AIG's Exposure to Munis and Spectre of QE3 Getting Real

Zero Hedge's Tyler Durden is reading 10-Ks, and in the 10-K of AIG he's found the insurer stuck with the toxic waste again, this time with state and municipal bonds that are rapidly losing value.

Will Ben come to the rescue, like he did in 2008? (Will he have a choice?) (No.)

From Zero Hedge (2/25/2011) [emphasis is original]:

Will AIG Implosion 2.0 Lead To QE 3.0?

There was a time when everyone thought CDOs are perfectly safe. That ended up being a tad incorrect. It resulted in AIG blowing up, recording hundreds of billions in losses and almost taking the rest of the financial world with it, leading ultimately to the first iteration of quantitative easing. A few years thereafter, several blogs and fringe elements suggested that munis are the next major cataclysm and will likely require Fed bail outs (some time before Meredith Whitney came on the public scene with her apocalyptic call). It would be only fitting that the same AIG that blew up the world the first time around, end up being the same company that does so in 2011, and with an instrument that just like back then only an occasional voice warned is a weapon of mass destruction: municipal bonds. AIG dropped over 6% today following some very unpleasasnt disclosures about its muni outlook, and corporate liquidity implications arising therefrom: "American International Group Inc., the bailed-out insurer, said it faces increased risk of losses on its $46.6 billion municipal bond portfolio and that defaults could pressure the company’s liquidity." So how long before we discover that Goldman has been lifting every AIG CDS for the past quarter? And how much longer after that until someone leaks a document that the company's muni strategy was orchestrated by one Joe Cassano?

From the Risk Factors section in the company's just issued 10-K:

The value of our investment portfolio is exposed to the creditworthiness of state and municipal governments. We hold a large portfolio of state and municipal bonds ($46.6 billion at December 31, 2010), primarily in Chartis, and, because of the budget deficits that most states and many municipalities are continuing to incur in the current economic environment, the risks associated with this portfolio have increased. Negative publicity surrounding certain states and municipal issues has negatively affected the value of our portfolio and reduced the liquidity in the state and municipal bond market. Defaults, or the prospect of imminent defaults, by the issuers of state and municipal bonds could cause our portfolio to decline in value and significantly reduce the portfolio’s liquidity, which could also adversely affect AIG Parent’s liquidity if AIG Parent then needed, or was required by its capital maintenance agreements, to provide additional capital support to the insurance subsidiaries holding the affected state and municipal bonds. As with our fixed income security portfolio generally, rising interest rates would also negatively affect the value of our portfolio of state and municipal bonds and could make those instruments more difficult to sell. A decline in the liquidity or market value of these instruments, which are carried at fair value for statutory purposes, could also result in a decline in the Chartis entities’ capital ratios and, in turn, require AIG Parent to provide additional capital to those entities.

Some more gasoline in the fire from Bloomberg:

AIG said that “several” issuers of bonds it holds have been downgraded, amid budget pressures. As of Dec. 31, the company had more than $700 million of state general-obligation bonds from California, which has the lowest Standard & Poor’s credit rating of any U.S. state. It also held more than $200 million in the bonds from Illinois.

Chartis’s portfolio has been reduced to about $36.3 billion, and 99 percent of the municipal holdings are rated A or better, AIG Chief Financial Officer David Herzog said in a conference call today with analysts.

$46.6 billion to $36.3 billion - that's 22% haircut already.

The article continues, and it has a transcript of the earnings call.

For more on this AIG's property and casualty insurance division, Chartis, read the Wiki entry. I have a feeling that AIG's idea of Chartis IPO may be shelved. It's been recently downgraded from A+ to A by Fitch, and the New Zealand earthquake may prove costly to the division, too.

But why would one division of AIG threaten the entire company? It would, when Chartis' investment assets ($89 billion) make up almost one-third of AIG's total investment assets; and Chartis' revenue at almost one-third of AIG's revenue, with $30.7 billion (2009) Net Written Premiums. (See the company's 10-K, wiki.)

I also have a feeling that Congress (House TARP oversight subcommittee, chairman Patrick McHenry, R-NC - a Gen-Xer who started a political career under Karl Rove and George the Lesser) would not want to subpoena Meredith Whitney after all...

Timmy had better dump the AIG shares while there's some profit to take. It looks like he may have a decent chance of buying them back again at a much lower price...

