A little more than two years ago, economist John Williams of shadowstats.com predicted a “severe recession” was coming and soon.  At the time, I was working as an investigative correspondent for CNN.  I interviewed Williams for a story about the coming financial crisis.  Most so-called experts, at the time, did not see the financial meltdown coming, let alone that all the banks were in trouble.  Williams’ assessment of the economy was spot on in 2008.  I don’t see how you can characterize what we have now as anything but a “severe recession.”   Accurate information is the first and foremost reason to use someone as a source when you are a journalist.  In my experience, what I have gotten from Williams has been stellar.  (Click here for the 2008 CNN story featuring Williams and his predictions for the President in 2012.) (Click here for shadowstats.com)

Williams also predicted 2 years ago we would have a “hyperinflationary depression”  within 10 years.  Then, about a year ago, he revised his prediction and narrowed the window to “five years.”  The day before last Friday’s dismal jobs report, Williams said, “. . . the timing of the looming U.S. financial Armageddon is coming into better focus, with increasingly high risk of it breaking within the next six months to a year.”   

“Financial Armageddon . . . within the next six months to a year.”  I called Williams to see why the odds of calamity have accelerated.  He told me on the phone last night, “What is happening now to bring the timing into focus is the economy IS turning down.  It is no longer the perspective the economy is going to turn down.  That, in turn, will eventually trigger all the problems with the dollar, the debt and the deficit.”  

For confirmation the economy is rolling over, look no further than the awful jobs report from the government last Friday.  The Bureau of Labor Statistics (BLS) reported July payrolls fell 131,000.  To add insult to injury, the June jobs number was revised downward.  The economy lost 221,000 jobs which is considerably more than the 125,000 the government reported last month. 

You want more confirmation the economy is in the tank?  Also, last week, the government revealed a record 40.8 million Americans are now on food stamps.  More budget woes can be seen at the state level.  Congress just passed an emergency aid package worth $26 billion to save teachers’ jobs around the country.  States are facing $200 billion in shortfalls in the coming months.  California is one of the worst, with a $40 billion budget hole to fill.  Commercial and residential real estate is still losing value, and set to take another plunge.  

So, what’s the government doing about the economy?  The Fed has set interest rates at near 0% for more than a year and a half.  The economy is not taking off.  According to a recent article from financial writer Jim Willie, who has a PhD in Statistics, “Never in US history has a recession struck after several extended months of emergency ultra-low interest rates. This will be the first such occurrence. The policy response from the USFed must therefore be limited. They cannot reduce the official interest rate, unless below 0% (which did happen briefly in Japan). The nation stands on the doorstep of hyper-inflation.  The only available tool within the USFed tool bag is Printing Pre$$ activity, pure monetization of both USTreasurys and USAgency Mortgage Bonds.”  (For the complete Willie article click here.)  

How much of a chance is there the Fed will just print money to pay bills?  When asked how the Fed was going to stop the slide in the economy on CNBC, St. Louis Fed President James Bullard said, “Quantitative Easing is our best bet.”  For us regular folks, QE means printing money out of thin air.  I talked about this in a recent post called “Money Printing Is Our Best Bet.”  

How fast could things go downhill when real trouble starts?  Mallory Factor at Forbes laid it out nicely in an article last week called “Collapse In Internet Time.”  Factor writes, “In an age when billions of dollars in securities are traded in nanoseconds, when a 24-hour news cycle seems long, why should national decline be exempt from what the Germans call Zeitgeist, the spirit of the age? The Book of Revelation, speaking allegorically of ancient Rome, states, “Alas! Alas! You great city, you mighty city,Babylon! For in a single hour your judgment has come.” Ancient Rome surely did not expect its sudden fall any more than the Soviet Union did in 1991, or than Americadoes now.”  (Click here for the complete Forbes article.) 

Ultimately, the immense debt and deficits of the United States will crush the dollar.  In his most recent report, Williams says, “The unfolding renewed decline in economic activity now is likely to be one of the proximal triggers for an even greater systemic solvency crisis, one that will pummel the U.S. dollar, threaten the solvency of the U.S.government and set the stage for a hyperinflation in the United States. In turn, such a crisis would exacerbate the intensifying downturn into a hyperinflationary great depression.” 

No one knows exactly when the buck will buckle, but it looks like the dollar will take a short walk off a tall building a lot sooner than later.

