International Forecaster Weekly

The Rotten Underpinnings Of Our Financial System Exposed

Money supply narrows, troubled banks still on life support, debt and problems will cascade through bond and stock markets, little or no criminal charges against banks and other lenders who bought up toxic waste debts, political influence helps poor banks, profits dont stop Goldman Sachs from generous bailouts and debt forgiveness.

Bob Chapman | December 23, 2009

Last week the Dow fell 1.4%, the S&P 0.4% and Nasdaq rose 0.9% and the Russell 2000 1.7%. Cyclicals rose 1.4%; transports 0.8% as consumers fell 1.8%; utilities 0.9% and banks fell 2.1%; broker/dealers rose 0.5%, as high tech rose 2%; semis rose 2.9%; Internets 0.6% and biotechs fell 0.2%. Gold fell $2.00 and the HUI fell 3.2% as our government shorted the shares. The dollar rose 1.5% to close at 77.73.

Two-year T-bill yields fell 1 bp to 0.72%, the 10’s fell 1 bps to 3.54% and the 10-year German bund fell 7 bps to 3.13%.

Freddie Mac’s 30-year fixed rate mortgages rose 13 bps to 4.94%; 15’s rose 6 bps to 4.38% and one-year ARMs rose 10 bps to 4.34%.

Fed credit expanded $22.8 billion. Fed foreign holdings of Treasuries and Agency debt rose $4.9 billion to a record $2.949 trillion. Custody holdings for foreign central banks have expanded at a 17.9% rate ytd, and were up $450 billion over the past year, or 18%.

M2 narrow money supply fell $12.8 billion to $8.402 trillion.

Total money market fund assets fell $54.1 billion to a 23-month low of $3.26 trillion. This is very significant. Players believe Treasuries are safe. Are they in for a surprise! Assets have declined $561 billion ytd, or 15.2% annualized.

Distressed debt – defined as a bond trading at less than 50 cents on the dollar – is rapidly disappearing from US financial markets as yield-hungry investors push up the prices for even the most beaten-down securities.  Bonds trading at less than 50 cents on the dollar now account for only 1.1% of the high-yield market, or $8.9bn in securities, down from 27.5%, or $202bn in bonds, a year ago, according to JPMorgan data.  The intense demand for once-distressed bonds is stirring the debate about whether investors are acting wisely or piling into junk bonds because of a lack of opportunities elsewhere in the fixed-income markets.  With the Federal Reserve keeping its overnight lending rate near zero, the yield on a two-year Treasury remains less than 1%.  ‘The Fed’s zero interest rate policy has been a catalyst for billions and billions of dollars flowing into the high-yield market,’ said Tim Donohue, managing director for high-yield markets at JPMorgan.  ‘The government is holding down interest rates and, as a result, cash is chasing one of the few asset classes that still offers a healthy yield.’” [Our stance has always been never chase a yield. It always ends in loses.]

“Even as the biggest banks repay their government debt in what is being heralded as a successful rescue program, four troubled giants of the financial world remain on government life support. These companies, the American International Group, Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, they are in need of continuing infusions that make them look increasingly like long-term wards of the state. And the total risk they pose to the taxpayer far exceeds that of the big banks. All the companies have recently drawn new government money or are in talks to do so: Fannie Mae and Freddie Mac have used $112 billion of a total $400 billion pledge from the Treasury. Now, according to people close to the talks, officials are discussing the possibility of increasing that commitment, possibly to $400 billion for each company, by year-end. GMAC already has $13.4 billion from the [TARP], and has been in talks with the Treasury about getting up to $5.6 billion more. A.I.G recently drew $2 billion from a special $30 billion government facility, which was created in the spring after a $40 billion infusion proved inadequate.  Those capital commitments from the Treasury do not capture the full scale of government assistance to the companies. The government has also bought mortgage-backed securities and guaranteed corporate bonds, while the Federal Reserve Bank of New York has made an emergency loan. [It is called a rat hole.]

Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers. Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to First American CoreLogic Inc.

The three largest U.S. banks are preparing for a comeback in the market for collateralized debt obligations backed by high-yield, high-risk loans, two years after issuance tumbled when credit markets seized up.  JPMorgan… Bank of America…. and Citigroup… are approaching managers of leveraged loans to offer terms for new collateralized loan obligations following a record rally this year in the debt, according to people familiar with the discussions. The highest-rated portions of CLOs have climbed to 89 cents on the dollar from a record low of 69 cents in April. The $440 billion market for CLOs, which pool loans and slice them into securities of varying risk, largely disappeared at the end of 2007. [They never learn.]

We have to chuckle when the world is concerned with financial events in Dubai, Iceland, Latvia, Lithuania, Estonia, Romania, Hungary, Austria, Spain, Ireland, Portugal and Italy, when all of Europe’s and America’s banks are insolvent. Who is kidding whom? We cannot leave out the brokerage houses and insurance companies. We must admit that the Fed and other central banks have done a good job covering up the mess they deliberately created by deceiving the public, as they prepare for stage 2 of the credit crisis. The only way these companies can continue to “survive” is to continue to keep two sets of books. Decisions by the FASB and the BIS have guaranteed that the charade will continue unbeknownst to the public and professionals alike. We are long past moral hazard and into criminal enterprise. They will operate in a one-world of in reality until they all simply collapse. Each and every day their underlying assets deteriorate. Next to fall over the years 2010 and 2011 will be the stock market and bond market. That should expose the rotten underpinnings and bring about the demise of our financial system. The only question is will we look like Weimar, Zimbabwe or Argentina?

We still ask why has there never been any civil or criminal actions against the banks, brokerage houses, rating companies by foreign banks, fiduciaries and insurance companies, which purchased the toxic waste known as collateralized debt obligations? We have seen a handful of civil suits in the US; now two years after the fact. The action of these foreign entities, which purchased 60% of the garbage, tells us this was part of a large plan to take the world financial system down. These people are very bright; they had to be part of the plan. Next they will feel the sting of derivative failure and say nothing as they collapse. These events are fraud on a colossal scale. In the background making sure nothing real is discovered is the SEC and CFTC, agencies formed to protect banking, Wall Street and insurance from discovery of the frauds that they are. The frauds come one after another: Madoff, Dubai, all government statistics, such as housing, unemployment, CPI, PPI and on and on. All are events of fiction. A pabulum to keep the masses asleep. The birth/death ratio is a transparent fraud for all who care to look. Economists and the media cannot expose such chicanery, because if they do they will lose their jobs. Thus, the task is left to just a handful of warriors with the guts to expose the system. We might add at great personal cost. Not a word is spoken when every month the gold, silver and USDX options markets are rigged by our government with the help of Goldman Sacks, JPMorgan Chase, Citicorp and others.


Nobel Prize-winning economist Joseph Stiglitz warned there's a "significant" chance the U.S. economy will contract in the second half of next year, and urged the government to prepare a second stimulus package to spur job creation.

"The likelihood of this slowdown is very, very high," Stiglitz told reporters in Singapore. "There is a significant chance that the number will be in the negative range."

Stiglitz, a professor at Columbia University, called on Washington to make more funds available to state governments who face a drop in tax revenue.

The U.S. economy, the world's largest, must grow at least 3 percent to create enough jobs for new entrants into the labor force, he said.

The unemployment rate fell to 10 percent in November from 10.2 percent in October.

"If you don't prepare now, and the economy turns out to be as weak as I think it's likely to be, then you'll be in a very difficult position," he said.

The economy grew at a 2.8 percent rate in July through September, after a record four straight quarters of contraction.

U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.

Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan's Ross School of Business.

Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.

Political influence was most helpful for poorly performing banks, the study found.

