The Fed's Plan - Rumors of News

Go back a week to an article in the NY Times (Link). The guts of this story is that the Administration is working on a plan to Re-Fi residential mortgages on a massive scale.

When I first read this, I ignored it. The scope of the proposal was too large. There was also (IMHO) a fatal flaw. The thinking was that the jumbo ReFi would be made available to only those who had a mortgage that ended up with either Fannie or Freddie. I ask the question, "What about those poor odds and sods who have a mortgage with a community bank?” Do they get nothing while those who owe F/F big bucks get a break? Where is the fairness in that result?

But every day since the NYT story, I have heard the rumblings about some deal being done. It has already impacted MBS spreads. It's back in the news today with an article in the WSJ. (Link) I have to believe that where there is smoke, there is probably some fire.

I went back to the NYT piece. There are some clues. First is that Louise Story wrote the article. She is a fine reporter. Anything that she says has been supported by “real” sources. "Who were these sources?" is a question to ask. Some words from the piece:

Administration officials said on Wednesday that they were weighing a range of proposals.

Read this to mean that people in the Administration deliberately planted this story. This was a “trail balloon” approach. This is very typical for this administration. They leak their intentions in advance. More from the NYT:

But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year.

The following chart was included in the NYTs article.

The information in the chart and the very precise estimate of “85 billion a year” can only have come from one source. It has to be the FHFA that is doing the talking to the NYT. It had to come from the most senior level. That HAS to mean that it came from the Acting Director, Edward DeMarco.

The NYT functionally confirmed the source of the article as DeMarco with this written quote from him:

“F.H.F.A. remains open to all ideas that provide needed assistance to borrowers” while minimizing the cost to taxpayers, Mr. DeMarco said in a written statement.

Now consider some of the wording in the WSJ article today. Note: This article was written, in part, by Jon Hilsenrath. Jon is well known to be a mouthpiece for the Fed. He gets his thinking directly from Bernanke. Some quotes:

There are several reasons why refinancing has been weak, say Fed officials.

Some Fed officials say that it would be in Fannie and Freddie's financial interest to allow borrowers who are current on their mortgages to refinance at lower rates because it would increase the likelihood that they won't default.

Officials at the Federal Reserve are frustrated that they've pushed interest rates to the lowest levels in decades and yet many borrowers haven't been able to take advantage.

You can take these quotes to the bank. They are from Bernanke. It is Bernanke that is frustrated that his low interest rate policy has not resulted in more ReFi’s. You can also take as a fact that Bernanke wants something done on mortgage relief.

One other fact in the picture. The new IMF head, Christine Lagarde, spoke on the phone to Obama before her speech at Jackson Hole. She must have told the Big O that a program to clear up America’s mortgage mess was her top priority. She made that very clear in her speech the following day.

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Okay. Put these pieces together. What do you have? Assume for the sake of discussion that the President does announce a major new initiative to ReFi F/F mortgages. Assume further that the cost of the millions of ReFi’s would come from existing sources (the $35b of already issued and funded Hope Now Bonds), or better yet, the costs would be crammed down the neck of the banks who are servicing the loans (necessary to get DeMarco to go along). Say, for the sake of discussion, that the targeted mortgages are those who have not yet defaulted, but are desperately in need of a break. That amount would come to about $1.4 Trillion. This is a very big amount. Assume finally that the new mortgage rate would be about 4%. This (if accomplished) would be a very big shot in the arm for the economy as a whole.

Now do a flow of funds for this mega transaction.

I) Homeowners get a new loan at 4% and payoff 100% of the old mortgage.

II) The servicing banks get the proceeds and pay off the old loan.

III) The money is paid to F/F. This money is used to redeem existing mortgage pools of Agency MBS.

IV) Fannie/Freddie have the same asset mix at the end of the day. They still need to finance the new 4% mortgages they are writing.

V) Fannie and Freddie are taking on substantial new risk as they now have a book of 4% mortgages and are much more at risk to rising interest rates.

VI) It takes 90 days for a new mortgage to become a new Agency MBS. During this period F/F warehouse these loans. They finance the warehouse with short-term debt. They take action to reduce their risk by entering into new swap transactions or by buying derivatives to neutralize the market risk.

VII) As the process goes on huge chunks of EXISTING higher coupon MBS are prepaid. Investors in those MBS securities will be forced to re-invest the proceeds.

So who is going to be the biggest recipient of the cash pre-pays? That’s easy to answer. It’s the Federal Reserve. They currently own 1.0 Trillion of Agency MBS. A very substantial portion of the total prepayments of F/F MBS will be paid to the Fed. The Fed’s balance sheet will shrink very rapidly as a result.

The Fed has already established what will happen when principal is prepaid on their holdings of MBS. The have said they will reinvest any proceeds back into new purchases of US Treasury securities. As this chart of the Fed’s holdings show, this has already happened to the tune of $250 billion. The new proposal for the mega ReFi will dramatically reduce the MBS holdings. It will force the Fed back into the market to purchase big amounts of Treasury bonds. This process will take at least a year. But the total amounts could easily exceed $600 billion (QE2 size).

There is a flaw in this logic. On a macro basis, total mortgages loans remain the same. This is only a re-pricing. Not a reduction of total debt. The reality is that the Fed will be buying more treasury bonds, but F/F will have to be selling new bonds to protect themselves against interest rate risk. What will be happening is that the Fed is buying to reduce interest rates while at the same time F/F will be buying protection in the form of swaps, options and new term funding. So the real consequence to the credit markets will be a wash.

There is one solution to this dilemma that achieves the desired outcome. The Fed could easily enter into the swaps/options with F/F to eliminate their basis risk. Think of this as a different version of “Operation Twist”. The Fed wants to reduce long-term interest rates. It does not matter to them if they do it with direct purchase of bonds or if they absorb future interest rate risk by writing derivatives that would neutralize the market impact.

The Fed can’t write $1 trillion of interest rate swaps to the street in order to achieve this objective. There would be far too much counter-party risk for the Fed to do this. But they have no counter party risk with F/F. At the end of the day F/F is the government, so the Fed can say they have no counter-party concerns. The bulk of this would be financed by F/F in short-term markets. The swaps and options with the Fed would alleviate the market risk they would face from the ReFi’s.

Who would be AGAINST this plan? No one that I can think of. DeMarco would be able to say that the plan protects the taxpayers from future losses. Obama would say that he has created a new stimulus of $85 billion a year. Bernanke would love this plan. He would be “Forced” into buying a new big amount of Treasuries. He would have his excuse for QE3 handed to him. That the Fed would be forced to absorb new risk of loss to rising interest rates is of no concern to the Fed. They are in so deep today, another $1 trillion of notional risk would not change the picture. Keep in mind that the Fed is very anxious to pull the next trigger.

Who would be the sources of SUPPORT for a plan like this? Everyone but some Republicans is the answer. DeMarco (FHFA) would get what he wants. Obama would get what he wants (10,000,000 homeowners would love him). The economy WOULD benefit from this as consumers would have new cash in their pockets. Bernanke would get everything he wants (a new QE), and would have the political cover for his efforts.

