EU News Dampens Stocks

Europe's $2.7 Trillion Debt-Driven Bank Bailout Sends Stocks Soaring

Dow up 1000 points in the past five days.

John Hussman's Message to Wall St Protesters

We're all for a good peaceful protest. As long-time readers know, I've been an adamant critic of the bailouts of mismanaged financial institutions, as well as various illegal policy actions that have been pursued by the Fed since the financial crisis began in 2008. Undoubtedly, there is good and bad on Wall Street, and we know a lot of smart, well-meaning financial advisors who go to work every day with the goal of improving the financial security of their clients, who do careful research, avoid speculation, and provide a service to others through their profession. A functioning economy needs to allocate capital effectively, and there Wall Street can be essential.

Unfortunately, over the past 15 years or so, the basic function of the financial markets has been corrupted into what I've grown to view as a self-serving carnival of speculation, where many participants are interested in nothing except getting the next rally going at public expense, regardless of how badly market signals are distorted, how recklessly capital is misallocated, or even whether what they do has any positive effect on the economy or the country (some of the sleazier ones even have their own shows on basic cable).

There is no single source of this transformation. Part of it is a remnant of the dot-com and technology bubbles, when market valuations moved to nearly triple the historical norm, and investors began to view perpetual market advances and high returns as a birthright. The subsequent decade of zero overall returns for the stock market largely reflects a reversion to more normal (but still cyclically elevated) valuations.

Another part of this transformation is due to the activist policies of Federal Reserve, which has continually attempted to short-circuit every instance of short-term economic discomfort by distorting the menu of investment returns (e.g. zero interest rate policies) in an effort to provoke investors to accept fresh speculative risk. Ironically, the long-term effect of distorting market signals has been to drive good, potentially productive capital into wholly unproductive uses - the housing bubble being a prime example. As a result, real U.S. gross domestic investment has not grown at all since 1998, and the portion financed by domestic U.S. savings has collapsed, so much of the new capital we've accumulated is owned by foreigners.

Undoubtedly, one of the greatest rhetorical victories of Wall Street has been to successfully plant in the minds of the public the idea that some financial institutions are simply "too big to fail," and that the "failure" of "systemically important" institutions will result in global financial meltdown and Depression. The reality is much different.

Germany Tells Geithner to Get His Own House in Order

Get lost, Geithner!

What In This Picture Does't Match The Others?

Stocks are rallying sharply overnight, despite that a pall of gloom overhangs world financial markets. Something doesn't quite match here. Are stocks showing signs of recovery, or is Europe truly the bellweather of gloom that these Wall St Journal articles suggest?
This reminds me of the pictures we would see in children's magazines that would show a picture or drawing and ask, "What in this picture doesn't match the others?" It's hard to imagine why stocks are rallying on this news of global gloom, but that's what's happening!
It also reminds me of another phenomena to which we have become accustomed. That phenomena is one off stocks rallying during the overnight hours when most Americans are asleep. This routinely occurs between 3-4 am EST. What gives? One wonders if this is market manipulation at an hour when few traders are awake to sell and there is such incongruity between market fundamentals and market valuation. Is there really this kind of momentum when there is no one to present a counterpoint to this bullishness? Is the market being manipulated at an hour during which there is no opposing force? One certainly has to wonder! And one must also wonder who is behind this. Is this Fed market manipulation at work? I am not the first to suggest it!

Bill Buckler Puts Things Back Into Perspective: "Of The Total US $15 Trillion Market Capitalization, The Fed Provided About Half Of That"

This from Zero Hedge. Surely, this is a nightmare, and we are going to awaken from it any moment!

On a surprisingly quiet night, during which many, chief among them the President of the US, were expecting some fireworks, it is easy to get lost in all in your face political farce, while ignoring, and even blissfully forgetting, the real financial details behind the scenes. Luckily we have Bill Buckler, whose latest edition of "The Privateer" puts everything right back in perspective, and reminds us that "in the period between December 2007 and July 2010, the Fed parcelled out $US 16.1 TRILLION in emergency loans to financial entities all over the world. Almost half of this - a total of $US 7.75 TRILLION - was loaned to four US banks. They were Citigroup, Morgan Stanley, Merrill Lynch and the Bank of America. In July 2010 (the cut off date for this “audit”), total US stock market capitalisation was $US 15 TRILLION. The Fed provided about half of that." And here we are, haggling over $30 billion here, and $50 billion there...

The Last Remission

According to the official figures put out by the US government, the economic “recovery” in the US celebrated its second anniversary on June 30, 2011. The “fuel” burned in this “recovery” is immense. Mr Obama’s presidency has ushered in the era of $US 1 TRILLION plus annual deficits riding on top of 0.00 percent controlling interest rates from the Fed. It has also ushered in the era in which almost nothing istraded on the paper markets which is not - explicitly or implicitly - guaranteed by the government.

The fuel to keep the global financial system functioning does not stop at the borders of the US. The “Dodd-Frank Wall Street Reform and Consumer Protection Act” has just produced the first ever “audit” of the US central bank. It reveals that in the period between December 2007 and July 2010, the Fed parcelled out $US 16.1 TRILLION in emergency loans to financial entities all over the world. Almost half of this - a total of $US 7.75 TRILLION - was loaned to four US banks. They were Citigroup, Morgan Stanley, Merrill Lynch and the Bank of America. In July 2010 (the cut off date for this “audit”), total US stock market capitalisation was $US 15 TRILLION. The Fed provided about half of that.

