The US banking system is still a mess no matter what the regulators and pundits say. From the Volker Rule to Basel III to fraudclosure there are issues that will have to come to ahead at some point in the not so distant future. Specifically, the Financial Times reported that because of the Basel III tier 1 capital requirements the top 35 US banks may be short $100 – $150 billion dollars. This means more capital raises for many of these banks, but don’t worry analysts say this is manageable.

Other parts of the FT’s article states that many of these banks may have to selloff $500B, in total, of assets to avoid the capital raise. The issue is that if all these banks, which the article admittedly says is not equally distributed between the top 35 banks, have to selloff $500B in assets to avoid a capital raise who will buy these assets? If the liability of these assets equals higher capital requirements buyers may be few and far between which means lower prices for the assets being sold or they will have to raise capital. Of note is the shortfall is only because of Basel III and not because of any other issue outstanding.

Remember how so many of these capital requirement issues were supposedly put to rest because of our “stress tests”? Clearly the stress tests, as has been stated time and time again, were worthless. In fact rumors are making their rounds that another round of stress tests are on the way for US banks. What is interesting about this is that the stress tests lack total credibility for 2 reasons. First, look at the EU’s stress tests which passed most banks and look what is happening in Ireland, they were a farce. Second, without good accounting rules, i.e. mark-to-market vs. mark-to-fantasyland, the stress tests are bogus. A loss is a loss and simply pretending it doesn’t exist is the most idiotic thing I have ever heard of and if investors do not do their research it can lead to major losses. In my opinion this is nothing more than state sponsored investor fraud.

What is missing out of all of these bank articles is the whole fraudclosure mess and its impact on the banks. As stated previously there is no remedy for a broken chain of title except to modify the mortgage which starts a new chain of title and eliminates the problem. There are issues with this though. First, doing nothing means that all of those MBS are worthless because there is no cash flow and the creditor cannot collect the collateral, think about that for awhile. Second, if your only option is to modify the mortgage it means that the MBS is worth less than face value. Either way someone somewhere is taking a loss and that means there may be a put back to the originating bank. When the Fed put back bonds to BoA that should concern investors… it’s the Fed telling banks you ripped us off.

If these put backs continue or escalate, which they will because who wants to take a loss on paper that was misrepresented to begin with, that could mean that banks have much larger problems than Basel III capital requirements. If the put back is widely exercised banks will need a lot more money than $100 – $150B. They might need a trillion or more, who really knows anymore? Frankly, Basel III is the last thing anyone should be worried about. People should be worried about what the put back risk is for many of these banks because the put back risk is far greater of an issue than the sub-prime crisis ever was. I believe we will find out if there are indeed “no more bank bailouts” or not. My guess is we will all be shareholders of some big banks in the near future. In the meantime I am waiting for my dividend check from our previously made, wildly profitable, insert sarcasm here, investments into GM, Citi, BoA, Ally…

John Carney at CNBC just put up a piece http://www.cnbc.com/id/39754650 which states: “This is a serious threat to financial stability. There’s no way Tim and Ben let this play out,” a senior banker told me, referring to Treasury Secretary Tim Geithner and Federal Reserve chair Ben Bernanke.

In short, Wall Street is betting that the bureaucrats will bail them out again.

I said this yesterday and these executives are right, banks will get bailed out again probably through QE. It is wrong and these banks have earned the right to fail, but the problem is that politicians do not have the will to help them this time. However, the Fed, which is proving itself so independent nowadays, will bail them out. As Zero Hedge reported PIMCO levered up on MBS and they know something, like $500B in QE coming directly to the MBS market, rumor has it. Again, QE will do nothing and while $500B is in the cards for MBS there is no word yet what the Fed will do with long dated treasuries… but they will buy them.

Well, this is beyond me, the DXY is dropping like a rock below the 50 day moving average on horrible news driving futures higher. There is simply no reason for this whatsoever as bad news usually rallies the dollar. What is more odd is gold and silver are also down fairly substantially as well. Frankly, it is not adding up in my book and something stinks. Correlations and inverse correlations don’t just break down for no reason on without any news. Perhaps one should be careful shorting this market today and look for a retest of 1040, the Euro is up large @ 1.24 + 0.0161 when the banks had to barrow a substantial amount for 6 days from the ECB which indicates problems. Stay nimble.

