The momentum behind China’s economy is staggering.

“China is increasingly becoming a responsible citizen in the global community,” economist Allen Sinai of Decision Economics told The Associated Press. “No longer lawless, no longer difficult to deal with, much more responsible. It is now a powerhouse among economies and finance. And it’s a rich country.”

In just the past few weeks, two of the world’s key global institutions – the World Bank and the Organization for Economic Cooperation and Development (OECD) – and a large swath of investment banks raised their 2009 and 2010 growth estimates for China’s economy.

The OECD said it now expects China’s economy to grow by 7.7% this year and the World Bank boosted its projection to 7.2% growth.  GDP will expand by 9.3% in 2010, according to OECD estimates.

BNP Paribas SA (OTC: BNPQY), Barclays Capital, Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE:UBS), Morgan Stanley (MS), Standard Chartered Bank, and RBC Capital Markets all raised their forecasts for China’s economy as well.

So far, BNP Paribas SA is the most bullish on China’s prospective growth, as it boosted its prediction to 8.2% this year. That would top Beijing’s 8% target.  Barclays Capital, Goldman Sachs, and JPMorgan all raised their 2009 forecasts to 7.8% growth.

“The strong acceleration in underlying economic activity is now unmistakable,” Goldman Sachs economist Yu Song told TIME magazine.

China’s Homegrown Growth

China’s $585 billion (4 trillion yuan) stimulus package gave the economy a big kick in the first half of the year, spurring bank lending and driving fixed asset investment. It even stimulated the oft-maligned Chinese consumer, boosting domestic demand while the market for exports remained dormant.

Chinese banks lent about $1.08 trillion (7.37 trillion yuan) in the first half of the year, nearly double the total loans extended throughout all of 2008.  And even though the economy is clearly on the road to recovery, it’s not likely lending will let up for the rest of the year.

BNP Paribas chief economist Chen Xingdong told Bloomberg thathe expects new loans will reach 9.5 trillion yuan by the end of 2009.

“The growth recovery has been even stronger than our anticipation,” Chen said.  “Strong fixed-asset investment growth and retail sales have started to generate real demand for industrial production.”

Fixed-asset investment rose 33.5% in the first half year to $1.34 trillion (9.132 trillion yuan), according to the National Bureau of Statistics (NBS). Investment in infrastructure rose 57.4% year-over-year, with spending on railways up 126.5% and highway spending up 54.7%. Property sales were up 53% in the first six months from a year earlier.

Of course, fixed-asset investment has been consistently strong in China for the past decade. The real turnaround in the past six months has been that the frugal Chinese consumer has begun to spend more liberally.

China’s retail sales in the first half of the year rose 15% to $859.6 billion (5.87 trillion yuan).  Retail sales in June also rose 15% from May, said NBS spokesman Li Xiaochao.

“There were two highlights in promoting domestic demand: commercial apartments sales rose by 31.7% in the first half year from the same period last year; automobile sales expanded by 17.7% year on year,” Li said.

Auto sales reached 6.1 million vehicles in the first six months, helping China to supplant the United States as the world’s largest automarket. Sales could easily surpass 12 million this year.

“The rebound has been driven by the domestic economy,” Jing Ulrich JPMorgan Chase & Co.’s Chinese equities strategist told Fortunemagazine. “The consumer proved resilient – and the government acted as a catalyst.”

“China can still achieve 8% growth,” she said. “Everything is happening very fast there.”

The One Potential Hurdle for China’s Economy

There’s no question that China’s stimulus package has been an unequivocal success. In fact, the only problem may be that it is working a bit too well.

In the United States concern about inflation prompted Federal Reserve Chairman Ben S. Bernanke to outline an “exit strategy” for the withdrawal of liquidity from the financial system. Similarly, China’s biggest challenge going forward will be clamping down on lending to keep potentially hazardous bubbles from growing in its economy.

Inflation is a particular concern, as rising commodity prices have crept into imports.

“Commodity markets around the world have bottomed and are rebounding, raising imported inflation pressures,” the People’s Bank of China (BOC) said in a report analyzing second-quarter economic trends, issued by its Financial Survey and Statistics Department. “At the same time, domestic demand continues to rebound, liquidity remains flush and inflation expectations are surfacing.”

However, as in the United States, policymakers in Beijing have said they will remain committed to “proactive fiscal policy” until it is certain a recovery is underway. In fact, some analysts don’t expect to see a significant change in policy until November, when leaders and regulators meet for their annual conference on the economy.

“We must see that the economic recovery is not on a solid foundation, and the negative impacts from the international crisis have not eased,” said Chinese Premier Wen Jiabao. “An improvement in the economy does not mean the difficult period is over.”

Indeed, stimulus must be maintained until China’s all-important export sector has recovered. And while Chinese exports climbed 7.5% from May to June, they were still down 21.4% from a year ago.

Of course that doesn’t mean Beijing will just sit back and wait for lending to reach excessive levels.

“China has achieved impressive results in reviving economic activities,” Gao Shanwen, chief economist with Essence Securities, told Reuters. “The basic tone of the appropriately loose monetary policy is unlikely to change, but there will be fine-tuning.”

The BOC has traditionally used a quota system to control lending, telling banks not to exceed specific ceilings. It may continue to do so if the central bank does not see a sufficient drop in lending. It may also choose to provide banks with a less stringent lending guidance, or range, rather than an outright ceiling.

“The banks are highly responsive to government policy,” Ha Jiming, of China International Capital Corp. Ltd. (CICC), the nation’s largest investment bank, told The Financial Times.

Punitive bill issuances are another tool in the central bank’s toolkit. In September, the BOC will require banks to buy $15 billion (100 billion yuan) in special bills. The bills will be issued at punitively low interest rates and reduce the amount of money banks have on hand to lend out.