The only voice of dissent will come from Republicans in the House. But it is very likely that this could all happen without a vote. From the NYT piece:

The idea is appealing because it would not necessarily require Congressional action.

There are too many pieces of this pie to ignore. This is a solution to problems that are both political and economic. I see no significant opposition. Republicans will scream “foul”, but who cares. This can happen over their objections.

I'm looking for something along these lines to be announced soon. It will come in the President’s upcoming speech. None other than Ben Bernanke will be the biggest supporter. That makes it a very feasible outcome.


Will this work? I’m not convinced. I think this is the ultimate "kick the can down the road". But that is the only strategy that is in place today. Delay the inevitable; win the next election. That is the only thing that matters in D.C.
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Rumors, rumors and more rumors

Government investment disaster in the works??

Update:

Solyndra has gone bankrupt. 24 hours after I wrote this article. This is a very big deal for Obama!

Link to the Bloomberg story on the bankruptcy (Link)

Read on for my thoughts re: Solyndra before this news:

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Solar stocks have been a terrible investment over the past few years. Some of the big public names have been hammered.

FSLR = -65%

LDK = -88%

ESLR = -100%

SPWR = -88%

Bloomberg had a story today on this. The bottom line:

The solar-equipment industry is beginning a consolidation that’s already the biggest in at least two years as plunging prices for photovoltaic systems force weaker companies to team with competitors or close shop.

From personal involvement I can add a bit of “color” to the story. Both China Inc. and Euro Inc. solar panel manufactures are willing to provide 100% of the financing (including “soft” costs) for a viable project. What better evidence could you find that there is a very big imbalance of supply and demand?

The fundamental issue is that solar panels are a low tech. commodity product. It’s very difficult to make a buck when that is the case.

These points all lead me to wonder about a big company in this space, Solyndra. This is a private company. I don’t have any financials to look at as a result. Neither do you. But you should, this company is heavily indebted to Uncle Sam.

There was a big announcement at Solyndra the other day. I think that this is a sign of some problems. This from August 19th:

Mr. Gronet was the CEO and Chairman of Solyndra. He was also the founder. He is Ex AMD. When he left in 2005 he had money in his pocket. That (and some VC money) was the capital that got Solyndra going.

It sure strikes me odd that he would be leaving right now. There has been no replacement named. That strikes me odd too.

As I said, there are no current numbers to look at. Solyndra tried to go public back in June 2010. There was a “Red Herring” stock prospectus that was circulated. There was no interest in the deal so it got pulled ("Unfavorable market conditions" was the excuse given) The SEC registration statement (S-1) for the proposed deal was also pulled from the public.

What was in the prospectus was, no doubt, the real reason that investor chose to take a ‘pass’ on the deal. There were revenue/expense numbers for the nine months preceding the proposed deal:

Revenue: $58.8mm

Cost of Goods Sold: $108.0mm

That is an absolute complete disaster. This is a low margin business to begin with. At Solyndra they were losing 84 cents for every dollar of sales. Adding in SG&A and CapEx the losses and cash drain had to be very heavy.

Of course, that’s just me guessing. I repeat, there are no numbers on this company. And that is the crux of the problem. There should be numbers available to the public. After all, the company has been financed by the Department of Energy for years. To make it worse, the funding has come from the Treasury Department’s own private bank. The Federal Financing Bank. Solyndra’s out-standings with the FFB/DOE as of July totaled $530 million. The rates for these advances are clearly subsidized. Consider the interest rate on this $2.5mm loan.

The pattern of subsidized financing is also clear from the FFB reports from January through June 2011.

You would think that with all this money and all these question marks someone in D.C. would be looking into all of this. There actually has been an effort to uncover some facts. But it went no place at all.

On June 27th the House Energy and Commerce Committee held a hearing. On top of the agenda was Solyndra. Jeffrey Zients (Office of Management and Budget Deputy Director) failed to show for the hearing to discuss OMB's role in the Solyndra DOE Loan Guarantee process. He sent a letter saying he had a scheduling conflict. A scheduling conflict? Give me a break!

Of note were the comments by the Chair of the committee, Cliff Stevens (R-Fla) who said that if the OMB refuses to comply in the coming weeks he would issue a subpoena to force disclosure. While I’m not holding my breath for this to happen, a showdown on Solyndra is coming. Keep in mind that the Boss/Owner (Pictured with O) just took a powder a few days ago.
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Side Notes:

From ABC news:

The loan guarantee, the administration's first for a clean energy project, benefited a company whose prime financial backers include Oklahoma oil billionaire George Kaiser, a "bundler" of campaign donations. Kaiser raised at least $50,000 for the president's 2008 election effort.

In one of those “twist of fates” you hear about; back in April of 2008 Senator Hillary Clinton exposed the Kaiser/Obama connection while she was battling the big O in the Arizona primary. Obama was running an ad that said:

“I don’t take money from oil companies or Washington lobbyists”

The Clinton campaign made a big deal of this and pointed squarely at George Kaiser and the fact that he was raising big bucks for O’s campaign.
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Watching Irene - A Buoy's perspective

If you’re one of the 20 odd million in Metro NY and you’re wondering when and what this means, and you can’t get enough info, I give you some buoy data to watch after.

Buoy # 44065 is NY Harbor, # 44025 is South of Islip, Long Island.

The link(s) look like this:

When you scroll down you get this info:

I’m not sure what the “bend” points are on the coming storm. It depends on the tides. There is nothing good to report on that either.

If wave heights get to the levels measured off the coast of N. Carolina today are achieved around NYC, well, watch out.

The URLs for the buoys:

NYC:
http://www.ndbc.noaa.gov/station_page.php?station=44065

Long Island sound:
http://www.ndbc.noaa.gov/station_page.php?station=44025

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My read on the speech

I went to play golf this morning rather than listen to the Bernankster. After all, I knew what he was going to say. I read about the speech in the Wall Street Journal a day before.

I (and many others) have made note of the fact that the WSJ’s crack reporter, Jon Hilsenrath, is the mouthpiece for Big Ben. This is what Jon said had to say last night. Do you think he talked to Bernanke before he wrote this? (15 hours before speech time)

Federal Reserve Chairman Ben Bernanke isn’t likely to break much new monetary-policy ground in his Jackson Hole speech Friday

To be sure, a number of others who have a public view on Fed policy also commented that the speech from the Chairman would bring nothing new. But the consistency of Hilsenrath’s words and Bernanke's actions is no coincidence.

If you believe that Hilsenrath gets the whisper from Ben, then you might want to consider what Jon had to say after the speech was delivered:

Fed policy makers will be discussing their options at a September policy meeting which has been expanded to two days instead of one to explore whether the Fed should do more.

Jon then quotes from the speech:

“The committee is prepared to employ its tools as appropriate to promote a stronger economic recovery.”