More…

Greg Hunter is so right about the result of MOPEd details of the present time major banking crisis.

If FASB did not capitulate there would be few solvent US banks. This includes major money center banks. This means that the earning statement and balance sheets of the financial community are as much a cartoon as the value put on bankrupt and near bankrupt OTC derivative so-called assets.

Dear CIGAs,

Last week, bank failures quietly passed the 100 milestone for the year.  I say “quietly” because the bank failure story has gone largely unreported or, at least, under-reported by the mainstream media.  Just to give you an idea of how fast the bank insolvency problem is accelerating, last year, at this time, 64 banks had been taken over by the Federal Deposit Insurance Corporation.  So far, this year, 103 banks have already been taken over by the FDIC.  There is no question the bank failures the FDIC will have to deal with will be greater than the 140 insolvent banks closed last year.  At this point, we just don’t know how many more, but dozens more than last year for sure. 

One big bank negative I see is the loss of business in the Gulf because of the oil spill catastrophe.  I don’t think it is a stretch to say that the loss of revenue from fishing, deep-water oil drilling, tourism and spoiled coastal property will probably have a negative effect on the balance sheet of Gulf Coast banks.  Just 2 weeks ago, a Wall Street Journal story documented tail spinning Florida banks asking for a break from federal regulators.  It said, “Florida banks—already weakened by the real-estate bust and hit again by customers suffering from the BP PLC oil spill—are asking federal regulators for a reprieve from government-ordered capital raising as they struggle to stay alive.” (Click here for the more on the WSJ story.) There are currently 775 “problem” banks on the FDIC’s list, and I don’t think that list will be shrinking anytime soon.

In order for the FDIC to close the banks, it has to spend cash to make depositors whole.  It is also entering into what are called “loss share” agreements.  It is a way to keep problem loans and foreclosed property in a banking environment and not become the full responsibility of the government.  It also caps the loss for the buying institution.  Here’s how the “loss share” basically works.  The FDIC writes down the assets to an estimated value.  Then, the FDIC covers any potential losses in an 80/20 split, with the FDIC covering 80% of any potential loss.  These loss share agreements were used in the S&L crisis in the early 90’s.  Since this crisis began, there have been $173.5 billion of loss share agreements through May of 2010.  (The total now stands at more than $178 billion.)  According to FDIC spokesman David Barr, if loss share agreements were not used, the failed bank assets might sell for “pennies on the dollar.”  The idea is to wait and sell the assets in the future when they might be worth more.  Barr told me just last week, “As the FDIC turns those losses into real losses when we sell those, then the loss at the failed bank is adjusted accordingly, some go up and some go down.”

If the economy continues to tank, make no mistake, there will be some liability to the FDIC.  We just will not know how much until the assets are sold.  There might be no future liability at all, but I don’t think that’s likely given the serious and prolonged problems facing the economy.  This is probably a multi-billion dollar future write down, but who knows?

The bank closings are also taking a toll on the FDIC’s Deposit Insurance Fund, or DIF.  In May, it was reported to be $20.7 billion in the red.  Back then, I wrote a post called, “FDIC Insurance Fund Still $20 Billion in the Hole.”    I said, “I talked with FDIC spokesman David Barr yesterday about the shortfall in the DIF.  He said, “The FDIC is not broke.”  It has an additional “$63 billion in cash.”  He told me there is about $46 billion in three years of prepaid deposit insurance premiums and an additional $17 billion in cash for a grand total of $63 billion in “liquid resources” to close insolvent banks.” 

If you subtract the $20.7 billion deficit of the DIF from the roughly $63 billion in “liquid resources,” you end up with a little more than $42 billion.  FDIC Chairman Sheila Bair was quoted, around the same time, saying the FDIC expects to spend “$40 billion” closing banks in the next year.  (Remember, this was before anyone knew how big the Gulf oil spill calamity was going to be.)  My math says that would leave a little more than $2 billion in “liquid resources.”  According to an email from David Barr yesterday, after that $2 billion is used, there is a “. . . 100 billion line of credit (from the Treasury).  The FDIC also has some $35 billion in assets from failed banks that we must sell.”  

That means in about a year, the FDIC will be closing banks with borrowed money and what it can get from selling the assets of failed banks.  If that doesn’t paint a dire picture of bank insolvency in this country, I don’t know what does.  It is amazing to me how little time the mainstream media is spending on this unfolding financial disaster and how much time it is devoting to things like Mel Gibson’s rants.

