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The
background noise has been considerable. The USCongress, the august body that
often passes legislation without reading it, evaluates a new initiative to
reinstitute the Glass Steagall Act. Pass it, don't read it! Great idea! In
the wisdom from post-Depression seven decades ago, the same Congress imposed
firewall separation among the commercial banks, the brokerage houses, and the
insurance firms in order to prevent systemic financial sector failure.
That is precisely what happened in the last two years, without proper
recognition or diagnosis, except by this and some analysts. Insolvent systems
do not spring back to life with grandiose infusions of phony money and
complete covers for fraud. They remain insolvent. The bank woes will suffer
massive relapse this year, from fresh commercial mortgage losses, from prime
Option ARMortgage foreclosures, and from continuing overload of toxic losses
from gargantuan residential property held on their books that they stubbornly
refuse to put up for sale. If the US
housing market shows any remote signs of price stability, it is due to a few
hundred thousand foreclosed homes held by banks, floating on their ruined
balance sheets, held back from dispatch to real estate brokers in auction.
Keep price stable by erecting a banker dam on properties. It must release,
but it might head straight into the Fannie Mae toxic pit.
Another
popular bizarre balance sheet item is the bank reserves held for interest
yield within the safe confines of the US Federal Reserve. The USFed itself
might desperately need such funds to ward off its own deep insolvency in the
hundreds of billion$. They did after all, ramp up toward 50% their ratio of
USAgency Mortgage Bonds, most of which are worth far less than the stated
value on their cratered books. The ugly truth on this matter is that US
big banks face additional huge losses, so the reserves held at the USFed
should be regarded as Loan Loss Reserves, hardly robust assets. They are
still insolvent. These big banks are so dead, that the only partners they
attract are other vampires. Non-performing loans have soared to a record 5%,
shown below. Now factor in that US banks carry over $7000 billion in
commercial loans. The resultant $350 billion of non-performing loans on the
books of banks is disclosed, but what is not disclosed is their additional
toxic assets off balance sheet and other various credit derivatives like
Interest Rate Swaps. These huge supposed bank reserves are not going
anywhere, surely not the USEconomy. The big banks are still wrecked.
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Quietly
the USCongress has been working on new legislation to reform the financial
system regulatory structure. It reads like a TARP to the sixth power.
The House of Representatives has passed its version, the House Resolution
4173. The US Senate must next tackle the issue. The House version calls
for up to $4 trillion in big bank aid if and when another banking system
breakdown occurs. Despite all calls to reverse rescue for financial firms
too big to fail, this bill does exactly the opposite. My pattern of analysis,
successful for five years, has been to hear the words, to expect precisely
the opposite in the action taken, and to regard the words as pure deception
to calm the opposition and lull it into a moribund state. The people are
easily fooled, and rarely comprehend new legislation once forged into law.
Hear the words, anticipate the opposite. That tactical approach was honed in
my work by observing Greenspan. Without any hint of doubt, the USCongress is
a trained lackey for Wall Street and the bankers. The nation has lost control
to bankers long ago. The end game is a shattering reality.
BLANK
CHECK TO FANNIE & FREDDIE
Turn
to the Eye-Popper this past week, an event that should have caused incredibly
deep alarm, disgust, dismay, disconcertment, and consternation. Instead, the US
financial markets have been so anaesthetized by nationalizations, big bank
welfare, major fraud cases, outsized executive bonuses for failed bankers,
prattle about recovery by political and bank leaders, and mindless federal programs
that cost multiples more than benefits. So the news of an unlimited line of
funds, not at all a credit line, comes to the viewing audience. This is a
BLACK HOLE of unlimited diameter. One should be immediately suspicious,
before reading any details. Fannie Mae & Freddie Mac (F&F) have been
the source of at least $2000 billion (yes, $2 trillion) in missing funds from
the Papa Bush and Clinton Administrations. Politicians love the Fat Fannie
Freddie Duo, since it has served as a slush fund source for two decades.
