The Market Ticker

Anyone remember October 1987?

The market had been drifting downward for a couple of weeks prior.  The 16th of October was Options Expiration, and the DOW closed down about 100 points - after being down about 75 the day before - a lot back then, with the index at roughly 2250.  It was a bloody day.

The next day it would close down 500.

Here's a chart:

Now here's tonight:

At the time we had a new Fed President (Greenspan) who was untested and untrusted.  We had other things going on in the markets in general, none of them particularly good.

We have no trust in the markets today.  None.

I cannot value anything in this market.  Absolutely nothing.  And this sort of lie is part of the reason:

Feb. 19 (Bloomberg) -- U.S., U.K., and European regulators are in talks to jointly regulate the $28 trillion credit-default swap market, the Federal Reserve said today.

Regulators including the Fed, U.K.’s Financial Services Authority, German Federal Financial Services Authority and European Central Bank met today to discuss a possible information sharing agreement, the Fed said in a statement on its Web site. The goal would be to apply consistent standards to the market and provide support across jurisdictions, the Fed said. "

This was supposed to be done last year, remember?  By the end of the year we were supposed to have an implementation plan to get this done with the infrastructure in build-out going on right now.

Instead we have The Fed lying again about the issue.

Why?

Because Bernanke knows - these contracts cannot be covered as the people who wrote them have ZERO, or close to it, in capital!

How do we know?  Because AIG still hasn't been forced to disgorge and close their CDS book, despite over $100 billion in direct support.  Why not BEN?  Is it because AIG's liability under those contracts might be several hundred billion more, and if you net them and then close the book you'd have to make good on it or default them, and the guys on the other side are your banking buddies?

That's right - the truth is almost certainly that firms like JP Morgan, Goldman and Morgan Stanley (along with Bank America and others) are, to no small extent, the people who are long those contracts from AIG.  If they're netted and then the book is closed the fact that these contracts are worth zero would be revealed and that could cause every one of these firms to detonate at once.

But the fact of the matter is that these contracts are worthless, unless "someone" is going to pony up their face at AIG!  And since AIG doesn't have the money, and it all links back to The Fed, what it comes down to is the taxpayer doling out another half-trillion to these banks - and even then, it might not be enough.

Then we have Geithner who we were promised would deliver a "detailed" proposal to "save the banking system."  He failed to do so.

Our media doesn't explain why, but The Times over in London does!

"At the heart of the internal battle inside the Treasury Department is what to do with the estimated $2 trillion of toxic and mostly mortgage-related debt that is threatening to topple the entire banking sector – the bedrock of US capitalism.

When Mr Geithner announced his plan to stabilize the financial sector last week it was received badly because it was so short on detail. The heart of the strategy – his prescription to remove the bad debt off the banks' books – was to entice private investors to buy up the toxic assets. He gave no firm proposals, however, about how the loans would be valued and how the private sector would be co-opted.

It has now emerged that Mr Geithner was deliberately vague at his press conference because he had a change of mind and suddenly began to pursue a different course.

He decided that his original plan to use government funds to buy up the toxic assets was too expensive and exposed taxpayers to too much risk, and that using the private sector was the best option.

So let me see if I get this right.

The man who engineered the takeunder of Bear Stearns (through what I would argue was capricious and outrageous actions including yanking their credit line they believed was committed, along with failing to disclosure they would have access to the Discount Window just 24 hours later!), the man who sat back and said he had "no legal authority" to do anything about Lehman Brothers, the same man who has had nearly a full year to examine the books of these institutions as the primary intermediary and counterparty to every major broker/dealer on Wall Street (since Bear blew up) at the point where he was supposed to announce a plan he didn't have one?

ONE YEAR later?

This is what the market DID as a direct and proximate consequence of Geithner's and President Obama's actions (or rather, their inability to come to the table with anything approaching an actual plan)

That's a decline of 87 S&P "handles", or about ten percent in less than two weeks.

But that's not all.  Have a look at the BKX, the banking sector:

That's a decline of thirty percent in the banking index in the same two week period.

THIRTY PERCENT.

Folks, this is the very definition of "no confidence."  A thirty percent loss in two weeks, in the very sector that we were promised would be "saved" by our new President, and that two weeks has passed without one iota of a plan being actually released.

How much lower can it go? 

