• A stronger dollar and falling oil prices helped U.S. stocks to suffer a sharp drop yesterday (Monday), as investors continue to find it difficult to see real signs of an economic rebound, Reutersreported. All three major U.S. indices – including the Dow Jones Industrial Average and the Standard& Poor’s 500 Index, dropped more than 2%. Hardest hit were the shares of energy companies such as Chevron Corp. (NYSE: CVX), which closed down more than 2% at $71.08. The dollar gained against all 16 of its major counterparts currencies, except for the Japanese yen, after Russian Finance Minister Alexi Kudrin said it was too early to consider an alternative to the greenback following a Group of Eight meeting. Of note, the euro fell versus the dollar following the European Central Bank said commercial banks in the 16-country euro region may lose an additional $283 billion by the end of 2010, Bloomberg News reported.

• Homebuilder confidence has dipped by one point, according to theNational Association of Home Builders (NAHB)/Wells Fargo Housing Market Index. “The outlook for home sales has improved somewhat in recent months, due largely to implementation of the first-time homebuyer tax credit and gains in housing affordability,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla. “However, looking forward, homebuilders are facing a few headwinds, including expiration of the tax credit at the end of November; a recent upturn in interest rates; and especially the continuing lack of credit for housing production loans.” The index is based on a monthly survey of 548 homebuilders.

• The International Monetary Fund (IMF) raised its outlook for the United States and called for steps to reduce concern about increasing public debt and inflation, Bloomberg News reported. The IMF forecasts the United States’ gross domestic product (GDP) will contract 2.5 % this year before growing 0.75% next year, according to a statement today after an annual staff analysis the world’s largest economy. Previously, the IMF’s World Economic Outlook report, released in April, had the United States’ economy contracting 2.8% this year, before stalling in 2010.

• President Barack Obama yesterday (Monday) told the largest doctors group in the country that changes are needed in areas from insurance to payment procedures to lower costs and cover the uninsured, MarketWatch.com reported. “What I am trying to do and what a public option will help do,” he said to the American Medical Association, “is put affordable health care within reach for millions of Americans.” The group said last week it opposes any public plan that forces doctors to participate or expands Medicare or pays Medicare rates. In his weekly radio address on Saturday, Obama laid out a proposal to cut $313 billion in government health spending, saying the reductions in Medicare and Medicaid payments to health-care providers would increase efficiency and the quality of care, while setting aside about $950 billion for reform over the next 10 years.

• In a sign that more Americans are curbing their discretionary spending, Six Flags Inc. (OTC: SIXF) filed for Chapter 11 bankruptcy protection on Saturday, Reuters reported. The New York-based company said the move will deleverage its balance sheet by $1.8 billion and eliminate $300 billion in redeemable preferred stock obligations. Day-to-day operation of its 20 parks will not be affected, and the filing “paves the way for a full revival of the company,” Chief Executive Officer Mark Shapiro said.

Source: Investment News Briefs Tuesday, June 16, 2009

Just for kicks, I put the year 1980 in the calculator to see what would come out. If you had $25 then, you would need $64.54 today to purchase the same goods and services. If you had $5,000 then, you would need $12,907 to have the same buying power today.

So, what if you had $850 in 1980?  How much would you need today to match the same buying power? The government tells us that number is $2,194. Perhaps you see where I am going with this.

The previous all-time high in gold was $850 an ounce, reached in 1980. So, by the government’s own calculation (which many have shown to be biased to the downside), you would need about 160% more dollars today to match the same buying power you had in 1980.

So how is it that gold – “the world’s greatest inflation hedge” – is roughly the same price today that it was in 1980, after 30 years of inflation? Keep in mind that gold only hit $850 for one day in 1980. The average price of gold that month was only $650. But the point is still valid.

The biggest reason is… manipulation.

It used to be that you didn’t speak about market manipulation in polite company. Everyone knows those conspiracies don’t exist. Who could do such a thing? We now know those sentiments are woefully naïve. There is now a deep and wide body of evidence that points to willful and ongoing, official and unofficial suppression of gold prices. Much of this evidence has been compiled and documented by the good folks at the Gold Anti-Trust Action Committee (www.gata.org).

Why would politicians, central bankers, commercial banks and Wall Street institutions have any interest in suppressing the price of gold? That’s easy. Gold is like a burglar alarm. It serves notice that politicians are spending more than they take in. And it emits a screeching siren when central bankers inflate the money supply. Wall Street and commercial banks hate gold because it represents competition for your investment dollars and savings… and because they can’t make any money on it.

A rapidly rising gold price signals to the masses that all is NOT right with our money and in the financial system. When the price of gold is going up, savers and investors begin to wonder why in the world they are holding dollars in the bank. There are some VERY powerful interests that would like to keep the price of gold in check.

So, how do they do it?

There are a number of ways the banking and political establishment have tried to keep a lid on gold. The first is simply the war of propaganda. Make gold savers out to be the lunatic fringe and denigrate gold itself. This is where the term “gold bug” came from. It was meant to be a disparaging term for people who believe in sound money and honest government. This is also where the talk of gold as a “barbarous relic” originated.

But that argument falls on its face immediately. If gold is such an ancient “relic” and so unnecessary and un-useful in today’s world of modern finance, then why do central banks still insist on holding gold in their vaults? And why do these same banks use gold among themselves to settle final accounts?

They do this because they don’t trust each other. They know that paper money is too easy to fabricate from nothing, while gold is rare and must be labored into existence. Despite what they say, central bankers know that gold is vitally important to the modern financial system and that there is no substitute for it.

Other than the war of words, the banking and political establishment put pressure on gold in other ways as well. One of these is central bank “leasing” of gold. I put leasing in quotes because usually when you lease something out, you expect to get it back (more on that in a moment). For years, central banks have been “leasing” the gold in their vaults to “bullion banks,” operated by institutions such as Goldman, Citi, Morgan, HSBC, etc.

