Credit and Credibility: by Greg Canavan

Is it laughable, or lamentable? The market, that is. In the past few years, it has become a joke…a tool of manipulation, an unreliable source of information. Despite the outperformance of the US equity markets this year, ordinary investors (presumably people with savings they would like to invest in productive and attractive businesses) are not interested.

Reuters columnist Felix Salmon recently posted a few charts to highlight this trend. This one, originally appearing at ZeroHedge, shows the decline in trading volumes since the credit bubble bust in 2007/08.

Using the Monday after Thanksgiving as the comparison date (the first day of trade after the 2-day Thanksgiving holiday) trade volumes in 2012 are back to 1997 levels. So while you’re being told a recovery is underway, it’s clearly not a recovery in investor confidence or involvement in the stock market.

Read more: Credit and Credibility http://dailyreckoning.com/credit-and-credibility/#ixzz2DkEOKUxw

Central Banking: A Blight On Humanity

Rob Kirby

Impeccably reliable sources have informed me that as recently as Sept. 30, 2009 – the last possible day of trade in the Sept. 09 gold futures – a number of well-heeled market participants “bought” substantial tonnage worth of gold futures on the London Bullion Market [LBMA] and immediately told their counterparties they wanted to take instantaneous delivery of the underlying physical bullion.

The unexpected immediate demand for substantial tonnage of gold bullion created utter panic in at least two banks who were counterparties to this trade – J.P. Morgan Chase and Deutsche Bank – because they simply did not posses the gold bullion which they had sold short [an illegal act which in trading parlance is referred to as a “naked short”].

Because these banks did not have the bullion to honor their contracted commitments, one or both of them approached the counterparties and asked if there was any way they could settle this embarrassing matter quietly on a “cash basis” to absolve the banks from fulfilling their physical bullion delivery obligations. The purchasers were not interested in a ‘cash settlement’ and demanded delivery of physical bullion giving these banks 5 business days to resolve the situation. A premium of as much as spot plus 25 % [that would be 1,250 – 1,300 per ounce of gold] was offered to settle this matter in fiat money instead of the embarrassment of a very public “failure to deliver” on the part of the London Bullion Market Association.

Earlier this week, no less than two Central Banks became involved in effecting the physical settlement of this situation. One of these Central Banks was British [that would be the Bank of England] – and reportedly, even they were only capable of providing less than pure, non-compliant gold bars that did not meet good delivery standards stipulated by the LBMA. Like it or not, this is a testament to lack of physical gold available, folks.

To summarize: Banks like J.P. Morgan Chase and Deutsche Bk. – who sold endless amounts of gold futures at prices of 950 – 1025 and then tried to make “side deals” with the folks they sold the futures to – offering them spot + 25 % [let’s say 1,275 per ounce] to settle in fiat – only after their counter parties demanded substantial tonnage of physical gold bullion.

Stunningly, if accurate [and there is absolutely no doubt in my mind that this is not accurate], this means that gold is already in SEVERE backwardation and this fact is being hidden from the public.

Then, to protect the “integrity” of the futures market as a ‘price discovery mechanism’ – Central Banks – aiding and abetting – plunder the sovereign assets of their respective countries to bail out their agents / friends in an attempt to ‘sweep the whole bloody mess under the carpet’.

To think that anyone wonders why our financial system and fiat money will soon to be TOAST?

What a disgraceful insult to humanity.

Latest Monetary Policy Proposal From the Fed Puts Your Money Market Fund At Risk

The Federal Reserve is discussing the possibility of using “reverse repo” transactions with money market funds that would be aimed at draining liquidity from the financial system.  The transaction would involve swapping the toxic assets on the Fed’s balance sheet for part of the $3 trillion sitting in investor money market funds.  Typically a repo transaction is a policy tool used by the Fed and executed with the Fed’s primary dealers in order the “fine tune” systemic liquidity and regulate the Fed Funds rate.   They are short term in nature and involve swapping short term Treasuries in exchange for cash, with the Treasuries being the collateral in order to “guarantee” that the short term trade can be unwound with little or no risk.

Here’s the link to the article that revealed this proposal:  Fed Wants To Drain Money Market Funds

The current Fed proposal is based on the fact that the primary dealer system only has enough cash to drain $100 billion from the system.  Here’s what is really going on with this proposal (without getting into the technical details of how repos work):  

The Fed has purchased trillions of dollars of toxic assets from banks.  We don’t know what price the Fed paid and we don’t know how corrupted the underlying collateral is (the Fed refuses to disclose both pieces of valuable information).  Most of the securities involve severely distressed underlying collateral like credit card receivables, subprime mortgages, auto loans and now commercial real estate mortgages.  Most of these assets will eventually be worth less than 10 cents on the dollar.  If the Fed were to hold onto these assets, the Fed, and the banks that ultimately are the shareholders of the Fed, stand to lose trillions. 

