US and UK Move Closer to Ratings Downgrades - Or Not

There is a spread of glass 'half-empty' and 'half-full' versions of this story in the news today. The Financial Times stresses that the ratings are 'safe' for now and 'well-positioned' while others such as Business Week choose to emphasize the deterioration and potential risk.

Who are Moody's and SP to judge this? Their shocking performance in the subprime and credit markets shows them repeatedly to be little more than carnival barkers and shills, willing to say almost anything for pay. Are they as malleable to political and commercial influence in this as they have shown themselves to be in the recent financial scandals?

And yet, the position of the fiat currencies and the financial engineers does seem to deteriorate to anyone who can look at debt to GDP ratios, debt servicability, and the quality of government statistics. And some currencies are more equal than others, being sustained by holdings in foreign reserves because of the current structure of international finance.

It is unlikely, however, that we will hear about any collapse before it happens from these US-based ratings agencies. Their ratings are triggers for traders however, and could be self-fulfilling, a tool for the currency bears, who use leverage to bring down nations.

The US will seek to stand the Dollar on the heads of Sterling and then the Euro to sustain its head about the rising waters.

Make no mistake about this. Keep an eye on Sterling as the currency wars intensify.

NY Times
Credit Agency Warns U.S. and Others of Risk to Top Rating
By DAVID JOLLY
March 15, 2010

PARIS — The United States, Germany and other major economies have moved “substantially” closer to losing their top-notch credit ratings and can not depend solely on economic growth to save them, a report warned on Monday.

The ratings of the Aaa governments — which also include Britain, France, Spain and the Nordic countries — are currently “stable,” Moody’s Investor Service wrote in the report. But, it added, “their ‘distance-to-downgrade’ has in all cases substantially diminished.”

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenues — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Greece, Portugal and other countries that are already in far worse shape have been rocked by strikes and other protests in recent weeks as they try to adopt tough austerity measures.

Without a stronger recovery, governments could encounter serious trouble in phasing out government support for the economy, Arnaud Marès, the main author of the report, said in a statement. That “could yet make their credit more vulnerable,” he said.

Credit ratings are important because higher-rated governments are typically able to borrow at lower costs. Last May, Moody’s cut Japan’s Aaa rating to Aa2, an acknowledgement of the market’s growing unease with the debt burden of the Asian country...

In the United States, the Obama administration estimates that the deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.

For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10.0 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

In Britain, Moody’s said, the risk is that tax receipts fail to keep pace with forecasts, as the government of Prime Minister Gordon Brown has little room left to maneuver. In that situation, the debt — which the government already predicts will stabilize at around 90 percent of G.D.P. — could balloon, undermining the credit rating.

In comparison to both Britain and the United States, the report noted, households in France and Germany entered the crisis with relatively low indebtedness, and hence have a little more room for maneuver. Yet both countries will find themselves under pressure to maintain financial discipline in the event that growth does not rise substantially...

As for the Nordic countries, the agency said the region entered the crisis in relatively good shape, and their credit ratings appeared to be well protected.

About That Seemingly Irrational Need for Bonuses...

Psychopath: A person with an antisocial personality disorder, manifested in aggressive, perverted, criminal, or amoral behavior without empathy or remorse.

He would sell his mother for an eighth.

He would betray his most solemn promise on a whim.

He was a law unto himself, forcing others to serve his needs.

He would grab society's tit and suck it dry.

He would grasp and tear until he showed them all.

He was beyond good and evil--- He was an American hero.

"Our hypothesis was that psychopathic traits are also linked to dysfunction in dopamine reward circuitry," Buckholtz said. "Consistent with what we thought, we found people with high levels of psychopathic traits had almost four times the amount of dopamine released in response to amphetamine."

In the second portion of the experiment, the research subjects were told they would receive a monetary reward for completing a simple task. Their brains were scanned with fMRI while they were performing the task. The researchers found in those individuals with elevated psychopathic traits the dopamine reward area of the brain, the nucleus accumbens, was much more active while they were anticipating the monetary reward than in the other volunteers.

"It may be that because of these exaggerated dopamine responses, once they focus on the chance to get a reward, psychopaths are unable to alter their attention until they get what they're after," Buckholtz said. Added Zald, "It's not just that they don't appreciate the potential threat, but that the anticipation or motivation for reward overwhelms those concerns."

Psychopaths' Brains Wired to Seek Rewards No Matter the Consequences

So let's give deregulation and the efficient markets hypothesis another chance to really maximize the damage.

An entire society built around white punks on dopamine, trapped in the infantile stage of development, allocating resources for the many, the arbiters of utility and worth, from Wall Street to the Congress: this is what America has become.

SP, NDX and US Dollar Daily Charts

The SP 500 is pushing up against the resistance associated with the long term trend of the rally. It will likely take several attempts to try and push through it.



Notice how cleanly the rally in tech has sliced higher to upwards resistance. A failure at resistance would confirm a 'normal' stock trend, leaving the rally intact but correcting the excess.

If there is going to be a breakout it will likely lead the way, and the entire pattern of the last six months or so can be considered a consolidation in what is likely to become an inflationary financial asset bubble.



The dollar is holding its primary trendline despite the recent sideways chop. This could be consolidation as there is more room to the upside of .83. However, this would seem to require a breakdown in stocks if normal patterns are to continue. If stocks break up and out in what is likely to be a financial asset bubble, then the dollar will be sacrificd to the incipient monetary inflation, even before it appears in the money supply figures.

NY Fed Implicated in the Accounting Fraud at Lehman

Quite a bombshell from Yves Smith of Naked Capitalism tonight.

I wonder if the US mainstream media will ignore and dismiss it as they did the exclusion of the Wall Street banks from European debt sales in response to their fraudulent CDO sales. Is there a 'reverse gear' on the Voice of America?

In response, let's see if Chris Dodd puts the Consumer Protection section of the financial reform legislation under the control of a private organization,the Fed, which is owned by the institutions it is supposed to be regulating, and which is now implicated in the failure and fraud that helped to trigger the recent financial crisis.

The senior Republicans on the committee have insisted that it be. Originally Senator Dodd seemed to be going along with that in the spirit of bipartisan support for the monied interests and the financial lobbyists. That would be the perfect Orwellian twist to an increasingly surreal decline in the observance of the Constitution and the rule of law.

And then of course there is Turbo Tim, knee deep again in messy conflicts of interest and crony capitalism. The "CEO defense" claiming attention deficit disorder and blissful aloofness is in fashion among highly paid US executives. Considering Mr. Geithner's record, even in the execution of his own tax returns, the incompetence defense might be plausible. But it then calls into question the judgement of the person who subsequently appointed Tim to be the head of the most powerful financial organization on earth, the US Treasury.

Call the New Yorker. Time for another media PR blitz, but this one is for the Chief.

Naked Capitalism
NY Fed Under Geithner Implicated in Lehman Accounting Fraud

Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were such that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.

Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counter parties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately...

Read the rest of the story here.