Regardless of what methods it chooses, the BOC is clearly ready to act. But it won’t jeopardize a recovery in a preemptive assault on inflation.

The central bank “will unswervingly continue to apply appropriately loose monetary policy and consolidate the economic recovery momentum,” said Su Ning, vice governor of the People’s Bank of China.

Source: With Its Economy Ignited by Stimulus Spending, China Is Leading the Global Recovery

On one side is U.S. President Barack Obama and his plan to expand the authority of the Federal Reserve. In addition to its current powers, Obama plans to give the Fed regulatory authority over large financial institutions that are considered “too big to fail.”

On the other side is U.S. Rep. Ron Paul, R-TX, who has gathered 250 signatures for a proposal to audit the Federal Reserve. This audit, by Paul’s own admission is only a down payment towards his overriding goal of abolishing the central bank.

So who’s right? Should the Federal Reserve have more authority or less? And what will the outcome mean for investors?

The call for greater Fed power comes, as might be expected, from those who think the Fed has done a good job managing the financial crisis. Their view is that the Fed – by swelling its balance sheet by about $1.4 trillion and more than doubling the monetary base in less than a year – prevented deflation from taking hold in the economy and saved the banking system, which was in dire danger of collapse.

To those with this mindset, it makes sense for the Fed to act as the primary regulator of banks and investment banks that pose a systemic risk to the U.S. financial sector.

But the problem with this plan is that any potential rescues would not be carried out on the Fed’s dime, but on that of the Federal Deposit Insurance Corporation (FDIC). That means a collapse in the banking system would actually benefit the Fed by allowing the central bank toramp up its balance sheet to replace all of the banks’ losses and ensure that its chairman makes the nightly news every evening.

Even for those who are not staunch believers in Nobel Prize-winner James Buchanan’s public choice theory, the incentives seem to be wrong. It would make more sense to put banking system regulation firmly under the FDIC, which is responsible for paying up if anything goes wrong.

It’s not likely that an empowered Fed would impose tight restrictions on the big banks. Instead, the central bank’s governance would probably become a prime example of “regulatory capture,” by which spineless regulators exist mainly to do the bidding of the very institutions they’re supposed to be regulating.

Since the rest of us are dependent on the Fed’s monetary policy to survive economically, and need bank regulation that will keep the biggest banks from picking our pockets every few years, we don’t want the Fed to become a subsidiary of Goldman Sachs Group Inc. (NYSE:GS) – something that seems likely under the Obama proposal.

On the other hand, Paul’s bill appeals to those like myself, who believe the Fed has consistently run an over-expansionary monetary policy since the mid-1990s.

The credibility of this theory has been undermined by the fact that inflation has been kept under wraps, but this month’s consumer price index (CPI) and producer price index (PPI) figures – up 0.7% and 0.5% respectively – suggest that another surge in prices may not be far off.

As we go through the fall, the months of price declines in late 2008 that were caused by the collapse of energy and commodity prices will cause year-over-year inflation to trend higher. That, in turn, is likely to raise gold prices and Treasury interest rates, causing bond market panic and inevitably changing the public perception of the Fed’s performance.

So if the Obama administration wants to give the Fed new powers and extend Chairman Ben Bernanke’s term in office (which ends in January 2010) they had better do so quickly.

In any case, Paul’s proposal to audit the Fed would bring central bank operations more under the control of politicians, who supposedly would be able to expose unpopular goings-on and unexpected losses in the Fed’s operations. That’s why it has attracted bipartisan support.

But rather than simply auditing the Fed or abolishing it, as Paul proposes, there is a much better case for giving the central bank a new mandate, whereby its obligation to maintain monetary stability is given precedence over all other obligations.

Under the Full Employment Act of 1978, it has a dual obligation to maintain employment and monetary stability. A new mandate that prioritized monetary stability would force the Fed to follow the policies of former Federal Reserve Chairman Paul Volcker. That would mean keeping interest rates well above the rate of inflation, thereby favoring savers over borrowers.

As investors, we should thus oppose the Obama administration’s plans for the Fed, which seem likely to perpetuate the rent-seeking of Wall Street’s biggest banks. We should also be suspicious of Paul’s bill to audit the Fed, since that would bring it more closely under the control of elected politicians. History has shown that politicians cannot be trusted with the ability to create money out of thin air.

Instead, we should back plans to pass legislation that “Volckerizes” the Fed on a permanent basis, making monetary policy sound, eliminating the risk of inflation, and raising the rates we earn on all of our savings to a level that pays us adequately for providing banks and other borrowers with our money.

In the end, the ability to earn decent returns on savings and keep the result is the most important capitalist freedom of them all.

Source: Choosing Sides in the Fight for the Federal Reserve: Whom Should Wise Investors Align With?

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

So how does this relate to the markets? According to the same study, Americans are supposed to have one of the lowest PDI’s, meaning that in order to avoid catastrophe, we aren’t afraid to speak up to authority in order to ring the alarms. Gladwell refers to this as “The Ethnic Theory of Plane Crashes”.

Apparently, when it comes to speaking up about potential fraud in the markets, we aren’t so ‘American’. How else can you explain the rampant fraud on Wall Street the last few years? Surely someone, somewhere inside the investment banks knew they were leveraged to the point of collapse. Until the day of reckoning, no alarms were sounded.

How about the situation at Madoff Securities? They were alerted to the situation as far back as 1999. As recently as 2005, they were told by Harry Markopolos that it was ‘highly likely’ that Madoff was running a giant Ponzi scheme. But every time the SEC looked at Madoff’s books, they couldn’t find anything.

Really? The government entity that’s sole responsibility is to find this type of thing was fooled into overlooking one of the simplest frauds known to man?

