the U.S. national debt.
11. The debt ceiling is the maximum amount of debt that Congress allows for the government. The current debt ceiling is $16.394 trillion effective Jan. 30, 2012.
12. The U.S. government has to borrow 43 cents of every dollar that it currently spends, four times the rate in 1980.
You can track the national debt on a daily basis here.
And some people wonder why so many people continue to prepare for the worst possible scenario. Is it any wonder after reading the above? I for one continue to prepare for a total economic meltdown.
When you see the world printing more and more paper money you always find more and more people fleeing to hard assets like Gold and Silver. Real estate, thanks to the rascals on Wall Street, is no longer an option as prices continue to fall amid the overhang in supply and foreclosures.
Gold and Silver are set to really get going this year as the printing presses work over time putting more ‘liquidity’ in the system…If it weren’t for the real estate crisis you would see inflation in the broader measures. Already you are seeing some price inflation in food.
P.M. Kitco Metals Roundup: Comex Gold Ends Firmer, At 2-Month High; Bulls Have Technical Power
2 February 2012, 2:04 p.m.
By Jim Wyckoff
Of Kitco News
Kitco News) – Comex April gold futures prices ended the U.S. day session higher and near the daily high as bargain hunters stepped in to buy the early dip in prices. Prices hit a fresh two-month high today and bulls continue to build upon their upside near-term technical momentum. April gold last traded up $9.10 at $1,758.60 an ounce. Spot gold was last quoted up $12.80 an ounce at $1,756.25. March Comex silver last traded up $0.348 at $34.155 an ounce.
Gold and silver both started their rallies right around the time of Thursday morning’s testimony by Fed Chairman Bernanke to the U.S. House of Representatives. While Bernanke said nothing really new or surprising, he reiterated the U.S.’s path to better economic times remains a tough one. It’s likely that gold rallied in part due to Bernanke’s general reaffirmation of last week’s FOMC statement that pledged continued low interest rates well into 2013 and hinted more quantitative easing could be forthcoming—which was bullish for the precious metals.
The U.S. dollar index was slightly higher Thursday on a short-covering bounce following recent selling pressure. The dollar index bears still have some downside near-term technical momentum. Crude oil prices traded sharply lower Thursday and hit a fresh six-week low of $95.44 a barrel. Crude oil bulls are fading and that did somewhat limit the upside for gold and silver Thursday. Crude oil and the U.S. dollar index will remain the two key “outside markets” that will have a daily influence on gold and silver price moves.
There were a few fresh developments coming out of the European Union debt crisis Thursday. A Spanish bond auction saw mixed results but with lower yields fetched.
A debt- restructuring deal between the Greek government and the private sector has still not been reached, but an agreement is closer, reports said. The EU debt crisis appears to have stabilized for the moment. But if recent history plays out again, the EU debt crisis will be back on the front burner of the market place.
The London P.M. gold fixing was $1,751.00 versus the previous P.M. fixing of $1,740.00.
Technically, April gold futures prices closed nearer the session high Thursday and hit a fresh two-month high. Gold managed gains despite bearish “outside markets” that saw a firmer U.S. dollar index and sharply lower crude oil prices. Yet, gold rallied anyway on its technical strength. Gold bulls have the solid overall near-term technical advantage and still have upside near-term technical momentum on their side. A steep five-week-old uptrend is in place on the daily bar chart. Bulls’ next upside technical breakout objective is to produce a close above solid technical resistance at the December high of $1,769.70. Bears’ next near-term downside price objective is closing prices below chart trend-line and psychological support at $1,700.00. First resistance is seen at Thursday’s high of $1,763.80 and then at $1,769.70. First support is seen at $1,750.00 and then at Thursday’s low of $1,743.30. Wyckoff’s Market Rating: 8.0.