These missing, stolen, counterfeited, absconded funds are documented by the
auditors to the USDept Housing & Urban Development. The follow-up stopped
in its tracks, as officials in the USDept Treasury halted investigations,
informing auditors that the funds are designed to fund black bag projects,
including the Working Group for Financial Markets. This is all well
documented, and not in dispute any longer. My theory from September 2008
onward has been that Fannie & Freddie were put under conservatorship
within the USGovt in order to prevent investigations of fraud, to prevent
discovery of Wall Street bond counterfeit, to prevent lawsuits on improper
securitization of mortgage income streams (usage of single income with
multiple bonds), and to prevent mortgage rates from rising as foreign
creditors dumped mortgage bonds. The joke on Wall Street these days has been
that Fannie Mae is a great firm to leave, since despite allegations of
criminal activity, nothing happens on the legal side, and besides, the exit
bonuses are in the multi-million$. Ex-CEO Franklin Raines, friend to all
politicians, earned $62 million upon exit amidst controversy and shades of
fraud.
So
next, the blank check is written for Fannie & Freddie, and
one should suspect that the funds will flow freely. Any expectation of major
home loan balance reduction for the benefit of the people might be misplaced.
We shall see! Maybe it will come! The USDept Treasury announced last
Thursday the removal of the $400 billion financial cap on the money line
provided to keep the companies afloat. To date, US taxpayers have parted
with $110 billion to the fat duo. All estimates submitted by the USGovt about
loss magnitude have been laughable. My forecast over a year ago was for at
least $2 trillion and possibly $3 trillion in losses ultimately, over 10
times what officials stated. My figure is looking better every passing week.
Denials persist that the original $400 billion limit was nowhere approached.
So why extend the line of funding to unlimited? The reasons are two-fold in
my view. First, grandiose grotesque gargantuan losses are coming, since
liquidation of bad home loans has been halted. A huge dam of toxic loans is
on the Fannie & Freddie books. As Rich Santelli of CNBC said on Tuesday, "This
move permits Fannie Mae to load on all kinds of additional pigslop onto their
balance sheet, and to do so without end." He followed with some
denigrating remarks about the wisdom of fiscal leadership. Second, the blank
check will permit continued coverup of the mortgage bond fraud, along with
rafts of broken credit derivative contracts. The coverup requires much
additional papering over. The size of the Interest Rate Swap book on the
F&F books must be greater than the global economy, maybe by a multiple.
Next
is large scale mortgage portfolio liquidations, mortgage portfolio
writedowns, and possibly some actual loan balance reductions finally. Massive
losses will be revealed by Fannie & Freddie, but the public and financial
sector will applaud the cleansing process. An astonishing volume of backlog
home loan constipation might be relieved by means of this official enema in
the planning stage. Housing prices are certain to drop if F&F refuse to
permit their managed home portfolio to grow without limit. If F&F dump
homes on the housing market, the prices will drop another 15% to 20% easily. The
alternative is more what my forecast has in store, a truly staggering
shocking alarming home rental business by the USGovt as landlord. The Fat
F&F Duo can mitigate the negative political reaction by reducing home
loans in a substantial way and to a meaningful degree, which would help to
stop the foreclosure parade and the reversal of the Ownership Society
nightmare.
MOTIVE
FOR THE USGOVT HOME OWNERSHIP
Fannie
Mae and Freddie Mac provide vital liquidity to the mortgage industry by
purchasing home loans from lenders and selling them to investors. Most
investors lose heavily, but the bond brokers make out very well indeed.
Together, F&F own or guarantee almost 31 million home loans worth about
$5.5 trillion, almost half of all mortgages. Without USGovt aid, the firms
would have gone bust long ago, leaving millions of people unable to obtain a
mortgage. The biggest headwind facing the housing recovery has been the rise
in foreclosures as unemployment remains high and the hidden bank inventory of
foreclosed properties swells each month. The Obama Admin dare not disclose
its long-term plans for the two agencies under conservatorship.
Pardon
me during outbursts of laughter at the mere word 'conservatorship' since
nationalization was under that thin veil all along, as in all along. The
formal steps were missing, but no longer. The Toxic F&F Duo will never
return to their former power and influence, not to mention integrity, if they
have had any for 20 years. The Obama Admin might do best to conceal its plans
of federal residential property ownership, since it might read like a
Communist Manifesto. In summer 2005, my forecast for Fannie Home Rentals has
come true, with nary a peep of objection. Rentals are seen as a great
solution. The F&F shareholders should face total ruin with share price at
zero. Instead, Fannie Home Rentals should provide a massive revenue stream
useful in justifying a stock share price. At the same time, the financial
sector will likely applaud all initiatives that result in removing home
supply from selling inventories. The federal landlord plan actually will
permit some home price stability. Let's not even touch on executive bonuses
and compensation packages for the current managers of these financial sewage
treatment plants.