I find that hard to believe. More likely, those ‘investigators’ didn’t dig too deep for fear of ruining their lucrative Wall Street careers after working at the SEC. Why ruin a huge payday down the road investigating one of the most respected individuals on Wall Street? He was the former chairman of the NASDAQ after all. A pillar of the community. Easier to just slap a few minor penalties on the company and go about your business. Which is exactly what they did, as they found Madoff guilty of a “violation of the registration requirements of the Advisers Act.”

Let’s hope in the future that those tasked with protecting individual investors learn how to speak up. Otherwise, Gladwell may have to add another chapter to his book, entitled “The Promotion Theory of Wall Street Careers”.

Source: The Ethnic Theory of Plane Crashes

You see, there’s a bond scandal that was uncovered in Italy, with Italy losing large sums of money, and some major banks like Deutsche Bank and UBS are right smack dab in the middle of the investigations. With Deutsche Bank in Euroland, and UBS in Switzerland, there you have the story behind those two currencies taking a beating from the dollar the past two days. There are other banks like JP Morgan Chase reportedly involved, but the majority of the problems resides in Europe… Let me try to explain the problem, as I know it to be from reading the story in the U.K. Telegraph last night.

Investment bankers, many based in London, spotted a major opportunity in the 1990s. Italian cities and regions wanted to borrow money. In order to avoid ballooning debt, the central government required local authorities to put away a percentage of the loan every year in a “sinking fund” so that when it was time to repay the full sum, they would be able to do so.

Investment banks offered to manage the sinking funds. While the funds initially had to be invested in Italian government bonds, the criteria were widened to include other government debt within the European Union. This could include debt from countries seen as more likely to default, such as Greece, as long as it was triple-A rated.

The banks took a fee to manage the sinking funds. They argued to the Italian authorities that as well as saving the money to repay their initial loan, they might also make some money from the investments. Many did when the global economy was booming.

All of the contracts were different. But critics have said some contained a “sting” which was not properly understood by some of the Italian authorities. While the local authorities only earned a return on the money they put aside, the value of their total loan was at risk. The banks could invest all of the money the authority had borrowed through bonds. If everything went well, the bank would pay a return based on the incremental amounts the local authority was putting into the sinking fund, and keep the rest as profit.

If things went badly, it was the local authority which would have to pay for the loss – and then also have to pay off the bond when it became due.

And THAT my friends is the big bugaboo right now… Things have not gone well, and the local Italian authorities (like cities) are left holding the bag, and they have no way of paying this debt! It’s a remake of: The Italian Job!

OK… That was a long explanation, but one that was needed, I believe, to explain this mess… One thing that I did notice in the story is that a Japanese Bank (Nomura) was involved, and this is the first instance of any involvement of a Japanese Bank in any of the mortgage bond meltdown and now this. Could be why the Japanese yen has seen a removal from terra firma the past couple of days.

There’s also the euphoria going on from the Obama Bounce… I’ve explained this a couple of times now in the first few days of 2009, so I won’t go there again, but when the President-elect goes on TV to discuss is “stimulus plan” the “bounce” gets magnified. There’s a lot of euphoria being built up for this plan. My problem is the size that it will end up being once the lawmakers get their hands on it, and begin hanging other spending bills on the plan. That just adds to our National Debt, folks… And that, in a nutshell, is a BIG Problem for me…

The euphoria is spilling over to the risk takers, as I explained yesterday. The Big Winner yesterday was the Brazilian real, which last week had a full 6 figure move higher, followed that yesterday with a full 8 figure move higher! WOW! OK… Before we get too excited about reals, let me point out that this huge rally in the past week, has left reals about at November’s levels. It’s still got a long way to go, to get back to last summer’s levels… But, Shoot Rudy! Why throw cold water on this move? 14 figures higher is better than 14 figures lower!

OK… Have you been following this Madoff stuff? So… I hear that the lawmakers are going to grill the SEC… As if! As if the lawmakers, save for Ron Paul, could have figured out what Madoff was up to if they were the SEC! But, it’s interesting anyway… The thing that ticks me off about the Madoff meltdown is that his people pulled the wool over the SEC’s eyes, even though there had been 8 probes by the SEC in the past 16 years…

Other lawmakers expressed concern about the make up of the SEC and even whether it should exist. Rep. Ron Paul, R-Texas, said he believes Congress should eliminate the agency, which he argued gave investors a false sense of security about Madoff and other problematic investment vehicles. “Investors should be self-reliant,” Paul said.

Did you see the collapse of Auto Sales yesterday? YIKES! Where have all the car sales gone? Long time passing… Shoot Rudy, even Toyota has announced that they will shut down their plants for 11 days in Feb and March… Now, that’s should tell us something… Here’s what the Wall Street Journal printed… “GM posted a 31% drop in U.S. light-vehicle sales for December, while Ford reported a 32% fall. Toyota saw a 37% decline, and Honda saw sales drop 35%, closing out the auto industry’s worst year in more than 15 years.”

Of course one might think that there would be some “real” sales for autos, eh? And not that cheesy “you get what we pay” promotion… I mean something with some real meat to it! Better to sell than to see it rot on a sales lot!

Well… The European Central Bank (ECB) and the Bank of England (BOE) both meet this week to discuss interest rates. There’s some speculation out there that the ECB will cut rates, especially after it was announced this morning that inflation for the Eurozone has fallen to lowest level in 2 years… Of course oil prices are behind that fall in inflation, but still… The ECB has done a marvelous job of providing price stability, even when Oil prices were shooting for the moon… Of course, I’m of the opinion that we’ll see Oil prices shooting higher again, and this is all great right now, but it won’t last.