More…

Dear CIGAs,

The decade of the 1990’s is America’s modern day equivalent of the Roaring 20’s.  Back then, we were making great strides in productivity.  We had near full employment, the government had a surplus of cash and the stock market was making many people rich.  The future looked so bright in December of 1996 that Fed Chief Alan Greenspan warned investors not to get carried away with the good times.  Greenspan asked this rhetorical question, “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”  According to Yale Economics Professor Robert J. Shiller, Greenspan “. . . never actively used the words ‘irrational exuberance’ again in any public venue.”  (Click here for more from Shiller who wrote the best selling book titled “Irrational Exuberance.”) 

Oh, what a difference a decade or so makes.  Just this past week, Fed Chairman Ben Bernanke testified in front of the Senate banking panel.  In opening remarks, Bernanke said, “. . . the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”  (Click here for a complete text of Bernanke’s prepared statement.) 

The Fed Chairman told Congress he is not sure where the economy is going?  This doesn’t sound like “green shoots” or a “recovery” to me.   It sounds like a warning things may take a turn for the worse.  The only consolation is the Fed will “take further policy actions as needed.”  That, to me, sounds like more money printing and bailouts if the economy rolls over, or maybe I should say when the economy rolls over.  

I guess I should not be surprised with Bernanke’s “unusually uncertain” comment.  After all, just last month, he said, “I don’t fully understand movements in the gold price.”   How can someone in charge of the world’s biggest gold reserve (more than 8,000 tons) be clueless about the rising price of gold?  (Click here for the Bernanke  gold comment story.)

The Chinese may be able to clear up the Fed Chief’s uncertainty about the economy and gold.  According to a Financial Times story (posted the same day as Bernanke’s Senate appearance), America is in deep financial trouble.  The head of China’s largest credit rating agency, Guan Jianzhong, chairman of Dagong Global Credit Rating, said, “The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings. . . Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.” (Click here for the complete FT article.)  

I think we are beyond the “borrowed money” phase and will go straight to “quantitative easing” or money printing when there is another meltdown.  What else would the Fed do?  Lower interest rates?  They’re already at 0%.  Raise taxes?  Sorry, that is not in their power.  The Fed printed and spent $1.75 trillion, stopping the last near collapse of the financial system, and they will do it again.  Don’t take my word for it.  Just listen to Ben Bernanke’s sworn testimony.  Again, he said, “. . . we remain prepared to take further policy actions as needed . . .”     

We have gone from “irrational exuberance” to “unusually uncertain” in just about 13 years.  This is a total repudiation of Federal Reserve policies.  Ironically, in the new financial reform legislation just signed into law, the Fed received vast new regulatory powers.  God help us.

Link to full article…

Both the House of Representatives and the Senate have passed their versions of financial reform legislation.  Now, the process of reconciliation takes place between both bodies of Congress to iron out a final bill the President can sign into law.  There is plenty in the bill such as new consumer protection, increased power given to regulators to prevent systemic risk, and new powers to oversee the $600 trillion derivatives market.  These are just a few of the highlights, and there is no telling what will actually end up in the final bill.   (The derivatives problem alone can kill the U.S. economy.  I wrote about this in a post called “Can The Financial System Really Be Fixed? Some Say No.”)

“Too big to fail” 

The most important issues that could cause another financial crisis are not covered in the pending legislation.  The biggest problem is the enormous size of the institutions being regulated.  “Too big to fail” means they are simply too big, and shrinking them is not on the table.  Last month, Senator Sherrod Brown (D-Ohio) explained the size problem this way: “Fifteen years ago, the assets of the six largest banks in this country totaled 17 percent of GDP.  The assets of the six largest banks in the United States today total 63 percent of GDP, and that’s too (big)–we’ve got to deal with risk to be sure, but we’ve got to deal with the size of these banks, because if one of these banks is in serious trouble, it will have such a ripple effect on the whole economy.” 

After the Senate passed its version of financial reform, Representative Alan Grayson said, “Too big to fail means too big to exist.  We have to systematically dismantle the institution that caused the systemic risk to the economy and that, for sure, the Senate bill does not do.”  I don’t see any way we are going to see a breakup of the banks.  There are some amendments that will force banks to spin off risky trading operations.  The banks are against any trading restrictions or spin-offs.  So, getting that into a final bill is going to be tough. I don’t think the big banks will get appreciably smaller until after the next meltdown, and one is coming sooner than later.  