March silver futures prices closed nearer the session high Thursday and hit a fresh 2.5-month high. Silver also scored gains despite bearish “outside markets” that saw a firmer U.S. dollar index and sharply lower crude oil prices—showing its near-term technical strength. Silver bulls have the solid overall near-term technical advantage. A five-week-old uptrend is in place on the daily bar chart. Bulls’ next upside price breakout objective is closing prices above solid technical resistance at the October high of $35.68 an ounce. The next downside price breakout objective for the bears is closing prices below solid technical support at this week’s low of $32.93. First resistance is seen at Thursday’s high of $34.35 and then at $35.00. Next support is seen at $34.00 and then at Thursday’s low of $33.455. Wyckoff’s Market Rating: 7.0.
March N.Y. copper closed down 535 points 378.85 cents Thursday. Prices closed nearer the session low. The key “outside markets” were in a bearish posture for copper Thursday, as the U.S. dollar index was firmer and crude oil prices were sharply lower. Copper bulls still have the near-term technical advantage. Prices are in a six-week-old uptrend on the daily bar chart. Copper bulls’ next upside breakout objective is pushing and closing prices above major psychological resistance at 400.00 cents. The next downside price breakout objective for the bears is closing prices below solid technical support at 367.50 cents. First resistance is seen at 380.00 cents and then at 385.00 cents. First support is seen at this week’s low of 376.30 cents and then at 375.00 cents. Wyckoff’s Market Rating: 6.0.
Follow me on Twitter! If you want daily, or nightly, up-to-the-second market analysis on gold and silver price action, then follow me on Twitter. It’s free, too. My account is @jimwyckoff .
By Jim Wyckoff contributing to Kitco News; firstname.lastname@example.org
I am always on the look out for dips in prices to buy more Gold and Silver…Silver especially!
Reading about the steps taken to ‘remedy’ the economic/finanical disaster in Spain (all of Europe looks pretty much the same) is like looking at 2008/2009 here in the U.S. all over again!
Merging banks, huge write downs on real estate etc. My issue is why did it take so long to hit Europe? Did they think they were immune to financial mismangement?
Spain to Unveil Bank Overhaul to Clean Up Real Estate
By Emma Ross-Thomas – Feb 2, 2012 5:51 AM MT
Spain is set to announce today its plan to shepherd struggling banks into mergers and make the industry set aside 50 billion euros ($66 billion) for real- estate assets left over from the bubble that burst in 2008.
The government will issue debt and inject the funds into banks via contingent convertible bonds, or CoCos, which convert into equity if capital ratios fall below a certain level, a person familiar with the process said yesterday. It will only support banks that merge and those lenders will also have more time to apply new provisioning rules, the person said.
Economy Minister Luis de Guindos speaks to reporters at 5:30 p.m. in Madrid today and the plan is due to be approved by the Cabinet tomorrow. The ministry gave no more details in an e- mailed statement.
Prime Minister Mariano Rajoy, in power since December, has pledged a “true restructuring” of the industry at no cost to the taxpayer four years after the decade-long property boom collapsed. Lenders have about 176 billion euros of what the Bank of Spain terms “troubled” assets linked to real estate on their books, including land and unfinished apartments, and have provisioned about a third of that.
“They don’t want it to cost the taxpayer anything, they don’t want to use EU bailout funds and they need it to be credible for the market, and those three conditions are apparently incompatible,” Fernando Fernandez, a professor at IE business school in Madrid and a former International Monetary Fund economist, said in a telephone interview.
The former Socialist government’s first initiative to help banks was to create the FROB bailout fund in 2009, which spent about 10 billion euros buying preference shares in lenders it encouraged to merge. In a second phase, the government bought ordinary shares in struggling lenders last year and in October, in a bid to shield the budget from further strain, it decreed that any losses generated by the overhaul would be absorbed by the industry.
Rajoy, who leads the pro-business People’s Party, had considered creating a so-called bad bank to buy toxic real- estate assets from lenders, two people familiar with the situation said in November. A bad bank may have clashed with Rajoy’s election pledge not to spend taxpayers’ money cleaning up lenders. Rajoy and Guindos have also ruled out using the euro region’s bailout funds to finance the overhaul.