My
personal conjecture is that Fannie Mae is burning through money 5 times
faster than the topline figures show. The USGovt will next be funding the
Great Black Hole in a more visible fashion, if that is a positive
development. One might even conclude that the blank check is not price
inflationary, since it goes right into the toilet. This is Weimar
Defecation. It will affect the USDollar and USTreasury global
integrity. Worse, we are at the forefront of a blossoming of the USGovt
emerging as a significant national landlord. What we have is the onset of
precisely the opposite of the Ownership Society put forth by ex-President
Bush II. What irony! Or was it the plan? Just like the Greenspan Project to
undermine the US
financial grid? One should harbor great suspicion that the USGovt has been
collecting mortgages on a grand basis, as has been the USFed. My full
expectation is that the USFed will dump their entire mortgage bond assets on
the USGovt at the appropriate timely moment, despite any lack of value, and
receive nearly full book value. The taxpayers inherit the sewage. Furthermore,
gigantic tranches of home loans from the residential sector are likely to
come from the commercial banks, heading directly to the Fannie & Freddie
balance sheets. This flood will accelerate the disenfranchisement of the
proletariat, as home foreclosures continue unabated, and the USGovt
entrenches its property ownership. Those who fail to see the trend toward a
communist state with military dictatorial powers are at best sleep and at
worst blind.
Numerous
theories have been floating in the media and in internet journals, where the
most responsible journalism exists, by far, bar none. Former HUD auditor
Catherine A Fitts shared her opinion that the banks are going to take huge
writedowns on the commercial side. To make room on their balance sheets to
handle the commercial mess, the residential portfolios are going to be
shifted to Fannie & Freddie in a manner that will protect the major
banks. The F&F balance sheets are where residential mortgages will go to
die, she expects. The market cannot handle the home sale flow from
liquidations. And besides, the Federal Housing Admin and Ginnie Mae are too
small and too logistically strained to move such volume so quickly. The
sewage treatment plant is well equipped. All roads lead to F&F Processing
Plant. The USGovt auditors will proclaim profits from Fannie Home Rentals,
but hide the enormous losses.
Dan Amoss
of the Strategic Short Report shares his opinion on a trend. He said, "The
market will eventually adopt the view that Fannie Mae and Freddie Mac have
been nationalized. Last week's elimination of limits on Treasury's capital
infusion into Fannie and Freddie is a defacto nationalization. In other
words, there is no longer much chance of a re-privatization, but instead we
will see a gradual transformation of these Frankensteins into new branches of
government. They will implement the official government agenda for housing,
without much regard for prudent lending. This will have huge consequences for
the Treasury market. While the federal government will stick to its
Enron-style accounting, and not officially consolidate Fannie/Freddie assets
and liabilities onto the government balance sheet, the smarter foreign
creditors will. These creditors will start viewing Fannie/Freddie
liabilities as equal to Treasuries in terms of default risk. But this
does not mean that spreads on Fannie/Freddie liabilities will tighten down to
Treasuries. Rather, it will substantially increase the long-term default risk
of Treasuries, and Treasury buyers will demand higher rates to compensate for
this risk." Amoss anticipates the principal mortgage provider in the
future is indirectly going to be the USGovt. Amoss also states that the
USTreasury debt is to be mixed with the USAgency Mortgage debt in perception,
no longer distinguishable since the former funds the latter. THE RISK OF
USTREASURY DEFAULT HAS LEAPED HIGHER!! Since Fannie & Freddie are deeply
insolvent, the new USGovt debt ratio also leaped higher.
On the
entire motive theme, ponder the following. The USTreasury Bonds are at risk
of higher bond yields. They will likely not shoot up rapidly, since the
JPMorgan machinery is still in operation, namely the Interest Rate Swaps.