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Matt Taibbi: Why Isn't Wall Street in Jail?

The latest from Matt Taibbi:

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."

I put down my notebook. "Just that?"

"That's right," he said, signaling to the waitress for the check. "Everything's fucked up, and nobody goes to jail. You can end the piece right there."

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

Yup.

Ben Bernank's scheme to goose up the stock market is to benefit the top 5% of the population (including all these rich and famous people), while the most important asset (or what once was) for the middle class (or what's left of them) - homes - continues to fall in value.

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TARP Inspector General Neil Barofsky Resigns

That's too bad.

From CNN Money:

NEW YORK (CNNMoney) -- Neil Barofsky, the special inspector general of the Troubled Asset Relief Program, informed President Obama on Monday that he is resigning from his position, effective March 30.

"I believe that it is the right time for me to step down and pursue other opportunities," Barofsky wrote in his resignation letter.

Barofsky said he has fulfilled his goals related to TARP since his nomination by former President Bush on Dec. 8, 2008. These goals, he said, were "to build a robust law enforcement agency to bring to justice to those who sought to profit criminally from TARP" and "to ensure transparency in the operation of TARP."

He said he also achieved the goal of providing "effective oversight over the government's decision-making process to minimize instances of waste, fraud and abuse."

He said that he had only one co-worker when he started the "SIGTARP" job and was "working out of a small office in the basement of the Main Treasury building." Since then, he said the position has grown to 140 auditors, investigators and attorneys, with offices in Washington, New York, San Francisco, Los Angeles and Atlanta.

The team is now being led by Deputy Special Inspector General Christy Romero who will continue its mission.

Rep. Darrell Issa of California praised Barofsky for his "extraordinary commitment to public service" but he said the work that he begun is not finished.

Issa said the next Inspector General needs to demonstrate Barofsky-style "vigilance, courage and commitment" in dealing with the 150-plus TARP recipient banks that have missed their regulator dividend payments.

Issa also said the next Inspector General needs to deal with the Home Affordable Modification Program, which "has fallen short of its goal to preserve home ownership."

Barofsky did not say what he plans to do next.

Just don't go work for Goldman Sachs or PIMCO.

I don't know whether Ms. Christy Romero will become the next Inspector General or not, but we shouldn't be expecting much from her. Her resume shows she worked for Mary Shapiro and Christopher Cox at the SEC before she came to SIGTARP.

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What Hank, Ben, and Ken Did in November/December of 2008: Lawless Government Is Right Here in the US

If you want to see a corrupt, dictatorial government in action, you don't need to sit glued to Al Jazeera's Live Feed on Egypt. It's right here in the US, and the government just gets away with breaking the law and ignoring the sub-humans (anyone who doesn't work for the government or the TBTF banks) each and every single instance.

This is just one of those, as recounted by Zero Hedge. It is about how Hank Paulson and Ben "Bernank" Bernanke illegally forced Ken Lewis, then-CEO of Bank of America, to go through with the purchase of Merrill Lynch without Ken Lewis invoking the MAC clause - that is, "Material Adverse Change" clause - and reneging on the deal.

Part from Zero Hedge:

Mr. Corngold: Before we do that, did you have an understanding of what powers the Treasury Department had to remove the board and/or the management of the bank?
The Witness: It was my understanding he said – that’s why I said I think he said government. I think – my impression is that was the language of the Fed used to use in Texas, basically saying, Don’t do something.
Mr. Corngold: You had an understanding that the Fed could remove the board and/or the management of a bank that it regulated if it found certain things.
A: Yes
Q: Do you know what it has to find?
A: They had been so strong about the fact that they strongly advised use not to do it and that it would cause harm to the bank and the system and they system wouldn’t be good for us, either – that it would damage the system. That’s kind of how it was being portrayed.
Q: Was this the first you heard about the government – to use your term – was considering that threat.
A: Yes

Q: Did you ask him, “By the way, what do you mean by that” – I’m sorry, the comment about the removal?
A: No. It was pretty clear.
Q: And at the time, did you sort of have that preexisting understanding of the Texas Fed way of communicating.
A: I had heard that at some point. I don’t know why that’s in my mind, but I’ve heard of that before that’s a way of telling you not to do something.
Q: Have you heard any kind of communication like that from a federal official to you before?
A: No

A: This was about just a shear magnitude of loss, and either you do it or you don’t. Behavioral changes, or whatever, wouldn’t fill that hole that we thought was $12 billion, which turned out to be $15 billion.