Look, things in the U.S. are certainly better, even though I am bearish on the economy, but they are just a “less worse” type of better rather than a true recovery or whatever you want to call it. Someone once commented that I would not know a V shaped recovery if it sat on my face, or something to that, as the recession in the early 1980’s saw a lag in initial claims of some 6 months before the recovery in employment happened. Boy, I hope that person is reading this because that comment was made in august or September of last year, almost a full year ago, and initial claims barely broke the 500K mark as we speak, is that the ”V” we are looking for? The fact is in a post credit collapse employment is a leading indicator, I said it a year ago and I am saying it now and the only difference is the unemployment rate is HIGHER today than a year ago.

What changed over the last 12 months?

Nothing. Wait, I take that back, a lot. The U.S. is now $3T more in debt, we performed a “stress test,” which we are telling the ECB to do, more on that in a minute, and the Fed expanded its balance sheet by how much? What did we get for all of that? A 5.2% GDP print based on inventory a rebuild that was probably premature, if we take away the stimulus would firms have rebuilt their inventories so much? I think not. Unemployment is slightly better thanks to temporary jobs and government hiring, not exactly what I would call “robust” at all. The bottom line is all my criticism of the stimulus was right, it failed.

The banks are better you say, right? Are they? If you think that, well, I just don’t know what to tell you. Did the banks get rid of the “toxic assets?” Did they write all their bad debts off? Did real estate values increase? How about commercial real estate, is that sector flying strong again? No. Are banks loaning money again? Sure, if you have a credit score of 850 or better and don’t need the money they will gladly make a loan to you. However, if you need to refinance your home you better hope you qualify for a government program or you are out of luck. The “stress test” was a joke and meant nothing because we are at the outer limits of the stress test, remember, 10% unemployment, etc., etc.? What saved the banks was one thing and one thing only, the repeal of mark-to-market account, period, end of story.

If we brought back mark-to-market accounting today we would have a handful of big institutions left, I guarantee it. Just look at Wells Fargo’s balance sheet with the “Pick-A-Pay Loans” they inherited, worse, they bought, from Wachovia, the LTV’s, except for Texas, God Bless Texas, are all horrible. I am not saying WFC would fail, I am just saying they would have to realize pretty significant losses is all. It is no coincidence that right after, literally right after, the repeal of mark-to-market accounting rules by the FASB, by Congressional pressure I might add, bank earnings went through the roof. What replaced mark-to-market accounting? Mark-to-model accounting, do you know who made that model famous? Enron, need I say more?

Europe

Now, Timmy Geithner is over in Europe telling the Europeans to do a “stress test” to let the world know all is well. Sorry Tim, I do not think this will work since it is technically not the banks in question, but rather the sovereign debt that they are holding. Why not do a stress test on governments instead, maybe that will solve the problem. This is a banking problem, again, that was brought on by huge deficit spending and countries inability to service their debt loads, this is big, huge actually. While this will impact banks it is not really banks that caused it, but politicians who decided to bribe the people with their own money.

It is likely that one of the PIGS, or whatever we are calling them now, will default given the issues they have and the inability of politicians to say no to spending. It is just odd, it always has been, that the people demand all this gravy from the government in the form of give a ways, tax credits or straight cash in some form. Don’t these people realize that they are only getting back their own money? Actually, if governments spent less and had lower debts that means they would have lower overall taxes which means the people would have more money on their own… they would be better off! However, the people insist on being bribed with their own money and politicians are only too happy to oblige.

The point is that this bigger than the banks as we are talking about the solvency of countries now. Bailouts are much more difficult to do for countries and the implications of a default by any country has widespread ripples that most people have no idea can or would occur. Even if Hungary or Greece defaults it is a huge deal and will impact governments and banks all over the world. I have been saying this for months now, Greece is a big deal and all those people saying it is not are, well, disqualified to render their opinions anymore as the markets have spoken and they have sided with me.

Run a stress test, it doesn’t matter because it really doesn’t matter Tim. The problem is with government spending this time and I do not think mark-to-model accounting can fix this problem.

The real problem

The real problem is I do not know where the sovereign debt problems will end, I know it will get worse. I know that more European countries will succumb to this very same issue as most European countries are socialist by their very nature and their debt levels are very high. As the weaker countries fall they will drag the stronger countries down with them, it is just how it works. I made a call that the Euro will fall to 1.18, we are about there. Do I think it will go lower? Yes, to parity in the near future. I think 1.16 is the next level, but the ECB will have to intervene and China has to intervene as a weak Euro is a major problem, it is, another story for another time. The currency will not survive without a mechanism to eject the weak states, period.