This inflationary explosion is unprecedented in any era. It represents the biggest ever effort to rescue a debt-based system from the ravages caused by its own debt issuing excesses. It has, at best, provided a “remission” for global paper markets. The cost has been devastating for REAL economies everywhere.

A cancer patient who goes under the knife gets the malignant disease physically removed. If all traces of the malignancy are removed, the patient will recover. If all goes well, the recovery will be permanent with no “remissions”. A life-threatening malignancy is NOT fought or cured by doing everything possible to increase its power and potency. Yet that is what financial authorities in the US and everywhere else have been doing in regard to the life blood of their economies. As this stark fact becomes ever clearer, Washington DC and Wall Street stand helpless before the fact that they can only cure the economy at the cost of killing the financial system which is feeding on it. It’s that simple.

Fed Keeps the Bailout Bucket Bailing

from MyBudget360:


The Federal Reserve is primarily concerned with one thing and that is to protect the interests of the banking industry.  The Fed has no desire or need to protect the underlying economy.  If they can get away with allowing banks to jump from one bubble to another they will do so.  The success of the overall economy is only consequential if it aligns with the deeper interests of the banking cabal.  This weekend former Fed Chair Alan Greenspan mentioned that simply bailing out Greece was a temporary measure.  When pressed he went back into “Greenspeak” and rambled on in his typical obtuse language.  The reason why global banks fear Greece is not because of the country itself, but because the country has billions of dollars in debt that global banks hold.  These banks do not want to pay for their bad bets and would rather shift the cost to the overall population in general.  The Fed balance sheet here in the U.S. is now up to $2.84 trillion, another record that gets no airtime in the press.  The Federal Reserve continues with clandestine bailouts only to protect the interests of the banking elite.

Fed balance sheet reaches $2.84 trillion

The Federal Reserve balance sheet is now up to $2.84 trillion.  The Fed has become the silo for shadow bailouts including bailouts for the commercial real estate industry, toxic residential loans, mortgage backed securities, and even loans that have no business being on its books.  Yet all this is seen as providing more liquidity for the banking system in the country.  Since the crisis started four years ago little benefit has been seen in the underlying economy.  Keep in mind the fiscal stimulus which is a fraction of what the Fed now holds on its balance sheet is what many Americans see on infrastructure projects.  The total amount spent since August of 2008 approximates $550 billion (roughly 3 percent of GDP).  On the other hand the Federal Reserve balance sheet specifically targeted to the banks now is up to 20 percent of GDP.
Of course little is discussed in the press about the Fed balance sheet.  The Federal Reserve has specially focused on bailing out the banking sector and this has worked well.  The too big to fail banks are now larger and profits are back to record levels.  Their biggest success was ripping off the public and more specifically have kept most of their hidden secrets buried deep in the belly of the un-audited Federal Reserve balance sheet.  We know that the Fed is holding $2.84 trillion in various “assets” but what exactly is being held?  They would like the public to believe that only pristine assets are being held in exchange for U.S. Treasuries but in reality the Fed is purchasing every questionable asset under the sun.  The Fed is ignoring the needs of the economy and simply focusing on protecting the interests of the banking elite.
Case and point with commercial real estate

Source:  MIT
Commercial real estate values have plummeted by 50 percent since their peak.  The crash has been monumental and devastating for the industry.  Yet banks have shifted many of these bad loans fixed to CRE and have “temporarily” placed them at the Federal Reserve.  This isn’t a tiny industry.  The CRE sector at its peak reached a nominal value of $6.5 trillion.  Today the value has fallen closer to $3 trillion.  Many of the CRE properties are solidly underwater yet the Fed has given the banks time to figure out ways to stuff their bad loans into the belly of the Fed balance sheet.
The banking system has plenty of money to lend out to the public:

The above chart shows how much money banks currently have that is readily available to lend to the public.  Yet these too big to fail banks would rather keep the funds at the Fed and earn 0.25 percent on the money while they decide what other bubble they will jump into next.  The too big to fail banks have nearly $1.6 trillion in excess money to lend to the American public!  This is money that back in 2007 they claimed they needed to help small businesses and keep credit going.  All of that was a lie and what really was the main purpose of the bailouts was to save the banking industry on the backs of taxpayers.  As the chart clearly shows, the banking system is simply looking for their next big profit machine and all that excess reserves has come from the Fed being friendly with their banking cronies.
Squeezing the working and middle class
The line out of Wall Street banks has now shifted from:

-(2007)  We need money from the Fed to keep money going to American families and small businesses.

And the new line now follows:

-(2011)  We need to cut spending and wages to keep competitive in the global marketplace.

