The Credit Bubble Was a Ponzi Scheme Enabled by the US Dollar

They say a picture is worth a thousand words.

Here is a picture of the US credit bubble, with the deleveraging which has just begun.

It is/was a Ponzi scheme, enabled by the advantages of controlling the reserve currency of the world, pure and simple.



It was the US dollar that was monetized, or more specifically US debt obligations, which are now substantially worthless and will have to take a significant haircut in real terms. This is similar to the Japanese experience in which they monetized their real estate.

Ironically, those expecting this deleveraging to result in a stronger dollar could not be more mistaken. The Obama Administration is scrambling to obtain relief from Europe and Asia, getting them to inflate their own currencies through 'stimulus,' in order to continue to hide the unalterable truth - the US must partially default on its debt as expressed in the dollar and the Bond.

This is the inevitable outcome of all Ponzi schemes. Several smaller, private schemes already have collapsed. The big one is yet to come down. And when it does, the foundations of democracy will shake, several governments will fall, and we will once again experience the kind of uncertainty more familiar to those who lived in the first half of the twentieth century.

The sad truth is that the Obama Administration has barely begun the real work of rebuilding the economy. Everything to date is simple looting, paper-hanging, and the rewriting of history.

Until the median wage improves significantly in real terms, and the economy is put back on a productive basis without relying on the unsupported expansion of credit, there will be no recovery, merely sound byte opportunities for the smoke and mirror crowd.

This is the reality.

Non-Farm Payrolls: Revisio ad Absurdum

Orwellian manipulation of government economic statistics, par excellence.







The moving average of the Non-farm Payrolls marked the downturn in the economic expansion with amazing clarity by a steep drop in late 2007. It will also mark the bottom and a sustained upturn when it arrives.

Pictures From a Monetary Bubble

Credit bubbles are very much like pyramid, or Ponzi, schemes.



The middle class is particularly hard hit as they exchange their remaining real assets in an increasingly corrupted financial system. They are dulled by falling from crisis to crisis. We seem to be at the stage where the wealth transfer from the many to the few has it last parabolic gasp before the collapse.



All turns to ashes, one way or the other, when we abandon our commitment to justice and the truth, with things as they really are.

SP Futures Hourly Chart at 2:30 PM

The Jobs Number today was a horror show, not so much for the 'headline number' which is routinely manipulated, but rather in the utterly cynical, almost Orwellian, of the January number down to a breath-taking low.

The Obama Administration did this as part of an effort to spin 'a bottom.'

Is there a V bottom in the making? Is this a legitimate rally in equities?

We don't think it is, at least in terms of the economy. The indicators continue to deteriorate badly.

But we need to be aware of the possibility of an attempt to reflate the asset bubble, and this will show up in equities first, with a possible deflation in the Treasury bubble as hot money moves from relative safety to risk.

Everything about this market, and our economy, is directed by expediency rather than principle, and is therefore short term in its goals and outlook.

Having said all this, the market is overbought and the rally overextended. It may get more overbought and overextended, as we saw in the market 'recovery' of 2004-6 in which the US equity indices were managed up to new highs, even while the rot in the real economy spread, crumbling the foundations of wealth.

It is hard to comment on this market, because the Obama Administration is a profound disappointment, to the extent now that our short term optimism and confidence has dissipated.

If Democrats were trying to create a new Weimar Republic it would be hard to imagine a more sincere and effective effort. The problem is that the shadow of what comes next looms over the world like a dark cloud of misery brought about by the madness of men.

US Dollar (DX Index) Hourly Chart

Trichet disappointed today by not cutting the Euro interest rates more sharply to match the monetization of the US dollar by the Federal Reserve.

The US dollar hegemon is based on relativism. The monetization of a fiat currency does not matter so much if the most reasonable alternatives are also in decline. It will show up as an inflation in the price of real goods, but these can be managed in a financial services regime in the short term.

Do not confuse what the Fed and the Obama Administration are doing now with any sort of long term plan. Their bias is the same as corporate management: getting through the short term and looking as good as is possible in doing it.

Obama would like to shift to a longer term strategy, but this is difficult given the huge momentum of malinvestment that grips our national economy.

Nasdaq 100 Futures Hourly Chart at 11 AM

This has the look and feel of an 'official rally' to create the appearance of enthusiam for Gordon Brown's bid to save the world.

Do not get in its way while it is in progress. Buying of the SP futures led us higher yesterday, with the Nasdaq 100 confirming with its own breakout attempt.

Jobs Report tomorrow is key.

