The Fed's Fisher Sees a 'Frightful Storm' Approaching

Fisher makes this prediction while the rest of the Fed and Treasury are sponsoring 'Take Your Family and Your Life Savings to the Beach" events. What is this, Jaws IV: the Fed Feeds Your Kids to the Shark to Give the Banks More Time to Do Some WaterSkiing?

Fed's Fisher sees 'frightful storm' brewing
By Alex Peacocke
May 29, 2008
Investment News

Dallas Federal Reserve Bank President Richard Fisher yesterday predicted a grim economic outlook for the United States and indicated that the Federal Reserve Board may be considering a change in monetary policy.

In remarks made to the Commonwealth Club of California in San Francisco last night, Mr. Fisher, a voting member of the Fed’s open market committee, predicted a “frightful storm” ahead for the U.S. economy.

He said that he expects “a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario,” if inflation expectations and developments continued to worsen.

Recent increases in commodity prices already have investors concerned about swelling inflation, which Mr. Fisher described as “the most insidious enemy of capitalism.” (I thought that the Fed and the Bush Administration were the top contenders for the title - Jesse)

The Fed has already cut its funds rate three times this year, to 2%. Mr. Fisher’s predicted change in policy presumably would indicate a hike in interest rates at the next FOMC meeting, which is scheduled for June 24-25. (Oh yeah that will be great for the housing market and the economy, unless its one of those 'fake' increases that is only on paper while the Fed and Treasury keep shoveling out liquidity to the banks to play with. - Jesse)

Moody's Internal Studies Show Ambac and MBIA Already 'Junk'

The swaps marketplace is showing more accurate forecasts of defaults and credit problems than the 'official ratings' by Moody's.

Moody's is paid for their ratings by the companies that issue and sell the debt as products, the Wall Street banks aka the locus of corruption.

Recent events show that when companies don't get the ratings they want to get from ratings agencies like Fitch they fire them.

Anyone see a problem or a conflict of interest? Like a massive fraud that is going to cost a couple trillion dollars, and decimate banks from Hong Kong to Frankfurt?

Just business as usual in the Humpty Dumpty economy.

We heard anecdotally that even rather modest requests for deliverable silver from the COMEX are being met with offers of 'cash buyouts' for amounts considerably higher than the current market prices. The prices are what we say they are, until you actually demand the product? Surprise surprise the cupboard is bare?

Won't we be surprised when some debt and some companies go from AAA to Junk virtually overnight.

If we get a certain kind of exogenous event complete with convenient scapegoats the ratings agencies and corporate confessors and government bureaucrats will be piling downward revisions on top of it like there is no tomorrow. And for many holders of bonds and stocks there won't be. They will be broke.

We understand the concept of 'managing perceptions' but are the Fed and the Treasury running a financial system or a con game here? Is this another example of the Administration trying to achieve their ends through selective deception and propaganda? What the heck has happened to our integrity? Yikes!


Moody's Implied Ratings Lab Reveals Ambac, MBIA Turning to Junk
By David Evans

May 30 (Bloomberg) -- Moody's Investors Service has created a new unit that surprises even its own director.

The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody's official grades.

The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody's credit ratings signify. And here's the kicker: The swaps traders are usually right.

``When I first saw this product, my reaction was, `Goodness gracious, Moody's has got a product that is basically publicizing where the market disagrees with Moody's,''' says David Munves, managing director for credit strategy research at Moody's Analytics. The implied-ratings unit works in a corner of Moody's new world headquarters in lower Manhattan, across the street from Ground Zero.

``But these differences are out there,'' Munves says. ``We might as well capture and learn from it what we can.''

The credit quality of bond insurers, which have been at the center of the subprime storm, differ dramatically. The official ratings of these companies say the insurers are in great shape; the alternative ratings say they're in dire danger of defaulting on their debts.

MBIA Inc. and Ambac Assurance Insurance Inc., the two largest bond insurers, got themselves into trouble by veering away from the plain-vanilla business of insuring debt issued by municipalities and corporations. The insurers began selling credit-default swaps, which are a type of insurance, to banks eager to hedge their own risks from collateralized debt obligations.

Subprime Debt

Because many of those CDOs were bundles of debt laced with securitized subprime home loans and other asset-backed securities, the insurers might now shoulder tens of billions of dollars in losses.

Ambac and MBIA have raised billions of dollars of new capital so that Moody's and Standard & Poor's would keep top ratings for the bond insurers -- and the rating firms have done just that. (Moody's and Standard & Poor's are under extreme pressure to keep the AAA rating because of the potential damage to the holders of the bonds which Ambac and MBIA are 'insuring' even though the insurance is worthless. It is a farce, a sick joke, a symbol of the falseness of our monetary and financial system of words backed by nothing but words and political pressure. - Jesse)

Moody's implied-ratings group paints a completely different picture. Using the CDS market, Munves's unit rates both MBIA and Ambac Caa1. That's seven notches below junk and 15 below the official Moody's rating.

