Monday, March 30, 2009

Where Has All the Money Gone?

The world has gone mad today,
And good's bad today,
And black's white today,
And day's night today . . .
Anything goes.

-Cole Porter, "Anything Goes"

Shortly after Barack Obama gave an interview to the New York Times in which he confided that Team Obama pays no attention to bloggers, the blogger barbarians are at the gates of the castle of Big Finance.  This time, they have the law with them.  It has now been revealed that NY Att'y Gen'l Cuomo is squeezing BofA's CEO Ken Lewis; BofA has been sued for enabling the alleged Cosmo scam on Long Island; and now it appears that the law is coming down on AIG, initially in the person of Joseph Cassano, who ran the AIG Financial Products division that (in) famously sold credit default swaps (i.e., insurance against bonds defaulting) without reserves. And so on and so forth.  As with Watergate, the revelations are beginning to cascade.  Perhaps people will reflect that Bernard Madoff was not just some scamster but was a founder of the NASDAQ, a major player in it, and that the NASDAQ per se largely functions as a scam from the standpoint of the average "investor".  And why are Citi and BofA reported to be buying broken CDOs at 30 cents on the dollar while carrying them on their books at 80-90 cents?

Why does Chris Whalen of the Institutional Risk Analytics, who testifies before Congress and does business in the financial arena in America, say in a post this week that:

 As we said of Mexico two decades ago, Americans now live in a Mafia State that is beyond control.
Our political class is entirely captive of Wall Street, the result of decades of corruption and moral decay. Our nation's capital is controlled by a criminal gang that masquerades as an elected government. . .

"Based on our projections and channel checks, we think that maybe the Fed staff got it wrong and put down the likely loss rate instead of the fanciful LT recovery rate embraced by Bernanke, Geithner and Summers. Truth is, the LT recovery or "Loss Given Default" (LGD) rate experience of 20-30% (which are the LT LGD rates used by Moody's, S&P for internal loss rate projections) are holding true in this cycle as in previous economic downturns and may actually be optimistic compared with the actual realized loss."

With most of the RES and CRE collateral we see in the channel trading in the 30s, it is only a matter of time before the markets force Bernanke, Geithner and Summers to abandon their desire to subsidize the large, insolvent banks and finally embrace liquidation. As we told our friend David Kotok at Cumberland Advisers, just remember to buy the bonds, not the equity, no matter what investment situation you may be considering during most of 2009. In the current environment, be a creditor, not a shareholder.

DoctoRx here.  Now that financial company insiders have been able to both sell and short-sell more stock at inflated prices after the last manipulated rally, the truth comes out.  The CEO of Morgan Stanley is reported yesterday to say to his employees that 2009 will be tough, and in the last fewdays Tim Geithner has said that the banks are not in fact all that well-capitalized, a fact supported by the CEOs of BofA and JPMorgan Chase.  And as far as the bonuses go, not to worry, as predicted here recently:

Bank of America May Raise Investment Bankers’ Salaries by 70% 

By Jacqueline Simmons and Josh Fineman

March 27 (Bloomberg) -- Bank of America Corp. plans to increase some investment bankers’ salaries by as much as 70 percent following the takeover of Merrill Lynch & Co., people familiar with the proposal said.

Bank of America, which has received $45 billion of taxpayers’ money, may raise the annual base pay for some managing directors to about $300,000 from $180,000, said the people, who declined to be identified because the final numbers are still under discussion. Salaries for less-senior directors would climb to about $250,000 from $150,000, and vice presidents would get $200,000, up from about $125,000, the people said.

“We regularly review our compensation programs,” Bank of America said in an e-mailed statement. “Such a review is particularly appropriate during such challenging times. While various alternatives are being considered, no decisions have been reached.”

DoctoRx here:  The anonymous Email is an obvious lie.  The only non-decision may be the exact salary numbers.