And what a lucrative racket it has been. For years, the bullion banks received massive amounts of gold from official vaults at the “good buddy” interest rate of about 1% a year. They then sold this gold into the market and invested the proceeds. How much money could you have made in the ‘80s and ‘90s if you were able to borrow billions of dollars at 1% and reinvest those dollars at 5% risk-free… or even higher if you were willing to take on some risk? Let’s just say it was a pretty good deal, if you could get it.

Not only has this provided a welcome source of cheap capital for the insider banks, but a near constant supply of gold to the market meant that there were always big sellers to keep pressure on the price.

By no means is this the only way gold has been manipulated, but it is certainly one way. But for this to work in the bullion banks favor, the price of gold must fall or remain flat. Borrowing billions of dollars worth of gold at $300 an ounce and paying it back at $600 an ounce is a recipe for bankruptcy. So you can imagine the enormous incentive within the system to keep the price of gold from rising.

But they have not succeeded. These gold leasing operations were running full tilt in the early part of this decade when gold was in the $200s and $300s. Gold is now three times higher than it was then. And these banks are on the hook for billions of dollars worth of gold.

But remember, these are insiders. By now you know what that means. They have no intention to pay back the tons of gold they have borrowed. And the central banks have no intentions of calling these loans. To do so would require the bullion banks to buy gold at the market, paying prices several times higher than the price at which the gold was borrowed. This would instantly bankrupt these banks, though we know they would be insolvent anyway without taxpayer bailouts. Therefore, the central banks simply roll the “leases” over, again and again.

So, back to the subject of manipulation. Why would you invest in a market that is so clearly manipulated? First, because it is the right thing to do to favor honest money over fraudulent money. But the other reason is that the establishment’s power to manipulate public opinion of gold and influence the market itself is becoming weaker and weaker, and will soon fail altogether.

I was investing in gold and silver and precious metals equities when gold was $260 an ounce. The cries about manipulation of the market were as loud then as they are today. The manipulation was real. And yet, gold has risen 240% in that time. Gold stocks have soared even higher. Despite the best efforts of the establishment, gold has climbed steadily for eight straight years. And considering what is happening in the monetary realm, this trend shows no signs of abating.

However the manipulation due to central bank leasing operations will most certainly abate. These banks do not have an unlimited amount of gold to sell into the market. And their appetite for doing so is clearly waning. Central banks around the world are now adding gold to their coffers rather than divesting.

And despite propaganda efforts to the contrary, the public is gradually waking up to the fraudulent nature of the fiat-based monetary system and the shaky notion of holding unsound dollars in unsound banks.

In the realm of world finance, gold is a tiny market. It won’t take a huge shift in sentiment to stir up a massive increase in demand… demand that could not be met by the world’s miners and would have to result in a sharp increase in prices. Sentiment has already turned. But not nearly to the degree it will when the specter of inflation returns.

That day is coming. Got gold?

Source:  Gold Is Manipulated…And You Should Buy it Anyway

• Sources close to the matter told Bloomberg News that President-elect Barack Obama may name Steven Rattner as “car czar,” a top-level position that would oversee the conditions of which bailout money is given to U.S. auto companies, Bloomberg reported. Rattner co-founded private-equity firm Quadrangle Group LLC in 2000.

• Barclays plc is planning to cut more than 2,100 jobs from its investment banking and investment management units, sources told Reuters. About 1,300 jobs would be lost from Barclays Capital. About 500 from Barclays Wealth. And about 370 from Barclays Global Investors.

• Great Britain energy titan, BG Group plc, plans to invest between $4 billion and $5 billion to develop oil fields in Brazil through 2012. “We’re confident that these developments can be made economic at lower oil prices, but we’ll need to ensure the efficiency of the investment. Oil prices we see today are much more realistic,” Chief Executive Officer Frank Chapman told Bloomberg.

• Pharmaceutical giant Pfizer Inc. (PFE) said it plans to slash 800 research jobs, a reduction of 5% to 8% of its research workforce. Most of the cuts will come from labs in California, Connecticut and England, and are in addition to the near 10,000 jobs cut companywide since early 2007, Reuters reported.

• Crude futures halted a weeklong price slide yesterday (Tuesday), as light, sweet crude for February delivery rose 19 cents to settle at $37.78 a barrel on the New York Mercantile Exchange. Futures briefly touched $36.10 a barrel, a new low for the year, earlier in the day.

• Commercial banks borrowed more while investment banks borrowed less from the U.S. Federal Reserve’s emergency lending program over the most recent week. The Fed report said commercial banks averaged daily borrowing of $87.9 billion during the week that ended last Wednesday. That was an increase from the $86.6 billion in average daily borrowing for the week that ended Dec. 31. Investment firms borrowed nearly $36 billion over the past week, USA Today reported. That was down from the average of $38.5 billion for the week that ended Dec. 31, the newspaper reported.

• U.S. companies may have to contribute $109 billion to their corporate pension plans this year to fill funding gaps caused by turmoil in the financial markets, consulting firm Watson Wyatt Worldwide Inc. (WW) said yesterday (Tuesday). Watson Wyatt expects companies also will have to contribute more than $102 billion in 2010. Both of these figures are up significantly from the $38 billion that companies were required to contribute to the plans last year.

Source: Global Investment News Roundup Wednesday, January 14th, 2009

The truth is there were many.

Fundamental and pragmatic banking regulations, which arose from the devastating financial collapses of the Great Depression, for decades strengthened U.S. banks and capital markets, making them the twin engines of American growth and the envy of the world.

The systematic dismantling of those same regulations by greedy bankers began in earnest in 1980, peaked in 1999, and finally climaxed with an insane Securities and Exchange Commission ruling in April 2004, a final decision that paved the way for the implosion of everything regulation was designed to protect.

Just how did we get here?

Wall Street bankers, their exorbitantly well-paid lobbying army of former congressmen and former regulators, their greatly contributed-to sitting legislators and, most egregiously, the self-righteous and still mega-rich “former” Street executives have systematically eviscerated the muscle and bones from the regulatory bodies charged with protecting us from banks’ self-destructive greed. An inordinately powerful group of executive insiders from the once-deeply respected House of Goldman Sachs (GS) have served as U.S. Treasury secretaries and in innumerable other administrative capacities.

