Christopher Whalen makes a remarkably convincing case for why we’ve simply kicked the can down the road and why the banks could be in for a repeat of their 2008 nightmares in 2011. If Mr. Whalen is right the banking sector is in for a whole new round of government intervention, takeovers, likely nationalizations and general disaster:
The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than frac14; of& the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1& in 5 mortgages could go into foreclosure without radical action.
Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.
The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007?2009 period only means that this process is going to occur over next three to five years –whether we like it or not. The issue is recognizing existing losses ?? not if a loss occurred.
Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for re?creation of RFC?type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.
Fast forward to the 1:07 minute mark where Mr. Whalen begins.
This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers — including the cash used to buy four planes that shipped a total of 22 tons of cocaine.
The admission came in an agreement that Charlotte, North Carolina-based Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.
That’s nice. Guns and ammunition cost money – lots of it. Getting that money requires some means of transporting it and "laundering" it. For that, we turn to the largest financial institutions in the world, who, it turns out, have never been prosecuted for these felonious acts.
“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” says Jeffrey Sloman, the federal prosecutor who handled the case.
Blatant disregard? Sounds like something you’d say at a sentencing hearing, right? Well, no….
No big U.S. bank — Wells Fargo included — has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.
‘No Capacity to Regulate’
Large banks are protected from indictments by a variant of the too-big-to-fail theory.
Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.
The theory is like a get-out-of-jail-free card for big banks, Blum says.
“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line,
Three of the five U.S. banks that dominate swaps trading already perform most transactions outside their depository institutions and would face minimal disruption from a congressional proposal to reorder the derivatives business, financial statements and banking records show.
JPMorgan Chase & Co. and Citigroup Inc. would be hit hardest by the proposal, crafted by Arkansas Senator Blanche Lincoln, to wall off swaps desks from commercial banks. JPMorgan had 98 percent of its $142 billion in current value derivatives holdings inside its bank in the first quarter of this year while Citigroup had 89 percent of $112 billion, the records show.
Morgan Stanley and Goldman Sachs Group Inc., each of which entered the commercial banking business in 2008 in the midst of the financial crisis, would be less affected. Morgan Stanley kept just over 1 percent of its $86 billion in derivatives holdings in its bank in the first quarter, and Goldman Sachs Group’s held 32 percent of its $104 billion. Bank of America Corp., which absorbed broker-dealer Merrill Lynch in 2009, had 33 percent of its $115 billion in its bank.
Now might be a good time to introduce a handy chart that shows the latest OCC data on derivatives exposure, or, more specifically, shows the concentration of said derivatives exposure among FIVE banks. You know, that would be the five banks that Blanche Lincoln might have wanted to target with this "reform" plan of hers. Just sayin, cue chart:
And let’s see, just who are those five banks?
JP Morgan, Bank of America, Goldman Sachs, Citi, and Wells Fargo eh? Well four out of five ain’t bad except that fifth is a b#*ch, how on Earth does Goldman get to weasel out of this?
The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $8.5 trillion (or 4.2 percent) in the fourth quarter to $212.8 trillion. Interest rate contracts increased $7 trillion to $179.6 trillion, while credit derivatives increased 8 percent to $14 trillion.
While the world suffers, Wall Street pays itself record bonuses, larger even than the peak year of 2007, by taxing the productive economy to maintain an extravagant lifestyle. These bonuses are being paid with your money, and your children’s money, if you hold US dollars.
And while this happens, the US credit card banks are raising interest rates to 20+% even on customers with excellent payment records and jobs which is certainly usury, and with an arrogant impunity. The insider trading scandals and tales of government graft yet to be told are so blatant and shocking that only a captive mainstream press keeps them from being investigated.
The rest of the world looks on in shock and amazement. What has gone wrong with America? What are they thinking? America has not only lost the high ground, it is sliding into a ditch.
While Americans are pacified by bread and circuses, the rest of the world looks at a painful reality show in the States, a country in a death spiral of corrupt leadership and public apathy. If it was Zimbabwe or Iceland there would still be sympathy for the people, but far less concern.
A deflationist friend was railing about the US slide into bankruptcy, and I could not help but ask, "What happens to the paper of a bankrupt company, or country?"
Where indeed will the dollar gain its long anticipated strength, its renaissance of value?