We would rather miss a portion of a move than be early and suffer losses and exhaustion by fighting the tape.

Potential near failure points are at 1312 for the NDX futures and 842 for the SP futures.

Longer term nothing has changed. The real economy is paper thin, the paper being supplied by the US dollar and the monetization of debt to create the appearance of vitality.

SP Futures Hourly Chart Updated at Noon

Here are three views of the SP 500 Futures on an hourly basis.

Notice that in the 'big picture' there is still an inverse head and shoulders bottom that is an active formation.

The question is whether this downturn is a natural fallback from the obvious tape painting exercise that occurred for the end of quarter, or a trend change that will challenge the inverse bottom.

Time will tell. But since the real economy continues to deteriorate, albeit at a less shocking rate of decline, we doubt this very much unless the government begins to encourage monetary inflation with abandon.

So, our bias is to the downside but keep an open mind. We would expect a fresh decline to test the prior near term bottom at the very least, with an eye to the lows if that gives way.

One might conclude that the rally we have seen is just a 'back-kiss' to the bottom of the longer term uptrend channel which, if it fails, brings a very bearish cast to the charts indeed.

We have to add, in editorial fashion, that the Obama administration is a complete failure when it comes to putting the economy in order. This is because of the embedded thinking from Summers and Geithner and their backers at the big five money center banks.

There will be no recovery until the banks are restrained, made into banks once again, and speculation is wrung out of system to be replaced by productive efforts and the creation of real wealth.

We prefer to attribute bad results to incompetence rather than inappropriate motives, but we're keeping an open mind with regard to these jokers.

Derivatives: the Heart of Financial Darkness

The heart of our financial crisis is reckless speculation with "too big to fail" funds by a relatively small group of US based money center banks.

There is sufficient circumstantial evidence from their concerted lobbying efforts to undo and resist regulation to show planning and forethought in what is an almost amazingly straightforward case of fiduciary and financial fraud. Many a blind eye was turned to the decline of the nation as it occurred, as the media and politicians and financial regulators were caught up in a seductive web of corruption.

The perpetrators are still in place, relatively unrestrained, and certainly not facing anything that might be called 'justice.'

Before there is any recovery, the banks must be once again restrained and balance restored to the economy and the financial system. The efforts of the Obama Administration are hopelessly ineffective, conflicted, and supportive of continuing losses.


The Prime Suspects



The Killing Field



The Wagers on Failure



The Wages of Speculation

How the Financial Industry Holds America Captive

You heard this here first.

"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time."

The Quiet Coup - Simon Johnson - The Atlantic Monthly

Here Come the Coupon Purchases by the Fed

The Fed made this announcement and the ETF we use to short the Treasury bond, TBT, took a nose dive.

FAQs on Fed Monetization of US Debt





Fed to start buying Treasurys on Wednesday
By Deborah Levine
2:58 p.m. EDT March 24, 2009

NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York will begin making purchases Of U.S. Treasury securities on Wednesday, starting with debt maturing between 2016 and 2019.

It will continue purchases on Friday and next week, with some days dedicated to purchases of maturities as short as 2-year notes with others for debt maturing in 17 to 30 years, it said in a schedule posted on its website Tuesday.

It did not indicate how much it would buy. The Fed announced last Wednesday it would purchase up to $3000 billion in Treasurys over the next six months. Treasurys rallied, with yields on 10-year notes (UST10Y UST10Y) paring an earlier increase to traded up 1 basis point to 2.66%.

Guest Blog: The Cheapest Call Option of All

No doubt Ben and Timmy have it all planned out, how they will use the trickle down machine to reinflate the financial system, and thereby float out loans again, at interest, to the hoi polloi.

From the Irish gnome in Zurich:

The cheapest call option on the planet is being provided by the world's largest HF//Prime broker: the US govt. Its also the best camouflage for a continuing rescue of Citi, GS et al that the Congress and the public cannot penetrate.

TALF Bait and Switch - Zero Hedge

And if it all goes wrong, Geithner is now looking for power to bail out the hedge funds, not to mention Pimco et al.

This sounds like a pretty cheap option to me.

But what has also gone unrecognised is the fact they will all make up this money on their CDS and S&P calls anyway.

If they pay banks their fictional book value, they will be able to pretend that the financial problems were overstated, just a 'liquidity' issue after all.

The banks can claim they HAVE been doing things right and we'll have a huge rally again. Anyone who participates will no doubt reckon on a reduced Prime Brokerage fee and extra leverage from the grateful seller - -which means asset inflation has another leg up.