What happened to lending to American families and small businesses, the actual reason for the bailouts?  These financial liars of course will say anything to steal more taxpayer money.  Now it is a narrative of more stealing.  These bankers of course don’t follow that line of cutting their own wages but then again, what do expect from the new oligarchy sponsored by the Fed?
The stats show something very different:

Source:  Mother Jones
I’m glad the middle class battle is now being picked up by more places.  If median household incomes had kept pace with the productivity of the economy the median household should now be earning $92,000 a year instead of $50,000.  As the chart above clearly shows, the vast majority of productivity gains have gone to the top 1 percent who have seen average income soar by over 240% since 1979 while average overall wages for working and middle class families have gone up roughly 10 percent in real terms.
The Fed and its banking cabal would like you to believe that now, everyone needs to live on wages slightly above minimum wage while the pinstriped suit bankers continually squeeze out more and more profits through bailouts, rip offs, financial alchemy, or simply by robbing taxpayers.  This is the new business model.  The Federal Reserve has failed its mission in many facets because when push comes to shove it is willing to sacrifice the economy for the sake of the elite banking sector.  Banks should become like a utility and strictly regulated with force.  Commercial and investment banking should be completely split.  Hedge funds should receive no special privileges especially when many make money by creating investments that sink the economy and also receive bailouts thanks to political connections.  You wonder why unemployment is still too high and wages continue to fall?  Look no further than the beast that is the Federal Reserve.

Fed's True Purpose: Permanent Debt and Wall Street Bailouts

This is amazing. This chart  from Tyler Durden at Zero Hedge blog shows (in red) the Fed purchases of US debt, and the stock market price (in black) response.

Here's how it happens. They call this "quantitative easing".
1) The big banks buy the US debt. The Fed calls them "primary dealers", but they are the same "too big to fail" banks that we were forced to bail out. The banks draw interest from the US treasury -- OUR tax money.
2) The bailed-out banks then "park" the treasuries at the Fed.
3) After a few days or weeks, the banks "sell" the treasuries to the Fed.
4) The Fed gives them cash for those treasuries. But the banks continue to draw the interest.
5) The banks buy stocks, commodities, and more treasuries with the cash. Prices go forever higher.

The Fed swears that this is prosperity. It's really just permanent debt and high inflation!

Is there any difference between this process and the Fed just printing more dollars to buy the debt? Here's the slight difference:

If they just "monetize the debt", the debts are paid off and no one gets the interest. If they use quantitative easing, WE pay taxes to pay INTEREST on the debt! It's the same thing, except that the banks get paid hundreds of billions in interest payments every year from OUR pockets. This is their compensation for creating trillions in bad debt, taking undue risk, and sticking it to the taxpayers? They get bailed out of the mistakes, and PAID to do it?

So why not just monetize the debt? At least that way, we don't have to pay $300 billion in interest every year! This proves that the Fed's real razon d'etre is to keep us permanently in debt and pay the banks, NOT to create jobs or grow the economy.

Escalating Europe's Bailout Bonanza

from WSJ:

BERLIN—The euro zone's sovereign debt crisis escalated Friday as the market homed in on Spain as another potential weak spot, leaving officials scrambling to quell investors' fears.
Spanish Prime Minister Jose Luis Rodriguez Zapatero moved to dispel the growing anxiety surrounding the country's fiscal position Friday, saying there was "absolutely" no chance the euro zone's fourth-largest economy would seek a bailout from the European Union. But his attempt to calm the markets had little effect, with the euro tumbling and the selloff in Spanish and Portuguese sovereign bonds continuing.
"If we continue to see the recent trend in Spanish bond yields then the crisis is going to be taken to a completely new level, as Spain accounts for approximately 11.7% of euro-zone [gross domestic product] which is pretty much double the figure of Ireland, Portugal and Greece [combined]," said Gary Jenkins, head of fixed-income research at Evolution Securities.
Sparking Friday's markets turmoil was a report in Friday's Financial Times Deutschland, which quoted unnamed German finance ministry officials as saying an aid package for Portugal would reduce the chances that Spain would also need a bailout.
The Portuguese and Spanish governments, the European Commission and Germany's finance ministry all denied the report, saying pressure wasn't being placed on Portugal to seek help. "It's absolutely, completely false—every reference for an aid plan for this country. It has neither been asked for and neither have we suggested it. It is absolutely false," said European Commission President Jose Manuel Barroso, a former Portuguese prime minister.
But the report still caused the euro to tumble against the dollar to $1.3252 from $1.3355 late in New York Thursday.
The yield premium that investors demand to hold 10-year Portuguese sovereign bonds rather than German bunds rose 0.3 percentage points to 4.35 percentage points, according to Tradeweb, while the spread between Spain's 10-year bonds and bunds spread rose to a fresh euro-era record high of 2.67 percentage points. The spread later recovered to 2.59 percentage points, still 0.07 percentage points higher than Thursday.

More Bank Bailoluts Coming?

And I thought the recession was over and we were in recovery!

Taxpayer Bailouts Continue Rising, Reach $1 Trillion

from Fox Business:

With little fanfare, the U.S. government has rapidly become the nation’s top backer of mortgages that require little or no money down, with taxpayer guarantees on them surpassing $1 trillion earlier this year, a FOX Business analysis shows.  

“Zero down” mortgages as high as $1 million have been backed by the Department of Veterans Affairs, which by law offers most of its loans with no down payment required. Such “no money down” jumbo loans were approved in higher-cost housing markets, VA officials said. The average VA loan is $207,000.

