Windup Wednesday

... here's the wind-up, and the pitch ...

or is that....

... here's the wind-up doll behind the curtain ...

Tuesday we discover that Moody's made a, uh, "mistake" in their computer software that erroneously rated certain synthetic debt obligations (CPDOs), causing "AAA" ratings to be applied when they should have been four notches lower.

This apparently was discovered internally at Moody's in early 2007, but do you remember any public announcement of this error, any mass-rerating of these securities, or any, uh, compensation to those who were screwed?

I don't seem to recall that disclosure, do you?

Gee, you don't think that perhaps investors, the public, and oh my gosh, the buyers who overpaid for these CPDOs had a right to know that there had been an error made, do you?

I mean its one thing to make a mistake, but its quite another to cover it up!

Cough-Watergate-cough.

Never mind that the curtain appears to be slowly drawing back on The Great Wizard of Oz, otherwise known as the government's scam in how it computes and publishes numbers of all sorts related to our economy. Marketwatch ran an amazing article Tuesday, but they weren't the first. The St. Peterburg Times blew the cover off this a couple of weeks ago, along with Harpers, and Prudent Bear is now being quoted in Asia Times, all on the same topic.

I guess some people have been reading The Ticker at a few editors' desks.

We're now seeing mainstream media articles on silly little inconvenient facts like:

• Intentional understatement of price inflation....
• Which leads to overstating GDP....
• And screwing Granny in her COLA adjustment on Social Security....
• And convincing people that unemployment is low (which it is not)....
• And enticing people to buy government bonds (T-bills) at a negative rate of return....
• While intentionally throwing hundred of billions of excess liquidity into the banking system so that your "best buddies" don't have to fess up to their losses which....
• Empowers Wall Street to blow bubble after bubble, while offloading their trash and costs into pension funds and ordinary people's pockets so we will all eat it while at the same time they pocket billions in fees and bonuses.

Never mind the cover up of all of this, where the lies just keep getting bigger and bigger as the compounding of fraud and theft snowballs just like 30% interest on a subprime credit card.

And before you go lambaste Republicans for this, stop right where you are. Democrats are just as guilty. Did you hear either political party go after Bernanke on The Hill after Bear Stearns was "bailed out"? On price inflation over the last few years? On his and Greenspan's insane "monetary policy" which amounted to intentional and willful blindness to fraud throughout the financial system, offloading the costs onto all of us?

Oh hell no.

As long as they can pretend there's a Maestro behind the curtain, the show will go on.

Or will it?

Several mainstream articles over the last couple of weeks seem to suggest that perhaps the proletariat (that would be "us", you know, "we the little people") might be getting sick of this crap and are fixing to raise a ruckus.

Hope springs eternal......

The "game" of 3-Card Monte requires an endless supply of new "marks", or its all over. When the con-man and his "buddy", who of course is in on the scam but pretends to be "just a passerby" deduce that they might be discovered, or worse, the number of marks has simply dwindled down towards zero, they suddenly up and run - with all your cash, of course.

In other astounding news we had hearings in the Senate Tuesday in which it was claimed that "speculators are driving a commodity bubble."

"Benn Steil, director of international economics with the Council on Foreign Relations, testified that the value of commodity index investments has grown by about one-third since the beginning of the year to more than $250 billion.

"The sharp recent rises in global commodities prices, particularly in the energy and agricultural sectors, is undoubtedly causing hardship for many Americans, and is indeed threatening the health of many millions in developing countries," Steil said. "There is also no doubt that these price rises have been accompanied by a corresponding rise in interest from institutional investors in commodities as an asset class.""

That's a very curious number, $250 billion. It all seems to have shown up out of nowhere, like Dorothy in The Wizard Of Oz, starting right about last August.

How'd that happen, one must wonder?

Oh, don't look behind that curtain over there! Why if you do that you'll find one Doctor Ben Bernanke pulling levers to fiddle with the slosh in the banking system, intentionally tamping down interest rates and taking trash collateral in exchange for his pristine Treasuries and cold, hard cash so his buddies don't have to recognize their losses.....

Oddly enough, the amount of money that he's been tossing around, the excess liquidity that he has allocated to this nefarious purpose is.......

about $250 billion dollars.

Oh my.

I think we figured out where the problem came from.

Sssshhhhhh... don't tell anyone that The Wizard Bernanke (we retired the moniker "Maestro") is standing behind that curtain butt naked.

If you're upset about $4 gasoline go talk to Bernanke - you are paying $4 for gasoline because he is covering up the insolvency of his buddies on Wall Street.

All that excess "slosh" has to go somewhere, and the "somewhere" is oil, gold, and grains in a vile attempt to "earn" their way out from under the rockpile that collapsed on top of their heads.

The bill is not only going to come due for this nonsense in the future, you are paying it right now!

Of course The House today played perpetuate The Wizard of Oz instead, voting to pass a bill that will allow The Justice Department to sue OPEC over fixing oil prices and limiting supplies. Bush threatened to veto it, but it has a veto-proof majority.

One has to wonder - exactly how do you enforce a judgment against, oh, Saudi Arabia? Might they not decide to give us the finger instead?

Perhaps we should tell The Wizard to put some damn clothes on first?

