Oh, wait, criminal charges may be filed against BP, but the crooks and liars from Wall Street are just fine. Is it me or do you see the supreme hypocrisy around this whole situation? BP is doing everything under the sun to correct its wrong, I know, it is not enough, but nevertheless they are paying people who lost their livelihood, paying for the cleanup and doing everything in their power to stop the flow of crude from the well and they may face civil and criminal charges. However, the banks, ratings agencies and other related crooks who bilked trillions in bailouts from governments, i.e. the taxpayer, that is you and I, on fraudulent loans and bonds are getting bonuses.
What is going on? What is the difference between BP and Goldman Sachs? Well, for one thing it is the money. Wall Street, collectively, gave Obama $23M in campaign contributions in 2008, the most out of any candidate running in the series that year. Compare that towards the oil and gas industry and it really just does not compare at all, Wall Street has the cash and if you think that has nothing to do with it you are naïve or blind to the hard facts of life. I am not saying BP, which as of yesterday I am a shareholder of, did nothing wrong, but they hardly blew up the financial system and drove millions out of jobs, their homes, blew up retirement plans and the list goes on, but Wall Street did all of that.
Where are the kangaroo trials for Wall Street? Where is that change I can believe in? I do not see it. I see the green lobby getting their kangaroo trials, but not the American people who lost trillions. We got Bernie Madoff which is not exactly a shining example of government efficiency as a whistle blower tried to turn him in 10 years ago, but other than that we got nothing other than an exploding deficit. The bankers got their bonuses last year, actually, if you think about it, they got their bonuses in 2008 as well and were really not impacted at all by the financial crisis in the least. Sure, some lost their jobs, lower level people, but not the main players who made it happen and they are still making millions a year.
The ratings agencies are still doing what they always do, rating paper on fantasyland assumptions which are far from reality and there is zero reform going on there. Goldman is going whatever Goldman does, perfect trading days for all of 2010, how does that happen? Citi is getting right back into the game of packaging and selling CLO’s again, more garbage to go into your mutual fund, how exciting! Yet, Chuck Prince still has his millions, John Mack still has his millions, all the executives at Lehman are still wealthy, same at Bear Sterns, but what about their bond holders and shareholders? What about Repo 105?
Give us 1 freaking show trial! Instead we are getting BP under investigation, great. I am sure the granola kids will love that show trial, but for those of us who actually pay taxes, work and actually show up to vote, well, we are mad and want some Wall Street heads on a platter still. Preferably Lloyd’s, but I will take John Mack’s just the same, I am not picky.
Since the meltdown last year much attention has been paid to how rating agencies determine the difference between AAA and junk paper. In a nutshell, and as you already know, the agencies gave AAA ratings to paper that was literally worthless and according to several books I have just read it is clear that the agencies had no idea how these debt instruments actually worked, I am referring to CDO and asset backed paper. Therefore, I humbly submit this new, simplified, rating system to the SEC and the ratings agencies.
My rating system will clear up any confusion as to the safety of the bonds you buy and investors will be fully aware of the risks. I am confident my recommendations will be turned down because the last thing Wall Street wants is transparency or to give the average (or institutional for that matter) investor a shot of actually understanding the risk they are assuming when they buy fixed income. I mean, what kind of fun could we have if AAA rated paper was actually safe? I am assuming Wall Street likes the fact that they can game the system and make total junk into AAA, which is exactly what they did with ABS. The last thing they want is for investors to make money because that would mean there is less money for them to make, right Goldman?
So, here is my proposed rating system:
AAA – Will now will be called “we think you will get your money back”
AA – Will now be called “we are somewhat confident you will get your money back”
A – Will now be called “you probably will not get your money back”
BBB – Will now be called “crappier”
BB – Will now be called “total crap”
B – Will now be called “are you freaking serious?”
CCC – Will now be called “what, do you hate your money?”
Unrated – Will now be called “there is a sucker born every minute, congratulations you are the sucker”
After reading so many stories about the financial crisis there is one thing that is consistent, regardless of who is telling the story or what context that story is being told, the ratings agencies had no idea what they were doing. In fact, in The Big Short, I highly recommend that book, there were several accounts of money managers talking to the ratings agencies and they said they were totally clueless. They went on to say that their models could not even calculate negative returns, how is that possible? No one at the biggest agencies had any idea how CDO’s or asset backed securities were created. They had no interest in looking at the makeup of what was sub-prime and what was not. They never looked at individual loans and instead used an “average FICO score,” how could you give a AAA rating when you did not look at the instruments backing the bond? These agencies are clueless and they still have no clue.
Sure, they are now downgrading this junk paper, 2 years later, but where were they when defaults were at 4-5%? This is why I am confident that the U.S. and the U.K. will keep their AAA rating right up until the day these countries are in receivership. After all, past actions do dictate future results. For example, Did AIG keep their AAA rating pretty much right up until they were acquired by the government? How about Freddie and Fannie, by the way there was never a government guarantee to this debt, it was merely implied, read a prospectus if you don’t believe me, did they not keep a AAA rating until the end? Then there is Executive Life, an insurer in the early 1990’s that collapsed with the help of Michael Milken’s junk bonds, which kept their AAA rating right until they were in receivership. Executive Life was downgraded only after receivership.