The bottom line, however, is that Ken Lewis wanted to hang on to the CEO job at Bank of America. He could have called their bluff and disclosed everything out in the open. That might have blown up the financial markets, but I doubt it. Merrill didn't have the kind of extensive reach that Lehman had. Even if that triggered the blowup, it might have been far better than what we have now - a market that has stopped pricing in anything meaningful, whether it is an on-going crisis in Egypt, dismal job numbers, housing market that keeps on collapsing, sovereign debt crisis, "non-core" inflation, skyrocketing commodities prices .... etc...etc... In other words, the market is dead.

Read the whole deposition at the link, and wonder aloud why isn't any of them, Hank, Ben, or Ken, in jail or permanent exile.

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How AAA-Rated Foreign Banks Made Out on Ben's Term Auction Facility

Financial Times reports [emphasis is mine]:

The Taf was set up in December 2007 to provide one-month loans to creditworthy banks as markets dried up for lending longer than overnight. In August 2008, it began offering three-month loans as well.

Rabobank of the Netherlands and Toronto-Dominion of Canada, two of the only banks in the world with triple A credit ratings, used more than $20bn in cumulative Taf loans.

Ed Clark, TD chief executive, said that using Taf was logical even though his bank never had a liquidity problem. “That wasn’t how we made a lot of money. But you make a dollar here, you make a dollar there. What’s the spread you make on a billion dollars?” he said.

In the summer of 2008, TD was borrowing $1bn from TAF at rates of between 2 and 2.5 per cent. For that borrowing it used the lowest quality – and hence highest yielding – collateral acceptable to the Fed.

More than 80 per cent of its collateral had a triple B credit rating at a time when such bonds yielded about 7 per cent. TD could therefore have made a notional gross spread of about $4m a month during 2008.

A BBB rating is the lowest a bond can be rated and still considered to be an investment-grade. In other words, one notch above junk bonds, which are rated BB and lower.

And we are supposed to think everything is OK and justified because the money was fully repaid with interest. Hurray for the banks who took advantage of risk-free free money from the Fed and made out like the true bandits that they were and continue to be.

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Pan-European Bank Run Tomorrow?

I wonder if they are still serious about doing it.

The simple plan - to withdraw money from your bank account - was hatched first in France, then spread to Germany, the Netherlands, UK, and Greece.

If anything, it will be no more than a symbolic gesture, a middle finger to the European banks who are being bailed out by the European taxpayers (and the US and Japan and the rest of the world, via the IMF). But is there any chance of actually causing bank runs in Europe?

Well, it might. Why? Because the European banks remain much more leveraged than the US banks. 1 euro taken out of the deposit (liability) may impact the banks' assets much more.

Here are two charts that shows the potential vulnerability of the European banks vis a vis the US banks. The first one is from Zero Hedge's November 1st article on the topic. The second one is from Wall Street Journal's July 15 article. They are both pretty much self-explanatory.

(Just a reminder: the GDP of the US and the GDP of EU are about the same, $14 trillion. Japan's GDP is about $5 trillion.)

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Federal Reserve Dumps $3.3 Trillion Bailout Data

from December 2007 (now official start of the recession that supposedly ended in June of 2009) to July 2010.

And who were the lucky winners of near-free money?

A lot of financial sites are busy crunching the numbers released by the Fed. I'll wait for them to finish the work, but here's one of the early results from Zero Hedge on the question of "cui bono?" in the Fed's purchase of MBS:

The answer to the question: European banks.

From the Fed's press release which re-writes history, the bailout was about helping Americans:

The Federal Reserve Board on Wednesday posted detailed information on its public website about more than 21,000 individual credit and other transactions conducted to stabilize markets during the recent financial crisis, restore the flow of credit to American families and businesses, and support economic recovery and job creation in the aftermath of the crisis.

Well, the Fed has failed so far; "the flow of credit" isn't flowing to families and businesses, unless it's to the families of big business execs and to the big businesses on Wall Street and Main Street.

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Obama to Give Buffett the Presidential Medal of Freedom and to a Bunch of Other Worthy Recipients (like Papa Bush)

and to a musician, a baseball player, a basket ball player, a labor union leader..