Big institutions take big risks.

There was a time when banks were not allowed to take on too much leverage.  The max was about 10 or 12 times capital.  During the Bush Administration, the caps on leverage were unlocked and banks took on insane amounts of risk.  During the last financial crisis, it was not uncommon for banks to be leveraged 40 times capital (sometimes even higher!)  The pending financial reform legislation doesn’t really address limits on leverage.  To be fair, President Bill Clinton signed into law the Gramm-Leach-Bliley Act (GLBA) in 1999.  That legislation repealed the Depression era laws of the Glass-Steagall Act and allowed banks to have unlimited growth and take on much more risk.  Without GLBA, also know as the Financial Services Modernization Act, the banks would have never grown “too big to fail.”  

Fannie and Freddie

Neither the House nor Senate bills address failed mortgage giants Fannie Mae or Freddie Mac.  The government took over these two institutions in 2008.  They have a combined taxpayer liability of more than $6 trillion!  There is not a mention of reform or how we are going to budget for this slow motion train wreck.  I guess if Congress just ignores a problem, it doesn’t exist or it will vanish all on its own.  Omitting this from financial reform legislation is too stupid to be stupid.  

The Fed gets more power!  

Finally, the big winner in all of this is the Federal Reserve.  The regulator who stood by and watched as the financial system spun out of control is going to be rewarded by getting more power!  These are the same people who fought regulation of the derivatives market and pushed for repeal of the Glass-Steagall Act.  The Fed will likely get authority to oversee a new consumer protection division for businesses such as mortgages and credit cards.  Also, the Fed will supervise the biggest and most complex financial companies.  This is like the proverbial fox guarding the hen house.  The pending legislation may force an audit of the central bank, but I wouldn’t count on any meaningful look at the secret deals of the Federal Reserve.  I hope I am wrong.  

Congressman Grayson recently summed up the importance of financial reform by saying, “We have a basic choice we have to make. Do we want a government of the people, by the people and for the people, or of Wall Street, by Wall Street and for Wall Street?  It is disturbing how much this government is by Wall Street and, therefore, you end up with bills that are for Wall Street.” 

Recent headlines coming out of the financial world have been jaw dropping.  Here are a few: US faces same problems as Greece, says Bank of England (The Telegraph), World markets rattled by Goldman fraud (The Economic Times), Goldman Sachs faces criminal investigation (Guardian UK), Government Probe into Wall Street Sales Widening (Fox Business), SEC expects early findings on dramatic, 1,000 point market drop next week (The Hill), Feds probing JPMorgan trades in silver pit (NY Post), Federal Reserve lends bucket to EU bailout (Politico),and NY AG investigates if banks misled ratings agencies (WABC).   

My favorite headline is Major Wall Street firms face criminal probe (Reuters), because the article goes on to name all of the big players.  The Reuters story says, “. . . preliminary criminal probe is being conducted with U.S. securities regulators and involves JPMorgan Chase, Citigroup, Deutsche Bank, UBS, Morgan Stanley and Goldman Sachs Group Inc.  The person said the investigation included mortgage-bond deals, that it was in an early stage and that it might not necessarily lead to criminal charges against all of the firms. The person spoke anonymously because the probe is ongoing.”

None of the financial institutions named above have been convicted of any wrongdoing. They all basically say they did nothing wrong.  Can all this negative press just be a big overblown mistake?  Mind you, the above headlines are recent, as in the past week or so.  I say when you put all the headlines together, it sure looks to me like the financial system is corrupt.  The financial markets are a rigged game.  The game is played to enrich the big fat cat trader and rip-off the little guy of his hard earned savings.

Rigged games are doomed to fail.  Eventually, everybody realizes the only money walking out the door is in the pockets of the house.  In this case, the house is the big Wall Street banks.  In my mind, the negative headlines all point to one thing–the rigged game is coming to an end.