After the carnage in Europe is done, I do not have a timetable for that, it could be tomorrow or 10 years from now, but more than likely it will be sooner rather than later, the debt problems will spread, to the U.S. We have $13T in debt and an economy that is not recovering, I am not happy about that, but those are the facts. We are spending $4.9B a day, 3 times the amount George Bush, not exactly the face of fiscal conservatism I might add, was spending. We are in major trouble and what are our politicians doing? Trying to figure out how to get stimulus 3 out the door, that’s what.

I have been saying for months that our debt to GDP level is almost at parity, but it takes the Drudge Report for people to start listening? OK, at least people are listening now. The problem is we have no politicians willing to take the steps to fix out problems. Go ahead, elect the Republicans, look what they did from 2000-2006, they really helped to speed the process up, in my opinion. Of course, out current President and Congress has surely kicked what the Republicans did into hyper drive as they added 30% to our debt load in less than 2 years, that is $3T, an astounding figure. Neither of these parties really want to fix the problems, in my opinion, because they have a vested interest in perpetuating the problems so they can stay in power, it is just how it works.

What this means is we are all in very big trouble. I am not talking about, oh, gee, go buy an ounce of gold and protect yourself from inflation, I am talking about the Weimar Republic, hyperinflation, type of trouble. I see no way out besides inflation and in a big way. As Paul Krugman points out, there is a big difference between Greece and the U.S., we can print our own money. We also know Ben Bernanke has no problem with hitting that print money either. I am also confident that the Fed is, basically, completely incompetent.

If we cannot go to the market to finance our debt, which we have trillions of dollars of that most of it matures in under 10 years, the Fed will monetize it. That is how we will deal with our sovereign debt crisis, we will print our way out of it and it will be the very worst thing we can do. Instead of cutting our government, spending or doing anything else that is logical, because politicians want to get reelected, they will choose to inflate their way out. Will gold protect you? Yes, but so will food and any other useful commodity including toilet paper. It disturbs me to no end that we are where we are and that the President is listening to the likes of Mr. Krugman who thinks deficits don’t matter, they do, and that since we can print money it is OK, printing money is not OK.

In the meantime I am still short the market. We will have a bounce I am sure and I almost took a nice broad long position today, but I passed. While I am sure we will have that bounce I did not think the risk reward was worth it. My target is still 900 on the S&P 500.

We all know the answer to that question, but he really has taken the cake today. As Goldman defends itself against this lawsuit Cramer had a piece on CNBC titled “Cramer: Goldman Invested Own Money in CDO.” In this article he cites an unnamed source, which is the first red flag, that stated Goldman did not short this CDO. Well, who cares as that is not the allegation. The allegation is that Goldman allowed Paulson to pick out lousy mortgages to short, in order to create the synthetic CDO, and did not disclose to investors that this CDO was created by a guy who wanted to short the market. The charges claim that the marketing of this CDO was said to have been picked by an “independent” third party which is patently false, unless Paulson & Co. wanted to lose money. As an aside, this is right about the time Goldman started to short the sub-prime market according to my sources, you know, publically available information.

The question is about whether Goldman did this, I think they did, and what other banks might have done the same thing, they all copy each other and the synthetic CDO market was a very esoteric vehicle to invest in. The CDO market was also controlled by a few main banks, Goldman, Morgan, BoA, Deutsche Bank, Citi and a few others. These banks kept the prices of the CDS swaps low, meaning the buyers, i.e. Paulson, was not making any money, as the market was collapsing which shows that the banks were deluding themselves about the reality of the market. Most CDO’s only needed a 5% default rate to blow up, banks did not move the prices of the CDS’s in the buyers favor until well after that 5% default rate, read The Big Short to verify. In other words, these guys controlled the market, created a product they knew was crap (the short sellers picked what they wanted to short!) and then sold these synthetic products to unwitting clients, they had to invest in some of them because by 2007 all the suckers were less likely to buy synthetic products.

My point is simple, no one claimed Goldman shorted this specific CDO, but misled investors to buy it by distorting the facts about it. Are they guilty? More than likely, but I am sure the case will be settled with admission of guilt. Does this mean AIG and other investors might have a claim? Yup, so go buy some GS Cramer, I am sure he will tell you that later tonight. Did other banks do the same thing? More than likely. It is hard to believe GS was the only bank that did this when they were a relatively small player in that business, compared to Citi, Merrill Lynch and others. Does Cramer grasp those facts or thoughts? I don’t think so.

After all, this is the guy who thinks the market going up every day for a month and a half is a good thing. Then again, Cramer, whose selective memory will omit this in a week or tonight, did this on his show last night:

I guess Cramer never made money shorting stocks… yeah right. I respect Cramer the hedge fund manager, but this other guy, what he turned into, is disingenuous.