Remember, ALL banking 'capital' is notional, so it is easy to conjure up the illusion of wealth creation once more.

SP Weekly and Monthly Charts Updated at Noon

The question one must ask is whether this is a technical bounce off a short term bottom, or the beginning of somthing more sustained.

Barton Biggs of Traxis Partners is saying today that he expects a thirty to fifty percent rally off this bottom. His reasoning is historic comparison off lows this severe.

If sustained, is this a genuine economic recovery or another monetary reflation and resultant bubble in financial assets.

The charts speak to this, not definitively, but with sufficient weight to be important. Yet another bubble sets us up for a great cascade fall down to 545, with a potential final bottom as low as 380.

The numbers may start to be skewed and distorted on the chart if a more serious monetary inflation in the dollar begins. The commodities and the quality of earnings in the SP 500 will be the 'tell.'

But make no mistake. The Fed and the Obama Administration are firmly committed to monetary inflation and a weaker dollar as another short term cure for the economy.

If the government does not make the fundamental reforms to the financial system and economy to bring back a balance with real wealth creation, it is difficult to see how the dollar and the bond will emerge intact from the next bubble without a further devaluation of 50 percent at least.

The Net Asset Value of Certain Gold and Silver Trusts and ETFs

GLD and SLV generally trade at a slight discount to spot because of their management fes. They are also used for arbitrage plays.

The premium on GTU is substantial as a result of the recent rally in gold. Personally I would not buy it at that level of premium preferring other investments.

Here Comes Turbo Timmy's Troubled Toxic Asset Clearance Sale

Wall Street Journal
U.S. Sets Plan for Toxic Assets
By Deborah Solomon
March 21, 2009

WASHINGTON -- The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance.

But the framework, designed to expand existing programs and create new ones, relies heavily on participation from private-sector investors. They've been the target of a virulent anti-Wall Street backlash from Washington in the wake of the American International Group Inc. bonus furor. As a result, many investors have expressed concern about doing business with the government in this climate -- potentially casting a cloud over the program's prospects.

The administration plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could expand down the road.

The plan, which has been eagerly awaited by jittery investors, includes creating an entity, backed by the Federal Deposit Insurance Corp., to purchase and hold loans. In addition, the Treasury Department intends to expand a Federal Reserve facility to include older, so-called "legacy" assets. Currently, the program, known as the Term Asset-Backed Securities Loan Facility, or TALF, was set up to buy newly issued securities backing all manner of consumer and small-business loans. But some of the most toxic assets are securities created in 2005 and 2006, which the TALF will now be able to absorb.

Finally, the government is moving ahead with plans, sketched out by Treasury Secretary Timothy Geithner last month, to establish public-private investment funds to purchase mortgage-backed and other securities. These funds would be run by private investment managers but be financed with a combination of private money and capital from the government, which would share in any profit or loss....

US Dollar Weekly Chart with Commitments of Traders

SP Futures Hourly Charts at 1:45 EDT: Vertigo

Recall that today is a quad witch in the options expiration, which typically bring a great deal of market manipulation in the days preceding.

The rally failed at 800 resistance, which would the neckline of an inverse H&S bottom, and the answer to bully's prayers.

Since the economy is not recovering six months ago, we expect that failure to stick and a new leg down to precipitate. This setup is easier to see on the second chart which is The Big Picture.

As always, we will wait for confirmation of this breakdown before taking positions of size. However the trend of our hedges has shifted to the short side at the second failure at 800 on the hourly charts.

The AIG Scandal Is Merely a Symptom of Our National Agony

The AIG bonuses are a calculated distraction.

This is the heart of the problem:

We will have no recovery until the system is reformed and brought back into a sustainable balance. To achieve this end, the banks must be returned to business of banking again, with the reinstatement of Glass-Steagall. The hedge funds must be restrained through fundamental regulatory reform.

A private agency like the Fed is not capable of performing these tasks. The Fed, for all the rhetoric that surrounds it, is a private enterprise owned by the banks. The effectiveness of self-regulation and the rational efficiency of markets are the great myths that have led us to our current crisis.

The Fed as the great regulator for multiple markets is an attractive choice for the government, because when it fails the government may point the finger of blame, and absolve itself of all responsibility for our ruin as they are attempting to do now.

Slate
The Real AIG Scandal
By Eliot Spitzer
March 17, 2009, at 10:41 AM ET

It's not the bonuses. It's that AIG's counterparties are getting paid back in full.

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall.

Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes.

So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure...

The Decline of the Dollar as the World's Reserve Currency

The arrogant belief that you are the 'only game in town,' and indispensable, provokes reckless behaviour that takes advantage of such a belief with abusive excess.