A Reflection on Reform

The Depository Institutions Deregulation and Monetary Control Act of 1980, signed into law by President Jimmy Carter, was the first major reform of the U.S. banking system since the Great Depression.

While touted as a boon to consumers, the law was actually a gold mine for bankers. Among other requirements and banker “gifts” the 1980 Act’s provisions:

• Lowered the mandatory reserve requirements banks keep in non-interest bearing accounts at U.S. Federal Reserve banks.
• Established a five-member committee, the Depository Institutions Deregulation Committee, to phase out federal interest rate ceilings on deposit accounts over a six-year period.
• Increased Federal Deposit Insurance Corp. (FDIC) coverage from $40,000 to $100,000.
• Allowed depository institutions, including savings and loans and other thrift institutions, access to the Federal Reserve Discount Window for credit advances.
• And pre-empted state usury laws that limited the rates lenders could charge on residential mortgage loans.

In 1980, in a virtual landslide, Ronald Reagan was elected and grabbed the conservative mantle. A year later, the shock troops of the heralded Reagan Revolution launched their attack and embarked on a massive, systematic de-regulatory campaign.  President Reagan’s first treasury secretary, former Merrill Lynch & Co. Chief Executive Officer Donald T. Regan, became chairman of the Depository Institutions Deregulation Committee.

In a burst of deregulatory bravado in 1982, Treasury Secretary Regan ushered through the Garn-St. Germain Depository Institutions Act. Key provisions of the Act ultimately coalesced with Treasury Secretary Regan’s protection of the lucrative “brokered deposits” business, in which Merrill was a major player, and paved the way for the future collapse of the savings and loan industry.

Some of the provisions in that 1982 Act would later be blamed for thousands of bank failures. The provisions permitted the following:

• Allowed savings and loans to make commercial, corporate, business or agricultural loans of up to 10% of their assets.
• Authorized a capital assistance program – the “Net Worth Certificate Program” – for dangerously undercapitalized banks, under which the Federal Savings and Loan Insurance Corp. (FSLIC) and the FDIC would purchase capital instruments called “Net Worth Certificates” from savings institutions with net worth/asset ratios of less than 3.0%, and would theoretically later redeem the certificates as these shaky banks regained financial health.
• And, most frighteningly, raised the allowable ceiling on direct investments by savings institutions in nonresidential real estate from 20% to 40% of assets.

The history of S&L greed and fraud – which resulted from brokered deposits and deregulation – wasn’t forgotten by legislators. But it was steamrolled by bankers pursuing an even greater unshackling of the regulations that constrained their ambitions.

Shattered Glass

The ultimate prize was to be the undoing of the Glass-Steagall Act of 1933. Glass-Steagall, officially known as the Banking Act of 1933, mandated the separation of banks according to the types of business they conducted. Investment banks, whose securities related activities resulted in relatively large risks, were to be separate from commercial banks, whose depositors needed greater protection. The Act created deposit insurance and the government wasn’t about to allow taxpayer-backed insurance of commercial bank deposits to be exposed to securities related risks. It was a prudent and sensible separation. Bankers tried for years to undermine and overturn Glass-Steagall, but it took time.

In 1987, Alan Greenspan replaced Paul A. Volcker – the stalwart Federal Reserve Board chairman, national inflation-fighting hero and active proponent of Glass-Steagall (and now economic confidant of President-elect Obama).

In its twilight days, the Reagan administration was determined to further fertilize the seeds of deregulation and Greenspan’s Ayn Rand-inspired “objectivist,” free-market philosophies would be the perfect embodiment of the deregulatory movement.

Securitization Enters the Scene

A year later – in 1988 – two very quiet revolutions sprouted that would ultimately hand bankers twin throttles to rain terror on us all.

That year, the Basel Accord established international risk-based capital requirements for deposit-taking commercial banks. In a byproduct of the calculations of what constituted mortgage-related risk (by nature of the loans’ long maturities and illiquidity) lenders should be expected to set aside substantial reserves; however, marketable securities that could theoretically be sold easily would not require significant reserves.

To obviate the need for such reserves, and to free up the money for more-productive pursuits, banks made a wholesale shift from originating and holding mortgages to packaging them and holding mortgage assets in a now-securitized form. Not inconsequentially, this would lead to a disconnect between asset-quality considerations and asset-liquidity considerations.

Meanwhile, over at the U.S. Commodities Futures Trading Commission (CFTC), the appointment of free-market disciple Wendy Gramm, wife of U.S. Sen. Phil Gramm, R-Tex., as chairperson, would result in her successful 1989 and 1993 exemption of swaps and derivatives from all regulation.

These actions would not be inconsequential in the aforementioned reign of terror that was still to come.

In 1993, with her agenda accomplished, Wendy Gramm resigned from her CFTC post to take a seat on the Enron Corp. board as a member of its audit committee. We all know what happened there. Enron’s fraud and implosion became the poster child for deregulation run amok and ultimately helped spawn Sarbanes-Oxley legislation, which has its own issues.

The constant flow of money to lobbyists and into legislators’ campaign coffers was paying off for the banking interests. The Fed, under Chairman Greenspan, was methodically deconstructing the foundation of Glass-Steagall. The final breaching of the wall occurred in 1998, when Citibank was bought by Travelers. The deal married Citibank, a commercial bank, with Travelers’ Solomon, Smith Barney investment bank and the Travelers insurance business.

There was only one problem: The deal was clearly illegal in light of Glass-Steagall and the Bank Holding Company Act of 1956. However, a legal loophole in the 1956 BHC Act gave the new Citicorp a five-year window to change the landscape, or the deal would have to be unwound. If aggressively flouting existing laws to pursue a personal agenda isn’t a perfect example of bankers’ hubris and greed, then maybe I’ve just got it all wrong.

