Banks Offloading Risk to Who?

Here is another rant inspired by a Bloomberg article I read a couple weeks ago.  Those folks at Bloomberg do some very informative reporting.

Everything in the article is fascinating.  To imagine for an instant, after the absolute crash we had in credit markets such a short time ago and the reality that technically, as I write this post, dozens of very large banks around the globe are insolvent if they were required to be honest about the current market value of the "assets" on their balance sheets, that the monetary "authorities" around the world would even entertain the idea that banks could "buy" credit protection against default of loans on their books is ludicrous, insane, archaic, incomprehensible and absolute madness, yet it is happening!!!

The only question one has to ask is, "Who are these people providing "insurance" on these portfolios of loans banks are buying and what capital do they employ to show that in a crises they could actually provide the "protection" they are offering?"  We are just living Credit Crises 2.0 in the making.  There are still tens of trillions of dollars of "credit protection" out there being bought, sold, securitized, traded, passed off, derivativeized etc. by a completely unregulated global financial "industry" for crying out loud, with no rational capital requirements or other oversight by anyone and being backstopped by governments, who are already ill equipped to do anything to prevent another disaster!!

The fact that institutions still functioning as "banks" with the backing of their activities by "taxpayers" through "insurance" still go about gambling on a global scale is insane to say the least and downright financially apoplectic to put it in real terms.

Now we have the largest "money manager" in the US, Blackstone, orchestrating "insurance" against losses on pools of loans on the books of international financial institutions.  Since when is Blackstone an insurance company?  And what assurances do we have that those who have provided the "insurance" actually have the capability of delivering on this insurance? Are we really going to let a government insured global institution hold less capital against their loan book because they have purchased "insurance" from an unregulated industry?

From what I see of this deal between Blackstone and Citigroup it looks like the same financial engineering that Greece used to hide liabilities and underreport the amount of debt they had on their books when lying to the ECB and European Governments.  It may be a different way going about it, but the effect is the same, and where did it get Greece?

From the article:

“It’s a form of financial engineering,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.

According to the article, Blackstone was able to do this because of how "regulators are viewing loan exposures".  Hmmm, so regulators are now thinking banks can financially engineer their balance sheets to offload exposure to loans on their books. 

I will never forget when back in 2006 when Bernanke actually said that banks had become sophisticated enough to manage risk and that implied regulation and oversight was not as needed in the past.  This mind think from the Fed, Treasury and our congress (who passed the deregulation at the encouragement of Wall Street firms and the Fed) was the most ignorant and destructive thinking that ever perpetuated our collective attitude towards the financial industry.  These people were all seduced by the same greed that drives the industry and to think for a minute the financial industry in a capitalist system has ANY objective but to create ways to scrape as much cash from the national (now global) till as humanly possible until there simply is no more, is to have a lobotomy!

Without strong and active regulation in a capitalist system is to turn all humanity into slaves.  You might as well just put everyone in a meat grinder and feed them to those who know how to best exploit the system.

Back to the article.  This is a notable quote:

The Blackstone deal is one of the first examples involving a private-equity firm, which traditionally look to take a more active role in managing assets. It demonstrates the extent to which banks are prepared to pay up for capital when other sources, such as issuing shares or unsecured bonds, are closed.

What does this say?  1) Private equity, traditionally having a history of actually managing the firms (assets) they take an interest in (though mostly they find cash rich companies, rape them, load them with debt, then float them again), now are interested in filling a role of "financial engineering" to the banking industry because no real investor will buy the bank's "shares, unsecured bonds" or whatever other shit they can come up with to raise money, cause any real investor knows they are INSOLVENT!!  But it does seem that a bunch of investors in the world of "unregulated finance" are more than willing to take millions of dollars of the bank's money to help the banks further understate their liabilities.  Why not?  There is absolutely NO RISK in doing so because the next time the "shit hits the fan" the unregulated pigs can just go out of business.  They have already banked their millions in fees providing this "service" to the industry and as we all know, NOBODY anywhere in the world was held accountable for anything that happened in 2008-09, NOBODY. So why the hell not take the banks money while they have it.

Thinking this quote though will almost make you laugh:

Private-equity firms have struggled to achieve returns exceeding 10 percent after banks cut off credit in the aftermath of the financial crisis, starving the industry of the leverage required to match previous returns. 