Inflation for the Eurozone hit 1.6% in December, down from 2.1% the previous month… Now that inflation is back under the ECB’s 2% ceiling target for inflation, we could very well see them cut rates this week… But, I’m going to go out on a limb and say they will be prudent and wait… But then, I don’t know about any smokey back room deals between the Fed and ECB…

The BOE will also meet, and I DO expect them to cut rates this week… The BOE is cut from the same cloth as the Fed, and believes that lower interest rates are the way to a Lender’s heart… I would argue that the way to a lender’s heart is through their stomach… They need to be fed tons and tons of cash, which is another arrow in the Fed’s quiver that they are using… But not the BOE at this time…

Today, in the U.S…. We’ll see Factory Orders for November (pretty long lag, I agree!) which I believe will follow up the previous month’s rotten print of -5.1% with another negative print of -2.3%. We’ll also see Pending Home Sales for Nov. , and later today, we’ll see the color of the last Fed meeting minutes, when they cut rates to .25%… These ought to be good!

The ISM (non-manufacturing) Index, which covers the Servicing Industry, will print too… And I don’t normally give two hoots about the Index, except for the employment component of the report, which is normally where I get my thoughts about where the total Jobs Jamboree will print. There, I just gave away one of my secrets! And you didn’t have to pay a penny for it either! WOW! What a guy! OK, stop it Chuck! Seriously though, I do use the employment component of this report to give me a clue about where the National jobs will print… So, here’s a key to look for!

Currencies today 1/6/09: A$ .7115, kiwi .5870, C$ .8405, euro 1.3350, sterling 1.46, Swiss .89, rand 9.31, krone 7.0420, SEK 7.94, forint 200, zloty 3.04, koruna 19.79, yen 94.10, sing 1.4790, HKD 7.7535, INR 48.69, China 6.8363, pesos 13.35, BRL 2.1820, dollar index 83.81, Oil $49.66, Silver $10.87, and Gold… $841.55

Source: Italian Job

Americans filed over 573,000 jobless claims last week — the most since 1982.

The Labor Dept. also said the number of people collecting unemployment reached a 26-year high too, 4,429,000.

Unfortunately, we’re just getting started if a study released this morning by UCLA is accurate. The Anderson School of Management predicts we will see negative GDP for the current and first two quarters of 2009… and the unemployment rate to reach 8.5%.

If you’re mildly interested in what it’s costing for the government to “combat” this pernicious downturn, the Treasury announced yesterday the federal government spent $402 billion… for the first two months of the fiscal year.

That’s $53 billion shy of 2008’s entire historically astronomical budget deficit.

We feared we were being alarmist back in October when we forecast a $1 trillion deficit for 2009. At this rate, a trillion will be light.

The trade deficit expanded in October, too, up 1.1%, to $57.2 billion.

Quants chained to their IBMs in the basement of Wall Street’s investment banks were expecting the deficit to contract, as nations typically pull back during times of economic strife. But something curious happened. Oil and gas got a lot cheaper… and Americans used a lot more. Who would have thought that would happen? The U.S. imported almost 75 million more barrels of oil in October than in September, when the average price per barrel was $107.

Year to date, the trade gap exceeds $590 billion… on pace to pummel 2007. But not in line with 2006’s record deficit of $753 billion. Not yet, anyway.

Oil thumbed its nose at the trade number by shooting up five bucks, to $47 a barrel today.

Still, global oil demand will contract in 2009, the International Energy Agency forecast today.

The group altered their yearly outlook again this week, this time suggesting that worldwide oil consumption will decrease from 2008 for the first time in 25 years. The world will consume 0.2% less next year, they say, at an average rate of 85.8 million barrels per day.

“Global oil demand may decline, but it is not going to plummet,” notes Byron King.

“According to this week’s MasterCard Spending-Pulse data, U.S. retail gasoline demand is back to about the same levels it showed earlier in 2008.  That is, high gas prices hurt demand over the summer and into the fall. (I drove less. Didn’t you?)  But the current low fuel prices have evidently allowed demand to recover. People are driving more. It’s basic Economics 101.

“I was talking with an economist for the American Petroleum Institute about two weeks ago.  He told me that overall gasoline demand in October was down 3%, year to year.  But diesel fuel usage was up by the same amount.  Overall U.S. oil demand is down about 8%, but that reflects the slowing use of oil in industry. Out on the road, people are still driving and trucks are still hauling.

“For all the sound and fury about the run-up in oil and fuel prices through July, and then the fall in prices after that, the aggregate demand for oil is only changing at the margins.

“Looking ahead by more than about two years, world oil demand is certainly going to grow.  It almost does not matter what we do in the U.S. or Europe. When you look at the numbers of young people who are already born and living and growing up in the developing world, the demand will be there.  Many of these young people already have a cell phone and a laptop computer.  When they finish school, they will want an apartment and a car.”

Gold is up another $20 today, to $825.

“Looks like the bulls are taking aim at $835-850,” notes Ed Bugos, “a psychologically important area of resistance. The $850 level is very important for a few reasons.  First, it is the neckline of the Jan-Jul top; second, it would reverse the bearish slope of the downtrend.

“Driving the market is a bunch of things, including the dollar’s waning momentum and the prospect of an oversold bounce in the commodities markets. However, as usual, all eyes are on the Fed’s upcoming meeting.  Speculators are looking for the Fed to make more unconventional moves, such as the targeting of long-term interest rates, or this idea of ‘quantitative easing,’ which is but a euphemism for ‘madly inflating.’

“I expect some [gold] profit taking on the news and I think we’ll see another correction before the market breaks out.  If Wall Street likes the Fed’s inflation-driven bailout package, the stock market may start to rally, which may even boost the dollar in the short term if sentiment turns in the other direction from whence it is heading now.