The Federal Housing Administration alone has expanded loan guarantees to $865 billion in June, including some refinancings of existing loans – almost double the 2007 level -- according to an agency report.

Such low- or no-down-payment loans, along with falling interest rates, have helped millions of low- and moderate-income homebuyers who might otherwise not have gotten a loan. But some housing-finance experts warn “affordable” mortgage programs at the VA, FHA and Department of Agriculture could be laying the groundwork for another housing crisis -- and additional taxpayer bailouts.

“You could have any number of things that trigger high default rates, and the risk on those loans is entirely with the federal government,” said Edward Pinto, a housing consultant and former Fannie Mae executive. “It's inevitable that government insurance programs are going to hit the wall at some point.” 

The Treasury Department has already pumped $145 billion into failed mortgage giants Fannie Mae and Freddie Mac, which generally have insured traditional “prime” loans requiring a 20% down payment and which themselves own or guarantee about $5 trillion in mortgages. 

Hundreds of thousands of the low/no-down-payment mortgages are already in default or foreclosure, most of them at the FHA, which is scrambling to avoid a bailout. 

And though officials insist that, to protect taxpayers, lending standards are tighter than ever, government auditors in September reported slack loan underwriting at the USDA’s “no money down” mortgage program that aids rural homebuyers. 

Regardless, Congress and the White House, under both the Bush and Obama administrations, have supported significant expansions of the FHA, VA and USDA programs. Officials say they’re necessary to provide mortgage financing in tight credit markets and to help bolster the shaky housing sector. 

“Home prices were in a free-fall” a year ago, FHA Commissioner David Stevens said. “Our ability to step in, in a counter-cyclical way, has been absolutely fundamental to stabilizing home values.” 

Collectively, the FHA, VA and USDA now insure about eight million home loans. They were underwritten by commercial banks and other lenders; the agencies pay them principal and interest when a homeowner doesn’t. The agencies charge homebuyers upfront fees of 2% or so to help finance their programs.

The FHA also usually requires a minimum down payment of 3.5% and, unlike the other programs, adds a premium of about 0.5% to homeowners’ monthly payments to also cover costs. 

Borrowers in all three programs must meet certain income, credit and debt standards to qualify. FHA and VA loans limits are higher – maxing out at $1.1 million in a handful of isolated high-cost counties – while USDA loan limits are lower. 

Historically, the programs’ guarantees have expanded and contracted with recessions and recoveries, depending on how active private lenders are in mortgage markets. 

During the recent housing bubble, banks, mortgage lenders and investors made sure homebuyers got plenty of easy loans – with the now-infamous, non-traditional “subprime,” “Alt-A” and “Option ARM” loans, to name a few.  

But when the bubble popped, stunned private lenders, facing big losses, pulled back. Anxious politicians stepped in, expanding the FHA, VA and USDA programs to new highs, so constituents could keep buying homes and the housing industry could keep workers working. Policymakers also raised loan limits, to allow the agencies to insure bigger mortgages and expand their portfolios even more.  

Real estate brokers, homebuilders and mortgage lenders have consistently lobbied for the moves.  

The FHA program is the largest of the three. VA guarantees outstanding have been steady at about $200 billion annually, even during the housing bubble. But the Administration projects they will hit $293 billion by next year.   

“We’ve seen a dramatic increase in originations,” said Mike Frueh, a VA mortgage program official. He added that VA loans are for “young men and women who have served their country.”  

USDA loan guarantees outstanding have nearly tripled, to $47 billion currently, from $17.1 billion in 2007, according to a department official. The VA also operates a $10 billion-plus program that makes direct loans to lower-income rural buyers with interest rates subsidized to as low as 1%. 

“We are pretty much the only game in town” for rural homeowners seeking mortgages now, said the USDA official, who agreed to discuss his department’s program on the condition he not be identified. 

In the first quarter of 2010, the FHA and VA alone insured $56 billion in new “low/no money down” home loans, according to Inside Mortgage Finance. They accounted for nearly half of all new mortgages underwritten by lenders in the quarter, including those requiring traditional 20% down payments. That’s up from less than 10% of all new loans before the housing bubble popped in 2007. 

The Obama Administration projects loan guarantees at the FHA, VA and USDA will grow by another $182 billion in fiscal 2011. 

Between Fannie, Freddie and the agencies, the federal government is now guaranteeing about 95% of all new mortgages, including refinanced loans, according to Inside Mortgage Finance. 

“At today’s very low 30-year mortgage rates, banks bear too much interest-rate risk” to assure loans are profitable for lenders long-term, said Bob Davis, executive vice president at the American Bankers Association. “The choice is either to make no loans, or make loans guaranteed (by) Fannie, Freddie, FHA, VA or USDA programs.” 

As with Fannie and Freddie, defaults and foreclosures in the agency programs have been rising, mainly due to continued high unemployment, generating growing loan losses. 

The Mortgage Bankers Association reports that for the FHA, “seriously delinquent” home loans – those more than 90 days past due or in foreclosure – rose to 9.1% in the first quarter of 2010, up from 5.3% in the first quarter of 2007. Seriously delinquent VA loans doubled to 5.3% over the same period.  