"Political connections play an important role in a firm's access to capital," Sosyura, a University of Michigan assistant professor of finance, said in a statement.

Banks with an executive who sat on the board of a Federal Reserve Bank were 31 percent more likely to get bailouts through TARP's Capital Purchase Program, the study showed. Banks with ties to a finance committee member were 26 percent more likely to get capital purchase program funds.

As of late September, nearly 700 financial institutions had received bailouts of $205 billion under the capital purchase program, the study said.

The banking industry has long been criticized for using political influence to obtain bailouts.

Scott Talbott, a senior vice president with industry lobbying group The Financial Services Roundtable, said the study was skewed because it did not exclude nine of the largest banks that were "strongly asked" by the government to take bailouts.

Those banks included Goldman Sachs Group Inc (GS.N), JPMorgan Chase & Co (JPM.N), and Morgan Stanley (MS.N) -- all of which repaid their bailouts in June.

Bank of America Co (BAC.N) and Citigroup Inc (C.N) more recently announced plans to pay back taxpayers.

Talbott also noted that $116 billion has been repaid with interest.

"This demonstrates the banks were excellent stewards of the taxpayer's money," Talbott said.

But a watchdog for the government's bailout, the special inspector general for TARP, said last month that the broader $700 billion bailout program "almost certainly" will result in an overall loss for taxpayers.

President Obama said in October that despite the bailout, there was still too little credit flowing to small businesses. (Reporting by Steve Eder; Editing by Gary Hill)

Iran's Trade Promotion Organization has announced a near future plan to completely exclude the US dollar from the country's foreign revenues and reserves.

Iran has recently asked Japan to replace the US dollar with the yen in oil deals it has with the Islamic Republic, Mehr News quoted the organization as saying on Friday.

Since October 2007, Iran has received 85 percent of its oil revenues in currencies other than the US dollar and Tehran is determined to find a substitute for the US dollar for the rest of its 15 percent of oil revenues, the report added.

Iran suggests other currencies such as the euro and the United Arab Emirates' dirham to replace the US dollar for oil revenues.

The constant declining value of the dollar and persisting economic crisis in the US has forced many countries to drop the currency in favor of a more stable and valuable one.

Saudi Arabia, South Korea, China, Venezuela, Sudan and Russia have taken steps to replace the US dollar in their foreign exchange reserves.

[Now it is only a matter of time before the attack on Iran begins.]

National chain store sales continued to show weakness in December, falling 4.9% in the first three weeks of the month compared with November, according to Redbook Research's latest indicator of national retail sales released Tuesday.

The fall in the index was compared to a targeted 4.3% drop.

The decline came as consumers battled a blizzard to make their final shopping push for the 2009 holiday season, while Hanukkah came earlier this year. Earlier Tuesday, the ICSC/Goldman Sachs index of chain-store sales showed momentum slowed last week because of the large snowstorm, although they still grew compared with both the prior week and year.

The Johnson Redbook Index also showed seasonally adjusted sales for the period were up 1.5% from last year, compared to a targeted 2.1% increase.

Redbook said retailers are indicating that the finish to the holiday-shopping season will have to be considerably stronger than originally assumed to meet their targets. It added that storms and the lure of free shipping drove customers to shop online, as well.

The US Gross Domestic Product grew at an annual rate of 2.2% for the third quarter of 2009, coming in below more optimistic forecasts of 2.8%. 

Despite the disappointing results, the GPB climbed from -0.7% registered in the second quarter, and this quarter' reading was its strongest in almost two years.

In other data released by the US Department of Commerce, the Gross Domestic Purchasing Index grew 1.3%, ahead of predictions which had it holding steady at the 0.5% registered during the previous quarter, while the Real Personal Consumption Expenditures improved to 2.9%, compared to -0.9% seen in the second quarter. [It took 2-1/2 months to finally get the right GDP, or is it right?] First it was 3.5%, then 2.8%, now 2.2%. Was it really 0.5%? We will never know.]