Little attention has been given to the main Friday events this year, I am guilt of not reporting on it either, which is bank failures. I guess everyone, me included, has become complacent with the fact that banks are failing at a very scary rate still. I am thinking that the Fed should have left the discount rate along as we are now up to 25 bank closures this year, 3 tonight (see below). At this rate we will see, assuming February is the example of what the rest of the year holds, we will see upwards of 180 bank failures for 2010. I thought the crisis was over?

Clearly there are major structural problems within the banking system still. Although the “too big to fails” will remain, well, too big to fail the smaller banks are up the creek without a paddle. Clearly whatever plan the administration had in mind for these smaller institutions has not worked or the problems are so severe that no one wants to talk about them. I think the latter is probably more likely than the former. Either way, these failures are a major problem especially as the FDIC is technically bankrupt, what else do you call an organization that has a substantial negative net worth? Obviously that lifeline with the Treasury will have to be tapped in order to guarantee the $250,000 per deposit.

Tonight’s winners are:

I guess the losses are not that bad, but given the sorry state of the FDIC I think any loss is bad news. So much for the FDIC’s national savings week push, why save when your bank goes out of business?

Waterfield Bank had no buyer, apparently, but the other 2 banks did have buyers. As you can see the losses are pretty severe given the asset size of the banks. All told losses could hit $808.1M if the FDIC needs to make good on the loss-share agreements, certainly some of the loss-share will be realized if not all of it. Bank of Illinois was purchased by Heartland Bank and Trust Company out of, get this, Normal Illinois and Sun American Bank was acquired by First-Citizens Bank out of Boca Raton FL.

Centennial Bank and Waterfield Bank had deposits of $1.8M and $407,000, respectively, not covered by the FDIC insurance, keep no more than the maximum insured limit at banks, especially smaller banks. There may be more closures later tonight so check back. Below are the press releases.

Waterfield Bank:

Waterfield Bank, Germantown, Maryland, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the insured depositors, the FDIC created Waterfield Bank, FA—a new depository institution chartered by the OTS and insured by the FDIC—to take over the operations of Waterfield Bank. The new institution will remain open until April 5, 2010, to allow depositors access to their insured funds and time to move accounts to other insured institutions.

The bank had one branch location. It also took deposits from customers via the Internet and 38 affinity groups.

At the time of closing, the receiver immediately transferred to Waterfield Bank, FA, all insured deposits of the failed bank, except certificates of deposits (CDs) and individual retirement accounts (IRAs). The FDIC will mail checks directly to customers with CDs and IRAs for the amount of their insured funds, on Monday morning, March 8.

Customers with savings accounts, checking accounts and money market deposit accounts will have access to their insured funds as usual during this transitional period. Banking activities, such as direct deposit, check writing, and ATM and debit card use, will continue as normal for the customers with demand deposit accounts until Waterfield Bank, FA, closes on April 5. At the end of this transition period, the FDIC will mail checks to customers who have not closed their accounts or transferred their funds to another institution.

On-line banking services, including bill pay, will be unavailable for transactions over the weekend; however, these systems will be active by Monday morning, March 8.

As of December 31, 2009, Waterfield Bank had $155.6 million in assets and $156.4 million in deposits. At the time of closing, the amount of deposits exceeding the insurance limits totaled about $407,000. This amount is an estimate and is likely to change as the FDIC works with customers of Waterfield Bank. The uninsured deposits were not transferred to the newly chartered institution.

Depositors with more than $250,000 at Waterfield Bank should call the FDIC at (800) 830-4735 to make an appointment to discuss the status of their funds. The phone number will be operational this evening until 11:00 p.m., Eastern Standard Time (EST); on Saturday from 9:00 a.m. to 9:00 p.m., EST; on Sunday from noon to 6:00 p.m., EST; and thereafter from 8:00 a.m. to 8:00 p.m., EST.

Customers who would like more information about today’s transaction can call the toll-free number; send an e-mail to waterfieldbankquestions@fdic.gov.

Under the FDI Act, the FDIC may create a new depository institution to ensure that depositors have continued access to their insured funds where no other bank has agreed to assume the insured deposits. This arrangement allows for uninterrupted direct deposits and automated payments from customers’ accounts and allows them time to find another institution with which to do business.

The FDIC estimates that the cost to its Deposit Insurance Fund will be $51.0 million. Waterfield Bank is the 25th bank to fail in the nation this year and the first in Maryland. The last FDIC-insured institution to fail in the state was Bradford Bank, Baltimore, on August 28, 2009.