Then Jon tips Bernanke’s next move:

it is worth remembering, when the Fed has said it is prepared to act during this long-running economic crisis, it generally has acted.

Bernanke is tipping his hand (via Jon) in order to prepare the market for what is to come in a few weeks. This is a heads up to the insiders that more monetary gas is in the works. The stock market’s first reaction to today’s non-event was to sell off hard. But after the word got around that this was just a delay (and a short one at that) stocks caught a bid. Basically, the plan by Bernanke to leak his intentions worked.

I think there are two reasons that Bernanke chose not to announce policy changes at Jackson Hole:

I) He wants it to look to the world (and a few Republican politicians) as if the Fed’s actions are being done only after deep deliberation and discussion. That is why the next meeting has been changed to a two-day format.

There will be a two-day circus of Fed Governors looking very serious. But that is just for the TV audience. This is Ben’s show. He has the votes. He is steering the ship. The decisions have already been made. Ben’s going to do something on 9/21.

II) Ben had to put off announcing more monetary oomph today because there is something that has to happen first. There has to be something that comes out of the EU before Bernanke makes his next move.

I’m not sure what happens next in Europe. I’m of the opinion that something needs to be done, and it needs to be done quickly.

There are a number of things that the ECB could do. They could (1) significantly expand their effort at QE (the number starts at E 1 trillion). They could (2) drop official lending rates close to zero. They could (3) agree to issue E bonds.

Some combination of those actions would buy some more time. The problem is that all of those steps have been discussed and pretty much firmly rejected. There is a fourth option. The strong hands in the EU could give in to the markets and let some of the PIIGS (starting with Greece) float on their own. This option has also been previously rejected.

I think it is time for serious consideration for this. I can’t think of a single person who has a voice in these matters that actually believes that Greece can be saved with more debt. We shall see, possibly as soon as Sunday night.

Yet another option is to get the US Fed into the picture with dramatic draw-downs on existing USD swap lines (Starts with $500 Billion). This is another possibility for this weekend or next.

My last point is one that I have made many times before, but feel obligated to repeat.
 

I flat out hate that this Fed is conducting monetary policy through leaks, a wink and a nod and innuendo. 

There is far too much at stake to make a circus out of the process. It feels like we should just put up a tent, because a three-ring circus is what we are getting non-stop. And Bernanke is the strong man in the middle ring.

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On the BAC deal

A few random thoughts on the BofA - Buffett deal.


This deal is $5b. A fair bit of change. But it is also small beer for a bank with $2.2 Trillion of assets. The stories that went around re BAC were related to the following issues:

Litigation risk

Second lien mortgages

Commercial Real Estate

Good will on the balance sheet that is in question

Direct sovereign debt exposure and indirect risk from CDS

Countrywide

Business Insider summed up the various concerns. The number came to as high as $200b.

it looks as though we could easily come up with, say, $100-$200 billion in write-offs and exposures to "clean up" Bank of America's balance sheet.

I don’t know what BAC has on its books, so I won’t hazard a guess on these numbers. I can’t believe there is no fire with all this smoke. Buffet’s 5 bill will cover 3-5% of the nut. Not much of a margin if there is, in fact, some big ticket issues.

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BAC could have done a public deal for common and pref under much better terms than Buffet is charging. To me, the only conclusion is that BoA bought Buffett’s name. Admittedly, Warren does have a lot of clout. I have no doubt but that many small investors are thinking, “If Warrens in, it’s gotta be good!” I’m thinking that Buffett is just an expensive show pony.

Just a question, How many times have we heard that there was no need to raise equity? I guess that was just a bluff.

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This is perpetual cumulative Pref. I find that interesting. There is no intention to pay a cash dividend. The 6% will be paid in more pref script. What does this structure mean to common shareholder and the hopes they might see some dividend action out of BAC? I think it means they will see very little (if anything) for a long time to come. It will be interesting to see (if we ever do) what covenant restrictions the Buffet Pref has regarding dividend restrictions on the common shares. If I were doing the deal I would get some capital ratio hurdles and restrictions that would limit future payouts (and stock buybacks). WB’s got sharp lawyers, so I expect he has language in the deal that protects his preferred position. Again, this is an “evergreen” deal. It doesn’t go away.

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Common shareholders (especially in a leveraged company like BAC) ALWAYS have to ask the question:

“What’s above me?”

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By this I mean, “What are the obligations that must be satisfied before common shareholders see a dime?” Whatever your thoughts of being a shareholder today, you should keep in mind that $5b just got ahead of you.  

Good old Warren Buffett is not sitting side by side with you at this table. He is sitting at the head of the table. That is a very big difference.


Speaking of dilution, another 700,000,000 shares have joined the table you are sitting at. 

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This is crony capitalism at its best and worst. We have created a situation where wealth and power is concentrated in just a few hands. Buffet shows up as a white knight. Maybe. I think this guy is a predator. I think of him like an Oligarch in Russia a decade ago.

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Buffet met with Obama the other day. I have to wonder if this came up in those talks. My suspicion is that it did. What if it went down like:

O: We’re a bit worried about BofA. The last thing I need right now is another problem with a big bank.

WB: I might be willing to plug that dyke. But it will cost. I need a pound of flesh from the boys at BAC. I want something from you.

O: I’m all ears.

WB: I’ll put up 5 large in fresh equity for the bank. But I want a Preferred position. I’m not taking an equity risk on this dog. In addition, I want stock options deep in the money. My investors have to eat, after all.

O: Sounds fair. What do want from me?

WB: I want you to be neutral on the Marcellus gas field. I have train lines running all through the area. I stand to make a bundle moving fuel. Don’t take a stand either way on this for the next couple of years. By then the momentum will be unstoppable.

O: Do nothing and win? Who can say no?

BK: Of course I’m just making this up, but if you think deals are not being cooked on the side, I’ve got a bridge for you.

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Even after the Buffett 'bucks' BAC remains on the top of the list of the TBTFs that is most vulnerable. That fact hasn’t changed. The stock is a target if things go wrong that are outside of BAC’s control.

Consider what market conditions would be like if we had something unthinkable like a credit squeeze in Europe that led to a second or third tier Euro bank being forced into a merger. Something like this could trigger a flight to quality in bank stocks and their preferred securities. As the market cap of the mid-sized banks shrunk, more forced mergers would happen.

In this type of environment global investors would pull back from those institutions that are perceived (rightly or wrongly) to have a capital adequacy issue. In the US market, that would make BAC a target of opportunity.

Just a reminder, we are in the midst of a credit squeeze for EU banks. There was a forced Greek bank merger in the past week. Very possibly the tip of a big iceberg. The destruction of market cap equity is what brought the big global banks to their knees in 2009. That was what took out Lehman. If that cycle repeats itself we will see it in full force on the weakest banks standing.

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There are tremendous opportunities in front of us to trade BAC stock. Both from the long and short side. One thing that I would not recommend is to think of the shares as a buy and hold. 

