Fed Man Says: STOP!

Bank Stocks Rally on Fed Move
Tuesday March 11, 11:23 am ET
By Dan Seymour, AP Business Writer

Bank Stocks Rally As Fed Offers to Swap Super-Safe Treasury Bonds for Mortgage Debt

NEW YORK (AP) -- Bank stocks spiked Tuesday after the Federal Reserve offered to swap $200 billion of ultra-safe Treasury bonds for some of the troubled investments roiling Wall Street.

The offer is designed to make it easier for banks to raise cash. By temporarily trading no-risk Treasurys for mortgage bonds that have become toxic on Wall Street, the Fed is giving banks collateral they can use to borrow money.

Over the last few months, lenders have developed a distaste for risk and uncertainty, and numerous markets where banks typically raise cash have frozen up. It is easy to borrow money using Treasury debt as collateral because the U.S. government is considered the most creditworthy borrower in the world.

"It takes a lot of the pressure off the short-term funding side of the major brokers," said Sanford Bernstein analyst Brad Hintz, who used to be chief financial officer of Lehman Brothers Holdings Inc. "What the Fed is doing is attempting to break the back of uncertainty in the repo market and ensure that no major financial institution goes down."

Hintz said a bank failure today would be far more problematic than it would have been 20 years ago. Through a complex series of contracts and swaps, Wall Street has created a nexus of interconnected risk, he said. The Fed needs to ensure no banks go bankrupt because they are so dependent on one another, he said.

Shares of investment banks, which were clobbered by a seizure in certain corners of the bond market Monday, recovered much of their value Tuesday.

Lehman Brothers climbed almost 7 percent, while Morgan Stanley, Goldman Sachs Group Inc., JPMorgan Chase & Co., Merrill Lynch & Co., and Citigroup Inc. all spiked more than 4 percent.

The Philadelphia Stock Exchange KBW Bank Index, which tracks 24 banks and lenders, surged nearly 5 percent. The dollar jumped, and "safe havens" such as gold and Treasury bonds, which investors have been flocking to in order to shelter their investments from the credit crisis, posted declines that have been rare in 2008.

Douglas Peta, market strategist at J. & W. Seligman & Co., said he is not convinced the money banks borrow will be put to good use.

Banks are struggling, and Peta said rather than lending the capital they raise the companies may use it to bolster their own balance sheets. This is good for the companies themselves, he said, but would not help financial markets.

"That's the equivalent of taking money and stuffing it under the mattress," he said. "What we're looking for is money to be lent."

The Fed has tried to stem the sell-off of a range of debt, particularly home loans, by cutting interest rates.

This approach has not worked, said LibertyView Capital Management President Rick Meckler, because companies that are borrowing at lower interest rates are still not using it to buy risky investments.

Despite lower interest rates, many lenders are still under pressure to dump their investments to buttress their finances or repay their own lenders. This selling has yanked down prices for many kinds of investments, he said, which in turn forced more selling.

Meckler said by coming up with more creative ways to inject liquidity into financial markets, the Fed will hopefully relieve some of the pressure on lenders to sell their assets.

"You were really in a vicious cycle," he said. "This is an attempt to break that cycle."

The Feds Were After Spitzer Personally

We couldn't make sense of some of the initial facts on the Eliot Spitzer scandal that broke this afternoon. Why was the FBI investigating a common, albeit high priced, prostitution service? Because it crossed state lines? Give us a break. And why was the FBI's Public Corruption department involved? It was juicy gossip of course, but it just didn't make sense at first blush, and the facts were leaking out selectively with heavy detail on what Spitzer did and said, with names and dates and room numbers, but precious little else.

Was there a general investigation going on in Washington DC of public officials? Was the FBI investigating a terrorist link somehow? The news made it sound as though Spitzer stumbled into an ongoing investigation. Ok, but why was the FBI directly involved? Sleeper cells of hookers?

It didn't make sense... until we read this story from ABC News. This story says that Spitzer did not stumble into an ongoing Federal investigation of a prostitution ring. Rather, the Feds were investigating Spitzer and his personal financial transactions at his bank, with no evidence of any crime, other than suspicion of some transactions as reported to the IRS by his bank.

They followed his personal financial transactions at the bank for months until they tumbled to the prostitution ring. They were looking for evidence of bribery. This was no general investigation that happened to nab a governor who was in the wrong place at the wrong time. It appears that the FBI, under the office of the Attorney General was following Spitzer's personal finances, looking for some evidence of wrongdoing. And they definitely found it. What Spitzer did was wrong, especially because it was not all that long ago that he was indicting and sending people to jail for breaking similar laws, and for involvement with organized crime.