Printing money out of thin air to bailout every bank and country in the Western World is increasing risk according to NYU Professor of Risk Engineering, Nassim Taleb.  Taleb said this week, “The problem is debt, and you don’t cure debt with debt.”  Taleb, who wrote the runaway best seller, “The Black Swan,” says he’s worried about a “failed (Treasury) auction.”  He thinks the government will eventually be forced to buy its own Treasuries because no one else will buy them.  He is also worried about “hyperinflation” caused by all the government money printing for bailouts.    Please watch this very informative video below.  It doesn’t get interesting until about a third of the way in:

Link to full article on USAWatchdog.com…

Dear CIGAs,

In the early days of coal mining, canaries acted as a warning that odorless poisonous gas was present.  If there was a dangerous gas build-up, the canary would be the first to keel over.  You can use the “canary in a coal mine” metaphor to describe the situation in today’s financial world.  Greece is the canary.  The poisonous gas is debt.  Greece has just keeled over, and the rest of the world is running scared.  That’s why the Dow was down 1,000 points at one time yesterday!  Oh yes, there was talk of “unregulated high frequency computerized trading” and “bad trades,” but make no mistake, the market is worried about massive amounts of sour debt at all levels around the globe.   

In a nutshell, Greece borrowed way too much money, and does not want to drive old cars and eat rice and beans for years to pay it back.  That’s why you are seeing riots in Athens.  The problem with Greece is it cannot print money like the United States.  Its debts cannot be simply inflated away.  Bills have to be paid with big cuts to pensions and social programs, and it is not going over well.  That brings us to the other option, and that is to simply not pay the money back and default.  

There is one other option, print money and bail out Greece.  Here’s how investment guru Monty Guild sums up the bailout scenario:“This is happening because if Europe does not support Greece, the government debt contagion that we have been discussing in recent memos will continue and spread. It will spread to Spainand Portugal and later to many countries in Europe includingItaly and possibly France.  Because they fear the spreading contagion, Europe wants to stop the crisis as soon as possible.  In other words, Europe is getting a bailout, not just Greece.” (Click here to read Guild’s full report.)

Greece isn’t the only country to have a bad debt problem, just the first to fall.  America will also need a bailout, and the Federal Reserve has been doing just that by printing more money than the world has ever seen.  This is why gold has been on a steady uptrend.  The smart money already sees the yellow metal as, well, money!

Economist Dr. Marc Faber appeared on Bloomberg yesterday to talk about the market plunge and said, “The governments are all bankrupt.  They can only survive by printing money (to pay debts), and they’ll print money and print money.  That’s why the price of gold went up today when everything else went down.”

Are the Greek people any different than anyone else in the world?  I think not.  Just look at what is going on in the United States.  Americans everywhere are protesting budget cuts.  Is America in the same shape that Greece is in?  You bet, according to Jim Rickards, an investment banking pro and risk management expert.  He said earlier this week on CNBC, “I’m having trouble finding a Greek metric where the U.S. isn’t as bad or worse than Greece or will be shortly.”  Rickards also said, “The dollar is pretty much at the end of the line.”  Listen to the entire interview by clicking below:

So what is it going to take to “fix” the debt mess the world finds itself in today?  Well, first of all, there really is no “fix” because the debt problem is just way, way too huge.  According to the Bank of International Settlements, the debt ball in the world today is $600 trillion.  I wrote about this financial phenomenon in a post last year called “Can The Financial System Really Be Fixed? Some Say No.”

This debt ball is made up of complicated financial instruments calledderivatives.  There are plenty of these instruments in places like Greece and around the world.  These are private debt contracts between individual parties.  There is no public market for derivatives.  That means there are no rules, regulations or guarantees.  Without a public market, there is no way to objectively price this ball of financial crap.  Bob Moriarty of 321gold.com sums up the end game of this enormous mountain of debt this way, “. . . The derivatives market is going to go into a meltdown like nobody’s ever dreamed of because nobody but me and the other nine guys actually understand exactly what $600 trillion dollars is. It’s 10 times the size of the world economy, and it’s been blowing up since June 2007 when those Bears Stearns funds went under. . . . You talk about “if” we have financial collapse. I talk about “when” because no other alternative is possible. Nobody and nothing is going to stop it from happening. It is as absolute as the time and tides.”  (Click here for Moriarty’s complete interview)

Link to original article…

Pick a financial fire and you can be sure the U.S. government will hose it down with gallons of money.  AIG, General Motors, Chrysler, insolvent states, FDIC, Fannie, Freddie and all the banks are just a few of the blazes Uncle Sam has sprayed money on.