Check the Office of Comptroller to the Currency for basic evidence. A
reversion to the mean, a reversal of the lopsided positions, a return to
normalcy would clearly involve over a $1 trillion loss to the JPMorgan
monster. The IRSwap contracts are firmly in place, ramped up, heavily
fortified by Printing Pre$$ activity without scrutiny or bounds, never
properly audited since done by venerable JPMorgan. While we all decry the
rise of credit derivatives, few complain about low interest rates in today's
age of speculation. Artificially low cost of money has fueled two decades
of asset bubbles and the ruin of the US
industrial base. My view is that the USFed is desperate to end their 0% rate,
since they realize it caused the housing & mortgage bubbles in 2003-2007.
But the USFed has returned to the scene of the crime with entrenched 0%
rates, stuck for over a year. The USFed definitely does NOT want long rates
to rise. They are scared witless of rising mortgage rates, since they would
kill the housing market altogether, or at least put it under a massive wet
blanket for an indefinite time. The IRSwap detonation could happen at either
end, on the short rate or long rate, much like a stick of dynamite with a
fuse at each end. Risk is acute if the USFed were to hike the FedFunds rate,
since they would directly set off IRSwap explosions. The USGovt borrowing
costs would triple also.
RISK
RISK RISK, MONETIZATION & INTEGRITY
Harken
back just a few weeks, when the USDept Treasury and USFed announced on a
repeated basis the end of Quantitative Easing. Their words were
laughable, intended to deceive, and were whole portions of propaganda.
INSTEAD, THEY DID THE EXACT OPPOSITE, AND MADE THE FORMAL ANNOUNCEMENT
BETWEEN THE CHRISTMAS AND NEW YEAR HOLDIDAYS. The move to permit unlimited
Fannie & Freddie funding is an end-around maneuver to prevent long-term
interest rates from rising, or at least to insulate the mortgage finance arena
from higher long-term interest rates. IT COMES AT A COST, OF SYSTEMIC
RISK, OF PERCEIVED DEFAULT RISK, OF USGOVT DEBT FOUNDATION RISK. The year
2010 might be characterized by a rise in the entire USTreasury bond yield
spectrum, from short-term to mid-term to long-term. It is not just a bad
thing, a risk filled development. It is a risk of game over! The monetization
threat and deep monetary inflation to fund USTreasurys (indirectly Fannie
& Freddie debt) are important parts of the vicious cycle displayed in the
December 16th article entitled "Full Circle of Govt Debt
Default" (CLICK HERE). The full circle (see the chart) starts
and ends with the USDollar and the USTreasurys, from debts, monetization, and
monetary inflation gone haywire. The toxic chickens come home to roost!!
The
credit markets must prepare for one of two undesirable outcomes. Either
interest rates rise markedly in order to fund the USGovt federal deficits or
else Printing Pre$$ output of phony money must escalate without bounds. Next
comes debt explosion or Weimar
inflation. The federal deficits must be securitized, in other words,
converted into bonds and funded. The process so far has involved an
incredible amount of hidden monetization. It is slowly being discovered, but
not reported by the sleepy lapdog intrepid press & media. My articles
have detailed some of the primary bond dealer monetization in Permanent Open
Market actions, and some of the foreign central bank monetization of mortgage
bonds to fund USTreasury bids. The year 2010 will feature monetization of
USGovt debt and of mortgage losses out in the open to a much greater degree.
The effect will be to place the USGovt debt viability at grave risk. It will
be interesting to watch the debt ratings agencies (Standard & Poors,
Moodys, Fitch) squirm. They are under tremendous pressure not to repeat their
lackadaisical behavior in the past. They are downgrading European nation
sovereign debt. They are denying openly the justification to downgrade both
United Kingdom Govt and United States Govt debt. Their denials are damning in
themselves, since why mention the lack of justification for such downgrade
unless they should be downgraded by any reasonable measure. The USGovt
short-term funding requirements are almost as great as their active
monetization, the clear expedient. The USEconomy tolerates huge Ponzi Schemes
from the inside, like Madoff, like Fannie & Freddie, like AIG, like Wall
Street itself. Rather the USEconomy has become one huge Ponzi. Its expansion
on the margin is uncontrollable, just like its appetite for new funds is
uncontrollable. The blank check to Fannie & Freddie is testimony to the
need to fund the Ponzi Scheme, but it is phony money entering a vast and
widening Black Hole.