“So be cautious in the short term. The waters are likely going to stay choppy until the new year when a new trend emerges. But, on the other hand, the ticker tape is looking sharp right now, as it should, and I don’t expect the pullback to be extraordinary.”

In the U.S. equity market, the Obama buzz seems to be slowly wearing off. Thanks to “Barack the Builder” and his promise to beef up U.S. infrastructure, stocks have surged this week. We saw some of that enthusiasm in markets yesterday, but it was more tempered… materials and energy players led major indexes to roughly 1% gains.

But then, Barack also promised to nuke Iran this morning, if they don’t get their beady little eyes off Israel.

The Dow opened down about 100 points.

On the other side of the world, we note I.O.U.S.A.’s brand of monetary enlightenment continues to spread. South Korea cut its main lending right by a mighty 100 bps overnight, to 3%, its lowest level ever.

The Federal Reserve has given the green light to the state-owned China Construction Bank — China’s second largest — to set up shop in the U.S. Even the CCB’s peculiar ownership structure is a worthy sign of the times… 57% owned by the Chinese government, 20% by Bank of America, 5% the Singaporean SWF Temasek and shareholders own the rest. The CCB has over $1 trillion under management.

Despite the credit crunch, the CCB is the fourth Chinese bank to expand operations in the U.S.

The largest leveraged buyout deal in history has collapsed.

The 5 reported with curiosity back in July the brave attempt of the Ontario Teachers Pension Plan to buy up Canada’s biggest telecom, BCE. The teachers, trying to set a good example for their students, borrowed $35 billion to fund the $51 billion deal.

Unfortunately, the deal fell apart yesterday when KPMG, accountant’s for the union, sent over some picky details. Turns out the telecom giant is no longer worth all the money the teachers union would be borrowing to buy it.

Of course, the broken deal isn’t without its share of winners. Citi, Deutsche Bank, RBS and Toronto-Dominion Bank won’t have to find $35 billion to fund the deal. And Canadian lawyers will be able to pay for their second (and third) homes. The breakup fee alone for this deal exceeds $1.2 billion.

The U.S. House of Representatives passed a bill that would extend a $14 billion loan to the Big 3 U.S. automakers. Now it’s off to the Senate. We know how this story ends, don’t we? Hank Paulson’s bank bailout metastasized 450 pages and several hundred billion dollars when it got treated over in the Senate earlier this fall.

“About this bailout,” Agora Financial’s managing editor, Chris Mayer wrote this morning,  “I keep thinking of Frederic Bastiat, the old 19th-century economist, and his idea of the “seen and unseen.”

“Most people look at the government’s bailout of Chrysler in 1979 as a success simply because the company recovered, paid off the debts and survived. But what they ignore is the unseen. What if Chrysler had failed? Perhaps GM and Ford would have gotten the pick of the very best of Chrysler’s workers. Perhaps a good chunk of the sales that would have gone to Chrysler instead would have gone to GM or Ford. In both instances, GM and Ford would be stronger.

“Maybe, just maybe, GM and Ford would have avoided the sad fate of begging for money in 2008. If so, then the Chrysler bailout was very expensive, indeed. Old Bastiat would have a field day with the stuff going on today. Lots of people ignoring the unseen consequences of bailouts in general.”

“Remember the Yugo in the ’80s?” asks a reader.

“We loved to make jokes about it, and it was our favorite example of a poor-quality communist product.  Well, I wonder if 10 years from now people in Asia and Europe will be laughing at the cars that the Big 3 churn out if our government keeps them on life support.  Obviously, some people are laughing already.”

“A sign of tough times,” writes a reader adding to our list, “one of our neighbors was driving home early Saturday morning from working a night shift. As he turned in to our neighborhood, he found a truck parked next to the three model homes, with a man apparently ‘working’ on the fence.  As soon as his car approached, the man jumped up, hopped in the truck and sped off.  He left behind his power tool and five gaping holes in the fence. He stole the 8-by-4 foot wrought iron fence sections, apparently to sell at a scrap dealer. I guess he didn’t realize that scrap iron prices peaked near 40 cents per pound in July and then plummeted nearly 80%, to 8 cents per pound, today.”

“Jupiter moved into Saturn’s sign earlier this week,” writes another reader, boldly making a forecast of his own “and he will be there for about two-three years. Amazing how such ticks in the court of the planets can cause such drastic swings in the stock market. But… it should, or could, be good for natural resources, actually.

“Maraka is the sign of the sure-footed goat climbing up the rocky mountain, followed by the sign we call Aquarius today. Aquarius was the polestar sign at the top of the dome of the sky when the floods occurred many years ago that swamped the equatorial nations.  It brought vast and mighty changes in the world organization, with four or 10 major cities going under the tides — India, Japan the North Sea and, of course, old Noah and his boat around the Caspian. I think that caused droughts and water shortages most places, as well, on land. More water in the sea means less rain and less drinking water. I’m just brainstorming.

“When Jupiter is in Leo, it certainly does cause gold to advance in daily monetary value. But why worry?  Gold is money and always has been. Hope we get more to bury in the backyard, or under the mattress.”

The 5: Hmmm… we’ve been having difficulties with our e-mail broadcast system of late too. Do you suppose this has anything to do with the alignment of Venus, Jupiter and the moon?

We’re just brainstorming too.

Source: Another Jobs Record, Huge Deficits, Oil and Gold Forecasts, The Auto Bailout and More!

The Federal Reserve was never envisioned to be lender of last resort to a whole slew of investment banks, money market mutual funds, and commercial paper issuers.

The situation is not easy to sort out, for the simple reason that the extent of their actions is not presented by the Fed via clear and concise data. Instead, the data is complex and hard to analyze, partly because of the piecemeal way the actions were taken, but also probably due to a desire by the Fed to avoid public scrutiny and criticism.