Bank of Illinois:

Bank of Illinois, Normal, Illinois, was closed today by the Illinois Department of Financial Professional Regulation – Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Heartland Bank and Trust Company, Bloomington, Illinois, to assume all of the deposits of Bank of Illinois.

The two branches of Bank of Illinois will reopen on Saturday as branches of Heartland Bank and Trust Company. Depositors of Bank of Illinois will automatically become depositors of Heartland Bank and Trust Company. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branch until they receive notice from Heartland Bank and Trust Company that it has completed systems changes to allow other Heartland Bank and Trust Company branches to process their accounts as well.

This evening and over the weekend, depositors of Bank of Illinois can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 31, 2009, Bank of Illinois had approximately $211.7 million in total assets and $198.5 million in total deposits. Heartland Bank and Trust Company will pay the FDIC a premium of 3.61 percent to assume all of the deposits of Bank of Illinois. In addition to assuming all of the deposits of the failed bank, Heartland Bank and Trust Company agreed to purchase essentially all of the assets.

The FDIC and Heartland Bank and Trust Company entered into a loss-share transaction on $166.6 million of Bank of Illinois’s assets. Heartland Bank and Trust Company will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $53.7 million. Heartland Bank and Trust Company’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. Bank of Illinois is the 24th FDIC-insured institution to fail in the nation this year, and the third in Illinois. The last FDIC-insured institution closed in the state was George Washington Savings Bank, Orland Park, on February 19, 2010.

Sun American Bank:

Sun American Bank, Boca Raton, Florida, was closed today by the Florida Office of Financial Regulation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First-Citizens Bank & Trust Company, Raleigh, North Carolina, to assume all of the deposits of Sun American Bank.

The 12 branches of Sun American Bank will reopen on Monday as branches of First-Citizens Bank & Trust Company. Depositors of Sun American Bank will automatically become depositors of First-Citizens Bank & Trust Company. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branch until they receive notice from First-Citizens Bank & Trust Company that it has completed systems changes to allow other First-Citizens Bank & Trust Company branches to process their accounts as well.

This evening and over the weekend, depositors of Sun American Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of December 31, 2009, Sun American Bank had approximately $535.7 million in total assets and $443.5 million in total deposits. First-Citizens Bank & Trust Company did not pay a premium to acquire the deposits of Sun American Bank. In addition to assuming all of the deposits of the failed bank, First-Citizens Bank & Trust Company agreed to purchase essentially all of the assets.

The FDIC and First-Citizens Bank & Trust Company entered into a loss-share transaction on $433.0 million of Sun American Bank’s assets. First-Citizens Bank & Trust Company will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-866-954-9532. The phone number will be operational this evening until 9:00 p.m., Eastern Standard Time (EST); on Saturday from 9:00 a.m. to 6:00 p.m., EST; on Sunday from noon to 6:00 p.m., EST; and thereafter from 8:00 a.m. to 8:00 p.m., EST.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $103.8 million. First-Citizens Bank & Trust Company’s acquisition of all the deposits was the “least costly” resolution for the FDIC’s DIF compared to all alternatives. Sun American Bank is the 23rd FDIC-insured institution to fail in the nation this year, and the fourth in Florida. The last FDIC-insured institution closed in the state was Marco Community Bank, Marco Island, on February 19, 2010.

Centennial Bank:

The Federal Deposit Insurance Corporation (FDIC) approved the payout of the insured deposits of Centennial Bank, Ogden, Utah. The bank was closed today by the Utah Department of Financial Institutions, which appointed the FDIC as receiver.

The FDIC entered into an agreement with Zions First National Bank, Salt Lake City, Utah, to accept the failed bank’s direct deposits from the federal government, such as Social Security and Veterans’ payments.

The FDIC was unable to find another financial institution to take over the banking operations of Centennial Bank. As a result, checks to the retail depositors for their insured funds will be mailed on Monday. Brokered deposits will be wired once brokers provide the FDIC with the necessary documents to determine if any of their clients exceed the insurance limits. Customers who placed money with brokers should contact them directly for more information about the status of their funds.

As of December 31, 2009, Centennial Bank had approximately $215.2 million in total assets and $205.1 million in total deposits. At the time of closing, the bank had an estimated $1.8 million in uninsured funds. This amount is an estimate that is likely to change once the FDIC obtains additional information from these customers.