The time for the dollar to fall from its reserve currency status is coming precisely because of the years of reckless deficit spending beginning with the Reagan Administration.

This is also a model for the Wall Street moneycenter banks, who have abused their position in the financial system egregiously since the repeal of Glass-Steagall.

The likely result of this long cycle of reckless speculation and arrogance was forecast here in 2005.

Forecast 2005: The Humpty Dumpty Economy
Jesse's Café Américain

The current trend in the United States economy is not sustainable. This is a
realization that will penetrate the national consciousness slowly and unevenly.
Most economists agree on how this cycle will end (even if it is only privately), but
the great debate is in the details of how, and most importantly, when.

If one does not accept that the situation is unsustainable, and believes that things
can continue on endlessly just as they are, with the United States consuming the
bulk of the world’s savings and production because of who we are, then perhaps
this is symptomatic of the national epidemic we now suffer which the ancient
Greeks called hubris.

"Where else will they put their surplus if not our debt? To whom will they sell their
goods if not to us? Who will teach them how to live, and govern them?" History
shows that even if such trends last far beyond most expectations, eventually a
day of reckoning arrives, in some frequently repeated patterns of systemic
failure....

Things rarely reach a turning point when we expect it. A true sea change is
slow to permeate the mentality of most people, because our experience is that
what happened yesterday will happen again tomorrow, and a long cyclical turn occurs
gradually and incrementally. We forget what happened even a few years ago.
Predictions of a continuance of recent trends are the common currency of most pundits...

However, and this is a common sense notion that has been nearly forgotten
by our generation, we have the ability to act in such a way so as to make the
improbable more likely to occur, to tempt fate by our actions. For example, there
is a certain probability of sustaining an automobile accident in the normal course of
our daily activities. High risk behaviors, such as speeding excessively or
drinking while driving, increase the chance of an accident. If one engages in high risk
activity, and nothing unusual happens, we become emboldened and think that
since we were able to drink moderately and drive last month, so we can drink
and drive this month and thereafter. Perhaps next month we drink a little more for
an indulgence, and again nothing happens. This cycle continues until something
changes our behavior, or simply ends when we literally hit the wall.

It would be our contention that the US is like such a driver, and we have been
economically tempting fate with increasingly risky behaviors. We are persuaded
that there is almost nothing we cannot do, almost nothing that can happen, that is
beyond our control. It is the propensity for people to increase and
repeat what they have been doing over time, to tempt fate through repeated and
increasingly risky behavior, and to forget the possibility of a sequence of
unfortunate events if you will, that gives rise to memorable events in history...

Predicting the failure of a complex system is not easy. One can examine it as a
whole, and determine that it will fail, and often calculate what must change in
order to allow the system to function more reliably. But it is often beyond our power to
calculate exactly how it will fail, and consequently when it will fail. This does not
invalidate the observation that the system will ultimately fail. It merely
underscores the unpredictability of timing a failure with the degrees of freedom
inherent in a calculation with a large number of exogenous variables. It is not
easy to predict exactly when a chronic DWI will demolish their automobile, but it
remains relatively predictable to say that they will do so as long as they maintain
their current mode of behavior....

There are four major types of tipping points:

o Demand: a break in the level of consumption in the US caused by the
unwillingness or ability of households to incur further debt to support
consumption beyond real wage growth

o Supply: a major disruption in the supply of an essential commodity like
energy, food, or raw materials, or even the realization that a major
commodity is in shorter supply than expected, such as silver or oil.

o Monetary: an inability of foreign central banks to continue to
monetize the US trade deficit and budget deficit through the recycling of
their trade surplus into US debt securities.

o Systemic failure: the failure of a major counter party that threatens the
US financial system, particularly in the hugely leveraged derivatives
market.

Two of the seals, Demand and Systemic Failure, have been broken, and the horsemen unleashed. Next comes Monetary, and then Supply, which is a Pale Horse.

There is still time to end this spiral of decline.


Reuters
U.N. panel says world should ditch dollar
By Jeremy Gaunt, European Investment Correspondent
Wed Mar 18, 2009 11:16am EDT

LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar's share in its own reserves in recent years....

Reuters
China backs talks on dollar as reserve -Russian source
By Gleb Bryanski
Thu Mar 19, 2009 11:24am

MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decisionmaking globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency)," the source told Reuters, speaking on condition of anonymity.

The source said the Chinese paper envisaged the International Monetary Fund's Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. "They said that the role of reserve currency should be given to SDR," the source said.

