I SEE FED PEOPLE....THEY'RE EVERYWHERE

And just as I post the most recent article about Bill Dudley, the NY Fed Chief putting on a PR blitz to save the reputation of the Fed and inform the public about the good works they do, we get another gem that reinforces just how rigged this whole system is. 

FORMER KANSAS CITY FED PRESIDENT, THOMAS HOENIG NOMINATED FOR FDIC CHAIR BY OBAMA.
http://www.bloomberg.com/news/2011-10-21/obama-nominates-former-fed-president-hoenig-for-fdic-vice-chair.html

Hoenig, who has served as President of the Kansas City Fed for 20 years and submitted his resignation on October 1st of this year.

Is it odd that Hoenig would retire only to move into the leadership role at the FDIC?  Perhaps not, however this interesting story about Bank of America, highlighted below, has me thinking a bit more now that I have noted the story.

WHEN THERE IS DISAGREEMENT IN THE WORKPLACE, FIRE THEM
When I worked at the hedge fund back in the day, you could tell when someone was about to be asked to leave the firm (fired).  Typically, the timing would coincide with any challenge or disagreement with the CIO on any investment decision or issue.  Once that event occurred the poor trader or manager was doomed to pack up his belongings within 30 days.

I think the Fed must have this type of leadership approach when it comes to the FDIC

B of A Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit -
http://mobile.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit?category=%2F

Hmmmmm.  Think just the first two paragraphs -

"Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position."

See, the FDIC looks at these transfers of derivatives into the bank holding company and sees these as potential claims against bank assets.  The counterparties that entered into these with Merrill Lynch love this because they are getting a "better" rated counterparty with much deeper pockets. 

Isn't it interesting that the FDIC and FED are split on this approval and a 20 year veteran Fed President would suddenly be nominated to a key leadership position at the FDIC?

ONE MORE JUST FOR GOOD MEASURE -
While it is not related to this story in any way, you just can't avoid a Federal Reserve connection or Goldman Sachs employee in any important office in our government.  While he never worked at Goldman, you've got to know that our friend Herman Cain was on the Board of Directors for the very same Kansas City Federal Reserve in the early and mid 1990's. 
MONTHLY UPDATE -
I took a much needed month off from writing the monthly reports and I feel refreshed and feel like I have a better perspective on the market due to the lay off.  I'm dealing with extended family health issues so I seem to have much fewer hours to devote to writing.  I will attempt to write less long, but more frequent posts in the next month.  The monthly update should be finished tomorrow for some weekend reading.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

WHERE THERE'S SMOKE, USD LIBOR IS RISING

SOMETHING NEW IN USD LIBOR?
Monthly readers are accustom to reading the monthly Macro Update and finding neat little charts of 6 Month USD Libor and Euro Dollar Libor posted here.  I've lamented each time that USD Libor remains stubbornly low and a result of straight up manipulation rather than some reflection of healthy interbank lending.

Before I go further, let's recall what LIBOR is.  LIBOR is the rate that banks say they can borrow from each other for overnight loans, but in the case of the charts I show, it is the rate for 6 month loans to each other.  LIBOR is extremely important because this rate is essentially the benchmark rate that many other interest rates are set against.  Some of you might have an 7 Year or 5 Year Option ARM, most of those reset according to some LIBOR rate plus a percentage mark up.  Needless to say, LIBOR is an important data point, and this is why I've posted it for more than a year or so. 

While we look at LIBOR as a metric to determine the cost of borrowing, it is also really an indication of the trust and fear levels in the financial markets.  If banks really trust each other, they will gladly lend to each other at low rates.  If one of them smells trouble, funding rates suddenly begin to climb.  Remember, these bankers are all buddies and they are all in the same game, if LIBOR is rising, it isn't just because someone is mildly concerned about a bank issue, it is because there is a real threat. 
Ok, so what is all the fuss about 3 Month and 6 Month LIBOR?  Let's take a look.

