Treasury to Resume the Monetization of the Fed's Programs to Support the Wall Street Banks

"It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder." Frederic Bastiat

This Treasury Supplemental Financing Program is designed to provide public funds for the Fed's efforts to purchase and then liquidate toxic assets and derivatives from the financial sector, effectively absorbing their losses and monetizing them.

The Treasury creates new notes and sells them on the open market. The money obtained in these sales is deposited at an account at the Federal Reserve. The Federal Reserve uses this money to purchase toxic assets from the banks at its own discretion and pricing, subject to little oversight and market discipline.

Senator Chris Dodd said "the Fed could become an 'effective Resolution Trust Corporation,' purchasing and ultimately disposing of depreciated assets.

It looks very much like a stealth bailout. It is even more of a scandal because of the Fed's resistance to any disclosures on the principles and specifics by which they are allocating taxpayer money.

Where this gets even more interesting is that the Fed in turn is buying Treasury debt after issuance through its primary dealers, debt that was issued by the Treasury to provide funds to the Fed.

Even more than a stealth bailout, this is starting to smell like 'a money machine.' Money machines are what Bernanke euphemistically called 'a printing press.' What is odious about this particular printing press is that the output is being given directly to a few big banks by a private organization which they own.

I believe that it is still illegal, by the letter of the statutes, for the Fed to directly purchase Treasury paper. But in this case, the Fed is buying Treasury paper with money supplied by the Treasury. Since the paper is passing through the marketplace, and the Primary Dealers are taking their commissions, it may be in conformance with the letter of the law. But it looks like it violates the spirit of the law.

And given that in many cases the Primary Dealers are the principal beneficiaries of the subsidy programs, selling their toxic debt to the Fed at non-market prices, this starts to appear like a right proper daisy chain of self-dealing and fraud.

As you can see from the background information below, this is a 'temporary' program from 2008 that the Treasury keeps promising to 'wind down.'

This is not a resolution trust by any measure. One only has to compare what happened with the Savings and Loan Resolution Trust, with the orderly liquidation of assets, losses assumed by the individual banks and their management, and investigations and prosecutions for fraud.

And the bankers involved in the Savings and Loan bubble and collapse were not still in business and giving themselves record bonuses within twelve months of their collapse, and engaging in the same frauds and speculation that led to the crisis.

Wall Street bonuses jumped 17 percent last year
SteveEder and Jonathan Stempel
Tue Feb 23, 2010 2:39pm EST

NEW YORK (Reuters) - Bonuses on Wall Street rose 17 percent last year to $20.3 billion even as the industry faced a public backlash over pay practices.

The rise in payouts, reported by New York State's comptroller, came at a time when Wall Street was recovering from the financial crisis of 2008, which forced a taxpayer rescue of the industry that, in turn, stoked widespread anger across
the United States.

Comptroller Thomas DiNapoli said on Tuesday profit for all of Wall Street could top $55 billion for 2009, nearly triple the previous record year. Last year, the U.S. economy began to stabilize and lenders raced to repay federal bailout money they had come to view as a stigma."

Further, the Savings and Loan bankers were not flooding the Congress with lobbying money to hinder reform of the banking system, and to shift the focus of Congressional discussion to the reduction of legitimate programs like Social Security to finance the public subsidies being given to the very banks responsible for the financial crisis in the first place.

As a possibly related aside, today's US Treasury 2 year auction was unusual. Indirect Bidders had 100% of their bids filled as noted by ZeroHedge.

MarketWatch
Treasury to expand Supplementary Financing program
By Greg Robb
Feb. 23, 2010, 12:01 p.m. EST

WASHINGTON (MarketWatch) -- The Treasury Department announced Tuesday that it is expanding its Supplementary Financing Program to help the Federal Reserve manage its enormous balance sheet. In a statement, Treasury said it will boost the SFA to $200 billion from its current level of $5 billion. The fund had been up to $200 billion but was scaled back when Congress delayed passage of an increase in the debt limit.

Now that an expansion of the debt limit has been signed into law, the department is able to resume the program. Starting on Wednesday, Treasury will conduct the first of eight weekly $25 billion 56-day SFP bills to restore the program. The department said it will then roll the bills over. "We are committed to work with the Fed to ensure they have the flexibility to manage their balance sheet," a Treasury official said.

September 17, 2008
HP-1144
Treasury Announces Supplementary Financing Program

Washington- The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week. To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.