Now, the Federal Reserve is printing up another $105 billion to send to Greece to help with its debt problem.  Is the bailout cycle getting ready to take another turn bailing out the Banks?  You know, the ones we were told had little exposure to sour European debt?  Check out this article from Bloomberg last week:  JPMorgan Chase & Co., the second- biggest U.S. bank by assets, has a larger exposure than any of its peers to Portugal, Italy,Ireland, Greece and Spain, according to Wells Fargo & Co.  JPMorgan’s exposure to the five so-called PIIGS countries is $36.3 billion, equating to 28 percent of the firm’s Tier-1 capital, a measure of financial strength, Wells Fargo analysts including Matthew Burnell wrote today. Morgan Stanley holds $32.4 billion of debt in the region, which equates to 69 percent of its Tier 1 capital, Burnell wrote.”

I guess now we know why Ben Bernanke is supplying Greece with $105 billion in bailout money.  It looks like he actually is bailing out U.S. Banks—again!  I wrote about the Fed admitting to massive money creation 3 weeks ago in a post called “Bernanke Admits Printing $1.3 Trillion Out Of Thin Air.” It also looks like we are not going to stop this money printing train wreck because the bailouts seem to be never ending.  This is the main reason we are facing a head-on collision with very big inflation.   

In the latest report from John Williams of shadowstats.com, the inflation picture looks dire and definite.  Williams wrote, “My outlook for a hyperinflationary great depression in theUnited States is unchanged; all that is unfolding now is some of the detail that should lead to that ultimate financial/economic disaster. Gold remains the best long-term hedge here, along with some silver, and cash outside the U.S. dollar and theUnited States. I still like the Canadian and Australian dollars and the Swiss franc. Again, the outlook is for the long haul, irrespective of any near-term extreme volatility in the various markets. As to the U.S. stock market, the term “insanity” comes to mind as I watch some of the day-to-day movements.”  

Williams also thinks there are “mounting systemic risks.”  On that issue, the Global Europe Anticipation Bulletin is in agreement with shadowstats.com.  GEAB writes, “The fuss made over Greece by the English and US media in particular tried to hide from the majority of the economic, financial and political players the fact that the Greek problem wasn’t a sign of an upcoming Eurozone crisis (2) but, in fact, an early warning of the next big shock of the global systemic crisis. . . one mustn’t forget that the current crisis has its origin in the collapse of the world order created after 1945, of which the United States was the support, assisted by the United Kingdom.”  (Click here for the complete GEAB report.)

I keep trying to find ways to explain the scope of what is going on in the world financial markets to friends and readers of this site.  I told an acquaintance at dinner last night the money printing going on “has never happened on this scale in human history.”  The guy just looked at me and said that he thought it was a good idea to invest in municipal bonds!  How are broke cities and states going to pay the interest, let alone the principal, back.  If the cities and states are bailed out, massive inflation will render the bonds worthless or near worthless.

People just do not understand the calamity that is upon us, but what do you expect when the mainstream media keeps broadcasting that we are in a “recovery.”  I do not know exactly how this is going to end, but for the unprepared, it will end badly.  

More…

When the litigation ball gets rolling one loss can take down the house.

Dear CIGAs,

Goldman Sachs was charged with fraud last week by the Securities and Exchange Commission.  The investment bank says the charges are “unfounded in law and fact.”  Regulators allege “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” SEC Enforcement Director Robert Khuzami said in a statement.  In other words, Goldman and a hedge fund client put together a ball of sub-prime crap designed to fail and bet against it.  Goldman also took out insurance on those same mortgage backed securities from AIG–yes, the same AIG taxpayers bailed out to the tune of $180 billion. Goldman was paid a total of nearly $13 billion from AIG at the direction of Treasury Secretary Tim Geithner.  What a mess and it is going to get much worse before it gets better.  

Plaintiff attorneys are preparing for a deluge of future lawsuits written about in this recent Reuters article: The SEC’s charges against Goldman are already stirring up investors who lost big on the CDOs, according to well-known plaintiffs lawyer Jake Zamansky.  “I’ve been contacted by Goldman customers to bring lawsuits to recover their losses,” Zamansky said. “It’s going to go way beyond ABACUS. (name of Goldman security in question) Regulators and plaintiffs’ lawyers are going to be looking at other deals, to what kind of conflicts Goldman has.” (Click here for the full Reuters story.)   Also, the UK and German governments are asking for their own investigation into Goldman Sachs deals.  