6 MONTH USD LIBOR

3 MONTH USD LIBOR

See, in the last month to two months, USD LIBOR has done a moonshot.  In the case of 6 Month LIBOR you are looking at a 21% increase in USD LIBOR since 7/1/2011 and 3 Month USD LIBOR has vaulted 29% since the first of July. 

Now I know that someone may say that LIBOR rates are going to be based somewhat on the costs of funds in the market, in other words that LIBOR rates will look to the Fed Funds rate or might even be forward looking anticipating future interest rate increases. I understand that, but what has happened to treasury yields during that same time period or Fed Funds rates.  Let's have a look.

FED FUNDS RATES

2 YR TREASURY BOND YIELDS

Not much change at all.  Fed Funds rates remained pegged at zero and Treasuries have simply fallen off a cliff here as the entire world has piled into US government bonds as a safe haven from the carnage that is our financial system.  And finally a skeptic may say, "Well yes the stock markets were really tanking and all LIBOR or interbank trading simply moved higher because there was a genuine concern when equity markets were getting body slammed.  I would simply highlight this graph of EURO LIBOR in response.  I've grabbed the 1 Month chart here, but all of them are the same.

Nope, not the same panic stricken increase in funding rates since July here, in fact, we see just the opposite, we see a drop in rates by about 10 bps here. Euro LIBOR is made up of 16 reporting European institutions (just like USD Libor).


IS THAT YOUR BANK THAT IS SMOKING?

We don't have to dig much deeper here to realize that there are real issues going on here that have caused the inter-banking lending rates in USD LIBOR terms to go up, and up a lot in percentage terms.  While we can't know if the drop in equity markets in general are the cause of the increase or if it something more specific related to the banking sector or if it is a particular bank here in the USA, it is pretty compelling.  I will continue to monitor these rates daily as it is obvious that CEOs of large US financial institutions mean what they say when they state, "We are well capitalized and don't need any future fund raising".  Clearly Bank of America's CEO Brian Moynihan couldn't be anything like another powerful CEO, Dick Fuld, from our favorite bankrupt investment banking firm, Lehman Brothers that uttered pretty much the same words several years ago.

Here's a little parting view of what distress in the banking sector looks like.
BAC Daily 100 Day Chart

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/













 
 

JOE 6 PACK LEARNS FROM BERNANKE AND GOES TO THE POKEY

JUST DOING WHAT OUR LEADERS DO -
While scanning the news I was struck by the irony of this story from the San Francisco CBS affiliate.
Samuel Kioski was arrested recently for an inventive application of Ben Bernanke's magical printing tricks.

http://sanfrancisco.cbslocal.com/2011/05/26/technician-faces-charges-of-cleaning-out-bay-area-atms/

REPLACING WORTHLESS DOLLARS WITH WORTHLESS PAPER
Allegedly, Mr. Kioski was an ATM technician who replaced almost $200,000 of real money for fake copies of dollar bills.  In his "rampage" Samuel opened up a total of 7 machines, grabbed the real cash, and dropped in bad forgeries into the cash dispensers.  The police stated that the fake money was not even a good attempt as he simply made the bills on a copy machine. 

The repairman was able to sneak away since last July with his haul, but was found two weeks ago in Arizona. 

YOU NEED TO BE A BANKER TO GET AWAY WITH THIS
See, Mr. Kioski didn't quite understand that you must have a PHD from Yale or Harvard and also deal in billions rather than hundreds of thousands to get away with this sort of trick.  Our central bankers have pulled off the exact same scheme, but instead of going to jail, they are lauded as heros.  Think back to the scary days of the economic collapse.  When the full impact of the Lehman implosion was being felt, we watched as Goldman Sachs, Bank of America, JP Morgan, and others swapped their toxic assets with us for clean, crisp, and freshly printed digital dollars.  We taxpayers (our leadership and the Fed) were more than happy to trade worthless paper (MBS) for our currency in the name of avoiding disaster. 