These firms cannot foresee risk or rate risk properly. After lawsuits were filed these firms defenses revolved around “free speech” and not around actually rating risk. Seriously? They now admit that one needs to do their own research and not trust their ratings alone. This must be news to all the insurance companies or pension funds that can only invest in A to AAA paper only. What they are telling you is that their ratings are not real and must have been always been fake. So, how can you trust their ratings on such things as sovereign debt? One simple question, do you think the U.S. will ever actually pay off its debt, all $12T worth of their debt? Not a chance, but they keep the U.S. at AAA and that is why their ratings are a joke.
P.S. – Sorry for the bad attempt at humor, come on, I am a geek, what do you expect?
In a story from the New York Times Goldman Sachs is at the heart of yet another financial crisis, Greece and some of the other PIIGS. The firm, apparently, helped Greece raise a substantial amount of money secretly in order to avoid the EU from knowing the country was violating the debt to GDP ratio. While I am not a regulator and my opinion is worth whatever the reader thinks, in my opinion Goldman, the Vampire Squid, is guilty of several EU rules and should be banned from doing business in the Euro Zone. The firm should also disgorge all fees paid to them for helping Greece bamboozle the world.
Goldman clearly suffers from a lack of a conscience and needs to attend business ethics training, although if you need to learn about ethics chances are you simply have none, as they clearly would sell their soul for a few million in fees. I agree that Goldman Sachs probably has the best f the best working for them, but that does not excuse the fact that, apparently, the firm helped a country violate rules and hide their reckless spending. At the core of the problem is also another familiar financial product, derivatives.
Apparently Greece, in order to keep spending, also sold their rights to airport landing fees, roads and lottery revenue in return for short-term money upfront which lowered their deficits in the near-term. Many of these deals were done in the early 2000’s which begs the question, what else is Greece and, apparently, Italy hiding? It also begs the question of what else has Goldman been up to? We know that Goldman went to Greece to help with a solution to their problems, which means kick the can down the road while sucking the remainder of Greece’s blood, but Greece said no to their plans.
Unfortunately, the story about Greece seems to be getting worse and worse as more details come out. As more of the story comes out I have a feeling we will learn more about Goldman’s and JP Morgan’s involvement in this deceitful tale. One also wonders if the US has also participated in such shenanigans as well. At this stage of the game, with the close ties Goldman has with Treasury, would it really surprise anyone if the US engaged in idiocy like the Greece government?
What is most disturbing about this whole story is the fact that Greece basically sold off their public entities to a firm like Goldman and JP Morgan. Essentially, those public utilities, which is the best description of what Greece gave as collateral, revenues would go to these banks. Along with that disturbing piece of financing news we also find out that if Greece takes a bailout the population will be forced to give up part of its sovereignty as well. How would you like to be a citizen of Greece knowing your Politian’s sold your sovereignty out in secret to private banks and now to the EU.
If there is a moral to this story it is why is Goldman allowed to exist at all? They clearly provide no real value to society or even governments as they made it so Greece could sell worthless bonds to foreign governments. This is also the second time the world is witnessing a credit crisis with a major US bank, Wall Street if you will, creating the mess or at least adding to it. Goldman and JP Morgan literally threw gasoline onto the fire in the case of Greece and, perhaps, Italy as well. How can we trust a firm who consistently knows how to make money for themselves, but screw everyone else? At the end of the day, why should Goldman exist at all?
Today was packed full of economic data that was less than impressive and in some cases downright scary. As you already know GDP, as predicted, was restated down to 2.8% and is likely going to be pushed further down again by the time we get the next report. Most say that the GDP revision is no big deal because it is looking in the rearview mirror, but I see it as a big problem as the market was pushed up dramatically based upon that report and many hailed the recession over based on that number.
The reality is that the revision down shows, with absolute clarity, that the economy is weak and without the governments support we would have pushed a negative number. I will say the number would have been relatively flat, somewhere in the -.5 to -.1%, but nevertheless very much anemic and not reflective of this so called V shaped recovery. The consumer is also in rough shape and the consumer confidence number was certainly nothing to write home about, but hey let’s not let the facts get in the way of a great recovery story.
The housing data was very interesting especially if you like month old stale data, but the widely watched Case-Shiller Index was up a whopping .3% which gave everyone a reason to cheer this morning. Of course it is widely known that the reason for the increase was because of distressed home sales and the tax credit. That housing data was on top of the huge, seasonally adjusted, data on Monday showing a 10% jump in sales, but again it was seasonally adjusted and the jump was because of, guess what, distressed sales and the first time tax credit. I know, the tax credit was renewed and expanded which I am sure will do wonders for the estimated 25-35% of existing home owners who are underwater in their existing mortgages and the 17.5%, U-6 report, unemployed or underemployed in America, not to mention the 50% of Americans worried about losing their jobs or having their taxes hiked to unspeakable levels. Again, let’s not let the facts get in the way of a great recovery story.