One of the biggest challenges to ending the foreclosure crisis is this: A surprising number of homeowners who get their monthly payments reduced fall behind again within a year.

When borrowers get into financial trouble, lenders have several ways to help. They can offer grace periods, longer repayment schedules, lower interest rates or reduced balances.

INTERACTIVE: Tracking the housing market's rise, fall, rebound

But nearly 40% of homeowners who had their monthly payments cut 20% or more last year were delinquent again within a year, according to a report Monday from the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

With the economy still weak and employers continuing to cut jobs, "even if you've gone through a modification, your situation may deteriorate," said Fred Phillips-Patrick, director for credit policy at the thrift office.

That's an ominous sign for the Obama administration's plan to stem the foreclosure crisis. Lenders participating in the program have offered trial loan modifications to 760,000 eligible borrowers since it was launched in March. As of last month, just 31,000 of them had been made permanent, which requires at least three on-time payments and proof of income. Nearly the same number had dropped out of the program or were found to be ineligible.

The meager success rate means the $75 billion program may bring little relief to struggling homeowners. A record 14% of homeowners with a mortgage are either behind on their payments or in foreclosure. And that affects many more homeowners because deeply discounted foreclosures are hurting property values in many parts of the country, especially Arizona, California, Florida and Nevada.

But regulators on Monday pointed to some encouraging signs among loans modified from April through June of this year.

About 20% of those borrowers had missed at least two out of three payments. That's far better than the track record of loans modified during the same three months a year earlier. About 35% of those borrowers were delinquent within three months.

The report also found that lenders completed about 31,000 short sales — ones in which the sales price is lower than the mortgage balance — in the July-September quarter. While that's up 22% from the prior quarter, lenders foreclosed on nearly four times as many homes.


Taxpayers to help with the rent at Goldman’s new office tower | Raw Story

As if billions in cash and government guarantees wasn't enough, it turns out investment bank Goldman Sachs will also be sucking on the taxpayers' teat when employees move into their slick new digs at the corner of West and Vesey in Manhattan next year.

The New Goldman Sachs World Headquarters -- a 43-story office tower next to the World Trade Center site -- is being built with the help of millions of dollars from taxpayers, Bloomberg news service reports.

The company that has been the focus of populist anger since the TARP bailout last year took advantage of programs the government set up to revitalize lower Manhattan after the 9/11 attacks. Setting up shop next to the WTC qualified Goldman Sachs for $49 million in "job-grant funds, tax exemptions and energy discounts," Bloomberg's Christine Harper reported.

Additionally, because then-Goldman Sachs CEO Hank Paulson raised concerns about security at the site, the city and state gave the construction project an additional $66 million in benefits. And the investment bank was also allowed to sell tax-free some $1.6 billion of Liberty Bonds -- bonds created to fund the effort to rebuild lower Manhattan. That allowed Goldman Sachs to avoid taking out a commercial loan for that amount of money, saving it an additional $175 million over 30 years, according to the Bloomberg report.

The New York Daily News reported earlier this month that the city of New York forgave Goldman Sachs about $161 million in lease payments the company would have had to make on the land where the new 43-story office tower sits. Under the agreement between the city and the company, Goldman doesn't have to pay the lease if Ground Zero remains empty.

Bloomberg reports that Goldman Sachs in on track to make $11.4 billion in profit this year, nearly tying its all-time record of $11.6 billion in 2007. In last year's bailout, the company received $10 billion in cash, had $30 billion of loans guaranteed by the government, and was re-classified as a bank holding company, which allows it to borrow cheaply from the Federal Reserve.

The new Goldman Sachs tower has been a headache -- and a hazard -- for New Yorkers. In December 2007, an architect was paralyzed when seven tons of steel fell off the building. Late last month, glass falling off the building shattered in the streets below and snarled traffic for hours.