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CBO Report: "The future is rosy"

The Congressional Budget Office released their ten-year outlook for the US economy today. It is a very complex analysis. There are dozens of critical variables that go into this long-term report. A Base Line set of assumptions is put into a (very big) computer. The report makes projections on future debt levels.

This document is significant as virtually all other long-term federal budgets are built around the operating assumptions that CBO uses. Economists and politicians will use this report to push their own agendas. That is how things work.

My crystal ball is cloudy these days. I’m having trouble looking down the road past a week. I don’t have a clue what conditions will be like in five years. Neither does the CBO. But they have to produce this report and they have to make assumptions to do that. I think the variables were set at levels that are on the optimistic side. But I’m a pessimist so I’ll let you decide if these are reasonable assumption.

The most critical variable is GDP. The folks at the CBO see clear sailing and high growth for the whole ten years. Their average growth rate is ~15% higher than the previous decade. That is because of the big 08 recession. The CBO believes that won’t happen again. No "dip" in ten-years. There is no basis for that. The US has a recession every 5-6 years.

Another central assumption that drives the results is the rate of unemployment. According to the CBO happy days are right around the corner. Unemployment will fall to 5% in just a few years and stay at that level forever. We should be so lucky.
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With the drop in unemployment would come an increase in hourly earnings. At least that is how the CBO sees it. Note that the hockey stick of improvement is supposed to happen, well, about a six months ago. Maybe I’m not looking in the right places.

Inflation drives many components of the federal budget. I’m not sure what number to use. The CBO thinks it will be tame. Maybe. But I doubt it. We are in a ‘short’ resource world and the monetary authorities are pumping high-octane fuel. It would be helpful if the CBO were to stress test this at 4 or 5%. The results would be quite different.

There are numbers for the revenue and expense side. Once again, the CBO plugs in some rosy assumption about the direction of income and spending. Just about every arrow is pointing in the right direction.

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The bottom line from the CBO is that debt held by the public will rise from its current level of $10T to $14.5T over the decade. The good news is that the percentage of debt to GDP will fall from the current level of 67% to 61%. The conclusion is we’re headed in the right direction.

To do that the USA will have to hit the numbers that the CBO has set out. I see little chance of that happening. There’s too much ‘up-side’ built into the projections.

When S&P went to the White House and told them they were going to cut the USA’s AAA the Treasury Department went on the offensive. Tim Geithner led that charge and did his very best to convince the American people that S&P had it all wrong. That they were incompetent and did not understand the macro economic dynamics that drive our debt profile. Geithner used these CBO projections to make his case that the US was on a good track.

S&P said “No Sale” to that argument. Looking at the assumptions that Geithner relied on to make his case I don’t blame them.

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Fed Economists – “We see a 15 year Bear Market for Stocks”

The San Francisco Fed has come out with a research paper connecting the dots between the retiring baby boomers and stock prices. The thinking is that the boomers will divest themselves of stocks as they retire and eat into their savings. This is an old argument, but I still found it interesting.

The authors, Zheng Liu and Mark M. Spiegel have attempted to quantify the implications. Their principal conclusions:

We find that the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025.

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021.

On the brighter side, as the M/O ratio rebounds in 2025 (BK: M/O = Baby Boomers die), we should expect a strong stock price recovery. By 2030, our calculations suggest that the real value of equities will be about 20% higher than in 2010.

These conclusions are just horrendous! The suggestion is that there is a 15-year bear market in front of us. Multiples will fall by 50%!! I loved the “good news” from the report, that stocks might be 20% higher than 2010, but we have to wait 20 years to see that improvement.

Bloomberg interviewed Spiegel about this report. There was one comment that I thought was telling:

“We do see it as something of a headwind as the economy is attempting to recover.”

This is worst kind of "Fed Speak" in my opinion. These deep thinkers have it completely wrong. They think that the key to having a stronger economy is higher stock prices. So they spend all of their efforts dreaming up ways to keep the S&P ramping up. I think it is the exact other way around. If the economy were to be growing, it is reasonable to assume that stock price might rise. It is completely false to assume that attempts to jigger stocks higher will lead to a stronger economy.  

The dog wags the tail. The tail does not wag the dog.

This is what we get for having academics from Princeton running the show. They have the cause and effect backwards. No wonder the economy sucks.

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Europe – “Sorry. That is a bad address”

Two important articles today on the gnarly topic of liquidity in Europe.

The first from Zero Hedge. This looks at a report out from Morgan Stanley on the status of Euro banks and the issuance of LONG-TERM debt. The bottom line is that as of August there is no long-term debt market for the EU financials.

NOTE: This is not T. Durden talking. This is the white spats boys @MS. When “The mother of all cheerleaders” starts writing stuff like this; it is worth noting.

Next from FTAlphaville who comments on a Fitch report Re: US money market funds draining cash from European banks. This was a July data report. Things have gotten much worse since then. The July data scared the crap out of (even) me.

It has been well know that the MMFs were leaving the weaker countries in the EU. What is scary to note however is that the money funds are leaving Germany too. The largest month over month decline came from German banks. Shocking!; is my reaction. Essentially the MMFs are saying, “NO EUROPE”.

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There is some evidence in the money markets of what is going on behind the scenes. Libor rates for Euros and dollars are elevated. The forward currency swap spreads are also evidencing a tightness in the dollar funding market. That said, I don't see the evidence on my screen that we are at a bend point in this story. I think the quoted prices are not where real business is getting done.

The interbank deposit rates that are the basis of the quoted pricing may well be the rate that a Citi does business with a Chase. But these quotes have nothing to with the rates that a Banca Nazionale del Lavoro is currently paying for cash money.

I believe that a number of the big liquidity providers to EU banks are charging a big premium for money these days. I'm sure that there is growing list of EU financials that are looking for money and finding that their traditional providers are no saying:

  “Sorry, I’m full up on your name today”.

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Note: On that title I used today; a side story.

At one point long ago I found myself in the position of being long an FX cash position with a London based French bank. On the other side of this was a short futures position with a street broker by the name of Refco.

There are only two ways out of this situation. One has to either (1) unwind the futures and also the cash or (2) try to do a “give up” of the cash position to the broker. (netting).

This was a several billion dollar position. More often than not the unwind approach costs money (the futures market is very smart at spotting this type of stuff). So I asked the French bank if they would do the wash trade with Refco. (Note: this is very common stuff)

I recall the exact response that was given (with a heavy French accent).

“I’m sorry, that is a bad address.”

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At first I didn’t get it. The wording was not the usual, “We don’t take that name”. But it did mean the same thing. The French bank simple would not do business with Refco. I undid the position(s), and it cost me. The "Bad Address" thing stuck with me.

One side note to the story is that on 10/10/2005 Refco was busted for lying to the public. Refco claimed to have a $530mm IOU on the books. Actually, it was worthless. Refco went Chapter 11 a few days later. Phil Bennet, the Refco CEO went to the slammer for 16 years.