I have it on good authority that there is very strong support of stock prices at zero, and if you look at charts of Bank of America (closed under $4 today), Citibank (closed under $2.50), Wells Fargo (closed at $12.01), Fifth-Third ($1.21), SunTrust ($6.70) along with dozens more you will find that all of them are in fact racing directly towards that very heavy support right at that zero boundary.  Many of these stocks have been cut in half or more in the last two weeks.

Mr. President, you cannot come to Washington and write checks with your mouth you are unable to cash, and expect the market to put up with it.  The market is bigger than you, or any other President, as you have just learned.

You also cannot expect any bank to be able to raise capital with a stock price measured in fractions of a penny, and that's exactly where they are all going in the here and now unless you and Tim Geithner get up on stage tomorrow and put a stop to this foolishness.

Your inept and outrageously incompetent handling of this mess has led to the destruction of one third of the equity value of banks in the United States in less than two weeks.  Your ineptitude is in fact greater than George Bush and Hank Paulson, who managed to take a third off the BKX but they took more time to do it than you did.

In short your and Timmy's policies thus far are an abject failure and we are now sitting on the abyss in the market with a literal potential for a waterfall selloff that initiates tomorrow and translates into Monday exactly as happened, and as severe, as in 1987.

If Taxcheating Timmy is unable or unwilling to discharge his duty as Secretary of the Treasury, I'll do the job.  You probably wouldn't like how I'd do it, but I'd do it.  Here's my prescription:

1. The memo goes out in the AM to every bank in America: No more lies.  If you lie, even once, your bank gets seized and you will be criminally charged personally.  Period.  I am particularly interested in Mr. Lewis' claims on national television (CNBC) that Bank America had a "great" January.  That sounds an awful lot like Dick Fuld who said he was going to "burn the shorts" and was "well-capitalized".  Oh by the way, I'd refer Mr. Fuld's statements over to Justice immediately, along with everyone else who said something similar (Bear Stearns anyone?)
2. I would then amend OTS and OCC rules: All bank examinations are public data.  All examinations must either have every asset marked to the market or the full model and data inputs must be disclosed, without exception.
3. Next, I would take the stage and give every bank in America 72 hours to disclose their current Tier Capital numbers under those rules.  They have 'em in the possession of their Risk Manager.  Let's have it.  In public.  You publish it, we print it.  Everyone who is under-capitalized and has been hiding it - your shares are suspended.  We'll get to you.
4. For those who are under-capitalized: If you have sufficient capital in your debt to be crammed down, that's what happens.  Your common equity is gone.  Preferred is crammed down, if that's insufficient it is gone.  Next we do subordinateds, and repeat until sufficient capital is restored.  End of discussion.
5. For those who cannot be crammed down we seize you.  Your deposits and good assets are auctioned off to sound institutions, spread among the physical locations of those assets and deposits so no concentration of more than 5% in one bank occurs.  The rest of the assets go the FDIC and are run down or auctioned off as they deem appropriate.
6. Any bank with more than 5% of the deposit base has 12 months to reduce it to under 5%.  This affects fewer than 20 institutions.
7. No bank may transact in any instrument that is (1) not a whole loan or (2) is not traded on an exchange.  Period.  Any such "assets" currently held must be disposed of within six months.  No exceptions.  I recognize that this makes banks a "utility" - entities that take deposits and make loans.  So what?  Its a good and profitable business, has been for hundreds of years, and forces proper underwriting since you must retain the risk.
8. Any bank that finds (7) onerous (and most will) is free to split itself into two firms, one a bank and the second a non-bank affiliate held by the parent.  The affiliate may not utilize depositor capital or otherwise be cross-contaminated with bank assets and support, but is of course free to raise money via debt offerings in the marketplace such as it is.  Said non-bank firm may trade in whatever it would like, however, it will not receive any government support of any kind.  Cross-contamination of any sort between a regulated bank and a non-bank sub will be treated and prosecuted as bank fraud.  Any existing "affiliate" bank credit lines must be extinguished within 90 days and "23A letters" are explicitly disallowed.
9. Reserve ratios are set at 8% with no exceptions.
10. Bernanke will do as the above directs without complaint or I will exercise my lawful and Constitutional authority to issue United States Notes, bypassing The Fed entirely.  Ben and The Fed work under my direction, not the other way around.  End of discussion.
11. Any bank that does not want TARP money may repay it immediately.  If you keep it, no employee may receive total compensation exceeding that of the President of The United States, without exception and in all forms, including stock, options as valued under Black-Scholes, deferred compensation, benefits and cash.  Period.  You are working for us, therefore we set your salaries.