Now perhaps we'll see more, much more detail, about this story in coming days. We're not defending anyone here, not at all. And we're sure most citizens of the United States of Amnesia won't care about any of the legal details, but instead will rejoice that another celebrity has shown their sexual missteps. We are not personal fans of Governor Spitzer. We think he fell far short in the investigation and settlements he made with the Wall Street banks as NY Attorney General.

But in the rush to judgement, we'd like to see a full disclosure of all the facts, including the details of how the investigation started, and who started it. We were old enough to read the news during the Nixon administration, and remember well his 'enemies list' and his other abuses of office. We would hate to see that sort of thing coming back into the Justice Department. Its a step in a very, very wrong direction for our republic.

It Wasn't the Sex; Suspicious Dollar Transfers Led to Spitzer
By BRIAN ROSS
ABC News

The federal investigation of a New York prostitution ring was triggered by Gov. Eliot Spitzer's suspicious money transfers, initially leading agents to believe Spitzer was hiding bribes, according to federal officials.

It was only months later that the IRS and the FBI determined that Spitzer wasn't hiding bribes but payments to a company called QAT, what prosecutors say is a prostitution operation operating under the name of the Emperors Club.

As recently as this past Valentine's Day, Feb. 13, Spitzer, who officials say is identified in a federal complaint as "Client 9," arranged for a prostitute "Kristen" to meet him in Washington, D.C....

The suspicious financial activity was initially reported by a bank to the IRS which, under direction from the Justice Department, brought kin the FBI's Public Corruption Squad.

"We had no interest at all in the prostitution ring until the thing with Spitzer led us to learn about it," said one Justice Department official.

Spitzer, who made his name by bringing high-profile cases against many of New York's financial giants, is likely to be prosecuted under a relatively obscure statute called "structuring," according to a Justice Department official.

Structuring involves creating a series of financial movements designed to obscure the true purpose of the payments....

March 10, 2008 It Wasn't the Sex; Suspicious $$ Transfers Led to Spitzer

Is it outlandish to think that some group with a grudge against Spitzer might have some influence with the Administration and the Justice Department?

Are Bush's Big Bankers Fixing To BBQ Eliot Spitzer?
Carpetbagger 'Rangers' Could Be Gunning for Empire State Lawman.
Austin, TX

August 8, 2003 - As the East Coast bankers and financiers who dominate President Bush's 2004 elite fundraising team jet toward Crawford, some probably would rather chuck New York Attorney General Eliot Spitzer on the coals than the cattle that these Pioneers and Rangers will be served first.

Why would Big-Apple bankers travel 1,700 miles to nosh barbecue under a hot Texas sun? asked Texans for Public Justice Director Craig McDonald. Are they recruiting help for their showdown with New York's top cop? Are the New York bankers who dominate Bush's Pioneer and Ranger team paying tribute in hopes the Administration will help take Spitzer off the beat?

Hounded by Spitzer, top investment bankers--including new Bush Ranger Stanley O'Neal of Merrill Lynch and new Pioneer James Cayne of Bear Stearns--hosted Bush's most lucrative fundraiser in New York in June. Then 18 financiers made their industry Bush's No. 1 financial supporter last month when Bush disclosed the first 68 elite fundraisers of his reelection campaign. A Texans for Public Justice analysis reveals that the finance industry accounts for one-third of Bush's 32 all-new Pioneers and
Rangers who were not part of this elite team in 2000....

Are Bush's Big Bankers out to BBQ Eliot Spitzer?

Yen to 80 and Euro to 160 against Dollar in "Worst Crisis Since WWII" - Bank of Tokyo

Paul Chertkow, Global Head Foreign Exchange Strategy for the Bank of Tokyo Mitsubishi made these points in an interview on Bloomberg Television.

1. US is in a recession. There is a real risk of a protracted downturn because this is not a typical business slowdown.

2. Interest rates will be cut by more than expected, possibly to 1% by end of June.

3. There is real risk that Mideast Treasuries will trigger a dollar crisis if they break their dollar peg.

4. Larry Summers says 'current crisis worst since WWII' and Chertkow agrees.

5. Foreign ompanies are content to see stronger currencies to relieve high imported commodity prices.

6. Yen down to 90 is realistic with next stop to 80, and 160 for the Euro.

7. Risk is that dollar will fall "well beyond expectations" for most currencies but especially the asian currencies.

8. US "strong dollar policy" is nonsense.

9. US life insurance companies and pension funds have 'a lot of disclosure left' on bad debt.

10. Dollar crisis is 'not inevitable' but cannot see anything to stop it and does not see official intervention as a real possibility at these levels. Thinks the crisis will end if the US Government comes in and underpins the mortgage market directly.