The association doesn’t break out USDA loans, but a USDA presentation obtained by Fox Business shows foreclosures in its guarantee program rose to about 4% in April, from about 3% in early 2007.

By comparison, seriously delinquent “prime” mortgages with standard 20% down payments hit 7.1% in the first quarter of the year, up from about 1% three years ago, according to the MBA. For “subprime” loans—generally mortgages with lower down payments at higher interest rates and fees made to borrowers with poorer credit histories -- the rate was 30.2%, up from 8.3% in 2007. 

Of the three programs, the FHA faces the most serious financial challenges because of its size and underwriting history. It insured piles of dicey loans in 2005, 2006, 2007 and 2008 that have been going bad. Last year, an independent auditor found a $12.8 billion shortfall in the FHA’s Congressionally-mandated capital reserve fund. 

The agency insists its finances are sound, at least for now. To help it avoid a taxpayer bailout, it has raised upfront loan fees, tightened standards for borrowers and lenders, and has asked Congress for the authority to raise premiums in homeowners’ monthly payments. 

“At this point…there’s no taxpayer bailout,” FHA’s Stevens said. “We'll do an actuarial (analysis) at the end of the year…We’ll see how the fund is looking at that time. I can tell you factually, right now, that our portfolio reserves are growing. They were forecasted to be dropping, but they are actually increasing.” 

But Stevens acknowledged FHA’s financial future depends on housing prices, which have dropped about 30% since the housing bubble popped, according to the S&P/Case-Shiller Home Price Index. 

“If we stabilize the markets and begin to recover, that (FHA) portfolio can begin to look a lot better,” he said. “If the markets don't recover as quickly, then there's additional loss risk to FHA. But at this point, all forecasts say no.” 

Pinto, the former Fannie Mae executive, believes the FHA faces “tens of billions” in losses within several years. “They’ve bought themselves some time,” he said, with recent operating changes as well as low interest rates and expansion of its portfolio, which generates income.   

VA officials attributed the lower default and foreclosure rates in their program to adherence to strict lending standards and appraisal requirements, homeowner counseling programs and mortgage modifications, when appropriate. VA officials said they make 30,000 “contacts” each month -- phone calls, emails and more -- to help financially struggling veterans. 

Since 1992, when the department began tracking its financing, the program has been operating without requiring extra funding over its regular annual appropriation, which is budgeted at $191 million in fiscal 2011, officials said.  

The USDA official made similar comments about his department’s program. But the department projects $193 million in losses this year, three times the losses it reported in 2007. 

Also, government auditors last year criticized a $10.5 billion expansion of the USDA program included in the Administration’s stimulus package.  

The auditors’ comments echoed criticisms of some mortgage lending practices during the housing bubble: Among other things, they found that the agency failed to require lenders to submit “documentation to support borrower loan eligibility,” “noncompliance” by field staff and lenders with program debt requirements, and “insufficient lender oversight” of mortgage brokers participating in the program. 

The department “generally agreed” with the findings, the audit report said, and proposed “corrective actions” to fix the problems.   

Stevens says that he thinks that at “the end of the day, taxpayers were at risk one way or the other,” with potential losses in expanding FHA, VA and USDA guarantee programs--or more losses in home values absent the aggressive government intervention in the housing market. 

“Had the Administration not stepped in fundamentally…the outcome would have been far worse, without question,” Stevens said. 

Stevens also said the Administration will contract his and the other programs, as well as reform Fannie and Freddie, once housing markets heal. 

“This administration is completely committed…to having a balanced financial services market where private capital re-emerges,” he said. “We’re doing a lot of things to try to head in that direction.” 

Pinto is skeptical. 

“Are they really going to back off on this? They say they are--Dave Stevens says he will, and he means that,” Pinto said. “But will Congress let him? Will the homebuyers let him? Will the Realtors let him? Because at the end of the day, the homebuilders and the Realtors like leverage—they like low down payment loans. And they’re going to be loath to give them up.”

