We Can't Handle the Truth?

Paul Volcker was providing testimony to Congress this morning, and it was being covered by Bloomberg television.

Volcker started to 'tell it like it is' and basically laid out the US economic situation in plain and simple terms. We wish we had recorded it. It was 'scathing' to say the least.

To paraphrase, the mathematicians took over with opaque and complex models. The regulators failed. No one likes regulators when times are good, and when times go bad they get all the blame. We had a system fueled by outrageously high compensation, and so the Wall Street firms did not care what they created as long as they could sell it to someone else.

It was starting to get interesting, and then... Bloomberg television cut away so that Betty Liu could tell us how well the stock market was doing, and they never came back.

CNBC was not covering Volcker's testimony. Neither were the C-Spans. CNN? Forget about it.

A friend who was traveling in Europe the past two weeks emailed with the news that 'things are much worse over there and talk of the financial crisis is all over the front pages and people are talking about it." We are in much better shape because no one is talking about it here.

If we had a financial crash and everyone pretended not to notice would it still have happened? We think there are some central planners in the States that would give a resounding 'No.'

So now that Volcker has spoken out, expect the corporate shills and stooges to make snide remarks, and attempt to smear him. This is what they do.

The Consumer Price Index number this morning was a complete fabrication, a farce.

Its time to start noticing, time to stop going with the flow. The flow is heading into madness.

Bloomberg TV cut away just before minute 6 of this excerpt so a clearly disapproving Betty Liu could tell us that the stock market was rallying Mr. Volcker and thank you very much. They never came back or mentioned it again.

Someone sent us a copy of the formal speech which Volcker leafs through on the video. It reads like it was written by staffers and carefully vetted. Very politically correct.

Do yourself a favor and watch the video excerpt. Its only eight minutes long or thereabouts, and its a classic.

The Fed's Balance Sheet - Pulp Fiction

Janet Yellen has been kind enough to put together a very nice chart of the Fed's Balance Sheet showing its degradation in support of the Wall Street banking bailouts. Thanks to CalculatedRisk for spotting it. We were working on a version of this but once again the principle of procrastination has served us well and delivered more time to play Halo 3 with the youngsters.

The Fed has consumed about half its reserves to prevent a domino crash in the financial system, and a probable stock market crash. It would have been rather messy. Before we pin hero medals on the Fed for avoiding it, let's remember who was a central actor in creating the situation we face today, which is only deferred, not cured.

So, 1400 on the SP 500 is what you can buy for 400 billion these days, plus a few hundred billion if you toss in the efforts of Treasury and their friends.

Next step will be to start playing with commercial bank balances if the Fed can start paying interest on them, and of course the direct monetization of debt if they can work out the right working relationship with the Treasury on this that only bends existing statutes which are sufficiently vague to allow for the creation of a pure money machine if bent under duress.

As we have observed on several occasions, the limiting factor on the Federal Reserve will be the value of the dollar and the acceptability of US sovereign debt by enough foreign trading partners to make it meaningful. That spells O-I-L.


FRB H.41 - Factors Affecting Reserve Balances

Moody's Warns on Credit Ratings of MBIA and AMBAC

3:30 ET (Bloomberg) MBIA Bond Default Risks Widen on Warning from Moody's.

Moody's: second lien RMBS woes may dent bond insurer ratings
3:36 PM EDT May 13, 2008

SAN FRANCISCO (MarketWatch) -- Poor performance of second lien residential mortgage-backed securities (RMBS) could impact the credit ratings of bond insurers, Moody's Investors Service said on Tuesday. Bond insurers have significant exposure to second lien RMBS, mainly through guaranties on the securities and, to a lesser extent, through exposure to collateralized debt obligations backed by such assets, the rating agency noted. "Moody's loss expectations for this asset class are higher than previously anticipated, owing to worse-than-expected performance trends," the agency explained. "This could have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk." MBIA shares fell 5% to $9.36 during afternoon trading, while Ambac Financial dropped 7% to $4.03.

Remember how the other day we laughed when MBIA rallied on its tremendous loss and noted the spin being put on the stock by the Wall Street pundits?

A cursory examination of the financials and their context indicates the company is functionally bankrupt, and has to be rescued to remain in business. That is not out of the question of course, but the rally that took it up yesterday was a joke in a dull market.

Well today the wheel turns, and MBIA is being sold off hard on a caution at 3 PM from Moody's about the future of their credit rating, essential to their continued business, and analyst downgrades from this morning.

Under the benign neglect of the Bush Administration in particular Wall Street has become the heart of deception as a way of life, a shame and corrupting influence on the Republic.

May 13, 2008, 4:24 pm
Ratings questions return at MBIA, Ambac
Fortune Magazine

The triple-A ratings at bond insurers MBIA (MBI) and Ambac (ABK) could soon be under scrutiny again. Moody’s said Tuesday that rising losses on bonds backed by second mortgages could hit ratings at insurers that have guaranteed second-lien residential mortgage-backed securities.

“Moody’s now expects 2005 vintage subprime second lien pools to lose 17% on average, 2006 vintage pools to lose 42% on average, and 2007 pools to lose 45% on average,” Moody’s said. “Moody’s loss expectations for this asset class are higher than previously anticipated, owing to worse-than-expected performance trends. This could have material implications for the estimated capital adequacy of financial guarantors most exposed to this risk.”

The comments come a day after MBIA posted a $2.4 billion first-quarter loss but spent much of a two-and-half-hour conference call explaining why it doesn’t believe it will need to come to market to raise more capital. CEO Jay Brown told investors he believes the company can make up a $1.7 billion shortfall relative to Moody’s triple-A capital targets over the next two quarters, through he conceded he doesn’t expect the company to get a stable outlook until house prices bottom out, which he said probably won’t happen till at least next year. The improved outlook may be even further off now, given Moody’s comments Tuesday. “Moody’s intends, in the short term, to assess whether worsening performance in this sector is likely to be material for exposed financial guarantors, and will update the market as appropriate,” the rating agency said.

AP
Ahead of the Bell: MBIA
Tuesday May 13, 9:13 am ET

MBIA edges up in premarket trading, but analyst lowers estimates after 1st-quarter loss

NEW YORK (AP) -- A Friedman Billings Ramsey analyst is cutting his estimates on bond insurer MBIA Inc., pointing to the company's large first-quarter loss and difficult competition.

Steve Stelmach said MBIA's reserves may not be enough to cover deteriorating credit and write-downs, as its losses in the first quarter were larger than expected. He now expects the company to lose $1.89 per share this year. Previously he expected a profit of $2.05 per share. Stelmach now predicts a smaller profit in 2009.

He cut his price target to $13 per share from $16 and kept a "Market Perform" rating on the stock.

The analyst added that competitors like Berkshire Hathaway and Assured Guaranty have not suffered from mortgage and debt issues the way MBIA has.

MBIA said Monday that it swung to a first-quarter loss, but shares rose 4.5 percent. In premarket electronic trading, they gained another 13 cents, to $9.98 from $9.85.