So poor private equity has been cut off from loose credit because the banks are insolvent.  So what to do.  Hmmm, why don't we find a way to make the banks look solvent. Then they can go back to reckless lending to us again.  Genius!

So what is the debt?  Part of a $500 billion book of loans out the "shipping industry", an industry that if you read anything now, is floating on borrowed time.   Commerzbank, an institution everyone knows is technically insolvent, made some risk adjustments to their books and wallah, lowered their reserve requirements by over $9 billion. This is significant. Citi is trying to offload it's reserve requirements to the same industry.  We all know where this is going.

I like this quote to:

Blackstone spent five months to develop a structure that the Financial Services Authority, the U.K.’s financial regulator, would accept, one of the people said.

You know, if it took five months to "develop a structure" that there was another year prior to that with a bunch of computer programs and mathematicians creating "models" and other "engineered" outcomes to ultimately approach regulators with the proposal.  And we all know, the smart people are NOT the regulators.

And how does the article end?

“The government is jumping up and down asking banks to lend more to small and medium-sized businesses at the same time as stricter capital rules come in,” Walsh said. “The banks can either say: ’I’m sorry, we’ll have to wait until people pay off their loans,’ or the regulators could look at sensible ways of releasing those assets from their banks’ balance sheets so as to free-up capital to allow them to lend to more businesses.” 

"The government", yea the same government that deregulated the financial industry while allowing taxpayers to stay on the hook to their activities, and has, in the case of the US, failed to even pass it's own budget for three years; the same government that bought into the idea that they did not need to be involved in the rapidly globalizing financial industry that has become way to large and unwieldy for ANY central bank to bail out; the same government that does not even understand how to manage a balance sheet; that government is now looking for ways to allow their insolvent banking industry to "lend more".  Go figure. 

Finally Agree with Geithner on Regulations Needed

I was pleased to read on Bloomberg today that Mr. Geithner has a plan to regulate over-the-counter derivatives. This is so overdue and I have been frustrated for 3 years by various leaders in Washington do anything about this market even though it was largely responsible for the collapse of the global economy.

Not only was it largely responsible for the collapse but very dangerous precedents are being set as I write this where these exotic financial products are being used as a gauge to price debt.

These contracts represent a $684 trillion over-the-counter derivatives market and they are now typically conducted over the phone between banks and customers!

What an absolute trip. I know with the "trillion" word being passed around like water lately another "trillion" figure may not sink in but Think about this number for a moment. What is the US debt, $10 Trillion? We are talking $684 trillion here. Yes, yes many of you will say, "So what." there are trillions of dollars in "derivatives" out there on every other product, commodity, stock etc. traded every day. Yes, "traded" on "open markets" with clear pricing and risks born by those who trade them and these types of "products" are not "insuring" against default of debt.

I was so incensed when I heard a clip by Lloyd Blankfein where he made this point with a straight face. The guy is a raving lunatic in my book to be able to do so. He is a "Hitler" of finance. There is no question. Some may call him a genius but he defends destruction and annihilation of all around him from a financial perspective and as I have said a million times and will continue to say, with 6 billion people on the planet all more interconnected every day, guys like Blankfein and the businesses they run no longer serve any benefit to humanity, on the contrary, they are destructive to humanity, our "capital system" and serve no allegiance to any good on the planet other than to do whatever is necessary to return 30% plus to their investors irrespective to the damage they cause economies and individuals and they operate without rules governed by any sovereign state, territory or jurisdiction (except for the strings now on his firm after taking money from the government and borrowing to feed his machine with the backing of the FDIC).

So some reasoning has entered Washington and they seem to understand the importance of regulating these derivative products. Now what about the unregulated pools of global money driving this, Hedge Funds?

Thank you Bernie

Driving and listening to NPR this evening I heard two guests talking about the Bernie Madoff guilty plea. One guest had, at best, a trailer park knowledge of the workings of the investment world and continuously refered to "her sources" an could do no more than focus on the few million dollars Bernie and his wife managed to squirrel away in her name. Listening to this woman was worse than listening to a bunch of impotent Senators talk about Wall Street bonuses. The more I listen to the "news" and "news shows" with supposed "knowledgeable" reporters and other industry appointed "experts" the more incensed I get with the ignorance being blatantly displayed about the world of international finance and the workings of unregulated funds.