A U.N. panel of experts is also looking at using expanded SDRs, originally created by the International Monetary Fund in 1969, but now used mainly as an accounting unit within similar organisations as a new reserve currency instead of the dollar.

Currency specialist Avinash Persaud, a member of the U.N. panel, told a Reuters Funds Summit on Wednesday that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and against those inside the basket....

Citigroup: Keeping Up With the Goldmans

What is ironic is that these stories of Citi extravagance are probably being leaked by other equally extravagant Wall Street players with big Credit Defaut Swap and short positions on Citi, hoping it breaks back down so they can get their own $10 million dollar offices.

The financial system is broken. The banks must be restrained. Speculation is no substitute for production, that creates real wealth. Speculation merely transfers wealth to the few from the many, until the blood tide rises.


Citi plans $10 million office refurb for executives
By Sam Mamudi
March 19, 2009

NEW YORK (MarketWatch) -- Citigroup Inc. plans to spend about $10 million on new offices for senior executives, according to a Bloomberg report Thursday.

The changes at the bank's headquarters in New York City will include a new office for Chief Executive Vikram Pandit.

The project is made up of 17 private offices, two conference rooms and open areas, reported Bloomberg.

Citi told Bloomberg that the refurbishment, which it began planning in June, will save the bank money in the long run.

SP Futures Hourly Chart at the Close

The Fed's Decision: PRINT

To net today's FOMC statement for you, the Fed has made an aggressive commitment to monetary expansion through its balance sheet to support the financial system.

What was particularly repugnant was the co-ordinated actions in the market ahead of this announcement. This included a major bear raid on the precious metals, and the panic-covering of the financial shares before the official announcement. The cure of the crisis ought not to be an occasion for looting, fraud, deception, and personal enrichment by insiders who in many cases caused the problems which are facing today.

The US government is engaging in the same artificial tactics that lead to the tech bubble and the housing bubble. They are artificial because they are not accompanied by systemic change and meaningful reform. We are shooting the patient with morphine so they can go back to work without treating the disease.

The next phase of this financial credit crisis may be take down the US Bond and the dollar. That is what is known as a financial heart attack.

Release Date: March 18, 2009
FOMC Statement

For immediate release

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.

Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession.

Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these
securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.

Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

The Hypocrisy of Barack Obama, Tim Geithner, Henry Paulson, and Christopher Dodd

This issue of the AIG bonuses raises concerns about conflicts of interest since the Financial Products Division of AIG was a large contributor to both President Obama and Senator Dodd.

It also gives fuel to the speculation that the retnention bonuses being paid to the AIG executives, some of whom have already left, are 'hush money' over the details of the payments of enormous sums of bailout money to politically connected businesses such as Goldman Sachs, who are also substantial contributors to both parties.

True or not, the failure of the Treasury Department to execute in this matter is alarming, and the lack of transparency by the Obama administration and the Democratic leadership is discouraging, if not appalling.

McCauley's World

Senator Christopher Dodd’s office recently announced that, “Democratic Sen. Chris Dodd, chairman of the Senate banking committee, demanded a full briefing from the Federal Reserve and the Treasury on why clauses weren’t attached to the four various AIG bailouts to halt bonuses.”

Yet the Senator well knows that while the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to that very bill. The provision, now called “the Dodd Amendment” by the Obama Administration, provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009” — which exempts the very AIG bonuses Dodd and others are now seeking to tax.
http://www.foxbusiness.com/story/markets/industries/finance/dodd-cracks-aig—time/

Obama & Dodd Were Friend’s Of AIG Before AIG Was Their Enemy

Obama may be grandstanding about AIG’s bonuses now, but it’s worth noting that Obama himself is the second biggest benefactor of AIG political contributions. Second only to Senator Chris Dodd, who is quietly trying to tip-toe away from legislation he inserted into Obama’s “stimulus” spending spree that protected AIG’s bonuses.
http://www.kxmb.com/News/Nation/346030.asp

Key Congressman tried to alert Treasury about the AIG bonus issue "six or seven times" in the past weeks.

Kanjorski: Treasury and Administration Knew of AIG Bonuses for Weeks

Edward Liddy is the government appointed Chairman of AIG during its bailout phase.

Edward M. Liddy is currently the chief executive officer of American International Group (AIG), where he succeeded Robert B. Willumstad in September, 2008. Upon taking the position of CEO at American International Group, Mr. Liddy had to resign his board position at Goldman Sachs.