The Fed minutes were released today, nothing too shocking in them, but the mere fact that the Fed is not willing to remove its balance sheet largesse or raising interest rates should be a huge red flag for everyone, but apparently it is not. I happen to agree that there is no immediate inflationary threat, I say that with some apprehension as oil and other commodities do indicate some inflationary pressure, I would not expect any interest rate hike for some time into 2011 or ever. Given our countries debt load do you really think we could ever raise interest rates? I don’t think so. We have $12T in total US debt, treasurydirect.gov which is counting backwards now for some reason, and out of the $7T in treasuries some $2.8T comes due next year.
Add another $1.4-$2T in new deficit spending, plus the next new stimulus to be announced soon, and the US has to raise some $4.8-$5T in debt next year, not including refunding. Based on that number and the current interest rates at 2.4%, or so, we cannot afford to raise interest rates because the debt service costs would cripple us and we are having a hard time placing longer term treasuries, just watch the auctions for proof. That means we will constantly have to be issuing new deficit debt at shorter maturities and rolling our old debt into <10 year treasuries. Soon we will have to be rolling $8-9T a year in new and old debt every year and that means we will not want to be paying a lot of interest on it. Even though the Fed is “independent” from political influence, which it is not (see quantitative easing for proof), it is my contention that it has been told that it has to keep rates low forever. Well, maybe they weren’t told, Ben is no dummy after all, it is really just a math thing.
This leads me to believe that the dollar will probably stay weak for sometime into the future, like forever. I do think that we will see a spike in its value in the near future simply because it is oversold and the global economy is not that rosy, see China and the bubble talk from leading real estate moguls. If China does pop, which it probably will, then the dollar will see its day in the sun for sometime leading equities lower, commodities lower and treasuries higher. As I have said for some time now, stocks, bonds and commodities cannot all be right yet they are all going up at the same time, that is not a good sign, sorry.
Longer term the dollar will go much lower and here is the really scary thing, the Yen is outperforming the dollar. Japan has lower credit ratings than the US, they have an older population and higher debt to GDP ratios, but we are following right behind Japan fairly quickly in all categories. Based on that information how in the world can the Yen be doing so well, comparatively, to the USD? That should worry people, but it does not. Mish Shedlock actually foresees a crisis in the Yen before the USD, but if that is the case why is it doing better than the USD? Mish is no dummy and I hold him in high regards, but the signal I am getting is that we are in bigger trouble than Japan. I base that on a few facts, they save money, are net exporters and creditors, we do the exact opposite. Therefore, if the dollar strengthens and commodities get hit, buy gold heavily.
At the rate the US is going we are heading for fiscal disaster and we have an increasingly bolder President and Congress who seem to endorse the bankruptcy of the republic. The previous administration is equally as guilty as they did not see a spending bill that they did not like either, but the primary difference is we were promised changed, transparency and real change. We received none of what we were promised and from my vantage point the economy, which is what Americans are really looking at, is getting worse not better.
In my neck of the woods Penn Traffic just went into chapter 11 and will promptly be firing 5,000 people, they were a grocer so go figure that a grocer went out of business, and Adidas is moving 100 jobs out of this area for foreign shores, those are not green shoots. Only now does the government decide to make jobs a top priority, but I thought that is what the $797B stimulus bill was for? I guess I misunderstood what they were saying when they passed that bill at the dead of night on that Friday in February. Never fear though as the government is here to save the day with another estimated $500B jobs bill that will more than likely be passed in early January 2010, just in time for the BLS announcement of the overstatement of some 800,000 jobs between January and March of 2009.
My point is that is things were truly better than we would not even be having this discussion. Unemployment would not be climbing towards 11% and firms like Johnson and Johnson would not be trimming their work force by 6%. The Federal Reserve would not be keeping rates at 0% and continuing quantitative easing, which is monetizing the debt no matter how you cut it.
Foreclosures would not be increasing and the mortgage modification programs would not be failing, see CNBC Reality Check for the story how people still fall behind after they modify their mortgage, the FDIC would not be in the red by $8B, there would not be 550 banks on the FDIC troubled bank list (an increase of 140 banks since last quarter), banks would not be worrying about bringing on off balance sheet SIV’s into the light, and the Fed would not fear anyone looking at their books. If all were fine, none of those things would be open for discussion, but they are and we are talking about them. As I have also said many times before, it is a year later and what has really changed? Banks still hold the same bad debt on their books, but the accounting rules have changed, that’s it and everything else is the same which means we still got major problems.
Maria Bartiromo just uttered those words on CNBC. Clearly, she has nothing to worry about with a boom and bust economy since she really never has to worry about losing her job. In fact, that very job security is perhaps why CNBC has little regard for the effect markets have on ordinary people. It may also explain why they are always bullish, even when they are clearly wrong, because being bullish is more fun for them.
Maria, here is what is wrong with a boom and bust economy, in the real world, which I pulled from CNBC.com; “It’s home to Disneyland — “the happiest place on earth” — but deputies enforcing home evictions in Anaheim find mold, backed-up plumbing, marijuana crops, abandoned grandparents and the occasional suicide.”
Do you get it now? I am sure you don’t, but maybe, just maybe you will.
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