Every time I hear "the SEC 'investigated' Madoff's business" and gave him a clean bill of health my eyes roll. Since when in the last 20 years did the SEC do a damn thing? Anyone who has known me for a while will remember my outrage when Eliot Spitser had to do their job for them for 5 years and the how pissed off I was when he came to DC to sit in front of our spineless, impotent government while being sneered at by the SEC for making them look like the complete fools there were.

So the media saying "the SEC did nothing to stop Bernie Madoff" is like saying its hard to light a match when it is raining. Duh. The SEC did nothing for 20 years.

Then I hear people suggesting the SEC is responsible for them loosing money with Madoff. Well this is just as comical. Madoff operated his "fund" like a "hedge fund" and from what I know, they are not regulated. The SEC only looked into his clearing operations, not his "fund". They apparently had him register as an advisor, but about that time, the SEC had started a program requiring certain Hedge Funds to register with the SEC. However, the Hedge Fund industry sued and had that requirement overturned. So if (and I don't know if this is the case in Madoff's fund) Madoff was required to register under the then "new" SEC requirement, he could have withdrawn his registration like many Hedge Funds did after the overturning of the rule in court.

So what is the moral of this story and why am I thanking Bernie? It is because as far as I am concerned, Bernie may have done more harm to the reputations of unregistered pools of cash burning every asset class on the planet then any impotent SEC or government body possibly could have. And, until unregulated pools of capital and their wrath of unregulated insurance products and the like are completely removed from the global financial system, we are going to have serious problems.

Thank you Bernie. You are scum. But the Banks, Wall Street firms, Insurance companies, and other "financial firms" that have been allowed to become "regulated banks" who have all taken taxpayer money and cannot or will not explain where it went are all the same right now. They take taxpayer money, put in a pool of cash and pay out others with it. What is the Fricken difference?

All the pigs became ridiculously over leveraged and lost the capacity to segregate any aspects of their Enron structured, far fledged, business. All of them have done everything possible, including stealing from their clients funds, instituting ridicules arbitrary fees, charging for services that were supposed to be free or included in certain types of accounts, raising interest rates or any other scheme they could think of to stay afloat.

I have personally witnessed each of these in my bank, investment and credit cards in the past 9 months. Just ask me and I will give you an example of each one listed above.

Finally an "Authority" Advocates Re-regulation

I was in University in the late 1980's and early 1990's studying economics at the University of Maryland when I was faced with two options, grow the company I started or pursue my masters in Economics with my thesis being the need for an international financial regulatory authority. At the time I had lofty ideas of becoming a global economic guru who would advocate the abandonment of the archaic, inefficient, unfair, and destructive way economics was dealt with on an international level. Human beings had managed to create highly sophisticated financial "systems" and global financial "markets" that were rapidly evolving but unfortunately the perspective of human beings was Neanderthalistic.

I had the benefit of studying Economics during the collapse of the S&L industry in the US along with a real estate bust, junk bond market implosion and fairly severe recession. I also was a "student" of economics and finance through real world experience and investing from 1981 which allowed me to experience the severe 1982 recession in the US, the Latin American debt crises, gold price explosion and implosion, oil price implosion and the first destructive false economic "growth" experiment of supply side economics by the Reagan Administration (accompanied by military welfare spending and enemy creation) and brilliantly orchestrated junk bond bubble and accompanying corporate buy out craze.

It was obvious to me during my studies we had a systematically flawed economic model functioning on a national and global scale and there were no way the idiots with ass backwards motivations who ran this model and all of its intuitions would be able to do anything that would be a net benefit to humanity. The same holds true today.

So I had the absolute pleasure of reading this article today on Marketwatch about what Henry Kaufman thinks of the global mess we are in.

Notably his statement:

A: The expectation certainly has to be that the banks are undercapitalized, quite a number of them. There are still probably some additional write-offs to be taken. The value of assets are not down yet to what they are supposed to be marked down to. This would seem to me to be an ongoing problem until we see some improvement in economic activity.

There are further issues facing the banking system. There will have to be a re-regulation of the financial system.

My recommendation has been the centralization of the supervision of the financial markets. Let there be one major oversight institution over markets and institutions. The head of that oversight group should sit as a vice-chairman of the Federal Reserve Board. The chairman of the Fed and the head of this oversight group [should] render an annual report to Congress showing what the financial health is of, say, the 25 largest financial institutions of the U.S. And that body should also provide a credit rating for each of those 25 institutions.

And his further remarks:

A: The Federal Reserve has admitted that the deregulation that has occurred has been a mistake. The Fed will support some re-regulation. It has not indicated what the magnitude of that re-regulation will be. Neither will the U.S. Treasury.