Spain, which pays about less than 4 percent to borrow for five years, will issue debt to fund its purchase of the CoCos, which will yield 8 percent, said the person, who declined to be identified because the plan isn’t yet public. The Treasury sold five-year bonds today at 3.455 percent, down from 4.021 percent last month, as the European Central Bank’s policy of extending longer-term loans to banks bolstered demand for sovereign debt.
The plan to be unveiled today won’t have any impact on the budget deficit, the person familiar with the process said yesterday. Still, the CoCos may end up being converted into equity, Fernandez said, as the IMF forecasts Spain’s economy will shrink for the next two years, adding to pressure on banks.
“Barring positive surprises on economic growth, it’s probable the CoCos will end up being converted into shares and so we would be just postponing the cost to the taxpayer,” said Fernandez, who used to be chief economist at Banco Santander SA.
De Guindos said on Jan. 27 that banks were themselves capable of funding the 50 billion euros of additional provisions he wants them to make for real-estate. Provisioning efforts will be “especially dedicated” to foreclosed assets, particularly “land and other kinds of property,” he said in an interview in Davos, Switzerland, last week. Lenders the government thinks aren’t viable in the medium term will have to merge, he said.
To contact the reporter on this story: Emma Ross-Thomas in Madrid at email@example.com
The liklihood of a strong economic rebound worldwide is not a very high probablility in my mind, regardless of our stock market having the best January in many years etc…Economic outlook is still very bleak in my mind!
As I have been saying, this game is far from over! Merkel is not buckling under to ‘outside’ pressure and will take this game to the very end! I don’t think the latest Central Bank Actions will do much for the overall health of the financial system, there nor here, in the medium to long haul…
Merkel Shuns ECB Role in Favor of Budget Limits
By Tony Czuczka - Dec 1, 2011 10:19 AM MT
German Chancellor Angela Merkel is set to snub investor pleas to back an expanded European Central Bank role in solving the debt crisis, as she pushes her demand for tighter economic ties in Europe as the only way forward.
In the days before a speech to German lawmakers tomorrow outlining her stance for a Dec. 9 European summit, Merkel has repeated her push to rework European Union rules to lock in budget monitoring and enforcement and seal off the ECB from political pressure. That risks a showdown with fellow EU leaders and extends her conflict with financial markets looking for immediate measures to end the contagion.
“The market is questioning Merkel’s tough approach,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, said by phone today. Investors want “clarity on what the framework will look like and what the financial bridge will look like” to fund euro-area governments and banks that need aid while fiscal ties are negotiated.
Merkel’s refusal to deploy the ECB is a rebuff to President Barack Obama after he exhorted Europe’s leaders to take more action to combat the crisis. The chancellor is loath to agree to follow the Federal Reserve and the Bank of England in policies she views as akin to fighting debt with more debt. Enlisting the ECB in battling the crisis would violate the central bank’s independence and set it on a course of action that might not work, destroying its credibility.
The ECB is independent and must choose its own method of ensuring the euro’s stability “without being praised or criticized” and states must protect that independence by improving their finances, the Westdeutsche Zeitung quoted Merkel as saying in an interview released today. The government sees joint euro bonds as “the wrong remedy in this phase of European development and even damaging,” she told the newspaper.
Underscoring the focus on debt cutting, Germany will propose that each euro country set up a national debt-reduction fund as one way to boost market confidence, Finance Minister Wolfgang Schaeuble said in Berlin today. Each country could pay into the fund every year until its debt level returns to the euro-area limit of 60 percent of gross domestic product, he told reporters.
Merkel’s drive to pursue economic and political convergence may still not be the final word. “You can’t put the cart before the horse,” she said in a Nov. 23 speech to parliament.
ECB President Mario Draghi signaled today that the central bank could do more to fight the crisis in return for fiscal union, one day after the ECB joined the Fed and four other central banks to lower financing costs for banks. Michael Meister, the parliamentary finance spokesman for Merkel’s party, has said that greater integration is a precondition for any German rethink of its opposition to “joint liability.”
