US Financial Markets Make a Mockery of Memorial Day

Today is the last day for the end of month 'window dressing' for May. The SP futures for June are now at 1407. What is provoking this rally? The 'better than expected' GDP number? What justifies this burst of optimistic buying?

The rally on the US equity markets, with the financial sector leading the way, is a distribution of stock in troubled companies to the 'greater fools' whose money is moving out of the US Treasury bonds and into US equities now that they are 'safe' based on analyst recommendations.

Most likely it is not the people themselves buying into this, but the managers of their pensions and savings, the managers of 'other people's money.' There are also huge tranches of public money being supplied by the Treasury and the Fed directly to the banks who are playing these markets actively. If you hold US dollars you are paying a price for this one way or the other.

This is a game being perpetrated by the Wall Street banks and the processes which have been corrupted by them, like the AAA rating being assigned to a barely solvent $3 stock like AMBAC because it is expedient to call worthlessness the highest of quality.

Its a disgrace. Its what is wrong with our country. Its the hallmark of the last two presidential administrations, to shift wealth from the many to insiders, to hand out pardons and tax cuts to the privileged few while the mass of people dumbly accept it while arguing over trivialities provoked by a corrupted press. This is exactly what Thomas Jefferson warned against.

Patriotism is not support for a "single great leader." We do not have Der Fuhrer or Il Duce or some Decider who is above the law, who rules us. We have elected representatives and a limited form of government by the people, for the people, and of the people. Elected representatives are answerable to the people, and the notion of an executive privilege to govern in secrecy is repugnant to our freedom.

If you do not understand the notion of the power residing in the will of the governed under a republic, if you dare to consider the US Constitution 'just a goddam piece of paper' and the president as someone above the law of the land, then you are not a patriot no matter how ostentatiously you drape yourself in the flag.



US and European debt markets flash new warning signals
By Ambrose Evans-Pritchard,
International Business Editor
UK Telegraph
6:40am BST 29/05/2008

The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.

Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.

But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn. (Don't be too concerned. The Treasury and the Fed have a plan to monetize the bad debts, bail out the banking system at the expense of the real economy, and make whores out of all holders of US dollar assets. Trust us on this one. - Jesse)

"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."

Lehman Brothers took writedowns of just $200m on its $6.5bn portfolio of sub-prime debt in the first quarter even though a quarter of the securities had "junk" ratings, typically worth a fraction of face value.

Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said.

The jump in corporate bankruptcies has not yet been picked up by the usual indicators, which tend to lag the market, lulling investors into a false sense of security. The true losses are already known to specialists in the business, said Mr Sels.

The Great Bond Crash of 2008, 2007, 2006, 2005....

As we forecast the great bond crash of 20xx is now underway.

Every year the bond puts in a top early in the year, and then crashes down to a low something in June or July as stock rotations are served up for the small spec, to take on the excess shares that Wall Street wishes to unload as part of its "sell in May and go away" gambit.

And there it is.

Sometimes an intentional shaking of markets can build up feedbacks to the natural frequency of a thing, as Nikolas Tesla demonstrated. If the Wall Street wiseguys keep shaking the national economy, we might be in for a real earth-shaking finish to the year.

Wall Street is an impediment, a drain, a parasite on the real economy.

The banks must be restrained.

Key Corp Increases Loan Loss Estimates One Month after Stating Earnings

KeyCorp raises forecast for loan losses
By John Spence
MarketWatch
9:50 a.m. EDT May 28, 2008

BOSTON (MarketWatch) -- Shares of KeyCorp came under early pressure Wednesday, retreating more than 10% after the regional bank increased its 2008 outlook for loan losses as a result of ongoing credit turmoil and housing-market weakness.

In a regulatory filing, the Cleveland-based company KEY) said it now anticipates net loan charge-offs in the range of 1% to 1.3% for the full year, up from its previous estimate of between 0.65% and 0.9% of average loans.

KeyCorp said it plans to deal "aggressively" with reducing exposure in its residential home-builder portfolio, and sees "elevated" net loan charge-offs in its education and home-improvement loan portfolios.

Several Wall Street analysts cut their profit estimates on KeyCorp in the wake of the news. Some were surprised that the revised outlook for loan losses came so soon after KeyCorp reported first-quarter results.

"While management had previously stated that these portfolios would drive higher loan losses, the major surprise is the degree to which management is increasing its guidance only a month after earnings, reflecting either misjudgment before or a significant deterioration in asset quality," wrote Deutsche Bank analyst Mike Mayo in an investor note. (We can expect to see a lot of these 'surprises' as the insiders continue to slowly sell off stock and bonds to the public. - Jesse)

KeyCorp's shares traded down $2.26 to stand at $19.69 in early action.

In April, KeyCorp reported first-quarter net income that fell 38% from the year-ago period as the company's provision for possible losses on bad loans rose by more than four times. At that time, the company raised its full-year loan-loss estimate to between 0.65% and 0.9%, up from a range of 0.6% to 0.7%.