Fed Official Warns of Risk to U.S. of European Bailout

WASHINGTON (AP) -- Europe's debt crisis poses serious risks to the unfolding economic recoveries in the United States and around the globe, a Federal Reserve official said Thursday.
Federal Reserve Governor Daniel Tarullo, in remarks to a House subcommittee, said the timing of Europe's problems on the heels of the global financial crisis is a "potentially serious setback."
If the crisis were to crimp lending and the flow of credit globally, triggering more financial turmoil, that would endanger both the U.S. and global recoveries, he said.
"Although we view such a development as unlikely, the swoon in global financial markets earlier this month suggests it is not out of the question," said Tarullo.
As he testified, Wall Street took another nosedive on European debt fears. The Dow Jones industrial average was down 376 points when the market closed.
In a worst case scenario, financial turmoil "could lead to a replay of the freezing up of financial markets that we witnessed in 2008," he said. That contributed to the worst global recession since the 1930s.
For now, Tarullo said there are good reasons to believe U.S. banks and financial institutions can withstand some fallout from European financial difficulties.
In the past year, the Fed has pressed the biggest U.S. banks to raise additional capital, giving them a stronger cushion against potential losses in the future. The direct effect on U.S. banks of losses stemming from exposure to overextended governments in Greece, Portugal, Spain, Ireland and Italy "would be small," he said.
Almost all of the U.S. exposure is held by 10 large bank holding companies, Tarullo said. Their balance sheet exposure of $60 billion accounts for only 9 percent of the core capital that regulators value the most, known as Tier 1 capital. He didn't identify those banks.
However, if problems were to spread more broadly through Europe, U.S. banks would face larger losses as the value of traded assets dropped and loan delinquencies mounted. U.S. money market mutual funds and other institutions, which hold a large amount of commercial paper and certificates of deposit issued by European banks, would likely also be affected, he said. Commercial paper is an important short-term financing mechanism companies rely on to pay for salaries and supplies. It practically dried up during 2008 financial crisis.
Tarullo said a moderate economic slowdown across Europe would slow export growth, weighing on the U.S. economy "by a discernible, but modest extent." However, a deep contraction in economic activity in Europe -- along with severe financial problems -- "would have the potential to stall the recovery of the entire global economy."
To contain the European crisis, the Fed on May 9 agreed to supply European central banks -- and the Bank of Japan -- with much-in-demand dollars in return for foreign currencies. The "swap" arrangements were aimed at easing short-term financing strains.
European banks need dollars to lend to companies across the continent. European companies that have operations in the U.S. pay their employees in dollars and buy raw materials with the U.S. currency. Also, oil and other commodities are priced in dollars around the world.
Under the swap program, Tarullo said the European Central Bank will repay a $9.2 billion loan to the Fed on Thursday. Tarullo said the ECB requested a new $1 billion loan and the Bank of Japan wanted $200 million. That makes $1.2 billion outstanding under the swap program. Federal Reserve filings haven't yet been updated to reflect the new figures, a Fed spokeswoman said.
Tarullo said the Fed isn't considering taking other relief actions.
However, a growing number of economists now believe that the Fed will keep interest rates at record lows well into next year, or possibly into 2012, to help protect the United States from fallout due to the European crisis.

EU Kicks the Can With Nearly $1 Trillion Package

European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases as they spearheaded a global drive to stop a sovereign-debt crisis that threatened to shatter confidence in the euro.
Jolted by last week’s slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.
The rescue package for Europe’s sovereign debtors comes little more than a year after the waning of the last crisis, caused by the U.S. mortgage-market collapse, which wreaked $1.8 trillion of global credit losses and writedowns. Under U.S. and Asian pressure to stabilize markets, Europe’s governments bet their show of force would prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro might break apart.
“Europe wants to give the impression that they are not dealing with the crisis on a piecemeal basis and are addressing it in a comprehensive fashion,” Venkatraman Anantha-Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore, said.
“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” Anantha-Nageswaran also said.
The euro headed for its biggest two-day rally since March last year, climbing 1.4 percent to $1.2930 as of 2:46 p.m. in Tokyo after advancing on May 7 on forecasts an agreement would be reached over the weekend.
Asian stocks also rallied, with Japan’s Nikkei 225 Stock Average rising 1.5 percent and the MSCI Asia Pacific Index up 1.3 percent. Futures contracts on the U.S. Dow Jones Industrial Average gained 243 points to 10,578.
“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after markets punished inaction last week.
ECB policy makers said they will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.
“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”
Treasuries tumbled on investors’ increased appetite for risk, with yields on benchmark 10-year U.S. notes rising to 3.57 percent from 3.43 percent at last week’s close. German bunds opened lower, sending 10-year yields up about 12 basis points.
The steps came after failure to contain Greece’s fiscal crisis triggered a 4.1 percent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18.
The ripple effect in the U.S., including a brief 1,000- point drop in the Dow Jones Industrial Average on May 6, prompted President Barack Obama to call German Chancellor Angela Merkel and French President Nicolas Sarkozy to urge “resolute steps” to prevent the crisis from cascading around the world.
Under the loan package, euro-area governments pledged 440 billion euros in loans or guarantees, with 60 billion euros more in loans from the EU’s budget and as much as 250 billion euros from the International Monetary Fund.
“They will have bought themselves a significant amount of time to do the right thing,” said Barry Eichengreen, an economics professor at the University of California, Berkeley.
Markets worldwide are reeling from Europe’s debt saga. Gold rose to a near-record of $1,214.90 an ounce in New York last week, and the MSCI World Index of equities dropped to a three- month low. Investors fleeing European markets parked money in U.S. Treasuries, pushing the 10-year note yield down 23 basis points to 3.43 percent.
In a step that skirts EU rules barring direct central bank lending to governments, the ECB said it will conduct “interventions” to ensure “depth and liquidity” in markets. The purchases will be sterilized, meaning they won’t increase the overall money supply in the financial system.
“This sets a precedent for the rest of the life of the Central Bank and will have likely surprised even the most seasoned observers,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “While the ECB’s intervention might attract bad press regarding its mandate and independence, we believe that this was necessary to short circuit the negative feedback loop which was getting more and more threatening for the global economy. ”

Greece Bailout Is Insufficient, Will Fall Short

from WSJ:
BRUSSELS—The €110 billion ($147 billion), three-year bailout offered to Greece by euro-zone countries and the International Monetary Fund won't be enough to cover Greece's costs, an examination of Greek financial figures shows, setting Europe up for more tough choices if private markets don't start lending again.
The bailout announced here over the weekend will solve one pressing problem: Greece will have enough cash to repay an €8.5 billion bond that comes due in two weeks. But the bailout package is based on assumptions that by the end of 2011 Greece will be able to borrow again from capital markets.

