A New 'Decider' and Sugar Daddy in the Fed's Don Kohn

"Kohn said he hasn't decided whether securities firms should continue to gain access to loans from the central bank."

Will Don Kohn send a memo to Congress when he decides what they should do? Or has the Congress become irrelevant and private banks are now really running the country? Citizen Kohn

Time to send a message. Time to vote against EVERY Republican this fall. They set this up. They had a majority in both Houses of Congress and the Presidency. And they used it to lead us into wars for profit, and sold us out to the Wall Street financial interests.

Throw them all out, all incumbents who do not do the right thing for us.

Kohn Signals Wall Street May Get Permanent Access to Fed Loans
By Scott Lanman and Anthony Massucci

May 30 (Bloomberg) -- Federal Reserve Board Vice Chairman Donald Kohn raised the possibility of giving Wall Street securities firms permanent access to loans from the central bank, as long as regulators tighten oversight of the companies.

Kohn also advocated continuing Fed auctions of funds to commercial banks and loans of Treasuries to Wall Street dealers even after markets stabilize. Such channels would stay open ``either on a standby basis or operating at a very low level,'' he said in a speech in New York yesterday.

The remarks go beyond Fed Chairman Ben S. Bernanke, who has indicated the central bank would shut lending to investment banks when the credit crisis passes. Lawmakers and regulators are debating how to approach the supervision of investment banks in the aftermath of the Fed's rescue of Bear Stearns Cos. in March.

``If you are a bondholder in one of these Wall Street firms, you know you have a big `Sugar Daddy' now called the Federal Reserve that's going to back you up,'' said Jeff Pantages, chief investment officer of Alaska Permanent Capital Management in Anchorage, which oversees $1.8 billion in assets.

``But if you are a stockholder this kind of worries you'' because investment banks ``will be more highly regulated and won't be able to use leverage as much as'' before, he said. (Yeah, with the team of Clouseau and Magoo providing oversight service under contract to the private ratings agency Dewey, Cheatum and Howe - Jesse)

Kohn said he hasn't decided whether securities firms should continue to gain access to loans from the central bank. (it is not your money or your decision Mr. Kohn - Jesse)

More Extensive

``The more extensive the access, the greater the degree to which market discipline will be loosened and prudential regulation will need to be tightened,'' Kohn said in his speech to a conference hosted by the New York Fed. ``Unquestionably, regulation needs to respond to what we have learned about the importance of primary dealers and their vulnerabilities to liquidity pressures.''

In addition, central banks are considering arrangements to accept collateral from other countries denominated in other currencies, Kohn said. ``A number of issues need to be resolved,'' he said, adding that major central banks may agree on accepting a ``common pool of very safe collateral.''

Kohn didn't discuss the outlook for the economy or interest rates in his prepared remarks. Financial markets are still ``far from normal,'' he said, repeating a phrase other Fed officials have used.

Federal Deposit Insurance Corp. Chairman Sheila Bair called on May 28 for greater oversight of investment banks, including a formula for closing them in case of insolvency, in return for access to Fed loans.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said last month he plans to consider risk-monitoring rules aimed at avoiding government-backed bailouts.

`Permanent Basis'

The Fed should return to its normal practices ``as soon as that would be consistent with stable, well-functioning markets,'' Kohn said yesterday. ``Central banks should not allocate credit or be market markers on a permanent basis.''

Bernanke and his colleagues established the Term Auction Facility in December for cash loans to commercial banks, the Term Securities Lending Facility in March for loans of Treasuries to Wall Street dealers and the Primary Dealer Credit Facility in March for cash loans to the same securities firms.

In response to an audience question, Kohn said a shortage of Treasury securities is ``not one of the things I'm worried about.''

The Fed sought in March to prevent a financial-market meltdown by rescuing Bear Stearns from bankruptcy with a $13 billion temporary loan. It also opened up lending to the dealers in the first extension of credit to nonbanks since the Great Depression.

Fed `Not Sure'

``The Fed is feeling things out right now and is not sure how far it wants to go,'' said Robert Brusca, president of Fact & Opinion Economics in New York and former head of the New York Fed's international financial markets division.

The Fed said yesterday direct loans of cash to commercial banks through the traditional discount window rose to a daily average of $16 billion in the week ended May 28, while loans to primary dealers fell to $12.3 billion.

It's the first time since the Fed started lending to the dealers in March that commercial banks have borrowed more at the discount window in a week on average than the investment banks have borrowed from the PDCF. The PDCF was scheduled to last at least six months, though the Fed could extend it. That decision is a ``difficult and important question,'' Kohn said.

`Difficult Issues'

``The public authorities need to consider several difficult issues'' regarding Fed borrowing by primary dealers, Kohn said. The Fed could limit borrowing to times when the central bank deems financial-system stability to be at risk, or it could grant the firms the ``same sort of regular access enjoyed by commercial banks,'' he said.

``We need to ensure that supervisory guidance regarding liquidity risk management is consistent with'' dealers' access to Fed loans, he said.

Meanwhile, the Fed is ``working closely with the Securities and Exchange Commission to provide appropriate prudential oversight of primary dealers and their affiliates,'' Kohn said.

Bernanke said yesterday, repeating May 13 remarks, that ``once financial conditions become more normal, the extraordinary provision of liquidity by the Federal Reserve will no longer be needed.''

The Fed's new programs are ``designed to be self- liquidating as markets improve,'' Kohn said. They are set up so they are ``effective when markets are disrupted,'' yet ``uneconomic when markets are functioning well.''

`Important Innovation'

``The Federal Reserve's auction facilities have been an important innovation that we should not lose,'' Kohn said. ``They have been successful at reducing the stigma that can impede borrowing at the discount window in a crisis environment and might be very useful in dealing with future episodes of illiquidity in money markets.''

Kohn, 65, has more experience at the central bank than all other Fed governors. He served as a top adviser to former Chairman Alan Greenspan before his appointment to the board in 2002. He became vice chairman in 2006.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Anthony Massucci in New York at amassucc@bloomberg.net.

Last Updated: May 30, 2008 00:01 EDT

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