The Presidential Medal of Freedom is the highest civilian award that is bestowed on individuals who have made "an especially meritorious contribution to the security or national interests of the United States, world peace, cultural or other significant public or private endeavors."

Yup. The world has gone nuts.

From Reuters:

President Barack Obama will name billionaire Warren Buffett one of fifteen winners of the 2010 Medal of Freedom, a White House official said on Wednesday.

Buffett, one of the world's most successful investors who has donated a vast chunk of his fortune to charity, will receive the medal at a White House ceremony early next year. The award is the highest U.S. civilian honor.

No wonder Buffett is singing the praise of the government.

Alongside Buffett, these people will receive this highest civilian honor in the country:

President George H.W. Bush
Chancellor Angela Merkel
Congressman John Lewis
John H. Adams
Maya Angelou
Jasper Johns
Gerda Weissmann Klein
Dr. Tom Little (Posthumous)
Yo-Yo Ma
Sylvia Mendez
Stan Musial
Bill Russell
Jean Kennedy Smith
John J. Sweeney

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Overdose: The Next Financial Crisis

A 46-minute documentary produced by a team of filmmakers led by prominent Swedish libertarians Jonah Norberg and Martin Borgs.

The film has been broadcast in Sweden, Norway, Finland, Denmark and Australia - and won the prestigious 'Best Feature Documentary' award at the San Francisco Frozen Film Festival.

To dispel the myth that capitalism caused the crisis, the producers have decided to make the 45-minute film free to watch online, in full, for a limited time. (Note from Peter Schiff's Euro Pacific Capital)

Or watch it at YouTube here.

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Todd Harrison: Financial Virus Permeats the System

and carbon-based traders and fund managers are calling it quits.

Financial Virus Permeates the System (Todd Harrison, 8/5/2010 Minyanville)

"We live in interesting times. Over the last two years, a financial virus spawned, infecting the economic and social spheres as a matter of course. This isn’t just about money anymore; our civil liberties, the foundation of free market enterprise, and the quality of life for future generations are dynamically shifting as we traverse our current course.

"I once offered that Shock & Awe was a tipping point through a historical lens. As Baghdad blew-up on CNN, I somberly sensed America would never be the same. That’s not a political statement -- we don’t know what would have been if we didn’t invade -- it’s simply an observation. World empathy turned to global condemnation, almost overnight.

"If we’ve learned anything through these years, it’s that unintended consequences tend to come full circle. Whether it’s the moral hazard of bailing out some banks, the gargantuan profits of a chosen few -- Goldman Sachs (GS), JP Morgan (JPM), Bank America (BAC), Morgan Stanley (MS), Wells Fargo (WFC) -- the caveats of percolating protectionism or the growing chasm of societal discord, times they are a-changin’ and it’s freaking people out.

"As The War on Capitalism intensifies, I expect financial fatigue to evolve in kind. We’ve already seen the burnout manifest in trading volume -- 70% of the flow are the robots -- and we’ve witnessed it in financial media, with reported viewership of some of CNBC’s marquee shows down as much as 25% year-over-year.

"Sun-tzu once said, “If your enemy is superior, evade him. If angry, irritate him. If equally matched, fight, and if not, split and reevaluate.” As we navigate unchartered waters and sail through The Eye of the Financial Storm, an increasing number of people are weighing their options -- and some of the smarter folks I know are “going dark.”

"What does that mean? They’re selling businesses, unwinding trading operations, or otherwise insulating themselves from the capital markets. The underlying reasoning is straight out of an Ayn Rand novel: “I can’t compete and when I do, the rules of engagement change in the middle of the game. I’ll let the powers that be vanquish themselves and return in three to five years to sift through the remains.”" [The article continues.]

I stopped visiting his site (Minyanville.com) as often as I had used to when he supported the TARP by saying it would be better to treat a cancer than have a car crash (and we ended up a car crash and a terminal cancer). But he always strikes me as honest and compassionate, with not much of a hidden agenda.

Harrison ends his piece with these words [emphasis is mine]:

"As we grasp at The Last Gasp Bubble and attempt to operate in the best interests of ourselves and those whom we love, I simply wanted to share that some of the smarter folks in the know have chosen to extricate themselves from an increasingly tenuous struggle. I suppose, in a way, they’re lucky to have that option.

"I don’t know if this distancing qualifies as apathy but it most certainly warrants some thought provocation as we collectively find our way. I remain of the view that preparedness and perseverance are precursors to profound possibilities; we simply have to go through it to get through it.