The other side note is; Europe is becoming a “Bad Address”.

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On EU banks, Solvency or Liquidity? - Or BOTH?

I look at the financial statements of the big banks. 10-Qs and the like. I’ve concluded that, for the most part, it’s a waste of time. There are usually 70 or so pages of numbers and discussion. Tons of data. But what is missing is a realistic appraisal of what the assets are actually worth.

Rather than go blind looking at small print I just look at market capitalization and assets. The balance sheet assets are a good proxy for what has to be funded. The market cap (shares outstanding X current market price) is the only number one can look at that is “real”. It is real because the “tape” and the market say so. It is a much more reliable number than what the accountants, auditors and management tell you.

Market cap is critical because there is a presumption that a big bank can go to the equity market and issue preferred and common stock equal to about 10% of the existing market valuation. A big equity valuation is a cushion in troubled times.

Societe Generale, Paris is a big bank that has been much in the news this week. SoGen is a top tier global bank. They have a very large deposit base and consumer business. They are also a big global trading bank. SG is well managed. I would call it one of the Crown Jewels of the financial picture in France. It is a classic Too Big to Fail.

Having said all those nice things about SoGen I also have to point out that it has a very thin margin of market valuation to support its huge balance sheet. The market cap/asset ratios for SoGen, Wells Fargo and JPM:

Looking at this one sees the problem. SoGen is levered 4-6 X’s the US banks.


Under normal circumstances my way of looking at things is irrelevant. It only becomes significant when there are problems. Today we have problems.

There are monstrous gobs of liquidity in the world. But every day that goes by that liquidity is getting more and more risk adverse. Globally there is about $60 Trillion of funded debt of one form or another. That huge amount has to be rolled over constantly. A very substantial portion of this has maturities of less than six months. It is a “faith based” system. The assumption is that there will always be ample liquidity from the holders of cash to roll over everything without a hiccup. At the moment there is not much faith in that system.

The nice folks at FTAlphaville put up this interesting chart Friday afternoon. It tells the story perfectly. Everything is green except the month of August and the very short end of the funding spectrum. The red area is a Short Squeeze. This is also a big Red Alert!

The lower the equity cap of any financial, the greater the risk that there are funding problems. This is what did in Lehman. Almost overnight they lost their funding sources. (Note: This is what happened to Drexel in 1989. I was there. It took ten days to go from soup to nuts.)

SoGen, being what they are, will not be the first bank to suffer liquidity problems. I used their equity numbers to make a point. It is the second tier Euro banks that are going to get squeezed. I have no doubt but they are already feeling the pinch.


I can’t see this going on much longer. We may have already passed the point where the downward spiral on funding availability is irreversible without global central banks stepping in. 

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That brings us to Jackson Hole. Damn near everyone I read is thinking that Bernanke is going to pull a rabbit out of his hat next weekend. Some new form of monetary stimulus will be announced and all will be well for the markets once again. I don’t agree.

While the US has some major league problems, those issues can’t be addressed by the Fed. There is nothing more that the Fed can do. With short-term rates at zero (and planted there for years to come) and the ten-year at 2% there is nothing left to be done. Or is there?

I maintain the next move by the Fed is to massively open up the dollar swap lines with European central banks. I don’t think Bernanke wants to announce this significant step at Jackson Hole. It is an EU issue and the Fed can’t take the lead on this. Opening the swap lines will prove to be very unpopular in the US. Politicians will jump on it as a bailout of Europe while America is struggling.

Bernanke is going to take some heat, when this happens (I think this is now a certainty, just not sure of the timing). But I also think that Bernanke is pushing (as I write) for this to happen. The only option left for Bernanke is to put another half trillion or so into the global system. He can’t do that in the US, but he has a great excuse today to do it in Europe.

I maintain the forum for this is not Jackson Hole. There is too much theater in all of this already. The Europeans don’t want this to be a circus (more than it already is). They want to be seen as responding to an EU problem, they don’t want to be seen as a slave to Bernanke and the Jackson Hole confab.

The announcement of the swap lines will not come from Wyoming. It will happen on a Sunday night. It either happens before next weekend, or the weekend after. Given that things are rapidly unwinding in the EU funding markets I don’t think they want to wait another two full weeks to put a band aid on the problem. They have to do something sooner than that. If they don’t, they risk a full scale liquidity blowout before September. If the blowout were to happen it would be very difficult to reverse. They have to (attempt) to get ahead of the problem before it is a crisis.

I think there is a decent chance this important next step takes place outside of Jackson Hole. It could happen this Sunday night. If I’m wrong, and we get nothing, the European funding markets are going to collapse next week. It will be very difficult to reverse the damage that this will cause. All the central bankers know this. They know that there is not much time left to act. They can’t wait another two weeks.

The Fed bombed the market - I ask, "Why?"

Last evening I got the WSJ breaking news story that busted the global capital markets today. Note the time, 8:06.

Look at the immediate consequence to the EURDLR fx rate. There are big gaps down for EUR shortly after the story hit the tape in Asia. That knee jerk reaction was the same market “read” that gutted a number of Euro banks today:

I looked at the WSJ story and concluded that it was a game changer. I wrote Tyler Durden at Zero Hedge about this. The “Re:” that I used was:

Stink on Shit

TD responded:

Obviously a plant.

ZH had a piece today on the WSJ story that caused all the trouble. The “plant” theme was repeated. from the ZH article:

Why would (the Fed) use its traditional mouthpiece the WSJ to spread fear?

Tyler answers his own question with:

Why QE3 of course.

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This is very important stuff. Three critical questions:

I) Was the WSJ story a plant?
II) If so, who planted it?
III) Why in heaven’s sake would anyone (especially the Fed) want to bomb the capital markets?

IMHO opinion this was a plant. The author was Carrick Mollenkamp. This guy is a seasoned pro. This story was vetted at the highest levels at the WSJ. The editors knew full well the implication of this article. Every ‘i’ was dotted and all quotes were checked. There are no mistakes in this article.

But who were those “sources” that the WSJ hung their hat(s) on? This was one of the biggest stories of the year. Who are the readers of the WSJ supposed to rely on regarding the serious issues raised in the article? Easy. No one is the answer. These are the attributed sources for the guts of the story:

Federal and state regulators, signaling their growing worry that Europe's debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe's biggest banks, according to people familiar with the matter.

The Fed is demanding more information from the banks about whether they have reliable access to the funds needed to operate on a day-to-day basis in the U.S. and, in some cases, pushing the banks to overhaul their U.S. structures, the people familiar with the matter say.

Fed officials recently have held meetings…………. according to the people familiar with the matter.

The New York Fed has also been coordinating with New York's superintendent of financial services, Benjamin M. Lawsky, to monitor the foreign banks' funding positions, said people familiar with the matter.

You can come to your own conclusions on this. It is my opinion that there is no way the WSJ could have run this story without direct confirmation from the Fed. Those people who are so “familiar” with this matter are senior Fed officials.
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That, for me, answers #s I & II above. But it begs the question, “Why”?