John Spence is a reporter for MarketWatch in Boston.

NY Fed Creates an Elite 'Special Team' for the Investment Banks

Fed Keeps Watch on Wall St. -- From the Inside
By Neil Irwin
Staff writer
Washington Post
Tuesday, May 27, 2008

In the two months since the government rescue of Bear Stearns, the Federal Reserve has built on the fly a new system of monitoring investment banks, radically redefining the central bank's role overseeing Wall Street.

New York Fed employees are working inside major investment banks every day, alongside the Securities and Exchange Commission staff members who are the firms' main regulators. The Fed employees are trying to gather information the central bank can use to make sure the billions of dollars it is lending the investment firms, through a special emergency loan program enacted in March, are not being put at undue risk.

This new approach, which is still at a relatively small scale, offers a window into how the nation's system of regulating financial firms might evolve as policymakers sift through the financial wreckage of the past nine months.

The Bush administration has proposed that the Fed become an all-purpose guarantor of the financial system, with the power to poke its head into any company that poses risks -- not just the large commercial banks it now supervises. Congress is likely to consider legislation overhauling financial regulation next year.

"Bear Stearns has forced an issue that we should have been thinking about anyway," said Douglas Elmendorf, a senior fellow at the Brookings Institution. "The issue isn't just that the Fed did this thing in March. It's that the Fed did what it did in March because investment banks posed risks to the overall financial system and the economy."

But it also creates risks. With the Fed having made emergency funds available to investment banks, lenders and those who work with them might become complacent about risks, expecting a government bailout if anything goes wrong. That could destabilize the financial system further.

"Once the Fed starts investigating and looking at the risks that they're taking, the market could back off and say, 'Well, the Fed's in there, so there can't be much risk,' " said Peter J. Wallison, who studies financial regulation at the American Enterprise Institute. (Those would also be known as 'famous last words' - Jesse)

The Fed currently lacks the legal authority to order investment banks to strengthen risk control systems or change their accounting for exposure to complicated derivatives. The SEC has those powers, though its historical mission has been to ensure that investors are protected, not to protect the integrity of the financial system as a whole.

On March 16, the Fed backed the emergency acquisition of Bear Stearns by putting $30 billion (since changed to $29 billion) in public funds at risk and opened an emergency lending window that last week lent $14.2 billion to investment firms.

Both actions, meant to prevent panic from causing a cascade of failures that could have had a catastrophic impact on markets and the world economy, defied 90 years of precedent, insinuating the central bank into the workings of Wall Street as never before.

Fed leaders concluded that they would have to step up their involvement in Wall Street, if only to make sure that those loans were likely to be paid back. So it insisted that banks, in exchange for the new lending, open up about the details of their operations -- a deal that the investment firms readily agreed to.

They have not, however, reached any firm conclusions about what form the ultimate regulation of the financial system ought to take and are not presuming that the improvised system established in the past two months will expand and become permanent once Congress acts.

In the meantime, a special unit has been created in the New York Fed, answering directly to President Timothy F. Geithner. Information about its operations is closely held by Geithner and other senior employees in New York, such that even Federal Reserve governors and presidents of other regional Fed banks know little about what the new unit is doing.

The unit is composed of individuals from the bank supervision staff, whose normal work is to regulate commercial banks; the markets group, which monitors the behavior of all sorts of financial markets watching out for threats to their functioning; and the legal department.

The Fed staffers accompany SEC regulators in frequent visits to the major investment banks Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers. They typically speak to risk managers, auditors, comptrollers and sometimes senior executives.

"What they're doing is not so much regulation, telling the banks what to do, as the Fed is saying, 'I'm lending you money, I'm doing my due diligence,' " said Ernest Patrikis, a partner at law firm Pillsbury Winthrop Shaw Pittman and a former senior official at the New York Fed.

In the past, collaboration between the Fed and the SEC has been more haphazard. Officials of the two organizations would frequently talk on the phone and meet every few weeks to discuss risks being taken by Wall Street firms, over lunch in the cafeteria at the vault-like headquarters of the New York Fed, for example, or on a balcony there overlooking the narrow streets of lower Manhattan.

As concern grew about the risks taken by hedge funds in 2006, Fed officials and their SEC counterparts had a series of discussions in which each side explained to the other how the institutions they directly supervise -- commercial banks for the Fed and investment banks for the SEC -- measure and manage the risks they are taking by lending to hedge funds.

Now, the interaction is more constant. The SEC is crafting a formal memorandum of understanding that lays out their roles, but it is in an early stage. It will mainly seek to formalize the information-sharing and cooperation that is occurring already, SEC officials have said.

"The collaboration is wide open," said Robert L.D. Colby, deputy director of the SEC's market regulation division. "We're essentially operating as if we're all within one agency. We are telling them what we know and how we think, and they're reflecting back what they know and want to learn. You don't always ask the same questions, and sometimes you get information the other might not have picked up."