Phil Gramm – the fire breathing free-marketer, Texas senator, and chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs – rode to the rescue, propelled by a sea of more than $300 million in lobbying and campaign contributions. In 1999, in the ultimate proof that money is power, U.S. President Bill Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act, at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup Inc. (C) as the new “King of the Hill.”

From his position of power, Sen. Gramm consistently leveraged his Ph.D in economics and free-market ideology to espouse the virtues of subprime lending, where he famously once stated: “I look at subprime lending and I see the American Dream in action.”

If helping struggling borrowers pursue their homeownership dreams was such a noble cause, it might have been incumbent upon the senator to not block legislation advocating the curtailment of predatory lending practices. From 1989 through 2002, federal records show that Sen. Gramm was the top recipient of contributions from commercial banks and among the top five recipients of campaign contributions from Wall Street. [Click here to read "How Subprime Borrowing Fueled the Credit Crisis."]

Since moving on from the Senate in 2002 to mega-universal Swiss banking giant UBS AG (UBS), where he serves as an investment banker and lobbyist, Gramm makes no apologies. “The markets have worked better than you might have thought,” he has been quoted as saying. “There is this idea afloat that if you had more regulation you would have fewer mistakes. I don’t see any evidence in our history or anybody else’s to substantiate that.”

The “New” Math

On April 28, 2004, in a fitting and perhaps flagrant final act of eviscerating prudent regulation, the SEC ruled that investment banks may essentially determine their own net capital. The insanity of that allowance is only surpassed by the fact that the SEC allowed the change because it was simultaneously demanding greater scrutiny of the books and records of what were the holding companies of investment banks and all their affiliates.

The tragedy is that the SEC never used its new powers to examine the banks. The idea was that Consolidated Supervised Entities (CSEs) could use internal models to determine risk and compliance with net capital requirements. In reality, what the investment banks did was essentially re-cast hybrid capital instruments, subordinated debt, deferred tax returns and securities with no ready market into “healthy” capital assets against which they reduced reserve requirements for net capital calculations and increased their leverage to as much as 30:1.  [Click here to read "How Wall Street Manufactures Financial Services Products," an insider's look at how greed on Wall Street results in unscrupulous investment instruments]

When the meltdown came the leverage and concentration of bad assets quickly resulted in the shotgun marriage of insolvent Bear Stearns Cos. to JP Morgan Chase & Co. (JPM), the bankruptcy of Lehman Brothers Holding (LEHMQ), the sale of Merrill Lynch to Bank of America Corp. (BAC), and the rushed acceptance of applications by Goldman and Morgan Stanley (MS) to convert to Bank Holding Companies so they could feed at the taxpayer bailout trough and feast on the Fed’s new Smörgåsbord of liquidity handouts. There are no more CSEs (the SEC announced an end to that program in September). The old investment bank model is dead.

The motivation for bankers to undermine and inhibit prudent regulation is inherent in banker compensation incentives. The September 1993 Journal of Financial Research sums up the problem on compensation by concluding: “Firm characteristics that influence managerial compensation include leverage (as a measure of observable risk) market-to-book ratio of assets, size and shareholder return. Evidence suggests that Bank Holding Companies may be exploiting the deposit insurance mechanism because leverage is a significant factor in our results for incentive-based components of compensation. Our results strongly support the view that fundamental shifts in business activities of Bank Holding Companies have influenced their compensation strategies”.

No one would tempt an alcoholic by putting one in charge of a liquor store and neither would anyone put a fox in charge of a henhouse. So why are greedy bankers being allowed to rewrite banking regulations to enrich themselves while leveraging taxpayers, destroying trillions of dollars of hard-earned savings and sinking us into a potential depression?

Until transparency sheds light on the backroom dealers and influence peddlers that aligned with Wall Street against Main Street, we will continue to be held hostage to the same greed and avarice that manifests itself in too many human beings who actually have the power to execute their personal agendas.

This is the story of how we got here. Where we are is actually even scarier than authorities are willing to admit. In the second article in this three-part series later this week, I will be the unfortunate bearer of the news of where “here” actually is.

Source: How Deregulation Eviscerated the Banking Sector Safety Net and Spawned the U.S. Financial Crisis

The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves against losses after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital.

– Meanwhile, Reuters reports that U.S. banks will need more $700 billion in government cash injections to stay afloat because “banks cannot predict how many of their loans will sour because they do not know how much the economy will shrink, and forecasts of their future losses would only spook investors.”

– The numbers are certainly worrying:

By the numbers, the outlook for banks is troubling. U.S. commercial banks had about $1 trillion of capital as of the end of the second quarter.

That may sound like a lot, but Alpert estimates that banks globally could have a total of $1.25 trillion to $1.5 trillion of writedowns and losses from mortgages, of which perhaps $600 billion have already been recorded.

– Earnings season is upon us. Investors are reacting to the prospect of corporate losses. This from MarketWatch:

U.S. stock futures pointed to a second straight drop on Wednesday on concerns for earnings in a rocky economy, though Apple looked set to buck the trend after the consumer electronics giant was able to sell far more iPhones than expected.

S&P 500 futures fell 20.1 points to 939.20 and Dow industrial futures tumbled 166 points. Futures on the tech-concentrated Nasdaq 100 fell a more modest 15.5 points to 1,277.00.

– Global stock indexes also fell. This from Bloomberg:

The MSCI World Index lost 2.9 percent to 944.07 at 12:02 p.m. in London. The index has lost 40 percent this year and oil has tumbled more than 50 percent from its peak in July as concern deepened government bailouts to save the global banking system won’t avert a recession.

– In the currency markets, the British pound hit a five-year low against the dollar. The euro plumbed a 20-month low against the buck.

– Crude oil prices fell below $70 a barrel on growing fears of a global economic slowdown. OPEC’s scheduled meeting on Friday to discuss output cuts has so far failed to stem oil’s slide.

– A lot of investors are calling a bottom — at least a tentative bottom — in stocks.

– Addison Wiggan and Ian Mathias in The 5 Min. Forecast note that Jeremy Grantham, self-proclaimed “perma-bear” is turning bullish.