Digging into the details of the Fed’s balance sheet reveals, however, the complete change of composition and direction of the Fed. The most obvious change is that they have doubled the size of their assets and liabilities. A year ago, the Fed’s assets consisted almost entirely of government Treasuries and a little gold.

That is a clean, safe balance sheet.

The only important liability was the currency they issued (our paper dollars). They also had a small reserve of deposits from all the banks. When Greenspan wanted to give the economy a boost by lowering short-term interest rates, he would create some money and buy Treasuries. He could also do the reverse.

Bernanke has turned this upside down. Initially he made focused loans to big banks. But then the loans became bigger than the reserve deposits, leaving the banks in total as net borrowers. The concept of a fractional reserve no longer applies when the reserve is net negative.

To fund yet more loans, Bernanke then sold off half of the Fed’s Treasuries. And he traded Treasuries for toxic waste of poor-quality mortgage-backed securities. And he encumbered half of the remaining Treasuries with “off balance sheet” swaps of about $220 billion. (Does this sound like Enron accounting?) The balance sheet started with $800 billion of mostly reliable assets and now has about $250 billion of unencumbered Treasuries.

The biggest source of funding is from the Treasury. Banks are leaving deposits in the Fed now that the Fed is paying interest.

The important conclusion is that the paper dollars are now issued by a far less soundly structured Fed, an organization that is more interested in bailing out the financial community than defending the dollar.

This chart below compares last year’s assets, which were mostly Treasuries, to this year’s twice-as-large and far more questionable mix:

The other side of the balance sheet shows that the Fed has borrowed and taken in deposits to fund the loans that are as big as the issuance of currency. In effect, the Fed has doubled its footprint and doubled its responsibilities. Mostly under the covers, they added almost $1 trillion new credit to the financial world in about two months.

There are additional important Fed actions not included in their balance sheet. For example, they invented a Money Market Investor Funding Facility (MMIF) to guarantee up to 90% of $600 billion of loans to that sector. They do this through special-purpose vehicles established by the private sector (PSPVs). The latest Commercial Paper Funding Facility (CPFF) started October 27 and has issued $143 billion so far. These are both in addition to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility initiated September 19. The programs are beyond keeping up with.

Nothing like this has ever been done before by the Federal Reserve. In time, the consequences in terms of confidence in the dollar will be bad.

Bud Conrad is the chief economist of Casey Research, LLC., providing fiercely independent analysis and investment recommendations for subscribers in the U.S., Canada, and over 150 other countries around the world.

Powerful forces are at work in the economy; a global tidal wave of bank failures, credit crises, and sky-high debt. The central banks of the world may not be able to stave off what’s coming — but you can protect yourself and profit… by catching one of the massive market riptides Casey Research identifies every month in The Casey Report. Don’t miss the lifeboat that can take you to financial safety. Learn more here.

Source: What’s Up, Doc?

A U.S. Securities and Exchange Commission investigation into credit-rating companies found the firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

A 10-month review of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings found analysts contributed to fee discussions and weighed losing clients over certain ratings, the Washington-based SEC said in a report released today. Employees also cast doubt on the quality of some ratings, the SEC said, declining to link firms to specific findings.

“We uncovered serious shortcomings at these firms,” SEC Chairman Christopher Cox said today at a news conference. “When there were not enough staff to do the job right, the firms sometimes cut corners.”

Pension and money-market funds bought AAA-rated securities backed by mortgages to the riskiest borrowers because they offered higher returns than government bonds with the same ratings. In many cases, credit raters were paid by investment banks selling the bonds, prompting regulators and lawmakers to question their independence.

The SEC report describes an e-mail in which an analyst refers to the market for collateralized debt obligations as a “monster.”

“Let’s hope we are all wealthy and retired by the time this house of cards falters,” said the e-mail, which was sent Dec. 15, 2006, to another analyst at the same firm.

Mike Burnick at Sovereign Society says,

A look inside one of these [subprime mortgage] bonds tells a frightening tale. A US$80 billion sub-prime asset-backed bond issued by Deutsche Bank in 2005 is still rated AAA by S&P and Moody’s. Yet, 18% of the mortgage loans in the security are in foreclosure.

Additionally, lenders have already seized 15% of the properties underlying the loan values for this security. Another 10% have been delinquent for more than 90-days.

Another Morgan Stanley Capital sub-prime mortgage-backed security has credit support of 64% relative to the number of delinquent mortgages loans in the pool. But the credit should be at least twice the delinquent mortgages to maintain a top rating.

Why This Junk Isn’t Rated As “Junk”

Technically, much of this so-called triple-A rated debt should have been downgraded long ago. So why hasn’t it? The simple answer is: Fear of too much “collateral damage.”

According to Bloomberg, “Financial firms own high-grade collateralized debt obligations, which package securities such as mortgage bonds and slice them into pieces with varying risk. As the underlying mortgage bonds are downgraded, those securities will also lose their ratings and tumble in value.”

There’s a huge potential “contagion” effect that would ripple through the financial system if Moody’s or Standard and Poor’s dared to downgrade these shaky sub-prime credits across the board. For instance, a bank holding US$100 million of AAA-rated sub-prime bonds needs just US$1.6 million in capital backing such a highly rated credit. – that’s a lot of leverage. And such leverage is fine, as long as the bonds remain triple-A rated.

Should the bonds get downgraded to below investment grade however, under global accounting rules, a bank must put up additional capital. In fact, it would take US$16 million in capital to back US$100 million in non-investment grade bonds.

That’s 10 times as much capital required in the event of a credit ratings downgrade. Wall Street just doesn’t have that kind of extra capital lying around. Bear Stearns found this out the hard way over the weekend. That’s why I expect the major ratings agencies, perhaps abetted by the Treasury Department and the Fed, to continue covering-up the true health of US$650 billion in outstanding sub-prime bonds.