There 'ya go.  Cards on the table, face up.  No bullshit.  If you're broke, you're broke.  We'll protect depositors and everyone else can twist in the wind.  Those who are bankrupt must be recognized as bankrupt so the system can clear and the market can function.

End of discussion.

Whatever your plan is Mr. President and Mr. Geithner, and I presume it is NOT what I outlined above, I recommend that you get it out in the public right now.  Overnight, with enough time for it to sink in - and certainly NOT 30 minutes before the market opens tomorrow morning for Options Expiration as Bernanke thought he'd do in August of 2007.  We've had enough liquidity destroyed due to government game-playing - we can't afford to have any more traders carried out on their shields that provide necessary liquidity in the markets.

PS: If the market crashes tomorrow and into Monday due to your lack of a plan you own it - and the economic destruction that comes from it - Mr. President.  Your StimUseless bill will be dwarfed - a crash into next week will easily cost America five million jobs within six to twelve months. You can bet I wil call you on it in public and print up T-Shirts with a nice chart of the index along with your name and a great big FAIL emblazoned on it, just as I did for Paulson and Bush after the EESA was passed.

Good luck sirs.

I think you're gonna need it.

Ok, ok.... its out on the web now, so here y'all go:

WASHINGTON, February 19, 2009—Accuracy in Media will honor M. Stanton Evans and Karl S. Denninger for their outstanding contributions to journalism in a ceremony taking place during the 2009 Conservative Political Action Conference (CPAC). The Reed Irvine Accuracy in Media Award is named for AIM’s founder, Reed Irvine, who was America’s first media watchdog.

“I am thrilled to recognize the excellent work of Stan Evans and Karl Denninger,” said Don Irvine, chairman of Accuracy in Media. “When my father started AIM 40 years ago, few would have believed that one day independent journalists like Stan and Karl would be empowered to stand up to the elite media by reporting the ‘other side’ of important stories. Stan Evans’ investigative reporting into the media’s vilification of Senator Joe McCarthy was truly groundbreaking, and Karl Denninger has been a force to be reckoned with in exposing the true cost of federal bailouts and stimulus measures.”

WHO: M. Stanton Evans, author of Blacklisted by History: The Untold Story of Senator Joe McCarthy and His Fight Against America's Enemies & contributing editor at Human Events; and Karl S. Denninger, founder of The Market Ticker blog (market-ticker.org) & capital markets trader

WHAT: Reed Irvine Accuracy in Media Awards

WHEN: Thursday, February 26, 2009, 5:00 p.m. to 6:30 p.m.

WHERE: Omni Shoreham Hotel, Empire Room, 2500 Calvert Street, NW, Washington, DC

WHY: The Reed Irvine Accuracy in Media Award was established in 2005 to honor those who have made outstanding contributions to the practice of journalism in the tradition of Reed Irvine by independently covering and reporting on news that was misreported or ignored by the mainstream press.

The Reed Irvine Accuracy in Media Award ceremony is open to the press and the public.  Attendees must also be registered to attend CPAC (cpac.org).

Accuracy in Media is a citizens' media watchdog organization whose mission is to promote fairness, balance, and accuracy in news reporting.  Founded in 1969, AIM is America’s first non-profit press watchdog group.  For more information, please visit www.aim.org.

To RSVP or for further information, contact Sarah Schaerr Norton at (202) 364-4401 ext. 107 or sarah.schaerr@aim.org .

Just say "when" Rick.  This will become something that TickerForum and The Market Ticker strongly support and promote.

I will make it my business to be there personally; we should organize speakers and make a big shindig out of it.

I'm tired of this crap and I'm sure you and the traders on the floor are too.  Let's do it and make a statement.  Grant Park needs to be filled up for something more productive than "Taste of Chicago".

(Hattip to Nike on the forum for the graphic - THAT is classy!)

Here's the Youtube of the rant - while it lasts....

This morning Rick Santelli went nuclear on the entire "fraudulent mortgage" game - the culmination of a series of rants that he has (correctly) launched over the last year.

(As an aside, great minds must think alike, as we both had the "extra bathroom" thing in our morning rants!)