Grantham says the time has come for “hesitant and careful buying” of equities. Grantham, who also correctly called a global bubble among all asset classes last year, told his $120 billion worth of clients that this is the quarter to start buying.

“On Oct. 10, we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will, therefore, be steady buyers at these prices. Not necessarily rapid buyers — in fact, probably not — but steady buyers…

“History warns, though, that new lows are more likely than not.

“Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look OK for now, but the pound does not. Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower.”

“But the big banks are about to get a whole lot cheaper.”

Andrew should know. He’s the CFO of a publicly traded bank. He knows how banks work… He’s the one who decides what the bank does with its money. He explained how it’s feast or famine now in the banking business… It’s feast if you’re a small bank, like his. And it’s famine if you’re a big bank.

Andrew is so optimistic about small banks, he’s just invested a chunk of his own savings in shares of tiny regional banks.

But he won’t touch the big banks like Citibank.

He says beyond the problems you already know about, the big banks have two more crises ahead of them – commercial real estate loans and credit cards. Let’s take a look at both…

When it comes to commercial real estate, banks are about to get hit with defaults here… You see, when a big bank makes a huge construction loan, it gets two years worth of interest payments in advance. Well, for many of those loans made at the top of the market, those two years are coming up.

———- Advertisement ———-
Save $2,000 on the Price of Our Research

For the next 3 days only, we’re offering 50% off the price of the best-performing research advisory we publish.

If you’re interested, we must hear from you by Tuesday, June 10 at the very latest. After this, this deal will expire.

Click here for more information.
————————————

As Andrew explained, this could mean trouble… The big construction loan might have been made to build a shopping center to serve a new neighborhood… The problem is, that new neighborhood was either never built or it didn’t sell well. Therefore the shopping center was either never built or it has no tenants. Now, there’s a real chance the developer will walk away from the construction loan.

Andrew figures big banks are in big trouble with their credit cards, too…

That’s because homeowners got used to taking a line of credit out on their home – a home-equity line. But once the real estate market turned, instead of cutting back on spending, homeowners turned to their credit cards.

Andrew told me the big banks moved too slowly here… It took ‘em a while to realize what was happening. Now they’ve pulled in those lines of credit. But Andrew thinks they were a few months too late.

So beyond the liquidity crisis… beyond the subprime crisis… beyond the housing crisis… the big banks have two more crises coming: commercial real estate loans and credit cards.

The opportunity here is in the tiny banks instead.

Andrew says the big banks have tightened up their lending standards so much, they’ll hardly make a loan. So Andrew, with his smaller banks, can make “slam dunk” loans all day… like jumbo loans to people with excellent credit and big down payments.

While it’s a worst-of-all-worlds environment for the big banks, the high-quality small banks – ones that simply stick to taking deposits and making safe loans – are in an ideal situation…

The small banks have less competition (mortgage lenders have disappeared and big banks aren’t taking their customers). Now they can charge higher interest rates – and make bigger profits.

So is it time to buy bank stocks?

According to my banking insider, Andrew, it’s time to avoid the big bank stocks… and back up the truck on the little ones that simply take deposits and make safe local loans.

Good investing,

Steve

Source: Time to Buy These Tiny Stocks?

Whether it was frantic buying or frantic short covering is unknown. But once the 20-day moving averages for both metals were significantly challenged, someone decided that that was enough…and both metals started down the moment that London closed for the day. Volume was pretty decent in both metals.

Wednesday’s open interest numbers are as follows. Gold o.i. rose 1,594 contracts and…once again…silver did the opposite, with o.i. down 670 contracts. This won’t be in the COT until May 23rd.

I’ve talked a fair amount about the 20- and 50-day moving averages the last week or so. Sooner or later, they will be broken to the upside by a substantial amount, and the tech funds will come pouring back in…and away we will go again. But before you start cheering, you need to keep the following in mind. The price of both gold and silver have always been a dance between the tech funds in the Non-Commercial category and the bullion banks in the Commercial category…always. At this moment, near the lows in price (and the 200-day moving averages), these same bullion banks are still short (as of the last COT) a knee-wobbling 79% of the entire Comex gold and silver market…not just the Commercial category where they reside. As these previously mentioned tech funds go long…who is going to take the short side of their long transaction? If it isn’t going to be the bullion banks, it certainly isn’t going to be anyone else, as all but 21% of the rest of the traders are LONG gold and silver. What happens then will determine whether prices explode to the upside (because no one wants to take on any more short positions), or the bullion banks go even shorter…and more concentrated. That time is getting very close.

I see a couple of days ago that banking analyst Meredith Whitney blasted Citigroup’s turnaround plan saying the financial giant “is so deep in a black hole that even renowned physicist Stephen Hawking could not help the ailing company.” Not too many shades of grey in that comment.

And in the King Report last night, there was this Freddie Mac answer to an analyst’s question…”No it’s not, Paul. We made a determination in the first quarter that given how widely the pricing we were getting on the ABS (Asset Backed Security) portfolio, that it no longer made sense to leave that in Level 2, so we essentially moved the entire ABS portfolio into Level 3. We were still using the mean pricing that we were getting from the dealers. So we’re not using a model price.” Freddie Mac now has an eye-watering Level 3 (mark to myth) portfolio of $157 billion. Everything is fine.

Two stories today. The first is from chief investment strategist John Embry over at Sprott Asset Management in Toronto. It’s his latest commentary posted in Investor’s Digest of Canada and is entitled “Last Chance to Board Gold Train at under US$1,000″. The pdf file is linked here.

The second article is from Ambrose Evans-Pritchard from the The Telegraph in London. It is more than worth the read because there is clear evidence of serious conflict boiling up inside the EU, and there is quite a discussion about it. The article is entitled “OECD Warning as Stagflation Goes Global” and is linked here.