USDOLLAR
BOUNCE
Last
autumn 2008, one year ago, the USDollar embarked on what my analysis called a
Dollar Death Dance. The bounce from the November depths last month at 74.5 to
the hardly rarified air near 79 has been sudden. The rise in rebound has been
built upon several factors. The Dubai debt
mess has exposed European and London
banks for further losses, leading to an exit from both the Euro and British
Pound currencies. The US
banks are more adept at hiding their losses, extended their toxic loans,
pretending they will find eventual value. The Dubai
shock has made vividly clear the heightened risk of a European Union
fracture, a threat to the Euro currency, and a need for Germany
to cut off the Southern Europe impaired limbs,
debt and all. One must wonder with sinister thoughts if the Dubai
debt was permitted to default, or orchestrated to default, precisely at the
most promising season for gold, into the year end strength. It
short-circuited the strong gold season. But one thing is for sure about
seasonality issues. They have been widely destroyed in recent years in
numerous asset classes. The late winter and spring for gold should be strong
again, as the USDollar will expose its toxic fundamentals. The only thing
making the ugly pig with lipstick look good is the unfavorable comparison to
broken European national debt structures, which do not have the benefit of
the Printing Pre$$ Privilege or the vast criminal sydicates supported by it.
The
Competing Currency Wars have heated up again from comparisons rather than
open hostility to protect exports. Money departs
the Euro harbors and enters the toxic USDollar pits, where the stench of
Printing Pre$$ overdrive operation fills the air, where the shame of
unlimited Fannie & Freddie black hole directed funds tarnishes the
USDollar image, and where the unprosecuted Wall Street bond fraud festers
like an open sore. This sudden US$ rebound has left the G-20 Meeting
declarations a recent bad memory. The emerging nations had shown steady
disrespect for the so-called developed nations, the deep debtors who long ago
lost their industrial base. They transformed industry to debt, a miracle of
modern central banking!! There is nothing like some debt liquidation to show
how the USDollar still has remnants of a safe haven. Its security has only
remnants, torn shreds adorned by stars and stripes once given respect. Let's
not even touch the endless wars, the clandestine military business in
narcotics, the private contractor fraud in the war effort, the missing $50
billion in Iraqi Reconstruction Funds that nobody is looking for. These
activities smear and harm the US
image in powerful ways, often without US
awareness from inside the US Dome of Perception.
Just
what is the force to sustain the USDollar rebound? More European member
nation debt woes. More credit derivative liquidation and payouts. The US$
rebound runs on noxious fumes. This is the Dollar Death Dance, part II. The
long-term trend will remain down. The immediate activity could feature more
of the same. The short covering of the Dollar Carry Trade has been clear.
It will have to muster enough funds, courage, and wisdom to put that carry
trade into second gear. It is inevitable. It is justified. It will be
profitable. It certainly will be dangerous, since the USDollar is still the
global reserve currency. That status is threatened though. Clearly, the
USDollar rebound, a move of a mere 6% in the last few weeks, is the only
factor pushing down the gold price. One can see that the gold price decline
has run its course. The overbought condition has worked itself off. The risk
of a move to 1060-1080 is apparent. However, the moving averages are rising.
The stochastix are ready to cross over in a positive way. Last but not least,
the fundamentals for the USGovt finances and the USDollar in particular could
not be more acutely horrible, miserable, outrageously negative, and represent
a palpable threat of a sovereign debt default down the road. At least we will
see a monetary crisis centered upon the USDollar. That would
pressure the eventual default.
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The
USDollar rebound and the reflexive gold correction have been rapid and thus
are unstable. They are both nurtured by European and London
weakness, rather than US
strength. The long-term trend is solid and up for gold. With all the hubbub
and gnashing of teeth, the gold price is still above its October highest
level. My favorite question of US$ Bulls is "What has been
fixed?" The answer is nothing. Much money has been spent, and huge
deficits have been racked up, but to what end? No remedy, no reform, no
structural imbalances corrected, no deficit reduction, no military expense
curtailment, no end to banker welfare, no successful modification to home
loans, no end to home foreclosures, no end to job cuts, no end to supply
chain disruption, no end to the USGovt and USFed acting as primary lenders,
not just lenders of last resort. The USDollar is running on fumes, and the
end to its bounce is near. The gold bull will run again. Three to four steps
up, one step back.
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