“If the euro zone succeeds in agreeing on more political integration with clear consequences for breaching fiscal and economic rules, the German government should eventually give up its resistance to euro bonds,” Carsten Brzeski, an economist at ING Group in Brussels, said in a commentary for Bloomberg Brief.
Throughout the market turbulence and conflict with allies, Merkel hasn’t budged, saying that euro bonds aren’t the answer for now. Her refusal to sanction using the ECB clashes with French President Nicolas Sarkozy’s government, while her focus on changing Europe’s rules irks countries such as the U.K. and Ireland, where voters twice rejected EU treaties in referendums.
“Not everyone is enthusiastic about treaty change because that requires a difficult process of consensus in individual governments, parliaments and populations for some,” Merkel told reporters on Nov. 29. “Still, I believe that those who give us money for government bonds in Europe expect that we have to ensure enforcement of the Stability and Growth Pact more strictly than in the past.”
Germany is seeking changes to the EU’s rulebook to allow closer monitoring of euro countries’ budgets, with sanctions against persistent offenders and potential veto power over national spending plans wielded by the EU Commission, the EU’s Brussels-based executive. EU President Herman van Rompuy is due to present proposals for treaty change at the Dec. 9 summit.
Merkel, who has signaled she doesn’t want financial markets or even her own economic advisers imposing solutions for the debt crisis, is sticking to the crisis-fighting arsenal built up since Greece, the euro area’s most indebted country, was bailed out in May 2010. Six months later, as Ireland prepared to join Greece in requesting a bailout, Merkel said policy makers have to assert “primacy” over the markets in “a kind of battle.”
Germany and Europe don’t have “unlimited financial strength” to counter the crisis, Merkel’s chief spokesman, Steffen Seibert, told reporters Nov. 28. That’s “why the German government reacts so skeptically to the many calls for Europe to finally free up the really big, final financial reserves, which the Anglo-Saxon world likes to call showing the bazooka.”
In the latest bid to tame the crisis, European finance ministers said yesterday they would seek a greater role for the International Monetary Fund alongside their own bailout fund, the European Financial Stability Facility.
Schaeuble said the IMF option, along with the EFSF’s ability to buy sovereign bonds and guarantee as much as 30 percent of bond issues by troubled governments, guarantees that all euro-area members will meet their financing needs well beyond the first quarter of 2012.
‘Game of Chicken’
The EFSF looks like “yesterday’s story” as German policy makers play a “huge game of chicken” over future economic and monetary union to achieve their budget-tightening aims, said Jim O’Neill, chairman of Goldman Sachs Asset Management.
“How close to the edge do you want to take this?” O’Neill said yesterday in a Bloomberg Television interview with Francine Lacqua. “It needs Germany and the ECB to decide whether they want EMU to exist or not, because that’s how it’s going.”
Merkel and Sarkozy, at a Nov. 24 meeting in Strasbourg with Italian Prime Minister Mario Monti, agreed to stop discussing the ECB’s role in the debt crisis. Three days later, French Budget Minister Valerie Pecresse, who is also the government’s spokeswoman, suggested that more help from the ECB may be forthcoming if euro states implement tougher budget rules.
“A new fiscal compact” is “definitely the most important element to start restoring credibility,” Draghi told European lawmakers in Brussels today. “Other elements might follow, but the sequencing matters.”
Merkel’s insistence on debt and deficit reduction is yielding results. Crisis-driven government changes in Italy and Spain ushered in leaders who pledge budget cuts, while EU states including France agreed to look at locking debt reduction into its constitution. Forecast growth in Germany, Europe’s biggest economy, of 2.9 percent compares with a euro-region average of 1.6 percent this year, according to the Paris-based Organization for Economic Cooperation and Development.
Merkel’s refusal to put more German wealth on the line to save the euro area “is not a categorical rejection,” said Brzeski of ING Group. “It is all about the sequence of events and decisions.”
To contact the reporter on this story: Tony Czuczka in Berlin at firstname.lastname@example.org
To contact the editor responsible for this story: James Hertling at email@example.com
Buckle up, it promises to be a bumpy ride from here on out! Buy some gold or silver and especially food just in case!