Is it remotely possible that the Fed deliberately engineered a collapse in markets in order to get the necessary political “cover” to initiate some new massive monetary policy as TD suggeted?

There is one possible clue in the article that points to this conclusion:

Until recently, that (Euro funding problems) hasn't been a problem. Thanks partly to the Federal Reserve's so-called quantitative-easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks

This observation from Mollenkamp is from the Feds lips. The obvious conclusion from this paragraph is that to reverse the crisis now boiling over in Europe more “QE” is required.

What is QE? It can be anything that stimulates the price, velocity and availability of money. It does not have to be LSAP (traditional QE) or an extension of ZIRP. It can take other forms.

The most convenient of which is to open the Fed’s $ swap lines to the Euro banks. We may get this development by Monday morning.

My take on this is that the Fed manipulated the news. It did so very deliberately. The Fed had an agenda; they did whatever they thought necessary to gain acceptance for what they have up their sleeve.
The story was deliberately timed to undermine (further) the European banks. It worked. Now Bernanke and his cohorts have the excuse they need to act.

That's my take on this story. We may never know the truth. I wonder if Governor Perry understands this stuff. If he did, and he got the facts on this “out there” he would have a very big cannon to shoot. If the Fed did manipulate both the press and the markets to justify its actions it would be a very big deal indeed.

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On the SNB, Once more

One of the greatest bluffs in financial history was pulled over the last week. I’m referring to the Swiss National Bank's “No Peg” decision this morning in Zurich. What’s amazing to me is that the bluff was just that, a bluff.

This started with a middle level guy at the SNB saying that “All options” were on the table to deal with the staggering appreciation of the currency. He included a fixed rate peg in that mix of options. The SNB spoke to all the press. The SNB spoke to market participants. They flat out told everyone that a peg was coming. They lied bluffed.

The notion of a fixed peg for the CH is the stupidest thing they could have done. At some point events would evolve such that Franc would come under speculative attack. That could break the back of the SNB and send the EURCHF 15% lower in a day. This is the Alamo approach. We remember how the Alamo ended. The SNB knew that a peg was a “risk all” bet. I’m sure that they also knew from their own experience and advice from other Central banks and Treasury types that the line in the sand (peg) was a way to make speculators fantastically rich.

I’m of the opinion that there never was any serious consideration for a peg. It was just noise. In support of that view I provide a personal perspective.

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Way back in 1992 I was running a modest slug of leveraged capital. This was a Macro approach. By that I mean we played in major markets looking for big relative changes. Availability of leverage was key to success. FX is max-leverage if you have capital. It was no problem to trade interbank FX and put up only 2% margins. At that level one could have a $1b currency position and it would only require 20mm to play. (There would have to be back up equity available)

Currency markets often move 2% in a day. So the possibility to make (or lose) 100% of your stake in a few hours was a regular event. And that is what I did. Functionally, a $25mm bet. Double it (or more) or lose it in a less than 72 hours. I was a percentage player; this was intoxicating stuff.

One day I get the call and the voice says that George Soros (led by Stan Druckenmiller) was shorting the shit out of the British Pound. That sounded like fun to me, so I joined the fray.

The rest is history. On September 16th 1992 (Black Wednesday) the Pound was devalued. It was very well publicized that Soros made a billion+ on his trade. He broke the Bank of England. My involvement was small compared to George S. I was not the only one who jumped on the Soros bandwagon. The cost to the UK Treasury came to $5 billion. The Soros share was only 20% of the total. Let’s say we all got fat.

All the global CBs were very pissed off about this. It made them look stupid. What Soros (and I/others) cleared was directly off the back of the BOE. Our gain was their loss. The UK/global press had a field day with guy who ran the show at the BOE,  "Robin" Leigh-Pemberton. (perfect, no?)

This was a very big deal for the CBs. There was a great deal of internal and external discussion. It went on for years. There was a bottom line conclusion that all the reserve currency central bankers came to:

They could never put themselves in a position on currency intervention where there would be a firm commitment to defend a given exchange rate. (a peg) 

The lesson of the devaluation of the Pound was that markets (and big market players) were bigger than the resources of even the Bank of England.

From that point onward there has never been a repeat of the fixed exchange (peg) approach.

CB’s like the SNB and Bank of Japan have been intervening for years. The strategy is always the same for these two. They have played defense. From time to time those CBs have come out from under a rock screaming and yelling and spreading rumors. On many occasions they have resorted to splashy interventions. But that is just noise. The only objective of these central banks has been to slow the inevitable.

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The current head of the SNB is a very nice fellow. Mr. Phillipp Hildebrand. He is an Olympic swimmer. He is a hero in Switzerland for his efforts in the pool. But he’s not a central banker, and he should not be running the show at the SNB.

There are many good former central bankers in Switzerland. There are also a few in Germany who have watched/participated in history. I’m absolutely sure that while Mr. Hildebrand was talking to the press about his idea for a peg, he was also getting some advice from some smarter sources. Who knows? He might have even gotten some input from his friend, DSK. (also perfect)

All of the CBers (both past and present) would have told Mr. H. the same. A peg is a modern day no-no for a reserve currency. That lesson has been learned. One time is enough. Hildebrand should have known this himself. If he didn’t, he shouldn’t have the job. He should never have initiated the peg talk. The "peg talk episode" will be his black eye that stays with financial history.

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Note:

There is no Peg. There is no intervention. So why the hell is the EURCHF at 1.14? Easy. The SNB has flooded the market with CHF. They have increased cash liquidity from 30b to 300b in a week. That is a ten-fold increase. The increase is equal to~50% of GDP. If something like were to happen in the US or Japan there would be some form of explosion. It’s just too much money to hit the system.

As a result, Swiss deposit rates have turned negative. This is reflected in the swaps market. If one wants to be Long Swiss and Short the Euro the position must be rolled over in the swaps market.

The cost of a short EURCHF has become very big as a result. The current spot rate for EURCHF is 1.1400. The six-month forward rate is 1.1270. In other words, the currency pair has to move by 1.1% just to break even. When the equity is only 2% it means that the financing costs eat up more than 50% of your capital behind the trade. Specs don’t like that action.

I'm taking a wait and see for a bit. It’s better to find something else to do than trade the Swissie until the swaps settle down (they will).

It’s impossible to forecast the timing of currency moves with any precision. But I will say that the way the SNB has handled the past ten days has made it a certainty that there will be another big speculative move into the CHF at sometime in the future. I would say sometime late fall.

I say that because the massive increase in liquidity can’t be maintained without consequence. I say that because the SNB has shown a very weak hand. They tried to bluff their way out of a tight spot. They may have bought some time. But that is all they have bought. They have hung a new sign on the SNB headquarters.

We were bluffing

We are just playing defense

We are vulnerable

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PS. Sorry for all these bits on the CHF of late. This has been an interesting tale for me to tell.