Compare the TARP swap with the trade Mr. Kioski made and you'll find little difference between his moves and those of the Fed, Treasury, and the bankers; little difference besides that it was a small amount and not sanctioned by the thieves at the NY Fed. 

WHO IS THE BIGGER CRIMINAL?

RULES TO STEAL BY -

So the takeaway from this story is that if you are going to pull a fast one and take money from folks, you must follow these rules to get away with your booty.

1)    Take money from taxpayers, not banks

2)    Rip folks off for billions or trillions, not thousands

3)    Wear suits and talk about the end of the financial system, everyone will hand over the money immediately

4)    Go to Davos, not somewhere like Arizona

5)    Take your wife with you, then she won't file a missing persons report

GOATMUG



BANKS - WHO WANTS EM?

I've taken a bit of flak over the last several days from people suggesting that I'm over-focused on banks.  Yes, I look at them, and yes they are important, but I need us to be on the same page regarding the concerns I have and where I think we are in general.

ROBOGATE / FORECLOSURE GATE / FRAUD
Ok, I've written about how dirty this whole process has been where banks have tried to forge documents and attempt to create titles where they have been lost.  These are juicy details and this is exactly the kind of item that makes a good story for a blog, but this is not really why this issue is such a big one.  The more important issue is that when the big banks were wrapping these mortgages into huge pools and securitizing them (slicing and dicing them into parts so different pension plans and investors could buy based on credit rating), they represented to them that they actually had recorded all of the documents for clear title and guaranteed or warranted that the MBS buyers were getting a solid legal claim to mortgage backed assets. 

What the sub-prime collapse and the subsequent real estate implosion has shown us is that the banks and their clearing system (MERS) did not actually do what they promised they would do by filing all the paperwork and ensuring that the MERS trust actually owned the notes and had a claim as a lien holder on the real estate asset.  By NOT doing what they promised in the prospectus or security documents, they committed fraud.  In addition, they firms are claiming that the securitizers that packaged up the deals didn't actually put the quality of loans in the deals that they promised.  This is the issue, and this is the big problem.  What this means is that the buyers of the MBS now potentially have a claim to get 100% of their money back on the investment because the trustee or the servicer, or the originator didn't actually create the MBS in the manner that they stated.  Remember, the buyers of these securities are not Joe 6 Pack.  The buyers of these MBS securities were insurance companies, mutual fund companies, hedge funds, governments, and private equity funds.  The buyers of these deals were big money players that then often leveraged these bets 10:1 or 30:1.  The total amount of mortgages wrapped up in these deals is numbering in the trillions!  So, are any of the buyers of these asking the originators to take them back?  Yes! 

http://www.bloomberg.com/news/2010-10-19/pimco-new-york-fed-said-to-seek-bank-of-america-repurchase-of-mortgages.html

I hope this provides some clarity regarding the view of the banks.  In addition, it is important to look at the chart for a technical view.  It is so interesting to me as I look at this 200 day view of XLF (big banks) that it simply cannot push through $15.00.  Look at the 5 or 6 attempts since June of 2010 to go higher.  Even in the last week we could just touch $15.00 only to be rejected.

As I am typing this, the market is ripping higher after yesterdays 165 point Dow thrashing.  This is the environment we live in now.  I truly believe that the market will not be allowed to decline for more than a day or two until after the elections.  If there were a string of 5 or 6 down days that would certainly ensure a resounding Democratic defeat.  The ability of the market to stay positive gives the incumbents a chance to retain a glimmer of hope to retain power.  Please note, that if Republicans do win, I actually believe banks will rally as the street will believe it will be business as usual and the Republicans will assist the banks in getting through this mess.  Hopefully that belief is misguided as I'm sick of the corruption and bailouts at taxpayer expense.

Be careful!

GOATMUG