Customers who have questions about today’s transaction can call the FDIC toll-free at 1-800-889-4976. Customers with accounts in excess of $250,000 also should contact the toll-free number to set up an appointment to discuss their deposits. The phone number will be operational this evening until 9:00 p.m. Mountain Standard Time (MST); on Saturday from 9:00 a.m. to 6:00 p.m. MST; and on Sunday from noon to 6:00 p.m. MST; and thereafter from 8:00 a.m. to 8:00 p.m. MST.

Beginning on Monday, customers of Centennial Bank with deposits exceeding $250,000 at the bank may visit the FDIC’s Web page “Is My Account Fully Insured?” at https://www2.fdic.gov/drrip/afi/index.asp.

Centennial Bank is the 26th FDIC-insured institution to fail this year and the second in Utah since Barnes Banking Company, Kaysville, was closed on January 15, 2010. The FDIC estimates the cost of the failure to its Deposit Insurance Fund to be approximately $96.3 million.

Haven’t we learned anything about legacy political leaders after the Bush years and countless other Congressional leaders who “inherited” their seat from a parent? Part of the reason the US is in shambles is because we elect these people, why I do not know, and they are ignorant about the problems the country faces. It is no secret that Mario Cuomo was extremely liberal and responsible, in my view, for NY States horrible financial condition because of his socially liberal programs. While I was young during his reign even I knew he was a terrible governor, but we elected Pataki twice so New Yorkers are not known for picking the better candidates.

Now we might be living under another Cuomo who is also a terrible leader and, as Dick Bove claims, largely responsible for the GSE’s collapse. According to Bove, Cuomo’s relentless pursuit to force Freddie and Fannie to loan to the poor led to the GSE’s into buying sub-prime mortgages and eventually their collapse. Frankly, in my opinion, Mr. Bove is correct, you will not hear me agree with Bove much I might add. Cuomo took the GSE’s and many banks to court because of discrimination, some of which I am sure is true, but his main problem was that banks were not loaning money to the poor. Now, I am not a rocket scientist, but I do know if you loan money to poor people who do not have the ability to pay back loans they will eventually default. The banks knew this and that is why they did not lend money to the poor, yes, some discrimination probably existed though.

Because of his zealous behavior we know have had to guarantee Freddie and Fannie for unlimited losses, which is also why the Fed will stop buying MBS’s as well because the GSE’s can now pick up the slack. With NY in such dire straits, and we are, is it wise to elect another lawyer to the governors position? I think not. Surprisingly, I actually like our current governor, who is a Democrat, because for all of his faults he realizes what a horrible position NY is in. He is actually trying to cut spending, but is met with the same corrupt response from the unions and Assembly that usually appears when you try to take money away from their interests.

Patterson is a mess and not the best person for the job, but I would vote for him over Cuomo any day of the week. Of course, Obama and other NY Democrats want him out, are you really surprised over the recent scandals breaking? My belief is that these timely scandals are appearing because Patterson is trying to cut spending which will impact many social programs like schools and welfare. Those are the Democrats pet projects and by cutting spending there, which is the primary reason for our fiscal distress I might add, he was a marked man and is now out.

Cuomo will be a party man upping the spending as much as the market will allow, but that will not be too much more given our deficits. He will do what he is told and not make those hard decisions because he is just like his father, a tax and spend liberal without the knowledge on how to pay for it. It is far easier to get reelected when you make your base happy and paper over the major problems. However, our problems here are so severe they cannot be papered over any longer. They have already robbed the highway and bridge trust fund to pay for the interest on our debt, that money was supposed to be secured for, well, highways and bridges.

How anyone can look to this man or to the Democratic Party in NY is beyond me. They have shown themselves to be horrible when it comes to financial issues and refuse to make the hard decisions. I am referring to NY Democrats not Democrats nationwide. I will not vote for him and I will find it difficult to vote for the Republican challenger, Rick Lazio is potentially the R’s candidate, because politics in NY have not changed. They simply pick the next person in line who is ‘due’ for the next run at a major office. I almost hope we go into receivership as it will let some sane court appoint conservator to get rip of the ridiculous contracts the unions have and, ultimately, uncover all of the corruption we know exists, but has been masterfully hidden from the public.

The Fed just raised interest rates to .50-.75% on the discount window. What does this mean? Nothing. It is simply just a measure to shut people like me up and to encourage banks to go to the private markets for capital. Essentially, this was a populous encouraged move and will have a negative impact on equities, but do not concern yourself with this.

