S&P Market Indicator Downgrades US Sovereign Debt to aa+

I thought it was interesting that S&P market-derived indicator has downgraded the US sovereign debt to aa+, its lowest level in two years. Further, US credit default swaps are now showing more risk than the Eurozone.

But as the article goes on to say, the risk of a US default is improbable. Long before they reach that point they will pay off the debt through inflation, the monetization of debt. If you think that this is not possible, that they cannot do it, that 'inflation is impossible,' then you are sadly mistaken. They are already doing it, but are trying to limit its impact through aggressive perception management and a variety of accounting gimmicks. It is really remarkable to watch. People cling to what they wish to believe until it sweeps them over a precipice.

Still, there is a message in this market, and I think it is one of selective default, but also a coercion. Those who hold the debt of the US, and its Banks, will seek to rule it, even moreso than they do today.

This is nothing new. Previous generations have fought the same battle, and won. Freedom is not a place to visit, or a thing to be achieved. Freedom is a commitment, a way of life, that will endure only as long as men love it for themselves and their children, more than their weariness, or their fear, or vain comforts.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst yourselves, and when you lost, you charged it to the Bank... Beyond question this great and powerful institution has been actively engaged in attempting to influence the elections of the public officers by means of its money...

You tell me that if I take the deposits from the Bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin. Should I let you go on, you will ruin fifty thousand families, and that would be my sin. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, I will rout you out."

Andrew Jackson on The Second Bank of the United States which was the Central Bank of his day

I would say that there is less risk to the US sovereign debt than there is to the US Constitution.

Wall Street Journal
U.S. Is Riskier Than Euro Zone; So Says CDS Market
By MICHAEL CASEY
MARCH 24, 2010, 4:47 P.M. ET.

NEW YORK -- Something troubling has occurred in the market for default protection on the debt of the world's biggest borrower.

As the folks at Standard Poor's Valuation and Risk Strategies division noted in a research note Monday, the difference between the spread on U.S. sovereign credit default swaps and an equivalent benchmark for AAA-rated euro-zone sovereigns flipped into positive territory March 12. As U.S. CDS spreads expanded to their widest levels in two years, that cross-region gap blew out to 5.7 basis points last Friday before narrowing to 4.7 Tuesday.

Wider CDS spreads indicate that sellers of insurance against a particular issuer's default are charging more for it. In effect, the positive U.S.-versus-euro zone spread means investors think the risk of a U.S. default--however remote--is greater than that on euro-denominated sovereign debt.

So much for the view that low inflation and loose monetary policy make for a rosier debt outlook for Treasurys than for the debt of crisis-hit euro-zone sovereigns.

"We've seen CDS on U.S. Treasurys break with euro CDS before, but never to the degree we have here," said Michael Thompson, head of research for S&P's

Valuation and Risk Strategies group. "If we sit on this precipice for a time, I think a lot of market participants would see this as a bit of a shot across the bow, a bit of a wakeup" for anyone who's complacent about U.S. debt. "

Wouldn't it also challenge U.S. Treasurys' status as the so-called "risk free" benchmark? S&P didn't go there. But the report did say the trend "reflects increasing market anxiety surrounding the U.S.'s credit quality." In other words, a fiscal deficit worth 10% of gross domestic product--in the absence of a clear plan to reduce it -- matters.

My first instinct was to dismiss the trend as an anomaly fueled by the technical quirks of an illiquid sovereign CDS market, where a conflicting array of investment strategies can confuse price signals. Some market participants use CDS contracts to hedge existing positions in underlying bonds, others sell default insurance as an alternative exposure to those bonds, while still more seek to extract arbitrage profits from playing between the two.

What's more, the AAA euro-zone benchmark doesn't reflect bets on a single sovereign's debt but rather a basket of the region's six remaining AAA-rated countries: Germany, France, Austria, Finland, the Netherlands and Luxembourg.

Disentangling its message on default risk could be messy. And what, after all, can a current-day contract on a future Treasurys default tell U.S. when a U.S. breach on its financial obligations is virtually inconceivable? [The government would pay for its debt with inflation long before opting for the blunt instrument of default.]

Yet, notes Mr. Thompson, "there is real money changing hands there [in CDS markets]. And if there is real money changing hands, there has to be real value ... The market is expressing some valuable information."

Short-term moves of a basis point or two can be attributed to technical factors, but such a lasting shift in the two regions' CDS relationship "is not technical," Mr. Thompson said. "I certainly wouldn't ignore it."

Thompson's team also noted that the deterioration in U.S. default swaps meant that S&P's "market-derived signal" dropped to 'aa+,' its lowest level in two years. The historical series for that indicator is based on an established correlation with actual S&P ratings.

There's no indication that S&P's separate ratings division is about to downgrade the U.S. 's vital 'AAA' rating. But over time, ratings analysts cannot stay blind to market signals like this one. As its weighs the stimulus needs of a still-fragile U.S. economy against future risks to debt servicing costs, the U.S. government can't ignore market signals either.

Michael Casey, a special writer with Dow Jones Newswires, writes a regular column about currencies and fixed-income markets. Previously he was Newswires' Buenos Aires bureau chief and before that, assistant managing editor for the U.S. economy, Treasurys and foreign-exchange group in New York.