Adjusted for inflation/deflation, the stock crash of the last 17 months is worse than that of the Great Depression at the same time frame, and the same things are happening.  Spain is in deflation, with an unemployment rate of 14%; its Prime Minister said the unemployed may as well just f--- because there's no work to be had.  Mish at has two recent posts, one about banks walking away from foreclosures because the properties aren't worth foreclosing on; and one on cities abandoning parts of their own municipalities and shrinking.  The accounting standards board, FASB, is revealed to be a bunch of lap dogs.  Last year, it refused to implement its rule requiring the Citis of the world to take on-balance sheet their SIVs, providing a pitiful non-reason for its reversal.  Now we have:

 Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes 

March 30 (Bloomberg

Four days after U.S. lawmakers berated Financial Accounting Standards Board ChairmanRobert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.

The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of writedowns they must take on so-called impaired investments, including mortgage-backed securities. A final vote on the resolutions, which would apply to first-quarter financial statements, is scheduled for April 2.

FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania. Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements.

Officials at Norwalk, Connecticut-based FASB were under “tremendous pressure” and “more or less eviscerated mark-to- market accounting,” said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. . .

Please review the first paragraph immediately above.  Bloomberg says that this rule change would "improve profits" at Citigroup.  WRONG.  It would improve reported profits.  Economic profits cannot be changed by an accounting change.  Who will be fooled by FASB's supine behavior?  Only the small investor, that's who.

The noose and the cops are closing in on the Establishment.  Newsweek's pitiful attempt to smear Paul Krugman went nowhere.  Felix Salmon at reported:

Newsweek's Fearful Krugman Profile

Evan Thomas has a profile of Paul Krugman on the cover of Newsweek. The 2,825-word article has six on-the-record quotes about Krugman; none of them -- not even the one from his mother -- are particularly flattering. No one is quoted saying a single nice thing about Krugman's economics or his opinions.

Salmon got it right with his title.  Newsweek and the Establishment are afraid of the truth.  While DoctoRx and Dr. Krugman have different political philosophies (big vs. small government), Dr. Krugman believes in "speaking truth to power", as his party liked to say when they were out of power.  As this blog has noted on numerous occasions, Dr. Krugman has been critical of Barack Obama's economic policies before Mr. Obama became President Obama.  

One can pick one's preferred time of when things went seriously, structurally wrong.  The Left goes back to Reagan.  I would more simply go back to the Asian contagion, when the average U. S. stock peaked around 1997-98, but the bubble was then perpetrated.  Ever since then, bubbles have been blown and burst.  However, there are now no bubbles left in the stock market, as all stock groups are in well-defined downtrends, and forget about real estate.  Only gold and Treasuries/government mortgage-backed securities are in defined up-trends.  One suspects that that's where the big money has been flowing, as the public continues to disbelieve that these markets are toppy. Even the ad for gold in the Super Bowl was for the public to sell its gold, not to buy it, and thus did not signify a top.

Some major unanswered questions include:  

1.  How will the financial fraud on the public, which is well on its way to being revealed for all to see and is thus coming to a climax, be resolved;

2.  In the midst of the worst financial crisis since the 1930s, how did America get as President the single least experienced President in its modern history, whose political career most resembled that of Robert Morse in "How to Succeed in Business Without Really Trying"?  (Remember the song, "Oh, I Believe in You . . .?);

3.  How much wealth will be/is left after all that has been looted by the banksters  and the insider/CEO has been revealed;


4.  Where have the looters been stashing their gains?

For individual investors, their pecuniary interest is actually most importantly revealed by #4.  This is where technical analysis, with trend-following rather than assuming reversion to the mean, may help.  After all, if you're a looter, your wealth has to be somewhere.  It's not logical for it to be sitting in T-bills just waiting for stocks to bottom "tomorrow" if you know that you and your ilk have appropriated for yourselves more than the public can imagine.  If it's in T-bills, it's to protect capital against deflation; in deflationary bananas, stocks have no bottom.  Back to Whalen:

"As global deflation proceeds, those with cash shall be king . . ."

This could be the financial equivalent of Watergate, and potentially more consequential.

Copyright (C) Long Lake LLC 2009

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