"May peace be with you."

I hope we can all survive. (But "we" don't include the ruling class, as far as I'm concerned.)

(H/T willsin)

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Mortgage Brokers to Be Fingerprinted and Registered

like criminals, like sex offenders released after a jail term. You gotta be kidding, right?

No. This is all thanks to the Federal Reserve, who will have even more non-transparent power to regulate and legislate under the Donk bill, aka Dodd-Frank financial "reform" bill.

Mortgage brokers to be fingerprinted and registered
(7/28/2010 Reuters via Yahoo Finance)

"WASHINGTON (Reuters) - Mortgage loan originators will have to be fingerprinted and sign up to a central registry to do business in future, according to final rules issued on Wednesday by the Federal Reserve and other regulators.

"The rules are part of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, also called the S.A.F.E. Act.

"They were issued by the Fed, Comptroller of the Currency, Federal Deposit Insurance Corp, Office of Thrift Supervision, Farm Credit Administration and National Credit Union Administration. [They all will be subsumed under the Federal Reserve.]

"Mortgage brokers came under tough scrutiny in the wake of the 2007-09 financial crisis, with some lawmakers and regulators sharply critical of underwriting standards and practices that were seen as so loose they helped foster a housing price bubble.

"The S.A.F.E. Act specifies that mortgage brokers who are employees of agency-regulated institutions must register with the Nationwide Mortgage Licensing System and Registry,

""As part of this registration process, residential mortgage loan originators must furnish to the registry information and fingerprints for background checks," a joint release from regulators said.

"The final rules take effect on October 1 and it is anticipated that the registry could start accepting registrations as early as January 28, 2011.

"Industry sources say that thousands of brokers have gone through mandatory education, credit checks and state and federal testing in order to retain the right to handle mortgage originations.

"The process has thinned the ranks of brokers, who may be even fewer soon given talk of a 30 percent fail rate on testing, said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York.

""It cleaned up the industry," said Moulton, who nonetheless cautioned that he felt credit availability for mortgage lending has been reduced as a result of uncertainty caused by U.S. financial regulatory reform."

Mortgage brokers DID NOT cause the 2007-09 financial crisis (which is on-going, as far as I know). It was 1) easy money from none other than the Federal Reserve; 2) securitization and leveraging by the big Wall Street banks that caused it, coupled with lax enforcement of regulation by the government (the current and the past).

Big Wall Street banks needed the raw material, i.e. mortgage loans whether it was subprime, alt-A, or prime, and a ton of them, to craft MBS (mortgage-backed security), CDO (collateralized debt obligation) based on MBS, and further permutation of the original material such as CDS (credit default swap) on MBS and CDO, and CDO made up of those CDS.

Do those TBTF (too big to fail) Wall Street bankers also get fingerprinted and registered? How about the officials at the Federal Reserve, present and past? Do they get fingerprinted and registered? How about the members of Congress, who turned the other way as long as they got preferential treatment and campaign money? Do they get fingerprinted and registered?

Instead, they go for small flies, the lowest in the food chain.

How is fingerprinting and registering the mortgage brokers and maintaining the national database supposed to prevent the future financial "crisis"?

This is a sick joke.

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House Approves FinReg, Awaits Senate

As expected, the House passed the financial regulations (237-192) that will surely regulate 'small people' a whole lot more while giving a pass at TBTF Wall Street banks and completely ignoring Fannie and Freddie as if they don't exist.

The Senate will follow suit, I have no doubt even if the vote is being delayed. The usual suspects in GOP who always side with Dems (why don't they just switch parties?) will vote for it, and Scott Brown, who was carried into office with the Tea Party mantra of fiscally conservative, smaller government, may vote for this massive bureaucracy creator of a bill because $19 billion bank tax has been dropped. (People of Massachusetts, be sure to vote this guy down the next chance.)

House OKs sweeping bank rules; Senate vote awaits
(6/30/2010 AP via Yahoo Finance)

"WASHINGTON (AP) -- Nearly two years after a Wall Street meltdown left the economy reeling, the House on Wednesday passed a massive overhaul of financial regulations that would extend the government's reach from storefront thrifts to the executive suites of Manhattan.