Between two evils, I always pick the one I never tried before. – Mae West

The President’s Working Group on Financial Markets must be in a frenzy about now. How they keep the markets levitated in the face of total economic disintegration is beyond me. Today’s activity will probably be another circus…Fridays always are…and we at Casey’s Daily Resource Plus will be here to report on it on Saturday. Have a great weekend.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s this…Friday, May 16th, 2008

There is a new report from the Comptroller of the Currency titled “OCC’s Quarterly Report on Bank Trading and Derivative Activities, Fourth Quarter 2007″, which shows that total bank holdings of derivatives is estimated to be “only” $164.2 trillion, whereas I seem to remember that the global glut of derivatives is upward of $700 trillion, which are both numbers so big that I cannot even begin to comprehend the enormity of them.

The report shows that the notional value of derivatives held by U.S. commercial banks has suddenly plunged by a whopping $8 trillion, which is (unbelievably) still only 5% of the total, and which merely takes the total down to the aforementioned-yet-still-staggering $164.2 trillion.

When I realized that $8 trillion is more than half of America’s GDP, that is when I realized that “Houston, we seem to have a problem, as we are on fire, and we are tumbling out of control into the sun where we will soon be fried to a cinder.”

And let’s not forget that even this baleful news is the best that the banks can come up with, as the whole report is based on banks volunteering to tell stories about themselves, which is unbelievably the same as with, according to an article in the Financial Times, Libor rates, which are the agreed-upon interest rates that London bankers agree to charge on short term loans to each other.

The upshot of asking lying, greedy bankers (the villains of history) to tell the truth and let everyone know what disreputable, untrustworthy scum they are has now proved to be an unreliable system of self-regulation, and thus the Libor rate may be understated because the rate is based on self-reports of people who are bankers, which means that they are lying scumbags who falsely report that their short-term borrowing costs are lower than they are, because they know it looks bad that they are getting charged a high interest rate, which proves that the people who are loaning the money to them know what kind of lying, scumbag bankers (as redundant as that is) they are.

But it is these self-reports, like the American O.C.C reports, that are the backbone of the Libor rate, which affects lots and lots and lots of other rates.

By how much is the Libor lending rate understated? Maybe as much as 0.3%, which doesn’t sound like that much, but when you are talking about trillions and trillions of pounds and euros of debt, it adds up to a lot of money! Now you see why they are so interested in lying!

And the last thing we need is higher interest rates, as Bloomberg.com reports that “U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit”, which is being made manifest by noting that a Merrill Lynch index showed that “The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007.” Wow! What’s that, an increase of 5,000% or something?

And another scary Bloomberg item was that loans are becoming harder to get, regardless of the interest rates, and “Banks worldwide are demanding 60% more in collateral from investors such as hedge funds to cut the risk of derivative trades going bad, the International Swaps and Derivatives Association said.”

And another horror is that the stock market went up, which is Pretty Freaking Strange (PFS) since Barron’s reports that the earnings of the Dow Jones Industrials went down, dropping to $225.53 from $234.49. This has produced the unbelievable price-to-earnings ratio of 57! Earnings are going down, but the stocks are going up! To a P/E of 57! Un-freaking-believable!

And not only that, but DJ Transportation index saw its earning drop, too, to $218.60 from $230.91, taking this index’s P/E to 23!

And while the venerable S&P500 has not yet shown any more deterioration in its earnings, the fact that the market went up made the P/E of this index go to a lofty 21! All of this in the face of deteriorating conditions and economic collapse! This is beyond incredible!

How can you NOT run to gold in such crazy times? Ponder this question well, as a lot depends on your answering it correctly, much like when the minister asked you, “Do you take this woman to be your lawfully wedded wife?”, and you know how well that turned out. So, like I said, ponder it well!

The Mogambo Sez: The nice thing about owning exclusively gold, silver and oil is that you make a lot of money when inflation is roaring like this, and you are sure to make a lot more in the future, too, which is even nicer!

There is a valuable lesson in there for you if you will look for it and then act on it. If not, then you are not as smart as you look! Hahaha!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

More are likely to follow, at least until normal conditions are resumed. Unclogging the mortgage market would be numero uno on an estate agent’s wish list. Something the Bank of England is working on. They’re look for a way to squirt more cash into the system without adding to the £100bn gorilla dropped on to the taxpayer’s already aching back with Northern Rock.

The Treasury is about to OK a plan for banks and building societies to swap their mortgage-backed assets for government bonds as opposed to cash, reports The Times. Though they don’t say why, but I think we can guess. The BoE can get its treasury bonds back more easily than slippery cash. It’s essential the taxpayer doesn’t shoulder any more risk, says LibDem Treasury spokesman, Vince Cable. Agreed. Otherwise we might as well give old Wedgie Benn a call, nationalise the lot of them and be done with it. Just when we thought we were Thatcher’s spawn, a Socialist utopia muscles in through the back door and repossesses our mortgaged home in the name of the Council.

A deal with the UK banks is pending within the fortnight and London bank shares are having a good day on the back of it. What also came to light today is that Libor, the measured rate at which banks lend to one another, may not be giving an accurate read. Commercial banks may be being a little “economical with the actualite”, say reports, of exactly what they’re having to pay for funding. The fear is that if everyone knew just how bad it was, it wouldn’t help much, not least them. The British Bankers Association is so concerned it has brought forward its review of the Libor rate system in a bid to shore up its credibility.

Over in the US, “real estate is getting worse,” JP Morgan CEO Jamie Dimon told investors yesterday. He expects US house prices to fall by another 9% this year. Others see peak-to-trough falls of around 20% or more.

Another banker, CEO of Wachovia Kennedy Thompson, doesn’t see the economy recovering until late 2009. “Until housing prices find a bottom, capital markets are going to be frozen.” His counterpart at the Bank of America, Kenneth Lewis, would appear to agree. He doesn’t see the US housing bust bottoming before 2009 either.

Former Fed chief Alan “it’s not my fault” Greenspan said this thing won’t be over until the housing market stabilises, but is a little more optimistic that it will come sooner. When that day comes what percentage of the economy will be consumer spending we wonder? It was around 70% before the roof collapsed on the EZ money house-as-a-cash-dispenser economy.