As if TARP money wasn’t enough…7.7 trillion in loans to bail out the criminals that caused the problem? Really? Someone needs to go to Jail in my opinion! If you or I did such things it would be fraud or worse…
That these guys still can’t get it right, look at Europe and our Too Big To Fail Banks with tons of derivative risk guaranteeing all that debt prompting yet another round of free money!
Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress
The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.
The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.
Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.
A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.
‘Change Their Votes’
“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”
The size of the bailout came to light after Bloomberg LP, the parent of Bloomberg News, won a court case against the Fed and a group of the biggest U.S. banks called Clearing House Association LLC to force lending details into the open.
The Fed, headed by Chairman Ben S. Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort — and that needy institutions would be reluctant to borrow in the next crisis. Clearing House Association fought Bloomberg’s lawsuit up to the U.S. Supreme Court, which declined to hear the banks’ appeal in March 2011.
The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.
“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”
Bankers didn’t disclose the extent of their borrowing. On Nov. 26, 2008, then-Bank of America (BAC) Corp. Chief Executive Officer Kenneth D. Lewis wrote to shareholders that he headed “one of the strongest and most stable major banks in the world.” He didn’t say that his Charlotte, North Carolina-based firm owed the central bank $86 billion that day.
JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation.
Howard Opinsky, a spokesman for JPMorgan (JPM), declined to comment about Dimon’s statement or the company’s Fed borrowings. Jerry Dubrowski, a spokesman for Bank of America, also declined to comment.
The Fed has been lending money to banks through its so- called discount window since just after its founding in 1913. Starting in August 2007, when confidence in banks began to wane, it created a variety of ways to bolster the financial system with cash or easily traded securities. By the end of 2008, the central bank had established or expanded 11 lending facilities catering to banks, securities firms and corporations that couldn’t get short-term loans from their usual sources.
“Supporting financial-market stability in times of extreme market stress is a core function of central banks,” says William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”
The Fed has said that all loans were backed by appropriate collateral. That the central bank didn’t lose money should “lead to praise of the Fed, that they took this extraordinary step and they got it right,” says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland.
The Fed initially released lending data in aggregate form only. Information on which banks borrowed, when, how much and at what interest rate was kept from public view.
The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak.
The Treasury Department relied on the recommendations of the Fed to decide which banks were healthy enough to get TARP money and how much, the former officials say. The six biggest U.S. banks, which received $160 billion of TARP funds, borrowed as much as $460 billion from the Fed, measured by peak daily debt calculated by Bloomberg using data obtained from the central bank. Paulson didn’t respond to a request for comment.
The six — JPMorgan, Bank of America, Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley — accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and investment- services firms, the data show. By comparison, they had about half of the industry’s assets before the bailout, which lasted from August 2007 through April 2010. The daily debt figure excludes cash that banks passed along to money-market funds.
While the emergency response prevented financial collapse, the Fed shouldn’t have allowed conditions to get to that point, says Joshua Rosner, a banking analyst with Graham Fisher & Co. in New York who predicted problems from lax mortgage underwriting as far back as 2001. The Fed, the primary supervisor for large financial companies, should have been more vigilant as the housing bubble formed, and the scale of its lending shows the “supervision of the banks prior to the crisis was far worse than we had imagined,” Rosner says.
Bernanke in an April 2009 speech said that the Fed provided emergency loans only to “sound institutions,” even though its internal assessments described at least one of the biggest borrowers, Citigroup, as “marginal.”
On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be “superficial,” bolstered largely by its $45 billion of Treasury funds. The document was released in early 2011 by the Financial Crisis Inquiry Commission, a panel empowered by Congress to probe the causes of the crisis.
Andrea Priest, a spokeswoman for the New York Fed, declined to comment, as did Jon Diat, a spokesman for Citigroup.
“I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability,” says Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee.
Judd Gregg, a former New Hampshire senator who was a lead Republican negotiator on TARP, and Barney Frank, a Massachusetts Democrat who chaired the House Financial Services Committee, both say they were kept in the dark.