"Senate support for the far-reaching bill remained in flux, however. The Senate was forced to delay its vote to mid-July, denying President Barack Obama a victory before Independence Day. Democrats struggled to secure the votes of a handful of Republican senators even after meeting their demands and backing down on a $19 billion tax on big banks and hedge funds.

"The legislation, swelling to more than 2,000 pages, would rewrite the nation's regulatory books. Simple supermarket purchases and exotic derivatives trades would be subject to new laws. And the entire financial system would be placed on a risk watch in hopes of thwarting the next threat of a financial crisis." [The article continues.]

No one knows exactly what's in it or how it may or may not work, as admitted by none other than Chris Dodd, whose name is attached to the bill for history.

Derivatives 'regulation' is just a sop, as it doesn't regulate the bigger chunk of $600 trillion (notional) derivative markets - interest rate swaps and currency swaps. The 'regulation' on prop trading and investing in hedge funds by TBTF Wall Street banks will likely to benefit, not harm, these TBTF banks. It won't reduce risks; on the contrary, it may increase risks as banks will not be required to put a big stake in the venture.

But it squarely puts the private institution (a banking industry cartel or co-op) - the Federal Reserve - in charge of "protecting" the consumer by making decisions on and creating new regulations for all financial transactions that 'small people' do - from mortgage application to grocery shopping using debit card.

One of the promotional line fed to 'small people' is this: "The regulation will put the cap on the interest and fees banks can charge on the credit card." It may sound great, but what it is doing essentially is to put a price control on money. Price control never works in lowering the price of goods and services. Goods and services will simply disappear and go underground. Ask ancient Roman citizens.

$19 billion bank tax has been dropped, and instead the TARP money will be used. That's the money extorted by Hank and Ben and the obliging Democratic Congress against the overwhelming opposition from taxpayers. So we are paying for it.

How is regulating 'small people' going to prevent the next financial crisis? (Did you know that we were out of the previous financial crisis? I thought we're still in the middle of it.) Derivatives control will not be there in any meaningful way, Fannie and Freddie will likely cost $1 trillion and the government refuses to deal with them while the FHA and Ginnie Mae churn out government-backed subprime mortgages.

Besides, the next big crisis, as it has been shaping up for the past few months over there in Europe, may be of totally different character anyway. Instead of private debt crisis (mortgages, credits, ABS, MBS, CDO, CDS on these debt instruments), it is going to be sovereign debt crisis and currency crisis. Instead of CDS, we will have the blowup of interest rate swaps and currency swaps, which this so-called regulation doesn't address. There's no need to remind you that the US government is the world-largest debtor and keeps on getting larger.

My conclusion is therefore highly cynical. The only purpose of this bill is to regulate us the 'small people' so that the government can keep track of one of the most vital and most important activities in life - finance. Free flow of money and capital is what defines a free and productive society. This bill is about the government CONTROL of that flow. You can guess what kind of society that they want, can't you?

And the government doesn't even have the guts to do it directly; it has delegated that authority to a private industry cartel. It is selling us the 'small people' down the river.

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Vampire Squid (Goldman) vs Vampire Squid (US Gov)

The match will be on tomorrow (Tuesday April 27, 2010), at 10:00 AM EST.

The government Vampire Squid is represented by the members of the Senate Permanent Subcommittee on Investigations (chairman Carl Levin (D-Michigan)).

Expect the trading on the US stock exchanges to be extremely thin, as most traders will likely be watching the show.

In February, the US government ganged up on Toyota over Toyota's sticking pedal recalls, which caused the then-world No.1 automaker's share price to plunge. Today, no one talks about Toyota.

Now it is ganging up on the top dog on Wall Street, as it tries to force the financial "reform" through the Senate. Shares of Goldman Sachs has lost 18% since April 16, when the SEC charges were leaked on New York Times ahead of the formal announcement.

The Senators will first beat up on 31-year-old Goldman trader "Fabulous" Fab Tourre, and then on to the showdown with the Vampire Squid incarnate Lloyd Blankfein. The last time he was on Capitol Hill, Mr. Blankfein was rather impatient with the Senators whose CPUs were clearly slower. Let's see how he does this time.

All for our entertainment, so that we can forget about the mountain of new taxes and regulations that are coming our way.

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Just In: SEC Charges Goldman with Fraud Over CDO

Just broke on CNBC apparently. (I heard it on a stock message board.)