This September meeting was the key decision point on bailing out AIG. As we have reported earlier, the ONLY non-official present was Lloyd Blankfein, the Chairman of Goldman Sachs, a major counterparty at risk with the AIG Financial Products Division.

And lastly, we ought not to overlook The Real AIG Scandal - Slate

Brokers Recalling Loaned Shares in Citi

Since this morning Bloomberg reports that major brokerages have been calling in the loaned shares that have been used for legitimate short sales in Citigroup.

This in part explains the rally in Citi today, as the shortsellers cover their positions ahead of a 2:30 PM deadline today by which they must return the borrowed shares.

It does seem rather calculated, particularly its conjunction with the Federal Reserve announcement.

We have not seen this in the general news, just on the Bloomberg TV analyst reporting.

There is the implication that this is a calculated market operation being conducting among big traders and the major brokerage houses who hold the shares for borrowing from customer accounts. Marketwatch seems to imply that this is being precipitated by 'the authorities.'

Nice timing to help bolster the financials after the FOMC announcement. This has the Larry Summers/Robert Rubin touch.

It would be a good thing indeed if the Obama Adminstration did something meaningful to curb naked short selling and enforce the existing regulations. But if they are doing so for only their favorite companies, then this is not market regulation, it is crony capitalism and insider trading.

Seeking Alpha

Citigroup Inc. – Shares are being squeezed once again today and the company has a valuation some 23% higher today with shares stretching above $3.00.

Intrigue continues in the June 5.0 strike options where arbitrageurs are using conversion plays that typically land a credit to take advantage of the squeeze. The volume in that line has more than 150,000 contracts trading both sides today with puts bought and calls sold when investors can position long of the stock.

Earlier in the week rumors did the rounds that the authorities might be on the hunt for hard-to-borrow stock certificates in select financial names.

This in itself has created a surge at AIG and Citigroup as desperate short-sellers try to cover their positions. The conversion trade could be established earlier in the week for a credit of 20 cents, but given the near-panic buying in the stock has shifted to a 1.10 cost to traders.

The Obama Team's Economic Performance Is Pathetic

Wouldn't it be nice if one day the Obama Administration came up with a change, an innovative reform for the financial system that made us sit back and say, "Wow, that's great! That's exactly what we have been looking for."

So far it has been one misstep, one fumble, one tired old Henny Youngman routine after another. The Clinton Administration retread meets the road, and falls apart.

Things went badly beginning with the appointment of Larry Summers as key economic advisor.

Larry was one of the three man miracle team of Greenspan, Rubin and Summers that turned the Asian monetary crisis into the tech bubble after a smoke and mirrors economic recovery while the industrial base of the US continued to slide into the Pacific.

We have seen nothing that speaks of the promise that we felt when America said "enough" and voted for a change in the fall of 2008.

And after the Summers disappointment we received the the Rubin protege, Tim Geithner, with the thinnest of financial backgrounds, who while at the NY Fed helped to help transform the housing bubble collapse into the bailout bust.

His position at Treasury is such an obvious, glaring mismatch that he cannot even staff key jobs in his own department. Who would want to work under such an obvious, embarrassing failure?

This is not a poor performance. This is an abject, incompetent inability to address the most critical issue facing this country.

This is Obama's Iraq: a morass of crippling failure brought on by horrible advice from key advisors with their own agendas.

President Obama throws rhetoric at the problem from a distance, like he is still campaigning against something. He leaves the impression of a more articulate Bush, inspiring no lasting confidence, giving no impression that he is in charge, on top of the situation, in control with a well thought out plan. He can make you feel good while he is speaking, then reality sets in and you realize that there is nothing there. Where are the management skills to back up the rhetoric?

Don't get us wrong. This is still early in the game. But the Democrats are losing the early rounds, as the situation grows more dire.

Well, Mr. Obama, you are President now, and even though you have only a short time in the office, so far you have shown us nothing. Your shepherding of a stimulus bill through the Congress was a nightmare, made worse by Nancy Pelosi who is a mediocre House Speaker at best, but appears a dynamo in comparison to Majority Leader Harry Reid.

Tired old solutions, inbred beltway thinking, old boy insider dealing.

Embarrassing. Unworthy. Amateurish. Pathetic.

You are failing, and we see it, and the anger, and sense of quiet panic, is building.

Time to get serious, to get it together. Time to step up to the job and take command. Time to show us your best stuff, find the levers, roll up your sleeves, and step down from the pulpit.

Nasdaq 100 Futures Hourly Chart Into the Close

The market went out on its highs suggesting that we will get a strong opening tomorrow for the FOMC announcement at 2:15 PM EDT.