Burnick concludes that:

At the risk of sounding like an alarmist, I just have one question. What happens to confidence in the U.S. financial system (not to mention the dollar) when people wake up and realize these fairy tale markets (held up by fantasy ratings) turn into a nightmare?

The Fed is merely monetizing Wall Street’s mistakes yet again, while leaving future generations of taxpayers with an even bigger tab to settle, and higher future inflation to fight.

But there’s just no time for such ponderings now, we’re in the midst of a full-blown financial crisis after all. Damn the financial torpedoes, full speed ahead with the monetary printing press.

The US’s minority party routed American taxpayers Tuesday when it mopped the floor with citizen-related issues by blocking a vote that would have:

• Killed corporate oil’s $17 billion tax break.
• Taxed excessive corporate oil profits, unless big oil poured the excess into exploring alternative energies.
• Forced oil futures speculators from big investment banks, hedge funds and brokerages to have a lot more than 5% cash in the margin accounts they use to bet on oil. Such a move would have dramatically cooled speculation, which even oil company executives admit makes a barrel of oil (today) $70 to $80 too much.
• Made it a federal crime to price gouge oil and gas.

On the first two issues, Republicans ignored the minimum $17 billion in taxes that would once again flow to US coffers. Instead, they accused Democrats of merely wanting to punish oil companies as a way of expressing the seething anger most American taxpayers feel over gas prices that have skyrocketed for no apparent reason.

Democrats said, “Yup, making oil companies pay their fair share and punishing them for excessive profits while Americans suffer is exactly what we wanted to do.”

“Why that’s un-American,” screamed GOP senators. All while they rushed to call John McCain in order to congratulate him for admitting that, if elected president, he’d continue a program that secretly wiretaps domestic phone calls made by American citizens.

GOP senators made no comment on the bill’s increased margin account provision. What could they say? Big investment banks, hedge funds and brokerages won. Taxpayers lost a huge one. Best to pretend it never happened.

But, Senator I.M. Forsale did applaud the effort. He said the move is part of an effort to make gas so expensive that “poor people won’t have the gas to drive to the bank to cash welfare checks… perverted homosexxxxxuaaaallls can’t afford to drive to city hall to get married and godless whore women are economically prevented from driving to Planned Parenthood clinics.”

He added, “$5 and $6 gas is finally going to shake the losers, the sinners and the old out of the American family tree.”

Republican leader Mitch McConnell of Kentucky acknowledged that Americans are hurting from the high-energy costs. But, he strongly opposed the Democrats’ response and ridiculed those who “think we can tax our way out of this problem.”

“Republicans by and large believe that the solution to this problem, in part, is to increase domestic production,” McConnell said.

A GOP energy plan, rejected by the Senate last month, calls for opening a coastal strip of the Arctic National Wildlife Refuge in Alaska. Drilling in the ANWR would net the US about 454 days of oil, at its current 22-million-a-day burn rate. And, it would take eight to ten years bring the first of this oil to market.

INTERNAL ENDORSEMENT

Just this Once
BELIEVE THE HYPE!

It was the email that shocked the investment world.

One noted investment authority told his readers to take seven huge stock market gains on one day… SEVEN HUGE WINNERS on one day that ranged from 526% to 102%… seven, and on stocks… not options.

But that was just the beginning! It now looks to be setting up to happen again this year, too.

That’s why you must check out the whole story right here.

I actually believe that oil field technology is advanced enough that it would be fairly safe to drill there.

Of course, there’s the human element to consider… as in shortcuts and corrupt contractors. And, with so much at stake, some people might try to cover up mistakes.

Then, I did some research and discovered just how little oil is in ANWR… modest predictions are 5.5 trillion barrels… best-case predictions suggest 10 trillion barrels.

And, that is quite literally – even at the 10-trillion level – a drop in the bucket.

You see, the US Energy Information Agency reported that if Congress gave the go-ahead to pump oil from ANWR, the crude could begin flowing by 2017. It would reach a peak of 876,000 barrels a day by 2029.

But even at peak production, the EIA analysis said, the United States would still have to import more than two-thirds of its oil.

That’s 21 years until peak. And, that peak would be less than one million barrels a day. That’s less than 1/20th of our daily burn.

And, this is a front-burner issue. For whom?

Now, I rarely share with you the thoughts I send in private to my Asia Business & Investing subscribers… but a bit of what I wrote to them on Wednesday is an extension of my thoughts here.

This is what I wrote

Here in the United States… apparently no one in charge is to blame for the state of the economy… fuel and food prices… except, of course, consumers who pay the prices.

Ron Reagan was known as the Teflon President because trouble didn’t stick to him. Today, US leaders in Washington eschew the Teflon, because no one is throwing anything at the White House or Congress.

It’s you and I that need the Teflon.

After all, it was greedy homeowners who created the credit crisis… not nominally regulated banks and lenders.

It is SUV drivers and soccer moms in mini vans who have run up the price of oil – not totally unregulated oil futures speculators (Google “Enron Loophole” for the whole story) or the threatened veto of a farm bill that included a provision to close the seven-year old crooked loophole, which is well known among Washington highest echelons at both ends of Pennsylvania Ave.

…if you’re like me, when you look around don’t you occasionally wonder who led us to the state we are in today… and why everyone in Washington has escaped blame… or worse, won’t accept responsibility?

Instead, what we get is the Mitch McConnells of the world saying “we know Americans are hurting but there’s not a thing Congress can do about it – except to open up oil drilling in the Alaskan Nation Wildlife Refuge…”

See, there it is again… Washington is not to blame… it’s those pesky, do-gooder, unpatriotic, environmentalists who are pissing in the soup.