You can view it here (can't embed as its a CNBS video clip)

Here's the point folks, when you get down to it:

• The entire last two decades of so-called "Economic Growth" has been fueled by one fraud after another, starting with the Internet Bubble.
• This fraud has been systematic and the mainstream media has been both an implicit and explicit enabler of these frauds, instead of doing its job, which is to root them out.  The looks on the faces of the other CNBC "anchors" was one of abject fear - perhaps parts of "The Fourth Estate" is coming to realize that when the pitchforks and torches come out - and they certainly will if we hold the course we're on - they might have some trouble explaining why they shouldn't be near the head of the list of those being "sought"?
• The conflicts of interest in the media, where their advertising dollars come from those who are promulgating and profiting from these frauds means that they must choose between their job of protecting the public (their essential purpose under The First Amendment) and being a willing accomplice in the theft being performed by the prime actors in these frauds.
• With the exception of a few months around 1995 (which roughly coincided with Microsoft's release of Win/95, the first "consumer" system of wide acceptance that had a dialer built in along with a web browser) the Internet NEVER doubled in size every three months.  Yet this was paraded as the statistic to justify all the bubble companies up until the bubble burst in the spring of 2000.  I was one of hundreds if not thousands of people with access to the core of the network and KNEW this was a lie.  Nobody would report the truth.  Proof?  Read all about it:

  • And that's not the only thing Denninger feels strongly about. Though the Internet made him a millionaire -- his stake in MCS was rumoured to be worth US$12 million at the time of the company's sale -- the feisty Midwesterner has nothing but scorn for the industry overall.

    "I refused to take any stake in the acquiring firm. The shell game being played by these corporations is astounding," he said.

    Denninger has also steadfastly avoided investing any of his personal fortune in the Internet: "I refuse to have anything to do with the Nasdaq 100. There will be a shake-out, and when it comes, it will be ugly and it will happen fast."

    He might as well have been speaking of Black Week, April 10 through April 14, when the Nasdaq crashed.

    The volatility of Net stocks in the past few weeks makes Denninger seem prescient, but his dislike for the unseemly marriage of breathless hype and dubious business plans is visceral.

• When the Internet bubble collapsed it was decided to intentionally pump liquidity into the system and ignore both banking regulations and the law, making possible the housing bubble.

• When the leverage ran out Henry Paulson, who was then with Goldman Sachs, came to Congress and the SEC and asked for the ability to run what would turn into effective infinite leverage.  The request was granted.
• The very same Henry Paulson, having done this, then bailed off and became The Secretary of the Treasury.  He was fully aware of what was going on when the bubble started to come apart in 2007 because he personally lobbied for the changes in law that made the terminal blow off possible!
• Every single one of the firms that has blown up has had leverage far higher than the former 14:1 legal limit.  Fannie Mae, Freddie Mac, AIG, Bear Stearns and Lehman - all had leverage at least twice the former legal limit when they blew up.  After the first blowup Treasury and the SEC could have slammed the door on this and forced leverage to be taken back down - in August of 2007.  Government intentionally refused to take that action despite myself and others screaming about it.
• Hundreds of billions of dollars were siphoned off by the banksters and common Americans as a consequence of willfully-blind and even fraudulent "lending."

If you measure "prosperity" by stock prices we're somewhere back in 1997 or 1998.  But if the entirety of these two bubbles were fraud-driven (and they were) then a realistic expectation is that we will not only return to 1995 stock prices (about ~450 on the S&P 500) but we will over-correct significantly because the debt that this fraud created still remains in the economy!

That could easily cut the S&P in half again, which puts my 210 "oh God" print on the table, no?

Let's be clear here: There is no way out of this box, and the corruption and fraud have permeated every corner of our financial, media and governmental systems. 

We give "free" education and health care to illegal aliens, paid for out of citizen tax dollars.  Our government supports this.

We propose to give "foreclosure relief" to people who lied on their mortgage applications; how many of the so-called "rescue" programs would have ANY uptake among the public if as part of the refinance or assistance process the original paperwork was re-underwritten to discover if you lied, and if you did, you were prosecuted instead of being helped? 

We have done exactly nothing to indict and prosecute the banking executives, the housing industry executives and others in the business world who contributed to these lies and frauds, in some cases explicitly.

The Congresspeople who got "special deals" from Countrywide Financial (and others) on their mortgages remain in office and are not being charged and tried for what, in my opinion, amounts to public corruption.  The amounts involved here are not small - the "savings" in many cases ran into the tens of thousands of dollars.