“We didn’t know the specifics,” says Gregg, who’s now an adviser to Goldman Sachs.
“We were aware emergency efforts were going on,” Frank says. “We didn’t know the specifics.”
Frank co-sponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, billed as a fix for financial-industry excesses. Congress debated that legislation in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival.
It would have been “totally appropriate” to disclose the lending data by mid-2009, says David Jones, a former economist at the Federal Reserve Bank of New York who has written four books about the central bank.
“The Fed is the second-most-important appointed body in the U.S., next to the Supreme Court, and we’re dealing with a democracy,” Jones says. “Our representatives in Congress deserve to have this kind of information so they can oversee the Fed.”
The Dodd-Frank law required the Fed to release details of some emergency-lending programs in December 2010. It also mandated disclosure of discount-window borrowers after a two- year lag.
TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says.
“Even though the Treasury was in the headlines, the Fed was really behind the scenes engineering it,” Shaffer says.
Congress, at the urging of Bernanke and Paulson, created TARP in October 2008 after the bankruptcy of Lehman Brothers Holdings Inc. made it difficult for financial institutions to get loans. Bank of America and New York-based Citigroup each received $45 billion from TARP. At the time, both were tapping the Fed. Citigroup hit its peak borrowing of $99.5 billion in January 2009, while Bank of America topped out in February 2009 at $91.4 billion.
Lawmakers knew none of this.
They had no clue that one bank, New York-based Morgan Stanley (MS), took $107 billion in Fed loans in September 2008, enough to pay off one-tenth of the country’s delinquent mortgages. The firm’s peak borrowing occurred the same day Congress rejected the proposed TARP bill, triggering the biggest point drop ever in the Dow Jones Industrial Average. (INDU) The bill later passed, and Morgan Stanley got $10 billion of TARP funds, though Paulson said only “healthy institutions” were eligible.
Mark Lake, a spokesman for Morgan Stanley, declined to comment, as did spokesmen for Citigroup and Goldman Sachs.
Had lawmakers known, it “could have changed the whole approach to reform legislation,” says Ted Kaufman, a former Democratic Senator from Delaware who, with Brown, introduced the bill to limit bank size.
Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard — the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.
If Congress had been aware of the extent of the Fed rescue, Kaufman says, he would have been able to line up more support for breaking up the biggest banks.
Byron L. Dorgan, a former Democratic senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking.
“Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse,” says Dorgan, who retired in January.
Instead, the Fed and its secret financing helped America’s biggest financial firms get bigger and go on to pay employees as much as they did at the height of the housing bubble.
Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data.
For so few banks to hold so many assets is “un-American,” says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate. I’m in favor of breaking them up and slimming them down.”
Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker, according to data compiled by Bloomberg. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.
‘Wanted to Pretend’
“The pay levels came back so fast at some of these firms that it appeared they really wanted to pretend they hadn’t been bailed out,” says Anil Kashyap, a former Fed economist who’s now a professor of economics at the University of Chicago Booth School of Business. “They shouldn’t be surprised that a lot of people find some of the stuff that happened totally outrageous.”
Bank of America took over Merrill Lynch & Co. at the urging of then-Treasury Secretary Paulson after buying the biggest U.S. home lender, Countrywide Financial Corp. When the Merrill Lynch purchase was announced on Sept. 15, 2008, Bank of America had $14.4 billion in emergency Fed loans and Merrill Lynch had $8.1 billion. By the end of the month, Bank of America’s loans had reached $25 billion and Merrill Lynch’s had exceeded $60 billion, helping both firms keep the deal on track.
Wells Fargo bought Wachovia Corp., the fourth-largest U.S. bank by deposits before the 2008 acquisition. Because depositors were pulling their money from Wachovia, the Fed channeled $50 billion in secret loans to the Charlotte, North Carolina-based bank through two emergency-financing programs to prevent collapse before Wells Fargo could complete the purchase.
“These programs proved to be very successful at providing financial markets the additional liquidity and confidence they needed at a time of unprecedented uncertainty,” says Ancel Martinez, a spokesman for Wells Fargo.