Swap traders see there's a huge risk that Ambac and MBIA will default, hedge fund adviser Tim Backshall says. He says swap traders don't trust S&P's and Moody's investment-grade ratings for the companies. (Yeah only the stupid public is believing Moody's and S&P these days - Jesse)

`Into Default'

``The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default,'' says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC. (Oh is this the model that they were shown to be 'adjusting' when they marked garbage debt as AAA when their clients were selling it to Europe? - Jesse)

The rating companies say their grades are correct. (Well that settles that. Who are you going to believe, the marketplace, the swap traders, or a few officials who have been shown to be completely wrong? - Jesse)

``Moody's will not refrain from taking a credit rating action based on the potential effect of the action,'' says company spokesman Anthony Mirenda. (Only if they get caught or the client who paid for the rating doesn't cough up the bucks - Jesse)

S&P spokesman Chris Atkins says, ``We make rating changes when we believe events warrant such action.'' (Events like disclosures of fraud? - Jesse)

Munves says that over one year, the implied ratings have been a more accurate predictor of defaults than Moody's ratings. The Moody's unit reports that implied ratings for one year have a 91 percent accuracy ratio compared with an 82 percent ratio for Moody's official ratings.

``The Moody's accuracy ratio is consistently lower,'' he says.

He says Moody's company debt ratings are designed to remain stable so they aren't influenced by short-term ripples, unlike the more volatile swap-implied ratings.

``The CDS market often ends up coming back towards Moody's rating,'' he says.

By the time the two ratings converge, though, a company's debt may already be in default -- and the investors who bought it may be out of luck. (Sounds like the general plan to us - Jesse)

Editor: Jonathan Neumann
To contact the reporter on this story: David Evans in Los Angeles at davidevans@bloomberg.net.

With Reckless Disregard for the Greater Good: the Crisis of American Capitalism

In our "Apertifs" section we have been a link to a video presentation by Kevin Phillips titled Bad Money: the Global Crisis of American Capitalism.

Its recommended viewing.

The cost of soaring public and private debt levels
Commentary: Examining Kevin Phillips' theories
By Peter Brimelow & Edwin S. Rubenstein
May 29, 2008

NEW YORK (MarketWatch) -- Is Kevin Phillips right that something funny is going on in the economy? Yes, although just how funny is less clear.

The numbers do suggest he's correct about one thing at least: public and private debt has indeed reached unprecedented levels.

Recently, we described Phillips' thesis, in his new book "Bad Money: Reckless Finance, Failed Politics, and the Global Finance of American Capital" that the U.S. economy has been run by a Washington-Wall Street mercantilist alliance for the benefit of the finance sector. See Column Here

Phillips doesn't flat-out predict that the resulting distortions will result in a crash. He says it's too early to say. But he meaningfully quotes a number of authorities, such as Yale economist Robert Shiller, to the effect that it will.

Phillips relies heavily on charts, which we like.

In this column, we look at one that is at the heart of his book: public and private debt as a fraction of Gross Domestic Product.

It looks like a barbell, with peak debt of 299% in 1933 falling to below 150% from the 1950-1980s, spiking again to a recent 353%. We've checked the numbers -- updating them to 2007 -- and he's right.

Phillips calls this "The Great American Debt Bubble". He says, somewhat melodramatically, that the financial media haven't been running it recently "Analogies to the 1920s would have been too disturbing."

This hurts our feelings. Early this year, we ran a chart of the unprecedented level of foreign holdings of federal debt, which is one part of America's dubious debt development, and is equally disturbing, especially because it suggests the dollar is very vulnerable. See Column Here

Phillips is also right that that the finance sector has been involved in this leveraging up more than any other sector -- because of securitization, derivatives and highly leveraged hedge funds.

He traces this finance sector debt expansion to easy money and to a series of bailouts orchestrated by the Federal Reserve, going back to the Arab rescue of Citibank in 1981.

Phillips also takes at face value colorful reports that the President's Working Group on Financial Markets, a public sector-private sector consultation group formed after the 1987 Crash, amounts to a "Plunge Protection Team" that has orchestrated systematic grooming of markets.

The objective: getting the system to swallow more debt and produce a bubble in the interests of Wall Street.

Much as we love charts, however, you have to be careful about them.

For example, the debt peak in 1933 was four years after the stock market crash. It may have been a symptom rather than a cause, reflecting the sharply contracting economy in the Depression.

In contrast, the economy has been growing as debt levels rose for most of this decade.

Conversely, credit controls and regulation may have artificially depressed debt levels during World War II and throughout the middle of the last century.

Is there a better way to look at America's debt dilemma? We prefer charting the interest burden rather than gross debt.

To see what we find, stay tuned for our next column

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.