The Federal Reserve and the Treasury over the last two decades have let the financial markets be on a deregulated basis. We did not supervise financial institutions tightly. The assumption by the authorities, the kind of belief by the Treasury and the Federal Reserve was that those who do well will prosper in the financial markets, those who do poorly will fail. That of course was not allowed to happen because we just don't allow big institutions to fail because of the systemic risks they pose to the entire world and the system at large in the U.S.

As a result, financial markets were allowed to end up in all sorts of risky ventures, and this contributed to the mishaps that we have today.

We live in global financial markets. We have institutions that operate on a global basis. Therefore, we should have an international oversight group over major financial institutions regardless of whether they're in London, New York, Paris or Tokyo. They should come under one major supervisory authority. That authority should set requirements for capital should set rulings for types of leverage that the institution can undertake, should set training practices for the major markets.
If we do not have a unified supervision, the business will flow to those markets that are most liberal. And those markets will then create havoc for the rest of the international financial groups.

I think there's more support coming for that now than when I first wrote about this 15, 20 years ago because I see France pushing in that direction. The Europeans on the Continent are pushing in that direction. The only ones I haven't heard from on this are the Federal Reserve and the U.S. Treasury.

Yes it pleases me greatly to know I was thinking ahead of this smart man. In fact what his article brings to mind were the few (far to few when I think back) conversations I had when I took the liberty of knocking on the door of one of my professors from time to time to ask their opinion of what was happening in the "real economic world" outside of the somewhat antiquated textbooks I had to study with.

If I had a chance to do it all over again I am still not sure I would have taken the path of furthering my economics education instead of pursuing my business. I was very turned off by the bureaucratic and pathetic "counseling" at the state university. When I initially inquired about the masters program they looked at my completed transcripts and suggested I had 2 semesters of classes that were required just to apply (I was like, why in the hell didn't you spell that out when I started my major, idiot?) and the fact that the University of Maryland for all it's efforts was basically churning out graduates to fill a cube at the Department of Labor crunching boring ass stats for yet more bureaucrats. Economics was going through it's "mathematicization" phase and I did not see the subject in the same light.

Perhaps this has something to do with the mess we are in now. Not unlike the "magic" of any idiot being able to create an impressive business plan and financial projection with the wider use of computers and the newly accessible spreadsheet programs in the 1980's that in my view had a great impression on the flow of money then, the movement of Economics by people determined to make it more of a "science" through the use of statistics, mathematics and computer models totally devalued what I saw as the beauty of economics as a social science that could have better application using some of the emerging technologies but not for those technologies to "take over" the discipline in entirety.

I strongly believe the current crises once again came greatly by application of sophisticated mathematics and technology in the creation of financial products that on paper made "investors" believe anything and any return was possible if you could "hedge", "buy protection for" and or otherwise "remove responsibility for losses" through securitization which resulted in the explosion of credit and unbelievably cheap prices.

I have been saying for more than three years now that all of this "protection" was nothing but a house of cards, not to mention the "false" profits created in the sale of the products themselves and it would not last longer than early 2008. Well here we are. We are nowhere near bottom and finally some "smart" people who did stay in the wonderful discipline of Economics, and who shared my views, are being listened to. God bless them...

Sir Lloyd Blankfein calls for More Controls?

Are you kidding? Mr. Blankfein, head of Goldman Sachs, was quoted in the Financial Times saying almost exactly (one word exception, key word of course) what I have been saying for some time. Here is the quote:

"All pools of capital that depend on the smooth functioning of the financial system and are large enough to be a burden on it in a crisis should be subject to some degree of regulation."

This completely blew me away. I read it like three times, then read the entire article over again. My statement used many times, though more harsh, read something like this:

In a world of over 6 billion people, having a couple trillion dollars of unregulated money leveraged 10 to one or greater doing everything they can on a global scale to earn 30% on their money with no allegiance to any nation, no regulatory authority to answer to and no rules on what they can or cannot buy, sell, create or destroy (not to mention being serviced and lent to by regulated entities) no longer serves the human race any useful purpose, period.

OK so it is a little different but if you just changed the word "some" in Blankfein's quote to "the same" and added the words "as other regulated financial institutions" to the end of the sentence you would have what I have been saying.

The idiots that run our financial world are almost there. Maybe some day they will "get it".

Read article here (subscription may be required)