JPMorgan absorbed the country’s largest savings and loan, Seattle-based Washington Mutual Inc., and investment bank Bear Stearns Cos. The New York Fed, then headed by Timothy F. Geithner, who’s now Treasury secretary, helped JPMorgan complete the Bear Stearns deal by providing $29 billion of financing, which was disclosed at the time. The Fed also supplied Bear Stearns with $30 billion of secret loans to keep the company from failing before the acquisition closed, central bank data show. The loans were made through a program set up to provide emergency funding to brokerage firms.
“Some might claim that the Fed was picking winners and losers, but what the Fed was doing was exercising its professional regulatory discretion,” says John Dearie, a former speechwriter at the New York Fed who’s now executive vice president for policy at the Financial Services Forum, a Washington-based group consisting of the CEOs of 20 of the world’s biggest financial firms. “The Fed clearly felt it had what it needed within the requirements of the law to continue to lend to Bear and Wachovia.”
The bill introduced by Brown and Kaufman in April 2010 would have mandated shrinking the six largest firms.
“When a few banks have advantages, the little guys get squeezed,” Brown says. “That, to me, is not what capitalism should be.”
Kaufman says he’s passionate about curbing too-big-to-fail banks because he fears another crisis.
‘Can We Survive?’
“The amount of pain that people, through no fault of their own, had to endure — and the prospect of putting them through it again — is appalling,” Kaufman says. “The public has no more appetite for bailouts. What would happen tomorrow if one of these big banks got in trouble? Can we survive that?”
Lobbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up — a gain of 33 percent, according to OpenSecrets.org, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate, OpenSecrets.org reported.
Lobbyists argued the virtues of bigger banks. They’re more stable, better able to serve large companies and more competitive internationally, and breaking them up would cost jobs and cause “long-term damage to the U.S. economy,” according to a Nov. 13, 2009, letter to members of Congress from the FSF.
The group’s website cites Nobel Prize-winning economist Oliver E. Williamson, a professor emeritus at the University of California, Berkeley, for demonstrating the greater efficiency of large companies.
In an interview, Williamson says that the organization took his research out of context and that efficiency is only one factor in deciding whether to preserve too-big-to-fail banks.
“The banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process,” Williamson says. “The big banks have incentives to take risks they wouldn’t take if they didn’t have government support. It’s a serious burden on the rest of the economy.”
Dearie says his group didn’t mean to imply that Williamson endorsed big banks.
Top officials in President Barack Obama’s administration sided with the FSF in arguing against legislative curbs on the size of banks.
On May 4, 2010, Geithner visited Kaufman in his Capitol Hill office. As president of the New York Fed in 2007 and 2008, Geithner helped design and run the central bank’s lending programs. The New York Fed supervised four of the six biggest U.S. banks and, during the credit crunch, put together a daily confidential report on Wall Street’s financial condition. Geithner was copied on these reports, based on a sampling of e- mails released by the Financial Crisis Inquiry Commission.
At the meeting with Kaufman, Geithner argued that the issue of limiting bank size was too complex for Congress and that people who know the markets should handle these decisions, Kaufman says. According to Kaufman, Geithner said he preferred that bank supervisors from around the world, meeting in Basel, Switzerland, make rules increasing the amount of money banks need to hold in reserve. Passing laws in the U.S. would undercut his efforts in Basel, Geithner said, according to Kaufman.
Anthony Coley, a spokesman for Geithner, declined to comment.
Lobbyists for the big banks made the winning case that forcing them to break up was “punishing success,” Brown says. Now that they can see how much the banks were borrowing from the Fed, senators might think differently, he says.
The Fed supported curbing too-big-to-fail banks, including giving regulators the power to close large financial firms and implementing tougher supervision for big banks, says Fed General Counsel Scott G. Alvarez. The Fed didn’t take a position on whether large banks should be dismantled before they get into trouble.
Dodd-Frank does provide a mechanism for regulators to break up the biggest banks. It established the Financial Stability Oversight Council that could order teetering banks to shut down in an orderly way. The council is headed by Geithner.
