Lucifer Pokes His Head In The Tent

Last night AIG was "rescued" with a huge "bridge loan", and the futures roared higher.

But then, overnight, HBOS was rumored to be in trouble over in Europe, and got nailed for 50% of its value.  Then there is chatter of a merger (gee, the criminals are playing with their Crackberries once again), and it spikes higher, erasing the loss with "interest."

Needless to say this does some ugly things to the stock market and the US Futures. 

Pre-market we have had a range of 33 points, or close to three percent!

As I write this the futures are down 7.5, or about 1/2%. 

Hmmm... perhaps that "roar" that I expected last night may turn out to be a lion, eh?

Also overnight we find out that The NY Fed had to issue nearly $80 billion in daily liquidity to clear some Lehman unwinding trades, advanced by JP Morgan. 

Oh, and just for a bit of "extra spicy sauce" there was a terrorist attack in Yemen against the US Embassy.

The Russian markets are halted for the second time in two days - this time "indefinitely" - after the index falls 10% within an hour, on the back of a 17% drop the previous day.  Apparently Vlad and Medvedev are figuring out the hard way about what happens when you invade foreign lands and start seizing private firms - people say "no mas!" and run for the door in a disastrous cascade.  Foreign capital has effectively withdrawn from the Russian marketplace, coming to the conclusion that it is radically unsafe to be there and extinguishing liquidity.

Welcome to Hell Russia; we may be about to join you there.  I heard a rumor that Beelzebub has  interesting accommodations available down there, and unlike Siberia, its rather warm.

Three-month LIBOR rose to 3.06%, but ominously the dollar overnight rate stands at 5.03% - an inversion that points to extreme stress in the lending system (and utter lack of confidence - and trust.)  The good news?  It fell 1.4% today - the overnight rate stood at 6.45% yesterday!

WaMu appears to be in serious trouble with regulators frantically trying to find a buyer.  Gee, you think?  NOW the regulators are panicking?  It was last April that I wrote about the problems with paying dividends in part out of capitalized interest - an event that should have set off big ringing church bells of alarm.  Now with the stock at $2 and change, someone finally wakes up.

And for only the second time in 25 years, Reserve Primary Fund, the oldest US Money Market fund in existence, "broke the buck" - an ominous development.  If you have funds in a money market and it is not backed by only Treasury debt, you need to consider moving that money right here, right now.  One fund that is fully Treasury-backed is run by Vanguard - VMPXX - and should be safe.

Again I repeat - where are the cops?

This entire mess - top to bottom - is one giant regulatory failure and as far as I can see there is no indication that our regulators have or are doing a damn thing to fix it.

I have for months been sending petitions and tickers to Congress and elsewhere - which anyone who has read this blog can testify to - pointing out that the leverage in the system is poisonous, irresponsible, and has to be taken down or we will run the risk of a cascade failure getting underway that could crush huge portions of our financial framework. 

Bear Stearns underlined the problem - 33 times leverage in a marketplace like this, and six months of warning after the first two big hedge funds they ran blew up, but the firm does nothing to address it?  The rest of the financial system does nothing?  The regulators do nothing to get in front of this and demand that these institutions de-lever and take down risk?

There is effectively no regulation in the markets and hasn't been for twenty years. 

In theory banks are supposed to have a 10% reserve but in fact we have removed regulations that require this reserve to be actually maintained through various forms of cheating, including sweep accounts and allowing essentially unlimited leverage via accounting fictions - that is - LIES.  The effective reserve level in the banking system is in the low single digits.

This looked great when times were good and led to insane "earnings" that were in fact not real, as they were achieved on the back of this "leverage", justified by the belief that property prices would always go up at several times the rate of increased wages - a flat mathematical impossibility.  That regulators refused to step in and put a stop to this horsecrap is a screaming indictment of all branches of government involved, including the OTS, OCC, FDIC, Federal Reserve, Treasury and both houses of Congress.

Yet even today Congress does not get it - Barney Frank and others in Congress still want to allow unlimited leverage in housing via the "Down Payment Assistance" game - another outright accounting fiction - is outrageous.

Folks, personal leverage in homebuying must be limited to 5:1 by federal regulation - which means we must enforce a 20% cash down payment requirement. 

No ifs, ands or buts - period.

Bank leverage must be limited to about 12:1 via strict 10% reserve requirements with no exceptions.  No more sweep accounts, no more off-balance-sheet exposures, no more BS, and this must apply to investment banks and insurance companies - anyone who has access to a public guarantee of performance of any sort, including Fed liquidity. 

PERIOD!

To put not to fine a point on it, it appears that AIG had OTS - the Office of Thrift Supervision - as their "global" regulator.  Where the hell were they in allowing these clowns to write FIVE HUNDRED BILLION DOLLARS worth of OTC derivatives?