This hike will not hurt corporate bonds, but treasuries and equities, ouch! The bottom line is that the Fed is not selling its assets so, again, this is meaningless at best. If they raise rates above 1% then be worried, but other than that, who cares. Ben, apparently, has just had enough of the negative mean people like me. However, this could prove difficult for Treasury as they have to place so much paper on to the Street. It is also a move to “prove” that this statistical recovery is for real, which it is not. A meaningful rate hike would be well above 1%, don’t hold your breath for that anytime soon.

Ben Bernanke may in fact seem like the unassuming soft spoken professor who is well spoken and polite, and he is, but at the same time he is perhaps suffering from the greatest of the deadliest of sins, pride. I am translating pride into arrogance with Ben because it is essentially the same thing and the sin is identical. There is also no question that Ben suffers from the delusion that he s right and everyone else is wrong, which is how we can tell that he suffers from this disease of arrogance wich will be his ultimate downfall.

I am referring to an article I read this weekend from Reuters, which was reprinted on Bloomberg and various other news sources, where Ben announced that it was not the Federal Reserve’s wall of liquidity during the early 2000’s that caused the housing boom, and subsequent bust, but rather lack of regulation. First of all, he is wrong, because without the liquidity easy credit or the showdown securitization mortgage market simply would not have existed, that is obvious. What is not so obvious is the fact that his regulation argument is also an attack on himself. While Congress did encourage the GSE’s and banks to loosen credit standards, so did the Federal Reserve Bank and the Fed had some significant regulatory authority over these mortgages.

Am I the only one that finds it ironic that Ben, Man of the Year, Savior of the Economy, or whatever else we are calling him now, is the same guy saying that his wall of liquidity is not to blame and more regulation’s was the answer, when part of his job was to regulate the banks? Granted, the Fed’s job in regulating the banks is somewhat small, but are we forgetting Greenspan’s famous speech were he encouraged banks to get more inventive when it came to mortgage origination? This does not sound like getting tough with banks, in fact it sounds like it was a green light to do whatever you want to get homeowners into a house.

Essentially, the Fed gave its blessing to do whatever it took to get people to sign the dotted line on the mortgage application. Not only that, the Fed also provided the liquidity to encourage the lax lending standards. Having just one of those two things is bad, but both combined is disastrous, which we found out. However, our Savior still does not realize that it was the Fed at fault for this mess and I think I know why he is saying this now. He simply wants to be left alone. He figures with his reappointment a done deal, his Man of the Year award, and the magical 25% S&P 500 returns in the market people will get off his back as he built up some credibility, especially the audit the Fed people.

I honestly believe he thinks that his sins of the past can be forgiven because of his recent ‘accomplishments’ which were not really accomplishments. If anything Ben was merely picking up after himself, but with our money. To put everything into perspective on how Ben feels here is how the article ended, and what he thinks caused, I guess, the credit crisis:

“Bernanke pointed to adjustable-rate mortgages and overconfidence that house prices would continue to rise as the main culprits behind the catastrophic housing bubble.”

That is that I guess. He was partially right, but it was not just ARM’s that were the problem, not at all, it was a whole slew of mortgages that were problems. There were jumbo’s that trigger higher rates if the LTV slides below a certain value, there were sub-prime, there was the fact that the asset bubble from the Fed was not just in housing, but in commercial real estate and, well, everywhere. The question is why were people betting so heavily on housing prices to rise? Perhaps because the liquidity spigot was going full force for way too long and then when you went to turn it off the effort was meager at best.  Regardless, the biggest problem now is with all types of mortgages, not just ARM’s and sub-prime.

The sheer arrogance of this man is just unbelievable though. The one thing about the deadly sins is that they are deadly and catch up to you, pride is always the one that kills the worst to. At first it was nice to see Ben apologize for the Fed’s role in the Great Depression, but how could we go from a guy who knows that his organization caused the Depression to him denying the Fed caused this problem. What happened over the last 4 years to Ben where he could state the obvious before only to deny it know? It makes no sense other than he suffers from the affliction of arrogance or pride. What I do know is what Ben is doing, long-term, will not work, because Ben has a terrible track record, and the Fed’s powers are on the verge of finally being reduced, which is a great thing as the system failed us greatly and it’s time for it to go.

No matter what Ben and Greenspan are to blame for a large portion of what happened. I am not saying that Congress is innocent, you know me better than that, and I am not saying that those who lied or bought houses they couldn’t afford are innocent either. However, legitimate fraud too place, even to reasonably intelligent people, the Fed let things happen that they should not have and Congress, well, Congress is just incompetent, what do you expect.