“Dodd-Frank does not solve the problem of too big to fail,” says Shelby, the Alabama Republican. “Moral hazard and taxpayer exposure still very much exist.”
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, says banks “were either in bad shape or taking advantage of the Fed giving them a good deal. The former contradicts their public statements. The latter — getting loans at below-market rates during a financial crisis — is quite a gift.”
The Fed says it typically makes emergency loans more expensive than those available in the marketplace to discourage banks from abusing the privilege. During the crisis, Fed loans were among the cheapest around, with funding available for as low as 0.01 percent in December 2008, according to data from the central bank and money-market rates tracked by Bloomberg.
The Fed funds also benefited firms by allowing them to avoid selling assets to pay investors and depositors who pulled their money. So the assets stayed on the banks’ books, earning interest.
Banks report the difference between what they earn on loans and investments and their borrowing expenses. The figure, known as net interest margin, provides a clue to how much profit the firms turned on their Fed loans, the costs of which were included in those expenses. To calculate how much banks stood to make, Bloomberg multiplied their tax-adjusted net interest margins by their average Fed debt during reporting periods in which they took emergency loans.
The 190 firms for which data were available would have produced income of $13 billion, assuming all of the bailout funds were invested at the margins reported, the data show.
The six biggest U.S. banks’ share of the estimated subsidy was $4.8 billion, or 23 percent of their combined net income during the time they were borrowing from the Fed. Citigroup would have taken in the most, with $1.8 billion.
“The net interest margin is an effective way of getting at the benefits that these large banks received from the Fed,” says Gerald A. Hanweck, a former Fed economist who’s now a finance professor at George Mason University in Fairfax, Virginia.
While the method isn’t perfect, it’s impossible to state the banks’ exact profits or savings from their Fed loans because the numbers aren’t disclosed and there isn’t enough publicly available data to figure it out.
Opinsky, the JPMorgan spokesman, says he doesn’t think the calculation is fair because “in all likelihood, such funds were likely invested in very short-term investments,” which typically bring lower returns.
Even without tapping the Fed, the banks get a subsidy by having standing access to the central bank’s money, says Viral Acharya, a New York University economics professor who has worked as an academic adviser to the New York Fed.
“Banks don’t give lines of credit to corporations for free,” he says. “Why should all these government guarantees and liquidity facilities be for free?”
In the September 2008 meeting at which Paulson and Bernanke briefed lawmakers on the need for TARP, Bernanke said that if nothing was done, “unemployment would rise — to 8 or 9 percent from the prevailing 6.1 percent,” Paulson wrote in “On the Brink” (Business Plus, 2010).
Occupy Wall Street
The U.S. jobless rate hasn’t dipped below 8.8 percent since March 2009, 3.6 million homes have been foreclosed since August 2007, according to data provider RealtyTrac Inc., and police have clashed with Occupy Wall Street protesters, who say government policies favor the wealthiest citizens, in New York, Boston, Seattle and Oakland, California.
The Tea Party, which supports a more limited role for government, has its roots in anger over the Wall Street bailouts, says Neil M. Barofsky, former TARP special inspector general and a Bloomberg Television contributing editor.
“The lack of transparency is not just frustrating; it really blocked accountability,” Barofsky says. “When people don’t know the details, they fill in the blanks. They believe in conspiracies.”
In the end, Geithner had his way. The Brown-Kaufman proposal to limit the size of banks was defeated, 60 to 31. Bank supervisors meeting in Switzerland did mandate minimum reserves that institutions will have to hold, with higher levels for the world’s largest banks, including the six biggest in the U.S. Those rules can be changed by individual countries.
They take full effect in 2019.
Meanwhile, Kaufman says, “we’re absolutely, totally, 100 percent not prepared for another financial crisis.”
To contact the reporters on this story: Bob Ivry in New York at firstname.lastname@example.org; Bradley Keoun in New York at email@example.com; Phil Kuntz in New York at firstname.lastname@example.org.
This is very serious business folks and your ability to Survive and Thrive are on the line now!