If you think this was the only shady deal dreamed up by Wall Street banks, you have another thing coming.  All of the big banks have been selling securities called derivatives for at least two decades.  Derivatives are usually bundles of debt.  There are derivatives for mortgages, car loans, credit cards, student loans and all types of government debt, to name a few.  Derivatives are complex, but when it comes right down to it, you can sum them all up as debt bets.  

Derivatives are a $600 trillion market according to the Bank of International Settlements.  (Some say the BIS estimate of the derivatives market is actually more than $1,000 trillion!)  And here is the best part–derivatives are totally unregulated.  That means there are no standards, no guarantees and no public markets.  With no public market, there is no real way to price this kind of Wall Street alchemy.  You just have to trust the person selling the “security.”  Take the Goldman fraud case, for example.  If there was a public market, Goldman would have never been able to pack crap loans into a security and sell them.  The regulation and guarantees would not have allowed it.  After all, regulations, guarantees and a public market make selling derivatives a lot less profitable.  That’s why Wall Street has been fighting regulation of the derivatives market for years.  

Now, amplify this kind of Wild West market with all the big Wall Street banks and you get something so huge and so packed with junk that you have to suspend accounting rules to keep the system solvent.  That is what you have today.   I wrote about this in a post last year called “Can The Financial System Really Be Fixed?  Some Say No.”

Famed investor Jim Sinclair (jsmineset.com) was setting off alarms about the massive problems derivatives can cause several years ago.  In 2005, he said, “What OTC derivatives do not do to International Investment Banks, litigation will.”  The Goldman fraud case is just the beginning of years of investor lawsuits against just about anyone dealing in the derivatives market.  So, when the news broke last Friday that Goldman was hit with fraud charges, all the big banks sold off.

Without unregulated derivatives, we would not have had the financial meltdown, mortgage giants Fannie Mae and Freddie Mac would not have failed, and we would not have problems with Greek debt and other sovereign debt.  How can this $600 trillion dollar market be unwound?  So far, taxpayers and investors around the world have been picking up the tab.  Now it may be Wall Street’s turn to pony up some dough.  Don’t be surprised if some of them get taken down by their own toxic financial waste.

More…

Earlier this week, Fed Chief Ben Bernanke told Congress to basically raise taxes and cut the federal budget.  The inference was, if Congress doesn’t get its financial house in order, it will be their fault if the economy tanks.  Here is how Bernanke actually said it, “. . . Maintaining the confidence of the public and the financial markets requires policy makers more decisively to put the budget on a sustainable fiscal balance.” 

Bernanke also said the federal debt “. . .is already expected to be greater than 70%” of Gross Domestic Product, “. . . at the end of 2012.”  And if that is not bad enough, Bernanke said that by 2020, “. . .federal debt would balloon to more than 100% of GDP,” provided  taxes are not raised and budgets are not cut.  The mainstream media gave this story a great big yawn; but don’t kid yourself, what Bernanke said was a powerful, ominous warning.

All I can say is Ben Bernanke has a huge set of cojones.  He is scolding Congress to keep taxes up and spending down to help pay for the gigantic bailout of Wall Street Banks.  Meanwhile, the Federal Reserve is fighting tooth and nail to keep from revealing its secret bailout of the same banks during the financial meltdown in 2008! 

The Fed was sued by financial news network Bloomberg two years ago.  Bloomberg wants the Fed to reveal which banks received $2 trillion in bailout money and why.  Bloomberg won the case and the Fed appealed.  Bloomberg, also, won the appeal in March 2010!  The precedent setting case would force the Fed to reveal the details of secret bank bailouts–including $500 billion given to foreign financial firms!!  

In a Bloomberg story earlier this week, lawyers representing the Federal Reserve (which is made up in part by big U.S. banks) said, “U.S. commercial banks will take their fight against disclosure of Federal Reserve (documents) in 2008 to the Supreme Court if necessary . . .”  Lawyers representing the Fed say they are worried that if details of trillions of dollars in bailouts are revealed, it could cause another financial meltdown.  General Council for the Fed, Paul Saltzman, says, “Our member banks are very concerned about real-time disclosure of information that could cause a run on the banks.”  This is another story, with dire implications, the mainstream media is ignoring.  (Click here for the complete Bloomberg story)

So, if the secret slimy deals of the Fed are revealed, people will lose confidence in the banks and want their money?  If that is the case, and I think it is, we Americans need to know why the Fed printed up at least $2 trillion and handed it out to their banking syndicate.   