I have no way to judge how many other regulatory failures similar to this have taken place, and must assume the answer is "all of them."

This, unfortunately, means that the FDIC's insurance fund (which doesn't really exist; it has been siphoned into the Treasury's general fund just like Social Security "deposits") is woefully inadequate, with some people now claiming that we need five hundred billion dollars, or more than ten times the FDIC's claimed "reserves", to cover the expected bank failure rate.

Folks, that would imply that somewhere between one and two trillion dollars worth of aggregate bank assets are going to go down the tube given the loss rates within the FDIC since this crisis began last summer.

I have, since this mess began last year, been very concerned that we could see what amounts to a global forcible unwind of all this leverage resulting in catastrophic losses for anyone who requires access to credit, or who is in debt and leveraged either personally or corporately.

Unfortunately it appears that even my "worst case" forecasts may have been too optimistic.

S&P this morning was out saying that the US "AAA" Credit Rating must be earned and is not guaranteed.  In addition, this morning Treasury announced that it is going to issue a "special auction" of T-bills for the explicit purpose of adding to The Federal Reserve's balance sheet, which is a clear statement that The Federal Reserve is out of money.

But The United States doesn't have any money! 

We are the largest debtor nation on the planet and we must stop this RIGHT NOW!

The United States Government must step in here and now, in all of its regulatory arms and forms, and insist on the following from all financial institutions:

• An immediate end to all "Level 3" asset marking, with all claimed "assets" marked to the market, so that investors and regulators can determine the state, today, of every firm's balance sheet.
• An immediate repatriation of all off-balance-sheet vehicles, without exception.
• All banks and other regulated entities, including investment and commercial banks as well as insurance companies, must be forced to de-lever to no more than 12:1 via asset sales or other forms of balance-sheet shrinkage, as necessary, with that process beginning now, with criminal penalties for failure to comply.
• A federal law must be passed to prohibit granting of mortgages with less than a 20% cash down payment.  All forms of "gaming" this system including FHA, VA and "Down Payment Assistance" must be terminated immediately.  It is absolutely critical that consumer balance sheets be protected in this fashion because we need consumers to remain solvent or we run the risk of a 1930s style depression setting in as consumers bankrupt en-masse.

The extra liquidity added since August must be withdrawn now.  If this causes failures in the financial system then it does. 

WE MUST PROTECT THE FEDERAL GOVERNMENT'S CREDIT AND ABILITY TO RAISE FUNDS.

The game-playing must stop RIGHT NOW. 

We are literally on the precipice of a global financial meltdown and the regulators and government have ignored the risks, attempting to "paper them over" with "rate cuts" and "liquidity injections."

As we have seen this approach has not and cannot work; we have watched The Fed literally decimate its own balance sheet in this puerile and foolish attempt to hide the rot within the system - a rot they are fully aware of and intentionally refusing to address.

Congress has as its proper role, per the Constitution, the right to coin and regulate money.  The Congressional delegation of this power to The Federal Reserve does not provide it cover from its abdication of responsibility, and we as Americans must not permit this state of affairs to continue.

The responsibility for this mess is ours.  We have a duty to stand up here and now, right now, TODAY, as Americans.

If Congress refuses to act TODAY - not tomorrow, not next week, not next year, but right now, TODAY, we must as Americans put aside the petty partisan considerations that the political parties use to divide us and band together, going on a general strike. 

We must insist that our legislators - our government - force these firms to stop lying and take down their leverage and risk RIGHT NOW, before we wind up with hundreds of failed banks and a decimated economy.

If we cannot do so with phone calls, letters, faxes and petitions, then we must do so by joining together to halt commerce in the United States through a refusal to provide our labor, when the fruits thereof are going to be continually abused by our government agencies in a continuing effort by these institutions to lie, cheat and steal from all of us.

If we do not stop this insanity RIGHT NOW there is a very real risk that the remaining banks and other financial institutions that make it possible for your employer to operate will all collapse, at which point you will have no job, no money, no credit, and no means to do anything about it.

The government has already spent or "secured" nearly one trillion dollars in "bailouts" - money we do not have - over the last year - a nearly twenty percent increase in the total federal debt which has been attached to you, your children and grandchildren, for the direct and sole benefit of these fraudsters.

YOU HAVE HAD NEARLY ONE TRILLION DOLLARS STOLEN FROM YOU THAT WE DO NOT HAVE AND THERE IS NO INDICATION WHATSOEVER THAT IT IS GOING TO STOP UNTIL THE UNITED STATES GOVERNMENT LITERALLY IMPLODES AS FOREIGNERS, WHO WE NEED TO FUND OUR GOVERMENT OPERATIONS TO THE TUNE OF MORE THAN $2 BILLION A DAY, WALK OFF IN DISGUST.

How much more has to be robbed from your wallets before YOU will stand up and say NO MORE DAMNIT!