SEC Charges Goldman Sachs With Fraud On Subprime Mortgages (4/16/2010 Business Insider)

"This just broke on CNBC, and the NYT has a huge story about this already....

"Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

"The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers."

For more on Goldman Sachs (and others) structuring CDOs that they designed specifically to fail, read here, here, here.

And this is what the news did to the stock market the moment it broke:

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CDOs and Mel Brooks

Huffington Post's David Fiderer, who has written detailed, well-researched posts on the events that led to the September/October 2008 financial near-meltdown, tells us that CDOs that may have helped crash the housing market which in turn crashed the financial markets which then crashed the global economy has a lot in common with Mel Brooks' classic - "Springtime for Hitler", a play within a play.

What's the common thread here? Both were designed to fail. ("Springtime for Hitler" succeeded, much to the chagrin of the producers. So they had to bomb the theater.)

Do Business Schools See Why CDOs Are Compared to "Springtime for Hitler"? (David Fiderer, 4/12/2010 Huffington Post)

"The Magnetar Trade was taught in the best business schools long before This American Life likened it to "Springtime for Hitler."

"For those unfamiliar with the fraudulent scheme portrayed in Mel Brooks' classic movie and Broadway musical, The Producers, "Springtime for Hitler" was an enterprise specifically designed to fail. It was a play thought to be so insipidly tasteless that it would close on opening night, so the investors, who laid out cash far in excess of the play's actual production costs, would never question where all the money went.

"New reporting in ProPublica offers hard evidence that Magnetar, a hedge fund group based in Chicago, had designed a series of subprime mezzanine CDOs that were all but guaranteed to fail. Magnetar made a bundle by doubling down on bets that its own CDOs, and similar financial instruments, would fail. This idea was not unique to Magnetar. Hedge fund manager John Paulson pursued the exact same investment strategy. The Magnetar story was first reported in the Wall Street Journal back on January 14, 2008, one day before John Paulson put Alan Greenspan on his payroll." [The article continues.]

So what's the big deal? John Paulson did it. Goldman Sachs did it. Why can't they?

The big deal to me is that this story has had hardly any traction in the mainstream media. That these big-shot bankers and fund managers deliberately created financial vehicles that had no intrinsic value for the express purpose of letting them fail. Or worse, making it sure they fail so they could profit. In the process, they at least aggravated the collapse of the housing market if not downright triggered it.

Now, many of the same savvy fund managers have bought up distressed mortgage-backed securities on the cheap, the same securities that they helped tank in price. They are waiting, for now. You can bet they are not waiting for the turnaround of the housing market. They are waiting for the federal government to make them "whole".

The federal government is beyond broke at this point. (See the debt clock on the upper left corner of this blog.) Who's going to pay to make rich investors and fund managers "whole"? Taxpayers, including those distressed homeowners who will be losing their homes.

It's such a comedy, if you are not party to it. Outdoing even Mel Brooks.

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Peter Schiff Will Pay to Debate Alan Greenspan

Peter Schiff is angry at Greenspan, who keeps repeating "Nobody saw it coming... Who could have known?" regarding the housing bubble he and his Fed created and the financial crisis triggered by it. Schiff knew, and he was laughed at (watch the second video in the link). So did many other people, including Ron Paul (he was laughted at, too, and continues to be laughed at by so-called mainstream media). Schiff is irate enough to offer money to debate Greenspan on TV (ABC in particular).

The New York Times Op-Ed piece Schiff is talking about in the video is here: "I Saw the Crisis Coming. Why Didn't the Fed?"

I, too, remember Greenspan praising adjustable-rate mortgages, instead of sounding caution.

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AIG Selling Its Crown Jewel to Pay the Goverment Back

Instead of doing the IPO, AIG is selling one of its most profitable and highly regarded insurance subsidiary in the high-growth region, AIA, to U.K.'s Prudential for $35.5 billion, as part of the effort to repay the U.S. government.

The U.S. government bailed out A.I.G., which was essentially a bailout of AIG's counterparties who also bet against CDOs insured by AIG's CDS. The sale of AIA is viewed in Asia as an inexplicable act, as they know that AIA is one of the top insurance companies in the region. Prudential is licking the chops, for very good reason.

The Federal Reserve Bank of New York owns the $16 billion preferred shares of AIA. The NY Fed will have their money back and probably a lot more, and they will claim how successful the government bailout is. See, we got your money back! The problem is that they didn't bother to ask us when they put the money in AIG, and we are not going to see that money back in our pockets.