Much the same could be said of the UK’s economy too. Consumers, either voluntarily or involuntarily, have been pulling in their purse strings and refocusing on needs at the expense of wants. The implications of this collective behaviour shift have been showing up regularly in the results of publicly listed companies, most notably in the retail sector. New examples today include WH Smith, where like-for-like sales fell 2% on high street “weakness”. And Findel plc, a shopping catalogue business and educational supplier, which issued a profits warning as it upped its bad debt provision. Something of a swift change of fortune after saying earlier in the month it expects a record profit for the year to March.

*** Woah…oil $115!

It keeps going up in leaps and bounds, but Mr Market doesn’t seem to care. His attentions appear focused exclusively on another form of liquidity. The kind that generally is found above ground and sloshes (or did, pre-August ‘07) through financial markets, ensuring everyone it touches is kept in champagne and bonuses.

And yet a few days ago we had the Russian VP of oil giant Lukoil saying Russia had hit peak oil already… Already? And there we were thinking the natural home of autocratic rule was just getting started with the black goo!

And today, the FT does nothing to calm the nerves of a tight market. Nigerian production could fall by a third by 2015, it reports. Reading further we find this is less a supply issue than a financial one. Big Oil, in the shape of Shell, ExxonMobil and Chevron, are finding an unreliable partner in the Nigerian government (why are we not surprised?) which is not ponying up its share. A headache Big Oil one doesn’t need, particularly Shell, given its recent history of the dodgy reserve booking and its ongoing struggle to replace what it’s sucking out of the ground with new reserves.

*** “Don’t talk to me. You want to know why Poles going home? I tell you,” says Simon, who’s been fixing up the bathroom and is returning home (for a visit he assures).

“I come here four years ago. Then 7 to 1”, (7 Polish Zloty to £1).

“Now 4 to 1 and every day going down.”

A trend noticed by “counter eddy” migrant Jim Parton, who thinks there may be money in it. The former City Whiz kid and author of the bestseller Buck Stops Here, is now installed in a Polish castle and asks: where can one buy Polish bonds? A nice 6% yield, an appreciating currency and wage inflation being crushed by migrant workers returning home. Sounds good to us, and with little call on our testosterone levels.

Finally, as basic food supplies cause shortages and price rises around the world, check this “World Clock” for a sobering estimate of how fast we’re adding to our number.

Finally, finally… no news from Bill again today as the concerns of running a multinational publishing empire make for increased demands on his time. He will be back soon, I’m sure. As to when, I’m not.

Regards,

Rob Mackrill
The Daily Reckoning

The goal of the FED, as with all central banks, is three-fold: (1) to protect the largest
commercial banks from their depositors, who occasionally exercise their contractual right to withdraw currency (the ungrateful cads); (2) to control entry of newcomers into the bankers’ cartel (interlopers); (3) to keep the stock market from collapsing in a panic, thereby persuading depositors to withdraw currency.

With the Federal Reserve System’s latest proposal, presented to the public by Secretary of the Treasury Henry”Goldman Sachs” Paulson, the FED is asking the United States government to make it the Great Protector of Capital.

Think of the bank run scene in “It’s a Wonderful Life.” Ben Bernanke wants us to view him as kindly Jimmy Stewart, handing out his honeymoon money to save the family
business from fearful depositors who want their money back. Sorry, but the best I can mentally conjure is an image of Donna Reed with a beard.

The Federal Reserve System has always been presented to the voters as the lender of last resort, the provider of the national safety net. But because of the now-admitted
fragility of the present leveraged financial system, the FED has become the deal-doer of first resort. When the New York FED intervened on Sunday, March 17, to cobble together an emergency deal for J. P. Morgan Chase to buy out Bear Stearns’ investors for $2 a share (the price had been $10 on March 15 and $68 on March 11), the New Domestic Order was made visible. The FED, not the capital markets, will set prices of financial institutions whenever the FED’s bureaucrats deem this necessary.

Anyone who says that the FED is not using its government-granted monopolistic power over money to protect the capital markets from the now-unpleasant effects of the
FED’s actions under Alan Greenspan deserves to be a Bear Stearns investor.

MORAL HAZARD AND UNCLE SCROOGE

“Moral hazard” is the phrase that describes one negative effect of guaranteeing the survival of a group of companies or an entire industry that have made bad investments, but which are then bailed out by the government or its licensed agent, the Federal Reserve System.

What is this negative effect? To promote future high-risk loans or investment strategies that offer above-market rates of return because of this risk.

The decision-makers, knowing that their rich uncle has previously guaranteed that several large firms were not allowed to go bankrupt, now pursue investment strategies
which they would not pursue if they believed that they would be held fully accountable for their actions. Senior managers see that their peers were bailed out. They think,
“We will be bailed out, too.” Uncle Sam is the rich uncle. And also Uncle Ben –
not the rice fellow: the FED fellow.

There is another Uncle with a lot of money: Uncle Scrooge. Uncle Scrooge was never dumb enough to offer his nephew Donald an insurance policy for Donald’s schemes to
make money. If he had, he would have found himself handing out a lot of money.

Uncle Scrooge understood the effects of insuring profit-seeking schemes by people who have been given security from their own mistakes. How do I know what Uncle Scrooge thought? Because I knew him personally. Well, not quite. I knew his advisor.

For many years, the man who wrote the story lines for the Uncle Scrooge comic books was Vic Lockman. He was a professional cartoonist. Back in 1969, he published a
cartoon booklet on the Federal Reserve System, “The Official Counterfeiter.” That booklet deserves to be posted on some website, or lots of websites.

Uncle Scrooge had a vault full of gold coins. So does the Federal Reserve System, or so we are told. Uncle Scrooge owed his coins. The FED holds gold bullion bricks
as a reserve for a part — a fixed part — of the money supply of the United States. It does this on behalf of the United States (it says here). That gold may still be in the vault at the New York FED, or it may not. Members of Congress do not know, nor do they know what, if anything, is in the vault at Fort Knox. Congress is assured that the gold is there. By whom? By the handful of Treasury and Federal Reserve bureaucrats who have access to these vaults.