Getting “Ugly”, DC Style

After the Fed announced last week that it would extend its zero interest rate policy for another two years I flipped out. I thought the Fed’s actions were flat out wrong for a dozen reasons. I lead with this one (Link):

This action is indefensible on the economic merits. This move is not motivated by sound monetary policy. It’s motivated by politics. This is a payback to Obama. Shame on the Fed for mixing politics with money.

It’s all well and good when a low rent blogger like me throws stones at Bernanke and the Fed and accuses them of playing fast and lose by mixing monetary policy with politics.

It’s quite another matter when a serious presidential candidate says pretty much the same words that I used. The difference is that Governor Perry called Bernanke’s action “Treasonous”. That is a fair bit stronger then me saying "Shame on Ben".

When the Perry/Treason story first broke I just laughed. I thought Perry would have to back off. Not a chance. He has not backed down a bit. When asked by reporters today he said:

“I stand by what I said”

To me, this just got ugly, DC style.

I am a cynical son of a bitch. (I’m the first to admit that) There is a part of this story that is not being told.

Perry’s candidacy has been telegraphed in the press for weeks. Every DC insider had this on their radar. Including Bernanke. Including his cohorts. Two weeks ago they have a meeting. It goes like this:
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BB: (commandingly)
I’ve called this meeting to give you my thoughts on which way we should move policy at the upcoming meeting. I expect you to conform to this view:


Cohort #1 (obediently)

Whatever you say!

Cohort#2 (excitedly)

Show me where to sign!

BB: (sternly)
While it is true that the economy has slowed of late it is the collective Fed forecast that growth will pick later in the year. There may be some moderation in energy prices in coming months, but the cost of rent will continue to push core CPI higher than our target.

Cohort#3 (sheepishly)
Yes! Yes! All that you say is true! We must balance our obligations to our dual mandate. You said that on TV Mr. Chairman! We must maintain policy as it is. We should not be more nor less accommodative at this time.

BB: (condescendingly)
As a policy matter you are correct. But we must play politics as well as run the global monetary system. I have a source who has given me a tip on what will come in the future. This information has forced me to change strategy. We must do something to shore up the stock market.

Cohort #4 (female voice)
Oh Gosh! That sounds scary! Is there some new economic crisis pending that we don’t know about?

BB: (exasperated)
I said it was political! It’s Rick Perry. That SOB from Texas. He’s running for President. I hear he is going to use the Fed, and me in particular, as his stalking horse into the White House.

Cohort #4 (fearfully)
Oh Dear! That sounds dreadful. How do you have this valuable information.

BB: (slyly)
Ha! I have a few friends in town. One of the guys in the banking lobby gave me the heads up. Perry’s campaign goons are out raising money. They are selling Perry as an upscale Ron Paul. He hates the Fed and that will be a plank in his campaign.

Cohort #1 (astonished)
Gee Wiz! This is a hell of a turn of events. What can we do? What can we do at the next meeting?


BB: (forcefully)
We can’t do another LSAP. That never worked. The only thing available to us is to extend the zero rate policy to a period past the next election. We have to take this bold step before Perry gets a national stage. We have to get infront of this guy. Out maneuver him.

Cohorts #3 (stupidly)
Wow! This is fun! Almost like Watergate! We get to do dirty tricks!

BB: (definatively)

Perry started it. We finish it.

We take this step now. Then we sit on our hands unless there is a true emergency. We can say we were politically neutral. Even if that is not the case. We will get infront of any of Perry’s public diatribes. We will take the high road publicly and be laughing all the way to the bank behind the scenes.

Cohort # 1 (nervously)
There’s only one problem Boss. Plosser, Fisher and Kocherlakota will never go along with a two-year extension of ZIRP! That would mean there would be three dissenters! We don't want that, do we?

BB: (Angrily)
Screw it! I don’t care what they say! I have the vote. I have you all in my pocket. Let them dissent. I have to do what I have to do. I want to deflect Perry. This will be my only chance. This will help stocks. That will keep Obama in office. And then I can keep my job as the head of the Department.

Cohorts #s 1-4 (in unison)
Well Done! Brilliant! Fine Leadership! Way to go Ben!
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All kidding aside, the Perry Development has tied Bernanke’s hands. Those hands won’t come untied again unless there is a significant “emergency”. What we have today, we will have for the next 18-months. There will be no more from the Fed.

So much for the Bernanke Put. 

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Gold and the SNB

Gold has a nice bid so far today. There are so many reasons to own gold. I think a factor in today’s price action is the Swiss National Bank. This is a slow motion breaking story. There should be a resolution on central issues the SNB is now pondering in the next 24 hours. Depending on the out come it would a) justify the gold pop today and b) set the stage for another big leg up in AU.

All of the Swiss newspapers have the same story. The SNB is “actively” contemplating a currency peg against the Euro. I find this information to be bizarre. Over many years of watching the Franc and the SNB I have never seen anything like this before.

Apparently the SNB is reaching out to all sectors of the Swiss economy and politics to obtain “Consent” to implementing the Peg Policy (“PP”). That’s a very unusual way to conduct monetary policy in any country. It’s especially true for the Swiss.

The reason that the SNB is ducking responsibility by getting an unofficial “Okay” from the business and political leaders is that there is a very big risk for the Swiss to undertake a PP.

The Swiss aren’t stupid. The reason that the public result of the PP deliberations is being deferred until tomorrow is that they are waiting for the Merkel/Sarkozy meeting to end. There is some (small) possibility that the meeting will result in a “Nein” by Germany for a broad program to save the EU. The Swiss could not afford to set a Peg on Tuesday morning when there was some risk that a major negative step within the EU would occur a few hours later.


This is just whacky to me. A major historical step in Swiss monetary policy is dependent on a meeting earlier in the day? Have things evolved such that global monetary policy is changing on a day to day basis? It sure looks that way to me. Where could this go?

My GUESS is that the M/S meeting today will be happy talk about long-term budget discipline and a reaffirmation to deal decisively (Not really) with the problems with bigger (But not big enough) band aides. I’m of the opinion that outcome is pretty priced in. I don't think we will see an announcement that there would be a new large (Starts @ Euro 2 trillion) ) pan European debt offering to take pressure off of Spain and Italy. I also don’t see Germany/France folding the tent on the Euro experiment.

IF that is the result then it substantially increases the probability that a Swiss Peg is announced. (That would not be the case in the (unlikely) Nein/Non scenario.

What happens if there were to be a peg? Two shorter-term outcomes that I can think of:

I) The CHF is the “go to” safe have. But not if they peg themselves to the Euro. Some of the money that is currently parked LONG TERM in Switzerland will leave. (I think a lot of the short term hot money has found the exit by now). Where will those long term seekers of of a safe haven go, now that it ain’t so safe? There is only one option, gold. That is especially true for those who have Swiss Francs in the first place. They all love gold. Now they will have to love it more.