As a reminder, this Friday is the 'triple witching' option expiration. The markets are frequently volatile as the big players squeeze the overleveraged option speculators.

Adobe reports tonight after the bell.

To say that the better-than-expected housing start numbers ignited hopes for the economy and triggered today's rally is ludicrous rationalization.

This was a short squeeze for option expiry week, pure and simple.

Alcoa and Nucor announcements show how dire the economic situation has become.

Congressman Proposes 60% Income Tax Surcharge on AIG Bonuses

Interesting development indeed.

Michigan Democratic Rep. Gary Peters introduced a bill in the House of Representatives to impose a 60 percent surtax on bonuses over $10,000 at any company in which the U.S. government has a 79 percent or greater equity stake.

This is in addition to the usual income tax rate.

Its directionally not bad, but the level of ownership by the Federal government should be 51%, not 79%. And stiff penalties for management bonuses at any institution receiving TARP funds or FED support above a certain level are needed.

The reason that the Obama Administration is in this box over the contracted bonuses is that Geithner and Summers refused to take AIG into bankruptcy reorganization.

Why?

Perhaps it has something to do with the enormous exposure that Goldman Sachs had to AIG. Lloyd Blankfein, the chairman of Goldman Sachs, was the only non-government or Fed official who was at the meeting at which this bailout was decided.

Yes, the AIG bonuses are an enormous, shocking scandal.

But it is only the tip of the iceberg. Recall that we predicted early last year that the patsies and scapegoats would be thrown off the back of the getaway truck to try and satisfy the angry mob once the magnitude of the frauds became apparent even to the average person.

Well we are there, and they are throwing patsies out the window with greater noise and flourish, because, in short, the angry mob is getting louder, and they are afraid.

Reuters
Congress eyes bonus surtax amid AIG outrage
By Kevin Drawbaugh
Tue Mar 17, 2009 1:17pm EDT

WASHINGTON (Reuters) - Some members of the U.S. Congress on Tuesday proposed slapping a surtax on bonuses paid to executives at American International Group Inc, amid outrage over the large payouts.

Michigan Democratic Rep. Gary Peters introduced a bill in the House of Representatives to impose a 60 percent surtax on bonuses over $10,000 at any company in which the U.S. government has a 79 percent or greater equity stake.

"Currently, AIG is the only company that meets this threshold," Peters said in a statement. "The legislation I'm proposing will get taxpayers their money back.

President Barack Obama on Monday expressed "outrage" about $165 million of bonuses to employees of AIG, once the world's largest insurer, now being bailed out by the government.

Senate Banking Committee Chairman Christopher Dodd said Peters' approach was "worth pursuing as an idea."

California Democratic Rep. Brad Sherman, a House Financial Services Committee member with Peters, said he favors "a tax law to impose a substantial surtax on excessive compensation paid to executives at bailed-out firms, especially AIG."

New York Attorney General Andrew Cuomo has said he will subpoena AIG for more information about the bonuses, including the names of the recipients.

Peters said it was "beyond outrageous that the very people who brought AIG to its knees and helped create the current financial crisis are scheduled to receive hundreds of millions of dollars in bonuses while tax dollars keep their company afloat."

Iowa Rep. Bruce Braley and Connecticut Rep. Joe Courtney, both Democrats, released a letter signed by 90 members of Congress to Treasury Secretary Timothy Geithner urging that planned bonuses to AIG executives be stopped.

Braley also said in a statement that he introduced legislation "to increase the tax rate on any bonuses awarded by businesses receiving government TARP funds, including AIG."

New York Democratic Senator Charles Schumer warned AIG employees to return the bonuses they are receiving or face being slapped with a major tax on those payments.

"They should voluntarily return them (the bonuses). If they don't, we plan to tax virtually all of it," Schumer said.

Teabagging the Congress

You are probably already aware of this 'tea party' invitation making the rounds of email and the internet.

What is remarkable is that I received this today from one of the most conservative people that I can imagine, who STILL won't admit that the George W. Bush administration was a disaster for our economy.

It appears that the full spectrum, from left to right, of the public is angry, very angry, and the Democrats led by Obama are setting themselves up as the lightning rod to receive it, primarily through their bungling of the financial crisis.

Send a teabag if you wish. Personally I would make some tea with it first. Why waste? I am not sharing my Typhoo with anyone.

It is good, though, to do something if you are angry. Symbolic protests are a good first step. But what will get the attention of these power players will be something with a monetary impact, such as a major boycott, or a move away from the dollar and into non-financial assets.