I think what Bernanke is really saying is, “America get your finances in order and pay for this Wall Street bailout while we (the Fed) continue to bailout our banking buddies in secret.” (My quote)  This will all be paid for eventually, one way or another, by U.S. taxpayers.  We should at least find out if we got our money’s worth.  Below is Ben Bernanke’s warning about big deficits on Capitol Hill earlier this week: 

More…

I heard Jim Cramer of CNBC say last night people are“ignoring the good news.”  I say when it comes to the mainstream media, just the opposite is happening.  The folks at the financial news networks are especially good at ignoring the bad news even though they should know better.  

For example, we have been told non-stop that we are in a“recovery.”  We are clearly not.  Want proof that we are not in a“recovery?”  Just two days ago, Fed Chief Ben Bernanke said,“We are far from being out of the woods.”  According to a Bloomberg story, in a recent speech in Dallas, Texas, the Fed Chief was hardly trumpeting a huge turnaround for the economy.  Bernanke said, “. . . the U.S. faces hurdles including the lack of a sustained rebound in housing, a “troubled” commercial real estate market and “very weak” hiring. . .” (Click here for the complete Bloomberg story.)  Why is the Fed Chief, all of a sudden, not beating the “recovery” drum?  I think someone figured out that if they keep talking up the “recovery” and that does not happen, then the Fed will lose major credibility. 

Sure, the economy looks like it stopped falling, but you have to keep in mind we spent trillions of dollars just to get to where we are now.  Taxpayers bailed out everything from car companies to insurance companies.  ALL the big banks got taxpayer charity, and the best we can do is bottom bounce?   

If we really are in a “recovery,” then why is the Fed keeping its key rate at nearly 0%?   The Fed has repeatedly said this cheap money“needs” to remain for an “extended period.”  If this was a big “recovery,” wouldn’t the Fed raise rates?

Here is another ignored item.  The banks are holding trillions of dollars in toxic assets, or bad debt, in the form of all sorts of derivatives.  There is no telling what these things are worth because there is no public market.  Without a public market, there are no standards for derivatives.  There are not any guarantees, and regulation has been non-existent.  Most importantly, without a public market, there is no “bid/ask” mechanism that is essential in setting a price (price discovery).  I wrote about this in a post, last September, called “Can The Financial System Really Be Fixed?  Some Say No.”  (Click here for that post)

That’s why Wall Street says derivatives are “hard” to price.  You bet they are hard to price!  Nobody trusts the fantasy valuation, and there is no way to set a real price without a public market.  What do you bet if there was a “price discovery,” we’d find out some of this stuff is worthless?  I’ll also bet plenty more derivatives are worth a lot less than the banks claim, and that will spell big losses in the future.  Why do you think Wall Street is fighting financial reform so hard?   

If you think banks don’t play accounting games with bad debt, then maybe this story, out yesterday, will convince you.  According to The Wall Street Journal, “Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public. . .”   That makes it appear the banks balance sheets are less risky.  I’ll bet it also justified some of those big bonuses too!  (Click here for the complete article.)  Uncertainty about the true value of assets in the banking system makes a real “recovery” impossible.    

Here are another 138,000 reasons we are not in a recovery.  That’s how many people filed for bankruptcy last month!  An astounding 35% increase over February filings.  This increase is almost totally ignored by the mainstream media.   

And ignore this–we have lost more than 8.3 million jobs since December of 2007.  We were told recently there was a big turnaround on the jobs front by the mainstream media.  When you cut out the temporary census workers, we supposedly created 114,000 jobs last month.  That job growth was so spectacular it did not even put a dent in the “official” unemployment rate of 9.7%.  Although, shadowstats.com says unemployment is really at more than 21%, if you calculated it the way Bureau of Labor Statistics did it prior to 1994.  After 1994, if someone is out of work for more than a year, then that person does not count according to the BLS.  They keep calling this a “jobless recovery,” but without jobs this is no “real recovery.”   Of course, all those unemployed people are probably just ignoring the good news.

More…