Federal Appeals Court Forces Fed to Reveal Bailout Recipients

March 19 (Bloomberg) -- The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.
The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.
The Fed had argued that it could withhold the information under an exemption that allows federal agencies to refuse disclosure of “trade secrets and commercial or financial information obtained from a person and privileged or confidential.”
The U.S. Freedom of Information Act, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”

Social Security Is Insolvent NOW!

from Yahoo Finance and Fortune Mag:
Don't look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.
A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.
Instead of helping to finance the rest of the government, as it has done for decades, our nation's biggest social program needs help from the Treasury to keep benefit checks from bouncing -- in other words, a taxpayer bailout.
No one has officially announced that Social Security will be cash-negative this year. But you can figure it out for yourself, as I did, by comparing two numbers in the recent federal budget update that the nonpartisan CBO issued last week.
The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).
This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.
Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn't provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.
It would have been a lot simpler to fix the system years ago, when we could have used Social Security's cash surpluses to buy non-Treasury securities, such as government-backed mortgage bonds or high-grade corporates that would have helped cover future cash shortfalls. Now it's too late.
Even though an economic recovery might produce some small, fleeting cash surpluses, Social Security's days of being flush are over.
To be sure -- three of the most dangerous words in journalism -- the current Social Security cash deficits aren't all that big, given that Social Security is a $700 billion program this year, and that the government expects to borrow about $1.5 trillion in fiscal 2010 to cover its other obligations, about the same as it borrowed in fiscal 2009.
But this year's Social Security cash shortfall is a watershed event. Until this year, Social Security was a problem for the future. Now it's a problem for the present.

Goldman Favored in Bailouts

Jan. 28 (Bloomberg) -- Goldman Sachs Group Inc., one of the biggest recipients of funds from the U.S. bailout of American International Group Inc., was seen by the public as favored by regulators, according to an internal Federal Reserve Bank of New York e-mail.
The public perception was a reason to reject a December 2008 media request for the names of securities purchased from banks during AIG’s rescue, according to the e-mail released yesterday. If the names of the assets were released, the banks, including Goldman Sachs, would be identified as beneficiaries, New York Fed employee Danielle Vicente wrote in the Dec. 4, 2008, e-mail to Fed counsel James Hennessy.
The New York Fed has said that releasing the names of banks that were paid to tear up $62.1 billion in AIG guarantees could hurt the insurer and its counterparties. The internal e-mail, obtained this month by a House oversight committee, indicates Vicente was also concerned that the AIG rescue would be viewed unfavorably if it was known that Goldman Sachs and non-U.S. banks received funds.
“A major U.S. counterparty was Goldman, which has already been seen as favored by the Fed/Treasury in the public’s eye,” Vicente wrote. Regarding the non-U.S. banks, “it would be hard to sell the public on U.S. funds to buy foreign entities out of AIG risk.”

More Fannie Failure

Another taxpayer-funded bailout for Fannie:

NEW YORK (Reuters) - Fannie Mae, the largest provider of U.S. home mortgage funding, on Thursday reported a $14.8 billion quarterly net loss that it said would force it to go to the U.S. Treasury trough a third time for money to stay in business.

The company noted a "significant uncertainty" of its long-term financial health in reporting its eighth consecutive quarterly loss, which illustrates its struggle to make money in the face of rising defaults and pressure to do more to stabilize the housing market.

Fannie Mae and rival Freddie Mac have become more crucial to the nation's housing system since 2007 as the financial crisis sealed off other sources of loan funding. The government last September seized the congressionally chartered companies to ensure that they would continue supporting housing while taking stiff losses. The government promised to inject up to $400 billion of capital.

Washington-based Fannie Mae said its regulator requested $10.7 billion from the Treasury to erase a deficit in its net worth, bringing total draws under a senior preferred stock purchase program to $45.9 billion

"Cash for Clunkers" - Just More Redistribute the Wealth

THESE FAUX PROGRAMS JUST RE-DISTRIBUTE JOBS BETWEEN SECTORS

What the media often overlooks with these fabricated programs is that both the giveaway money AND the money consumers spent on those cars will be money that will NEVER be spent elsewhere on other products. It just sucks the life out of other sectors of the economy, while forcing workers in those other sectors to fund the programs that are sucking them dry. Whether those funds are cannibalized from purchases that would have been made on television sets, computers, recreational vehicles, furniture or furnaces for the house, or new shoes for the kids, will never be acknowledged by the politicians or their complicit media.

This cash for clunkers program is just UAW bailout #2 -- or is it #3 -- or #4? It funnels resources into the auto industry that would have provided jobs elsewhere instead!

But the jobs that are LOST by the "out-of-favor" (non-union) sectors, as these funds are reallocated by government edict from one sector to another are a certainty, even while the politicians applaud themselves for what they term "success" at these re-allocations.

And the administrative expenses for those programs are just wasted and unproductive money, too. I just read yesterday that many administrative costs rise as high as 80% of the available funding in some government programs intended to serve the poor. The poor benefit only marginally. They are its greatest victims, not its beneficiaries! The politicians benefit greatly by, in essence, buying votes!