I guess a few firms had to be to Scrooge given the 452K initial claims we saw this morning. Anyone expecting a larger number than we got is crazy because companies just do not or try not to fire people around the holidays. In fact, I am shocked that we saw claims as high as we saw today which reinforces my thought that the employment picture is not getting any better, I know I wouldn’t know a V shaped recovery if it hit me in the head because employment is a lagging indicator. That would be true for an inventory recession, but not for a credit collapse or do I have my type of recessions mixed up?

These initial claims and the ISM data is still not consistent with the magical -11K employment report we got in November, sorry for being a doubter. I simply do not trust government data and neither should you because the BLS along with this administration, any administration for that matter, will do anything to make themselves look better. For example, even though banks are not lending the BLS insists that 30K people started their own businesses in November, really, that is what the birth/death model says. Go back a year ago when things were really bad and the numbers are even higher, 100K+ people were starting their own businesses when the credit markets were frozen solid, so trust those BLS numbers all you want, I don’t.

To further illustrate this point, last month the BLS reduced the number of people in the work force by some 130K, they just took them out of the work force, why? Because they gave up looking for a job, or could not find one, and that is how you get a -11K employment report and massively revised prior reports. I wish we could all doctor our books like the government as we would all be rich. However, did you hear Steve Liesman tell you about how the BLS removed people from the workforce? Nope, you did not. Santelli told you about it and Santelli told you about how retail sales were doctored, but none of the other talking heads, why? I don’t have an answer, I really want to know why. I get that no one wants all bad news all the time, even I don’t want that, but I do want the truth.

My point is that last week and this week we will see soft initial claims numbers and December’s employment report will probably be OK, unless they doctor it up again. If they doctor the report, which will be unnecessary, it will be spectacular and completely unbelievable which will be the problem. Moving forward credibility will be an issue for the government, kind of like the USSR in the 1980’s when they said everything was fine and we knew it wasn’t, we are trying to do the same freaking thing. The thing is when 20% of the population is unemployed/underemployed, 1 out of 5 people, you cannot lie your way out of that and you will pay through the elections. This AM on Squawk even Liesman finally admitted that the Bush “economic recovery” was very poor and we are right where we were at the beginning of the decade. We need massive job growth, 300K+ a month now to turn this around and that is not going to happen.

The economy is bad and without government intervention there is no green shoots, period. The housing data yesterday proves that because that was the first look at housing starts without the tax credit, starts were down 11% when expectations were for +6%, ouch. That is quantifiable proof that the private sector is doing nothing right now and it is 110% government intervention growing the economy which has zero multiplier effect, it actually destroys wealth especially when your country has to borrow 100% of the money. That one data point on its own destroys the V shapers story, but if you combine it with any other data point it completely buries it. Let us not forget that if this was a V shape the Fed would have at least changed its language during the last meeting, but nope they did not even do that. Keep in mind I want out of this to, but I am just not delusional. Sure stocks are higher, but that doesn’t mean the economy is OK and in fact it means there is pain coming hard and fast somewhere along the way. Oh, where’s the volume?

Just how bad are things? Well, banks aren’t lending to the wealthy either. I spoke to a very wealthy friend of mine yesterday in Florida which is telling of what is really going on in the mortgage market right now. Now, I know how lending works, but there is simply no excuse for what he is going through right now in trying to refinance his condo in Florida, I know it is a hard hit area, but hear out the story before passing judgment. His condo was worth 7 figures before, but now in the high 6 figures and he has zero debt, $2M in cash, 790 FICO score and he is self employed. Now his self employed status is an issue because he has inconsistent income, $40K a year to $400K a year which is wild swings, but not bad considering he only wants to refinance $200K.

Here is the thing, he cannot get any financing from any bank anywhere. He wants to refi a portion of his condo, so it is totally secured, he has cash, credit, no debt and income with no bank wanting the business. Keep in mind I am not talking about a second lien where if he filed for bankruptcy the bank gets nothing, we are talking first lien here. So, how can this be if banks are ‘eager’ to lend, the credit markets are fully functional or the economy is just fine? It is not possible as this guy is prime to lend to. Now, if a bank is not going to lend to him, which is a collateralized loan I might add, then they are not going to lend to a small business or consumers in general.

All of this points to much tighter credit and much higher unemployment coming soon. Especially since banks are dumping TARP as fast as they can because they do not want to be told to lend by the administration or they want that one last big payday before the whole thing comes down. Actually, my belief is that why wouldn’t banks not want to repay TARP since they know they could get it back anytime they want. Either way, banks do not want to lend and they are not going. No lending, no growth.