So, with gold as a reserve — we hope — and with government debt as a reserve, and with mortgages handed over to the FED by banks and financial institutions in exchange for Treasury debt, the Federal Reserve System regulates America’s money supply, or tries to.

It now wants to regulate far more than the money supply. It wants to regulate the institutions that lend or invest large chunks of the nation’s money supply. Why? Officially, because of the fragility of the financial system. That, at least, is the implication of Secretary Paulson’s published statements. The financial system was not seen as fragile in July, 2007, but it is now. On the contrary, the system was said to be A-OK in July, 2007, but not now. Everything is different today.

It isn’t different, of course. It is the same. What is different is that what was always implicit has now become explicit: the threat of falling dominoes. If the proposed legislation passes — and it will — things will be even more different in the future.

BAD MORTGAGES? LET’S WRITE MORE!

Recently, a memo issued by Wachovia Bank indicated that it would no longer make high-risk loans to home buyers. This sounds to me like locking the barn door after the horses have escaped. The memo got leaked. Then an amazing thing happened.
Wachovia’s response was neither to confirm nor deny.

You think, “Wait a minute. Why not confirm it? Why not admit that making high-risk loans is a bad policy?” Because Wachovia is regulated by the United States government. It must be very careful about refusing to make high-risk loans.

There is a bank lending policy called red-lining. Banks in the past refused to make mortgage loans in neighborhoods where there is a past record of high default rates. This policy is today illegal. The Federal government subsumes it under racial discrimination.

It’s not that red-lining was aimed at the Sons of Tonto. It was aimed at high-risk neighborhoods. And, because birds of a feather are said by the U.S. government
never to flock together, it’s illegal to discriminate against birds of a certain color.

We know that zip code marketing is very profitable. The Claritas company has broken the United States into 66 different neighborhood types: income, age, education, etc.
These are tied to nine-digit zip codes. It sells this information to marketers who want to plan sales campaigns for certain products.

Claritas has been doing this for years. How? Because birds of a feather really do fly together. Response rates to direct-mail solicitations do differ in terms of zip codes, right down to all nine digits.

Wachovia is still making loans called option ARMs. These loans involve an offer to a borrowed to pay less per month than is required to repay the loan. Each month, the
money left unpaid is added to the loan’s principal. Then, at some contractual trigger price for principal, the loan’s monthly payment jumps. The borrower may have to pay twice
what he had been paying. He may pay even more than double.

Why would anyone agree to accept such a loan? Two reasons: (1) he expects his income to rise sharply in the next year or two; (2) he is a person who does not read or
understand contracts and also believes in something for nothing. Here is a description of who might reasonably take such a debt.

Option ARMs are best suited to sophisticated borrowers with growing incomes, particularly if their incomes fluctuate seasonally and they need the payment flexibility that such an ARM may provide. Sophisticated borrowers will carefully manage the level of negative amortization that they allow to accrue.

In this way, a borrower can control the main risk of an Option ARM, which is “payment shock”, when the negative amortization and other features of this product can trigger substantial payment increases in short periods of time.

http://www.GaryNorth.com/snip/532.htm

We are now in a recession. The number of people who can expect big increases in their income next year is a small and declining figure. But Wachovia is still making
option mortgages. But aren’t option ARM’s the most vulnerable to default
of all mortgages? Yes.

So, Wachovia has a big problem. (1) It wants to make more of these loans; (2) it does not want to get prosecuted for red-lining. This led to the memo. On the one hand, Wachovia made no bones about its desire to continue to make option ARM loans. Where? In California. California? Where housing prices are plummeting? Yes.

Certain markets looked more risky than others. So, in these markets — Caucasian, middle-class places like Riverside County, where I lived for a decade — Wachovia
decided it might be wise to cut back on such loans. You and I know what happens to internal memos. They get leaked. But high-level people write memos never catch
on. So, the “Los Angeles Times” got a copy and published a story on it. The memo identified 17 counties where property values have fallen so far that the bank would no
longer write new option ARMs.

When asked to explain this memo, a bank official refused to comment. The policy is merely “under consideration.” The memo was sent “prematurely.” This is a tried and true response to embarrassing memos that probably goes back to Middle Kingdom Egypt.

http://www.GaryNorth.com/snip/533.htm

The present subprime mortgage crisis has been in full swing since August, 2007. Why in March was Wachovia still making these loans — in California, Missouri, or anywhere
else? This rule comes to mind: “When you’re in a hole, stop digging.” Why isn’t Wachovia honoring it?

I don’t know about you, but my assessment is that option ARMs are really bad ideas today. I first heard of these loans 30 years ago. They were not called option ARMs. They were called backward-walking mortgages. They were written by sellers of homes who wanted to take back those homes after a hopeful buyer defaulted on his loan. It was an interim program to get a house sold when the seller expected the house’s price to rise. He wanted a buyer to occupy the house. A renter usually does not take care of a house as carefully as a buyer does. So, house sellers used backward-walking mortgages to get a down payment out of a person who was virtually guaranteed to default. The person moved in, took care of the house, and was evicted right on schedule.

No one ever sold a house with a backward-walking mortgage if he expected the house to fall in price. So, I understand Wachovia’s concern with 17 counties in California. Frankly, I think this concern applies to 3,000 other counties in the United States.

But I don’t understand this aspect of the deal. Wachovia, unlike a seller of a home who is in the business of buying and selling homes, does not want to foreclose. Wachovia is not in the house-flipping business, except as a lender to house-flippers — a bad idea these days. Wachovia presumably makes loans that it wants borrowers to pay off. Then why does it still write option ARM loans?

My guess: because it can get more borrowers to sign the loans than if the borrowers understood that the loan contract they are signing is a backward-walking mortgage.
They want borrowers now. They don’t care about foreclosures tomorrow. They expect enough borrowers to keep paying. I think they are wrong. But I don’t make policy at
Wachovia.