It gradually, but inevitably, saps the vitality from the economy, causing more and more lost jobs and economic stagnation!

The $23.7 Trillion Price Tag

The U.S. Inspector General said today that the total bailouts could cost the U.S. $23 trillion. This is stunning, especially since the Inspector General is a non-partisan officer of the U.S. government.

from Politico.com:

A series of bailouts, bank rescues and other economic lifelines could end up costing the federal government as much as $23 trillion, the U.S. government’s watchdog over the effort says – a staggering amount that is nearly double the nation’s entire economic output for a year.

If the feds end up spending that amount, it could be more than the federal government has spent on any single effort in American history.

For the government to be on the hook for the total amount, worst-case scenarios would have to come to pass in a variety of federal programs, which is unlikely, says Neil Barofsky, the special inspector general for the government’s financial bailout programs, in testimony prepared for delivery to the House oversight committee Tuesday.

The Treasury Department says less than $2 trillion has been spent so far.

Still, the enormity of the IG’s projection underscores the size of the economic disaster that hit the nation over the past year and the unprecedented sums mobilized by the federal government under Presidents George W. Bush and Barack Obama to confront it.

In fact, $23 trillion is more than the total cost of all the wars the United States has ever fought, put together. World War II, for example, cost $4.1 trillion in 2008 dollars, according to the Congressional Research Service.

Even the Moon landings and the New Deal didn’t come close to $23 trillion: the Moon shot in 1969 cost an estimated $237 billion in current dollars, and the entire Depression-era Roosevelt relief program came in at $500 billion, according to Jim Bianco of Bianco Research.

The annual gross domestic product of the United States is just over $14 trillion.

Treasury spokesman Andrew Williams downplayed the total amount could ever reach Barofsky’s number.

“The $23.7 trillion estimate generally includes programs at the hypothetical maximum size envisioned when they were established,” Williams said. “It was never likely that all these programs would be ‘maxed out’ at the same time.”

Still, the eye-popping price tag provoked an immediate reaction on Capitol Hill. “The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn’t even imaginable,” said Rep. Darrell Issa (R-Calif.), the ranking member of the House Oversight Committee. “If you spent a million dollars a day going back to the birth of Christ, that wouldn’t even come close to just one trillion dollars – $23.7 trillion is a staggering figure.”

Congressional Democrats say they will call for Treasury to meet transparency requirements suggested by the inspector general, said a spokeswoman for the Oversight committee. “The American people need to know what’s going on with their money,” said committee spokeswoman Jenny Rosenberg.

In his prepared remarks, Barofsky writes: “Since the onset of the financial crisis in 2007, the Federal Government, through many agencies, has implemented dozens of programs that are broadly designed to support the economy and financial system. The total potential Federal Government support could reach up to $23.7 trillion.”

The comment comes in the context of a quarterly report to Congress by the special inspector general. Barofsky will testify Tuesday before the House Committee on Oversight and Government Reform. The office of the special inspector general was created to serve as an auditor of the federal bailout by the same legislation that launched the TARP program itself.

Originally, TARP was intended, Barofsky writes, to facilitate “the purchase, management, and sale of up to $700 billion of “toxic” assets, primarily troubled mortgages and mortgage-backed securities.”

But that plan was soon rejected, and the TARP instead became a grab bag of bailout initiatives, including bailouts for GM, Chrysler and auto parts suppliers as the federal government struggled in real time to contain a spiraling economic disaster.

Barofsky reports that TARP has come to include 12 separate programs that include a total of as much as $3 trillion, “including TARP funds, loans and guarantees from other agencies, and private money.” Of the initial $700 billion allocated by Congress, Barofsky found that the Treasury has so far announced how $643.1 billion will be spent, and it has actually spent $441 billion as of June 30.

Barofsky’s calculation of a $23 trillion figure took into account a wide-ranging group of federal programs set up by disparate agencies within the federal bureaucracy.

The special inspector general counted approximately 50 initiatives or programs launched since 2007 to fight the economic collapse.

The Federal Reserve, he found, has increased its balance sheet from $900 billion to more than $2 trillion, and Barofsky estimated that the total amount of support to the economy by the fed is at least $6.8 trillion, because it is exposed to significant losses if many of the assets guaranteed by the Fed deteriorate in value.

The FDIC, Barofsky writes, has contributed $2 trillion in “new gross potential support.”

The Federal Housing Finance Agency – “under whose auspices fall the Government Sponsored Enterprises such as Fannie Mae [and] Freddie Mac,” – has effectively provided more than $6 trillion in gross potential support.

Treasury itself, Barofsky concludes, has contributed nearly $4 trillion of potential support to the economy beyond the TARP program itself.

And Barofsky points out the at the non-TARP programs, which are far larger than the TARP itself, do not come with the strings that the high-profile TARP money itself comes with, including executive compensation, and they don’t necessarily require congressional approval. And beyond the ability to tally their costs, Barofsky has no authority as an auditor over the non-TARP programs.

The hearing before the House Oversight Committee will be held at 10:00 a.m. Tuesday in room 2154 Rayburn House Office Building.