Chris Whalen: Tim Geithner is a Disaster and Will Be Out by June

"Tim Geithner has no financial skills. The only reason he is there [the Treasury Secretary] is to protect Goldman Sachs."

Interview with Chris Whalen of Institutional Risk Analytics on TheStreet.com

US Treasury Department Official Allegedly Aided and Abetted Banking Fraud (Again)

Darrell Dochow earns $230,000 per year at Treasury in banking regulation. He reportedly gave Indymac some suggestions on cooking their books, and then allowed the exception to the rules to accomplish it. It appears to have been a blatant and obvious accounting fraud.

Mr. Dochow is also the official who presided over the Lincoln Savings and Loan scandal. Having looked into Charles Keating's eyes and seeing him a good man, he reportedly overrode the protests and findings of fraud from the banking experts. After his S&L debacle he was apparently demoted, but brought back into a position of importance under the Bush Administration. All the details on this have not yet been made public.

Mr. Dochow is unlikely to do any prison time, but may lose his job. That is because this is 'criminal with a small c' according to this news report.

When this sort of behaviour becomes criminal with a 'capital C' and when people like Dochow find themselves on the business end of FBI probes and Justice Department indictments at least as serious as the one mounted against Eliot Spitzer and his hooker, we might make some approach to honesty and reform in this country.

Ok, Obama Administration, the buck is on your desk now. Time to take meaningful action to back up the rhetoric.


ABC News, New York
Government regulators aided IndyMac coverup, maybe others
By Brian Ross, Justin Rood, and Joseph Rhee
Friday, January 16, 2009

A brewing fraud scandal at the Treasury Department may be worse than officials originally thought.

Investigators probing how Treasury regulators allowed a bank to falsify financial records hiding its ill health have found at least three other instances of similar apparent fraud, sources tell ABC News.

In at least one instance, investigators say, banking regulators actually approached the bank with the suggestion of falsifying deposit dates to satisfy banking rules -- even if it disguised the bank's health to the public.

Treasury Department Inspector General Eric Thorson announced in November his office would probe how a Savings and Loan overseer allowed the IndyMac bank to essentially cook its books, making it appear in government filings that the bank had more deposits than it really did. But Thorson's aides now say IndyMac wasn't the only institution to get such cozy assistance from the official who should have been the cop on the beat.

The federal government took over IndyMac in July, after the bank's stock price plummeted to just pennies a share when it was revealed the bank had financial troubles due to defaulted mortgages and subprime loans, costing taxpayers over $9 billion.

Darrel Dochow, the West Coast regional director at the Office of Thrift Supervision who allowed IndyMac to backdate its deposits, has been removed from his position but he remains on the government payroll while the Inspector General's Office investigates the allegations against him. Investigators say Dochow, who reportedly earns $230,000 a year, allowed IndyMac to register an $18 million capital injection it received in May in a report describing the bank's financial condition in the end of March.

"They [IndyMac] were able to maintain their well-capitalized threshold and continue to use broker deposits to make loans," said Marla Freedman, an assistant inspector general at Treasury. "Basically, while the institution was having financial difficulty, it kept the public from knowing earlier than it otherwise should have or would have."

In order to backdate the filings, IndyMac sought and received permission from Dochow, according to Freedman.

"That struck us as very unusual," said Freedman. "Typically transactions are to be recorded in the period in which they occur, not afterwards. So it was very unusual."

One former regulator says Dochow's actions illustrate the cozy relationship between banks and government regulators.

"He did nothing to protect taxpayers in losses," former federal bank regulator William Black told ABC News. "Instead of correcting it [Dochow] made it worse by increasing the accounting fraud."

Meanwhile, IndyMac customers who lost their savings are demanding answers and are further infuriated after learning Dochow was also the regulator in 1989 who oversaw the failed Lincoln Savings and Loan, a scandal that sent its CEO Charles Keating to prison.

"He's the person who claimed that he looked into Charles Keating's eyes and knew that Keating was a good guy and therefore ignored all of the professional staff that told him that Keating was a fraud, and he produced the worst failure of the Savings and Loan Crisis at $3.4 billion. Now he's managed more than triple that," said Black, now an economics professor at the University of Missouri in Kansas City, Missouri.

Following the Lincoln scandal, Dochow was demoted and placed into a relatively obscure office, but later, inexplicably was brought back into the Office of Thrift Supervision.

Dochow declined to answer questions from ABC News.

After Ronnie Lopez was killed in Iraq, his mother Elaine invested the life insurance proceeds at IndyMac. She lost $37,000 of it.

"I was hysterical," she told ABC News. "I literally thought I was going to kill myself that day, because I felt so bad that I had let him down. I remember going to his grave and telling him "don't worry, I'm going to get that money back,' and I feel like he was saying, 'Hey, Mom, don't let them take that. I did the ultimate for that.'"

A group of angry investors has started a website, demanding answers on the extent of Dochow's actions.

"It's just the strife and anger," said IndyMac customer Lisa Marshall. "That this Dochow person is still employed. It's unbelievable, it's shocking."

While Dochow could end up losing his job, neither he nor his colleagues are expected to go to prison.

"This is criminal with the small 'c,'" said Black. "No one within the regulatory ranks may go to jail, but they have done the worst possible disservice to the taxpayers of America."