The game-playing isn't limited to the commodities space either. Have a peek at the fun and games at Freddie Mac:

"Until then, we're left with a system in which the only reason Freddie Mac is now solvent is that everyone who matters has agreed to believe it's true. That can't last forever, either."

What's that about? Simple - Freddie, along with Fannie, are "ignoring" losses by claiming that the impairments are "temporary."

How temporary? In many cases for more than a year, in some more than two. The size of these "adjustments"? More than $30 billion - enough to wipe out shareholder equity and, quite likely, render Freddie insolvent.

OFHEO, the so-called "watchdog", thinks this is just fine.

More lies, all sanctioned by yet another branch in The World Of Oz.

Never mind the other piece of deception that The Wizard and Maestro enabled, that of hedge fund CDS-writing.

Writing insurance is not a bad thing, right?

Well we're about to find out, because this over the counter hedge fund "swap business" is what everyone was freaked out about with Bear Stearns and contrary to popular belief the problem has not gone away.

See, this is the problem:

"Investors can't tell whether the people selling the swaps - - known as counterparties -- have the money to honor their promises, Backshall says between phone calls."

Those aren't "promises" they are contracts and if you write one with no ability and intent to perform you've committed an act of fraud, pure and simple.

I think we can all figure out that if we buy insurance on our house against, oh, say, a hurricane, the time to find out that the company has no money to pay (and never did) is probably not after Katrina comes knocking on the front door (blowing straight through and out the back!)

Yet that is exactly what's going on here. But more than a year after all this started in early 2007, despite warnings from people as diverse as Warren Buffett and Mr. Satyajit Das going back several more years, there has not been one substantive move to force these counterparties to prove capital adequacy or repudiate these contracts.

NOT ONE!

Make no mistake - The Wizard is clearly empowered to do exactly that, at least as far as it pertains to the regulated banking system, including, now, the Investment Banks.

See, The Wizard could, if he decided to, proclaim that nobody gets access to any Fed Credit Facility until and unless they can document that all of the swaps they rely on for protection are "money good".

That would end the fraud in one day.

It would also probably result in a couple of big "booms" in the investment and commercial banking world, and a whole lot of booms in the Hedge Fund industry.

But no!

We have to pretend that The Wizard is in fact a great and glorious demigod rather than the shrivelled up old naked man behind the curtain that he really is.

If he bellows loud enough then he's really powerful, right?

The Great Wizard of Oz.

What happens when this all collapses under its own weight? It will, you know. These sorts of games only work until someone comes to the point that their counterparty either has to pay them or they can't make the electric bill.

Will we, the people continue to allow this to go on with our financial system? The one that keeps our paychecks and investments in electronic accounts as nothing more than flickering numbers on a computer monitor?

If Congress was serious about stopping this nonsense instead of masturbating for the public they could end it immediately.

Send a note over to The Wizard and his cohorts and tell them that they have 30 days to do all of the following:

• That The Fed must withdraw all of the "excess slosh", including the TAF, the TSLF and the other "alphabet soup" nonsense. If its not an actual government security The Fed won't take it. If this means you must sell it to raise money, then you sell it. Life's tough and we all make bad investments. Deal with it and take your losses.
• BLS is directed to publish actual price and labor statistics as the headline numbers, with no "black box" adjustments. All headline numbers shall be unadjusted. Any adjustment the BLS wishes to make in the "internals" as an "alternative" number must be fully disclosed as to the data set gathered, how it is collected, and the precise formula(s) used to derive it.
• All counterparty exposures must be documented as money good or repudiated within 30 days for any firm that has a Government liquidity guarantee of any kind. In addition nightly mark-to-market and margin supervision must be performed going forward to guarantee capital adequacy, with a central clearing agent (like the OCC) given plenary supervisory authority. This includes but is not limited to all commercial and investment banks.
• All swaps and other instruments held by any such government "backstopped" firm must trade on a public exchage. Chicago already has one set up but it is being actively boycotted by the banks as they love the ability to "massage" quotes to customers so as to skim off more spread. This, and the above, bring swaps and other "exotics" under the same sort of contractual and procedural framework that governs listed options. There has never been a fail on an OCC-cleared option. NEVER - not even after the 1987 crash.

The "or else" part of the letter is simple - you attach The Bill with your sponsors signatures on it to repeal The Federal Reserve Act of 1913 as amended, returning monetary control to Congress, and at the same time you place the Bureau of Labor Statistics (BLS) function (that compiles the statistical data) under the non-partisan GAO.

If Congress gets told to go stuff or is stonewalled, the Bill is filed, debated and passed.

This would instantaneously collapse any speculation in the commodity markets, radically strengthen the dollar immediately, and force recognition of the real rate of GDP and income growth.

It would also go a long way towards preventing the formation of future asset bubbles.

To be fair, it would also drive up interest rates to sustainable levels, complete the adjustment of housing back to sustainable prices, force both government and private industry to live within their means, and go a long way towards stopping the routine plundering of our people.

Are you, the people, waking up yet?

If so its time to call Congress.

Psst: You know that warning I've issued repeatedly about uninsured bank deposits over the last few months? My ears are ringing...... and a long weekend is coming up. Nuff said.