The paid help may be fearful, but the ringleaders are drunk with power. They have been at this for some years now.

It has been some time since I have seen ordinary people so generally angry and disgusted by the US national government. Certainly not since the Nixon Administration. Something will have to give if the current course does not change.

Bailout Anger Creates Peril for Both Parties - MarketWatch

Tea Party - Please mark your Calendars

A tea party, what a wonderful idea, I just wish it had been mine. I have a feeling that USPS is going to have a lot of tea to contend with, after all it only costs 42 cents to send a message, hopefully heard round the world!!!

So please mark your Calendars

There's a storm abrewin'. What happens when good, responsible people keep quiet?

Washington has forgotten they work for us. We don't work for them. Throwing good money after bad is NOT the answer.

I am sick of the midnight, closed door sessions to come up with a plan. I am sick of Congress raking CEO's over the coals while they, themselves, have defaulted on their taxes.

I am sick of the bailed out companies having lavish vacations and retreats on my dollar. I am sick of being told it is MY responsibility to rescue people that, knowingly, bought more house than they could afford. I am sick of being made to feel it is my patriotic duty to pay MORE taxes.

I, like all of you, am a responsible citizen. I pay my taxes. I live on a budget and I don't ask someone else to carry the burden for poor decisions I may make. I have emailed my congressmen and senators asking them to NOT vote for the stimulus package as it was written without reading it first. No one listened. They voted for it, pork and all.

O..K. folks, here it is. You may think you are just one voice and what you think won't make a difference. Well, yes it will and YES, WE CAN!!

If you are disgusted and angry with the way Washington is handling our taxes. If you are fearful of the fallout from the reckless spending of BILLIONS to bailout and "stimulate" without accountability and responsibility then we need to become ONE, LOUD VOICE THAT CAN BE HEARD FROM EVERY CITY, TOWN, SUBURB AND HOME IN AMERICA.

There is a growing protest to demand that Congress, the President and his cabinet LISTEN to us, the American Citizens. What is being done in Washington is NOT the way to handle the economic free fall.

So, here's the plan. On April 1, 2009, all Americans are asked to send a TEABAG to Washington , D.C. You do not have to enclose a note or any other information unless you so desire. Just a TEABAG.

Many cities are organizing protests. If you simply search, "New American Tea Party", several sites will come up. If you aren't the 'protester' type, simply make your one voice heard with a TEABAG. Your one voice will become a roar when joined with millions of others that feel the same way. Yes, something needs to be done but the lack of confidence as shown by the steady decline in the stock market speaks volumes.

This was not my idea. I visited the sites of the 'New American Tea Party' and an online survey showed over 90% of thousands said they would send the teabag on April 1. Why, April 1?? We want them to reach Washington by April 15. Will you do it? I will. Send it to; 1600 Pennsylvania Ave. Washington , D.C. 20500 ..

Visit the website below for more information about the 'New American Tea Party'. I would encourage everyone to go ahead and get the envelope ready to mail, then just drop it in the mail April 1.

Can't guarantee what the postage will be by then, it is going up as we speak, but have your envelope ready. What will this cost you? A little time and a 40 something cent stamp.

What could you receive in benefits? Maybe, just maybe, our elected officials will start to listen to the people. Take out the Pork. Tell us how the money is being spent. We want TRANSPARENCY AND ACCOUNTABILITY. Remember, the money will be spent over the next 4-5 years. It is not too late.

Of course, if you agree with the way things are being done now, just delete this e-mail !!!!!

SP Futures Hourly Chart at Noon

It is important to remember that this is a 'triple witching' week with options expiring on Friday. In markets such as this in particular it is a week of shenanigans as the bigger house players squeeze the option punters who are essentially speculating with too much leverage. March is a big expiration.

We also have the Fed in a two day FOMC meeting with their announcement tomorrow at 2:15 EDT.

The uptrend has held so far. The first chart shows the hourly action up close, and the second chart shows the same scenario but within the context of the bigger picture.

This feels like a technical rally. And surely there is no recovery in the real economy six months out, which is what is required to justify a sustained market uptrend and a new bull market.

Although Ben Bernanke has made noises about a possible recovery at the end of this year, we would file that with his other economic pronouncements about the credit crisis being confined to subprime and so forth. He is constantly talking his book, which demands a rosy recovery. He won't get it.

There will be no recovery in our nation until there is significant reform enacted to bring our economy back into balance. The financial system, gone off the track with gambling, is draining our energy away from real productive efforts, acting as a hidden by substantial tax on the quality of our growth.




A view of the above chart within the greater context of this rally.