Or yes, from "less dollars" through debt destruction. Mutant monetarism gone mad, an argument worthy of Herr Goebbels. The dollar will rise in value by immersing itself in a pool of corruption, and by destroying its shareholders, those who hold their savings in it, while oligarchs loot the financial system. Unless the US can turn its trade balance positive overnight, while raising interest rates, and maintaining a growing domestic economy based on consumption, it is not going to happen. The US is running out of degrees of freedom.
Wall Street holds the US public and government hostage by threatening financial armageddon if they do not get what they wish. We would anticipate a similar threat to the global economy based on dollar debt at some point, asking for a global monetary regime controlled out of New York and
As I have previously pointed out, the New York Times wrote in February:
In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.
In other words, the nine biggest banks were all insolvent in the 1980s.
Richard C. Koo – former economist at the Federal Reserve Bank of New York and doctoral fellow with the Fed’s Board of Governors, and now chief economist for Nomura – confirmed last year in a speech to the Center for Strategic & International Studies that most of the giant money center banks were insolvent in the 1980s.
Specifically, Koo said:
After the Latin American crisis hit in 1982, the New York Fed concluded that 7 out of 8 money center banks were actually "underwater"
All the foreign banks (especially the Japanese banks) had to keep their lending facilities open to American banks so the American banking system didn’t collapse overtly and out in the open
The Fed knew that virtually all of the American banks were "bankrupt", but could not publicly discuss how bad the situation was. If went out and said the "American banks are bankrupt", the next day they will go overtly go bankrupt. So the Fed had to come up with a lot of stories like "its good debt on their books"
Then-chairman Volcker instructed the banks to keep lending to the Mexican dictator so that the Mexican economy didn’t totally collapse, because – if Mexico collapsed – it would become obvious that all of the U.S. banks were underwater, and they would immediately collapse
It took 13 years to manage the crisis (at another point in the talk, Koo says 15 years).
The way that Volcker approached the problem was that he allowed U.S. banks to keep their lending rates relatively high, while the central bank brought short-term
So, according to the Fed's academic experts, the US economy is not, well, the US economy, it's not Y = C + I + G + NX, it's not the product of all goods and services created in the United States... it's this:
Which, for those confused, is precisely what it appears to be: a bunch of dots drawn on a piece of paper, not to be confused with this following random bunch of dots drawn on a piece of paper, which however is far more indicative of what the US economy is really like.
Whether the problem is with low interest rates themselves or the fact that rates still aren’t low enough to ignite a new credit boom is not clear. What is clear is that the world’s money center banks are facing a brutal downsizing. From today’s Wall Street Journal:
U.S. stock-index futures were little changed, after disappointing results from Alcoa Inc. offset optimism from a winning streak that’s put the Standard & Poor’s 500 Index on track for its best week of the year.
1) The shares of one of my largest short positions (~3%), Exact Sciences, crashed by more than 46% yesterday. Below is the article I published this morning on SeekingAlpha, explaining why I think it’s still a great short and thus shorted more yesterday. Here’s a summary:
The U.S. Preventative Services Task Force’s Colorectal Cancer Screening Draft Recommendation issued yesterday is devastating for Exact Sciences’ only product, Cologuard.
I think this is the beginning of the end for the company.
My price target for the stock a year from now is $3, so I shorted more yes...
Bulls can be happy with today's progress. What weakness emerged today was reversed by the close, a change on yesterday's action where sellers dumped in the last few minutes of trading. Volume climbed to register an accumulation day.
The S&P finished at the 50-day MA, but beyond that there is plenty of room beyond that to run to the next level of resistance at 2,045. Technicals are net bullish.
The Nasdaq pushed off its 20-day MA and has another 50 points of maneuver before it gets to its 50-day MA. Technicals are not yet net bullish, but they are close.
Uncertainty about the health of the global economy led investors to flee U.S. equities during Q3, primarily driven by worries about China's growth prospects and the Federal Reserve’s decision to not raise rates. Sure, there are plenty of real and perceived headwinds, but on balance it seems that a recession here at home is not in the cards. And when you consider sentiment and the technical picture, it appears that a continuation of Friday’s bounce is in store. The question remains as to whether the seasonally strong Q4 will be able to propel the bulls through levels of resistance that have built up.
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Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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