It has been disclosed that several sitting Congressmen received tens of thousands of dollars in campaign contributions from Stanford Financial (now under investigation on suspicion of not only bilking investors but also money laundering!); the firm also allegedly gave eight hundred thousand dollars to the Democratic Senatorial Campaign Committee during a year that Congress was debating a bill that would have tightened anti-fraud provisions against the securities industry.  The bill was killed in a Senate committee.

We learned that government employees are also profligate tax cheats!  Not only the high-profile ones like Geithner and Daschle either - this is an across-the-board problem:

The Internal Revenue Service is trying to collect billions of dollars in unpaid taxes from nearly half a million federal employees. According to IRS records, 171,549 current federal workers did not voluntarily pay their federal income taxes in 2007. The same is true for 37,752 active duty military and nearly 200,000 retired civilian and military personnel.

Documents obtained by WTOP through the Freedom of Information Act show 449,531 federal employees and retirees did not pay their taxes for a total of $3,586,784,725 in taxes owed last year.

What?!  Oh, and with the exception of the IRS, you can't be fired as a government employee for not paying your taxes either.  You can't make stuff like this up folks - nobody would believe you.

I'm tired of people demanding that I cover the bad bets they made as a consequence of fraud throughout the system, while the people responsible, including those in industry and Washington DC go unpunished.

The fruit of a poison tree is also poisonous and if you were a victim of that fraud (that is, you didn't knowingly buy a house you can't afford, you didn't overstate your income and you didn't intentionally speculate on home price appreciation - you instead bought responsibly, you didn't exceed 36% DTI on the back end, you put significant money down and you took a conventional mortgage - not one of those fancy "Option ARM" rent-a-house products that you'd NEVER be able to pay off on the original terms) then you should be looking to those who DID commit fraud for recourse, not the government and everyone else's tax dollars.

If on the other hand you did overstate your income, you did take out an OptionARM, you did lever yourself up to your neck, you did play the "House is an ATM" game or you did speculate with your house then you deserve exactly nothing for help because you participated in an intentional attempt to game economic and financial reality and lost.

Now for those who merely speculated and lost (and there are a lot of them) I believe we should reverse the Bankruptcy "reform" act so you can access the courts and find relief, both spreading the pain to the lender who imprudently granted you credit and accepting a lot of that pain yourself in the form of a destroyed credit rating for the next seven years.

But for those who overstated their income or otherwise committed some form of fraud - and let's be clear here folks, mortgage fraud is a federal offense - what those people deserve is a long stay in prison.

Since we seem to have a shortage of prison space I recommend that we immediately decriminalize all non-violent drug possession and consensual sales between adults, expunging their sentences and releasing those prisoners.  We can then tax drug sales (and sell them in DRUG STORES, which are conveniently named), use the money to pay for treatment programs, but more importantly we will have plenty of room to jail all the fraudsters, including the banking executives and Congresspeople that got us into this mess.

Our economy must contract to a sustainable level - period.  This is not a matter of what we want, it is a matter of what is possible.

A bubble economy built on fraud cannot be reflated once it pops and the fraud is exposed at the level to which it occurred in this case.  It is simply not possible.

We must deal with the underlying rot in our financial and political systems, and until we do in a forceful and forthright fashion we will continue to see economic malaise and destruction.

Wake up America.

You have to love the media this morning; the PPI was released to great fanfare with the claim that it showed..... inflation.

Oh really?

Here's the deal "by the numbers":

• Total PPI up 0.8% in January.
• Foods down 0.4%.
• Energy up 3.7% (primarily gasoline, which has been going up)
• Ex-food and energy, 0.4%

Sounds like inflation ("break that deflation"), right?

Uh, not quite.

Crude goods were down 2.7% on the month and intermediate goods were down 0.7%.

What are crude goods?  Things like iron ore.

Intermediate goods are "half-finished" things - for example, rolled steel.

Of course finished goods are things like cars, toasters, etc.

So what does this report mean?

Simple: Manufacturers are attempting to increase prices into ramping unemployment in a desperate attempt to maintain their operating margins.

It won't work.  Trying to increase prices into ramping unemployment leads to a collapse in demand and ultimately business failure.

But for the mouthbreathing "mainstream media", including, unfortunately people like Matt Drudge who ran this on his front page,

its all good......

To the point I raised this morning: If this is what passes for "reporting" in today's media, we're truly hosed.

Buckle up.