II) The next time there is a crisis on the table where will the money go? Not the Swissie. That would be a dead end. So the rest of the hot money will have less of a place to go. Once again it points to gold.

The “next time” I refer to is likely to happen by Friday. We are living day to day.


For the record

I want to say that should the SNB choose to set up a Peg it will not work. It will end with a staggering explosion. I can’t see a “solution” in Europe. Germany will not “Federalize” the debts of the peripheral states. Therefore the problems will not go away. The risks to Italy and France will grow as a result. As that happens, capital will have to move in the direction of Switzerland. That is always how this has worked in Europe.  The SNB may buy some time with their Peg and force scared money into gold. But sooner or later the money will flow to Switzerland. This is especially true given that the SNB will be subsidizing the price of the Franc for that hot money.

Should we go down that  road the SNB could be forced to absorb 300 billion Euros. The losses on those holding could be staggering for a small economy like Switzerland. In a recent blog I suggested:

The Swiss like to “Double Down”

A Peg would be the biggest double down in financial history.

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How to make some big bucks!

Finally the government is doing something to help the dismal employment situation and the drop in personal income. The clever folks in D.C. have come up with something that I am sure is going to create a new cottage industry. The upside in this new effort is very substantial indeed. The payoff starts at $200k and the sky is the limit after that.

What does one have to do to get some of the fast cash being offered? Easy! You just have to uncover a scam. Not some small scam, mind you. It has to be pretty big. The minimum threshold is a scam of not less than $1mm. These days everyone is ripping off everyone else. So this is really not as hard as it may sound.

To get started on this exciting new opportunity one must first go to this web site:

Our good friend, Mary Shapiro, has formally initiated the Whistle Blowers club (AKA-Rat Patrol).

If you’re wondering where to begin the process of coming up with the required ‘dirt’, the good old SEC has a page for that too. They have these helpful suggestions of where to start looking.

I have to admit that my personal income has been lagging of late. ZIRP is killing me and my stocks are (thankfully) underwater by only a tad so far this year. But my expenses have been soaring. My food and energy bill has been on a tear (I know this doesn’t matter to DC, but it sure does to me). Everything else is costing a bunch more (my health insurance is up 30% in a year!). The only expense that is going down is my income tax. Unfortunately that bill is zero because I am making no money (I suspect I’m not alone).

So I’ve decided that I’m going to become a rat and make some coin while I’m at it. This can be a collaborative effort. Anyone reading is welcome to join me while filing some claims.

What “We” are looking for is evidence of some big scams. Ones that will pay us big time for blowing that whistle. The minimum of $1mm is not where I/We should focus our efforts. I want 20% of a very big number. Say $1B. That would put a tidy $200mm in our pockets (actually they take the tax “off the top”). For those budding entrepreneurs (and potential partners) out there I have some thoughts on where we might look to find some Mega Scams that we could cash in on. Back to those helpful suggestions by the SEC:

Fraudulent investment scheme, such as a Ponzi scheme or the promise of high-yield returns

There has to be an angle here for us. The entire US economy is a Ponzi. Could we focus on the $6 trillion of recorded unfunded liabilities at the Social Security Trust Fund?

Unregistered securities offering

Could the Fed’s swap lines to other central banks be an avenue of inquiry? How about the Fed’s restriction on buying corporate securities? We have Maiden Lane as evidence they skirted the law.

General trading practices or pricing issues

I'm wondering if we could not make a case that QE is a distortion of pricing. After all, The Fed did buy 1.3 Trillion of private sector debt of the GSEs. That paper was worth no more than 60 cents on the dollar. The Fed bought it all in at a premium to par.

The good folks at Treasury bought over $2b of subordinated debt of Fannie and Freddie. This crap had no security behind it at all. It was worth less than a quarter of the face value (at best). But that swill got bought out a premium as well. Someone has to be guilty on the pricing issue.

Manipulation of a security

Manipulation? Everything is manipulated these days. Stocks, bonds, real estate and commodities have all been influenced by the not so invisible hand of Uncle Sam over the past few years.

Insider trading

This is fertile ground for us. There are dozens of examples that we could hone in on. For example, the S&P downgrade announcement was know to every money center bank well before it was public. We might look into all those “leaks” that Jon Hilsenrath at the WSJ gets from Bernanke.

Material misstatement or omission in a company's public filings or financial statements, or a failure to file

I could go on for a bit in this category. On the matter of public filings consider that neither Treasury, CBO nor OMB acknowledge we have unfunded liabilities of $50 trillion or so. When it comes to something simple like “failing to file” we could look into the fact that there has been no budget in the USA for 860 days.

Municipal securities transactions or public pension plans

The opportunities are endless in the category. Public pension funds are “accruing” income at an 8% rate, but they are not making close to that. Then there is the business of General Obligation debt by munis. Aren’t 49 states supposed to have balanced budgets?

Bribery of, or improper payments to, foreign officials (Foreign Corrupt Practices Act Violations)

Just one example that I can think of. In his book “On the Brink” former TSec Hank Paulson describes how the Russians tried to conspire with the Chinese to force the US into a GSE debt buyback by threatening to dump paper onto an already weak market. The threat worked. The Fed ended up buying 1.3T. This was an “improper” payoff to foreign officials; no?

A specific market event or condition

This one is sure to get the folks at Zero Hedge a very big payday. They have documented every flash crash for the past year. How many has there been now? 20 or so that I can think of.

While this area of inquire is certainly fertile ground for a whistle blower award it is also a difficult case to make. The problem is that the SEC would be on both sides of this. The SEC is absolutely responsible for the Flash Crashes. There can be no doubt about that. But getting them to agree (and to pay) will be another matter. In this case we could just document the facts and submit a claim. The claim would (of course) be denied. At that point all we would have to do is sue in Federal Court. The evidence of SEC culpability will stand up in court. (I think this is such a strong case that the lawyers would take it on a contingency basis)

Note: I’ve separately contacted Tyler Durden to elicit his support. My proposal is that he opens this up as a “class action” whistle blow. (All ZH registered viewers as of 5PM today will be included in the payout). So far Mr. D has been keeping his cards to his chest on this. (I can’t blame him, there are billions involved.)

If your complaint does not fit in any of the categories above, please describe below

Ah! The “kitchen sink” approach is open to us as well. I was happy to see that the SEC has left this so open ended. It allows us to be creative. I’m not going to dwell on this one. I leave that to you. There are hundreds of areas of inquiry here.


Sadly, this piece is just a joke. While there may well be hundreds of opportunities to blow the whistle on schemes, ponzis misrepresentations and market manipulation perpetrated by D.C. the last few years the chances of getting paid by the SEC for these tips is about zero.

That’s not to suggest that we shouldn’t use this opportunity to register our feelings of what is fair and what is not. I think the collective “we” should be sending thousands of messages to the SEC. So many that the servers get clogged. I’ll be sending a few. In case you want to join me, that link again: SEC Whistle blower.

We may not get paid for being a rat. But we surely can send a message to the Rats.
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