So, how about this for an idea?

If this oil is so freekin’ critical to the US’s way of life, then we open up the ANWR for oil exploration, but with two huge restrictions.

They would be that ExxonMobil is not allowed to participate in the ANWR.

And, oil company profits would be capped at 6%.

You see, the US Geological Survey estimates that at $30 a barrel, oil company profits would be about 12% on ANWR oil… but, the Department of Energy, on Thursday, said that oil prices will be $129 a barrel in 2009. It should be $86 in 2010. And it should be back over a c-note at $107 in 2015.

So, who knows how high profits would fly on ANWR oil by 2017 when its initial oil came to market.

But, under my restrictions, every penny beyond a 6% profit would evenly flow directly to the Social Security Trust Fund and Medicare.

And, I am certain that as patriotic Americans with the ability to help sustain the American way of life, US oil companies would rush to accept that deal.

Have a great weekend.

Andy

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

Source: Kiss Your Gas Goodbye

And if the The Institute for International Finance Inc.’s new proposal on “mark-to-market” accounting is implemented, Wall Street will have achieved this objective.

Needless to say, that would be bad news for shareholders.

Once upon a time, asset valuation was easy, even for banks. Whatever you paid for it was the value at which you carried it in the books. In the years of inflation, shysters would wander round the country looking for companies that carried their Head Office at its value when built in 1926.

The only exception was in the few cases such as dud bank loans. If the asset was clearly worth far less than you paid for it, then you would write it down to a new lower value. More often than not, you wrote it off altogether and forgot about it. However, if you wanted credit for an asset’s increase in value, you had to sell it – simple as that.

The only exception to this methodology arose in a few trading operations, such as the investment banks – at the time, much smaller – and commodities traders, where positions were written up or down, or in other words, “marked-to-market” at the end of each day, according to that day’s closing prices. By and large, the only assets marked to market in this way were actively traded shares and bonds.

The advantage of this system for shareholders is that it was difficult for management to play games. There was no possibility of management declaring a higher value for an asset while the company still owned it and paying itself a bonus based on the increase. That’s a big protection, because unless the asset is very liquid or actively traded, it is impossible to be really sure of its value until it is sold.

Banks began to move to mark-to-market accounting in the 1980s. They quickly discovered that it could prove a bonanza for management if there was any kind of profit sharing bonus arrangement, even more so if stock options were involved. In a bull market, it was no longer necessary to sell a building or an equity position to record a profit on it; you could record profits and pay yourselves bonuses as you went along. The technique became particularly profitable when there wasn’t a true market for an asset; in that case management was free to make up a value, using some internal mathematical model.

Naturally, if a bear market occurred, mark-to-market accounting resulted in much larger losses than traditional accounting. First, the value of assets had been marked up to the absolute maximum bull market peak, so they had to be written down that much further than they would have under historic cost accounting. Second, under historic cost accounting an asset whose value was temporarily diminished but was still fundamentally sound did not have to be marked down. Thus share positions, or bonds whose credit rating had become impaired, could still be held at book value.

However, under mark-to-market accounting, those positions had to be marked down to their new value and a loss taken. In theory, mark-to-market accounting was more precise in a bear market. In practice, it allowed management to pay themselves bonuses for year after year, and then declare one utter disaster year, in which everything would be written off and most of the profits of the preceding decade would disappear in smoke (without, however, management having to repay the bonuses from the boon years).

Of course in some cases, most notoriously Enron Corp. (OTC: ECSPQ), it was taken too far and the company went bust, but hey, that’s capitalism.

The new FAS157 that came into effect last December did not change much in principle, but codified some of the nastiness. Under it, assets were now classified into three “levels” according to how much of a market there was. “Level 1″ assets had a liquid market – no problem. “Level 2″ assets could be valued by reference to a liquid market in a related asset. “Level 3″ assets had no easily relatable market, and therefore had to be valued by internal mathematical models.

Unfortunately for Wall Street, the new system, which had appeared to offer opportunities for endless bonus-creating mark-ups, was put in place right in the middle of the subprime mortgage crisis. All the collateralized debt obligations with subprime mortgages underlying them became a problem, because the very thin asset-backed securities index or “ABX” market for them collapsed, with AAA-rated bonds being quoted at less than 50 cents on the dollar. That paper, which had all been recorded in Wall Street’s books as “Level 2″ had to be quickly shifted to “Level 3″ – otherwise huge losses would have been taken (huge losses WERE taken; but these would have been even larger).

Fortunately for Wall Street, astute lobbying had ensured there was a loophole in FAS157 – if the market for an asset was a “distress” market without willing buyers or sellers, the asset no longer needed to be counted as Level 2 but could be shifted to Level 3. Naturally the ABX market was a “distress” market – nobody wanted to sell at those prices, and it was highly distressing to management how far prices had fallen. So the subprime mortgage-backed paper was duly shifted to Level 3, increasing those assets by over $30 billion in one quarter at Goldman Sachs Group Inc. (GS), for example, giving Goldman $96 billion in Level 3 assets, nearly 3 times its capital.

Nevertheless, the idea that prices might have to be marked down sharply in a bear market was unpleasant. What’s more, bear markets could last for years, in which write-down after write-down could occur, wiping out profits year after year and preventing bonuses from being paid. Wall Street lifestyles were seriously threatened!

Now the Institute of International Finance, Wall Street’s tame think-tank, has come up with a solution. Prices should still be marked UP to market, but in difficult times they should no longer have to be marked DOWN to market. In the long run, this would turn Wall Street balance sheets into gigantic collections of waste paper. In the short run, it would preserve profitability and bonuses. And if it all goes wrong in the end, well, as The Bear Stearns Cos. Inc. (BSC) rescue showed, what are taxpayers for?