Paul Chertkow - Bank of Tokyo-Mitsubishi on Bloomberg Television

At the Crossroads of the Packaged Debt Financial Crisis

"I went down to the crossroad
fell down on my knees
I went down to the crossroad
fell down on my knees
Asked the lord above "Have mercy now
save poor Bob if you please...

Early this mornin'
when you knocked upon my door
Early this mornin', oh
when you knocked upon my door
And I said, 'Hello, Satan,'
I believe it's time to go."
Robert Johnson, Crossroads and Me and the Devil Blues

Steve Waldman writes an brief but excellent analysis of the Fed's recent actions in his Interfluidity blog here:
Repurchase agreements and covert nationalization

We like it, not just because most of the points agree with the same ones which we have. Its nicely written, compact, concise and to the point. We like his analysis, and found his summation to be exceptionally insightful. We learned a new slant on things from it.

You may object, and I'm sure many of you will, that our little thought experiment is bunk, debt is debt and equity is equity, these are 28-day loans, and that's that. But notionally collateralized "term" loans that won't ever be redeemed unless and until it is convenient for borrowers are an odd sort of liability. Central banks are very familiar with the ruse of disguising equity as liability. Currency itself is formally a liability of the central bank, but in every meaningful sense fiat money is closer to equity.

I do not, by the way, object to nationalizing failing banks. There are (unfortunately) banks that are "too big to fail", whose abrupt disappearance could cause widespread disruption and harm. These should be nationalized when they fall to the brink. But they should be nationalized overtly, their equity written to zero, and their executives shamed. That sounds harsh. It is harsh. One hates to see bad things happen to nice people, and these are mostly nice people. But running institutions with trillion-dollar balance sheets is a serious business. Accountability matters. These people were not stupid. They knew, in Chuck Prince's now infamous words, that "when the music stops... things will be complicated.", and they kept dancing anyway.

But accountability has gone out of style. The Federal Reserve is injecting equity into failing banks while calling it debt. Citibank is paying 11% to Abu Dhabi for ADIA's small preferred equity stake, while the US Fed gets under 3% now for the "collateralized 28-day loans" it makes to Citi. Pace Accrued Interest (whom I much admire), I still think this all amounts to a gigantic bail-out. And that it is a brilliantly bad idea from which financial capitalism may have a hard time recovering. Like a well-meaning surgeon slicing up arteries to salvage the appendix, the Federal Reserve is only trying to help."

We're not so concerned with the nationalization of the banks, as we are with the monetization of more bad debt as the result of the wealth gained by a relatively few insiders through reckless mismanagement and fraud. Although it will be presented as just a small amount for everyone to pay, just the price of a discount coupon, we've learned through the latest debt fraud in Iraq that 100 billion quickly grows to a trillion.

Yes, the world is still willing to take our dollars, our markers, our IOUs. And yes, we can keep pushing the envelope of integrity to see how long they will keep taking it. But like a good reputation, once pushed to the breaking point by serial deceit, our national currency will not keep taking this unscathed, and there is likely a point of no return.

So what ought to be done? By all means, let us continue to mitigate the collateral damage to the innocent that the banks have caused.

But let us also take counsel from the recent words of Tom Hoenig, Kansas City Federal Bank President:

"In conclusion, let me stress again my belief that the response to this crisis should be fundamental reform, not Band-Aids and tourniquets. "

The only way to resolve this is that any government intervention to resolve this must include:

1. A formal reinstatement of the Glass-Steagall restrictions on ALL banks doing business in the US including multinationals. A revocation of 23A exemptions and removal of the Fed's latitude to overrule any written law on their own volition. An end to self-regulation and revolving door government regulation by non-civil service political appointees.

2. A return to the concept of regional and local banks through a reinstatement of laws limiting bank ownership across state lines

3. A national usury ceiling for all interest rates and fees on all debt, both revolving and non-revolving, to prevent banks from perpetuating predatory interest rate schemes based on extending individual state laws.

4. A significant set of Congressional hearings and the appointment of a special prosecutor assigned to investigate, with FBI support, the pervasive frauds in the US financial industry from Enron to Tech to Subprime, with special attention to RICO statutes and individuals as well as corporations. The insiders will seek to offer up some designated patsies. We have to try and go beyond that and strike the root and not just the branches.

The last point deals not with retribution, but restoring accountability and deterrence on this happening again in five or ten years with some new Ponzi scheme. If we take no action it will happen again.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)