AIG President and CEO Bob Benmosche says, as reported by Huffington Post:

"This transaction, the most significant milestone to date in our ongoing effort to repay taxpayers, also gives us greater flexibility to move forward with AIG's restructuring and focus on enhancing the value of our key insurance businesses, which will benefit all stakeholders."

Enhansing the value of their key insurance businesses by selling off one of their most successful insurance business in the fastest-growing region. Now that makes sense. What else are they selling to enhance the value of their insurance businesses?

AIG, who started its existence in Shanghai, will now be severed from its roots. All for paying back the government who was there to "rescue" big Wall Street banks, who essentially forced the "rescue".

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'Trust' May Have Been the Biggest Casualty in Banking

in this recession triggered by the financial crisis

I went to a local branch of a big, national bank yesterday to deposit checks. I went inside instead of using ATM machine. The bank was crowded with people waiting to do transactions. The bank greeters were back. Two of them. There were people sitting in the cubicles taking to the bankers.

Six months ago, this branch looked deserted whenever I went. Usually only 2 to 3 tellers were open, and there was no line, no greeters. Almost all the tellers looked barely out of high school.

That changed, I think, about two months ago. At first I thought it must be something to do with the holiday seasons. But the branch continues to be crowded. Now half the tellers look like they actually have some work experience.

I asked the person who did my transaction, "Is the bank crowded today?" She said it was, and that it had been like that for some time. "I wonder why," I said. She replied, "I think people are more worried about their money these days. They don't trust banks. I hope my money is safe with this bank..."

I was rather taken aback by her assessment. This is the branch of a bank that scores relatively high for a large national bank in terms of customers trust.

This New York Times article from February 9, 2010 lists the bottom 7 banks in terms of trust (as percentage of customers who agree with the statement "My financial provider does what's best for me, not just its own bottom line"). Not surprisingly, they are large national and regional banks: Bank of America, Chase, Capital One, TD/Commerce, Fifth Third, Citibank, and in last place, HSBC.

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House Oversight Committee Hearing: Value of AIG's CDS

So it was mere 50 percent of the par value.

Nice job, New York Fed. A true defender of big banks on Wall Street and around the world.

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Obama vs 'Evil Banks', But Who Buys His Government's Debt?

Treasury Secretary Tim Geithner seems to have doubts about the latest bank regulation proposal by his boss. Other lawmakers are cautious in commenting on the proposal to ban proprietary trading and investing in hedge funds.

Aside from the questions like "Does proprietary trading matter?" (or for many lawmakers, "What is proprietary trading?") and "Did it cause the market turmoil and crash in 2008?", I'm thinking about the consequences of openly declaring "war" on the nation's banks, fake or not.

One of them that occurred to me is this: Who is going to buy all the debt that the president and his administration is going to incur?

The nation's big banks happen to be the primary dealers of the Federal Reserve, who are required to bid at the Treasury auctions. Goldman Sachs, J.P.Morgan Chase, Morgan Stanley, Citigroup, Bank of America all bid in every single Treasury auction. Every week, Treasury Department sells short-maturity bills to the tune of $50 billion or more. Longer-maturity notes and bonds are sold every other week, often exceeding $100 billion.

Would the administration risk totally pissing off these banks who buy and arrange others to buy the government debt that is set to increase even bigger? The administration needs to fund $1 trillion-plus deficit, plus $1.5 trillion debt rollover.

The answer is rather obvious.

The president is striking a populist image of fighting the 'evil banksters' by focusing on the secondary or tertiary issues that need to be addressed in a real financial reform but which probably didn't cause the market melt-down in 2008. Is he talking about regulating OTC derivatives like CDS? Is he talking about rating agencies? Is he talking about securitization of illiquid and potentially risky assets like mortgages and credit card debts? No, he isn't.

Instead, he focuses on what the average Americans can understand - big bonuses.

The stock market is tanking for the third straight day. Since Wednesday, Dow Jones Industrial Average has lost over 500 points, or 4.6%. A panic will break out if Dow dips back below 10,000 again, which is only 200 points or so away, as it may feel like the nightmarish days of October 2008 are returning.

On October 2, 2008, Dow started the plunge after the bank bailout bill passed. In three trading days, it lost 870 points. In seven trading days, it lost 2,375 points, or 22%.

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