What the Fed proposal would do would move these toxic nuclear waste assets from the Fed’s balance sheet and into money market funds, in exchange for cash sitting in the money market funds.  The biggest problem is the Fed has no basis for valuing these assets other than the price it paid the banks for them, so at what price will the Fed value these securities in order to establish the market value basis for the repo transaction?   In other words, the Fed can stick a random price on these assets and swap them for the cash in the money market funds and say “trust us, we’re Fed – we’ll make you whole.”  

Without going in-depth into the problems that could occur which might make the Fed’s promise wothless, this proposal, if made effective, would expose money market funds to a significant, if not catastrophic level of risk.  To be sure, each fund individually has charter limits which would put a cap on the amount of cash the Fed could “repo” out of the individual fund and replace it with garbage assets.  However, these assets were fraudulently rated AAA in the first place and have no business being put into money market funds.  Money market funds are supposed to be basically risk-free funds in which investors “park” cash and earn a small amount of interest.

At best, this is a move by the Fed to justify draining a large amount liquidity from the system by using one of its monetary tools to drain cash from money market funds.  This has never been done before and is well outside of the traditional boundaries of repo/reverse repo tool used by the Fed with primary dealers. At worst, I believe this is a veiled attempt by Bernanke to move toxic assets from the Fed’s balance sheet and onto the public, under the false pretenses of using money market funds  to drain liquidity from the system, rather than putting these near-worthless assets back on to the balance sheets of the Fed’s primary dealers.

Hopefully this idea goes away. If it does become reality, I would not, under any circumstances trust this situation and would withdraw all funds from any money market funds you own and either move the cash into gold or into a short term Treasury bond fund.

Big Bucks for Bailout Barons

By Katrina vanden Heuvel

September 03, 2009 “The Nation” — One year after the global banking system collapsed the Institute for Policy Studies (IPS) 16th Annual Executive Excess report — “America’s Bailout Barons” — shows that the perverse system of executive compensation which contributed to the financial meltdown is still thriving for top bailout recipients.
President Obama had it right in April when he delivered his “economic Sermon on the Mount ” and said, “We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock.” And, as the IPS report notes, even earlier in the year Obama spoke out against excessive executive compensation, saying, “In order to restore our financial system, we’ve got to restore trust. And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.”

But the fact is we haven’t learned — or haven’t acted on — the lessons we must heed if we’re going to build a more just, sustainable economy that works for the real economy rather than the Wall Street. The IPS report focuses on the twenty banks that have received the most bailout money from the federal government and shows that the banks and bankers are still acting and being rewarded as if they are Masters of the universe — abetted by a government that is failing to take on the status quo.

Sure, some steps have been taken to rein in compensation for TARP recipients — but they are timid ones. And IPS’s valuable report makes clear, “Lobbying armies from corporate and financial trade associations are energetically doing battle behind the scenes to keep even modest changes in pay rules off the legislative table.”

As a result historic inequality in pay is still prevalent and the neo-Gilded Age tycoons are raking it in. According to the report, a generation ago top execs rarely earned more than thirty to forty times the pay of the average American worker. But now top execs make an average of 319 times more than the typical worker. For the top twenty financial industry execs the divide is even greater — 436 times more than the average worker in 2008. In the past three years, the top five execs at the twenty US financial firms receiving the most Bailout Bucks took home pay packages worth a staggering $3.2 billion — an average of $32 million each. In 2008 those cats averaged nearly $14 million each–even though their twenty firms laid off more than 160,000 people since January of that year.

While a new and smart economic populism has fueled plenty of talk about compensation reform, good proposals haven’t been seized. Senators Bernie Sanders and Claire McCaskill tried to cap compensation for employees of bailed-out firms so that it wouldn’t exceed that of the President of the US, $400,000. The amendment was passed but then stripped in conference committee. In April, Progressive Caucus member and Chief Deputy Whip Jan Schakowsky introduced the Patriot Corporations Act to extend tax breaks and contracting preferences to companies that meet certain benchmarks, including not compensating any executive at more than 100 times the income of the company’s lowest-paid worker. That bill has been referred to committee. Hedge fund managers are still only paying 15 percent capital gains rate on the profit share they get for managing investment funds rather than the 35 percent income tax they should pay. And unlimited amounts of executive compensation are still shielded in deferred accounts–at an annual cost of $80.6 billion to taxpayers–in contrast to the limits placed on income deferred by normal taxpayers via 401(k) plans.

There is no shortage of opportunities to curb this unjust and unproductive growth in unequal pay. As IPS senior scholar and Nation contributor Chuck Collins put it, “Public officials in Congress and the White House hold the pin that could pop the executive pay bubble. They have so far failed to use it.” It’s time to use it.