The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

Calculated Risk
Treasury to Unwind Supplementary Financing Program
11/17/2008

One of the credit indicators I was tracking was the activity in the Treasury's Supplementary Financing Program (SFP). This was the Treasury program to raise cash for the Fed's liquidity initiatives.

Once the Fed started paying interest on reserves, the supplemental financing program wasn't needed any more to sterilize the expansion of the Fed's balance sheet. The Treasury announced today that the program will be unwound...

As it should be obvious, these guys cannot give up the needle on their own.

SP 500 Futures - Daily Chart

According to reports, the bank prop trading desks are having troublem making their quotas for this month.

Bernanke will be speaking later this week, and that may move the markets.

The average person buys when they should sell, and sells when they should buy. Often they buy or sell when they should do nothing. The Wall Street insiders and their demimonde frequently help them to do this. That is how things are, and now moreseo than before because of the shrinking pools of exploitable non-banking czpital and the lack of financial reforms.

Elizabeth Warren: Why Washington Is Not Reforming the Financial System

Elizabeth Warren Discussing the Lack of Bank Reform on the Bill Maher Show.

"The problems could not be more obvious, and quite frankly, the solutions are just about that obvious, but we just can't seem to get the two together...The reason that we are not changing things right now is because the banks have lobbyists in Washington in numbers I have never seen...People who just want to advocate for American families, people who want some changes to level the playing field do not have that kind of lobbying power. And so what we are really watching here is a David and Goliath story."

Five Former US Treasury Secretaries Endorse the 'Volcker Rule'

I do not expect the Volcker Rule to be passed by Congress for the simple reason that the Wall Street banks hate it. They spent hundreds of millions of dollars in lobbying money achieving the overturn of the original Glass-Steagall law.

The Senators who are beholden to the banks will simply not allow this restriction, which 'worked' for almost 70 years as effective regulation.

I have yet to read a coherent reason why the rule should NOT be passed, except that the Banks do not like it. I spent quite a bit of time listening to arguments and reading presentations, and even exchanging emails with a highly respected colleague who was not in favor of it.

Without exception, every argument was specious, misdirected, or founded on spurious assumptions. Most of the alternatives proposed are more complex and require the active vigilance of regulators.

Simple rules are best, and most easily enforced. This is why the banks hate them.

Part of the problem with this rule was the highly awkward method in which the Obama Administration chose to introduce it into the process, with little background and discussion. I would attribute this to the huge split amongst his advisors, with the Summers-Geithner group holding the most influence.

The reform will not be passed, no matter who endorses it. Congress is in the pocket of the Banks. That is the long and short of it, in my opinion.

US Treasury Secretaries of the last 40 years.

John Connally DEAD
George P. Shultz ENDORSES VOLCKER RULE
William E. Simon DEAD
W. Michael Blumenthal ENDORSES VOLCKER RULE
G. William Miller DEAD
Donald Regan DEAD
James Baker
Nicholas F. Brady ENDORSES VOLCKER RULE
Lloyd Bentsen DEAD
Robert Rubin
Lawrence Summers
Paul O'Neill ENDORSES VOLCKER RULE
John W. Snow ENDORSES VOLCKER RULE
Henry Paulson


Reuters
Ex-Treasury secretaries back Volcker rule
by Philip Barbara
Feb 21, 2010 8:49pm EST

WASHINGTON (Reuters) - Five former Treasury secretaries urged Congress on Sunday to bar banks that receive federal support from engaging in speculative activity unrelated to basic bank services.

"The principle can be simply stated," the five said in a letter to The Wall Street Journal. "Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services."

The Treasury secretaries said, however, that hedge funds, private-equity firms and other organizations engaged in speculative trading should be "free to compete and innovate" but should not expect taxpayers to back up their endeavors.

"They should, like other private businesses, ... be free to fail without explicit or implicit taxpayer support," said the former secretaries for both Republican and Democratic presidents.

The appeal comes as Senate lawmakers are pressing ahead with efforts to produce a financial regulatory reform bill that would curb some of the practices that led to the 2008 financial crisis.

Several major financial firms collapsed, were sold or had to be bailed out after a bubble in the housing market popped, causing real estate prices to plummet and leaving markets uncertain about the value of billions of dollars in mortgage-backed securities.

The liquidity crisis that followed threatened the financial system and deepened a U.S. recession that became the worst since the Great Depression.

The regulatory reform proposal endorsed by the five former Treasury secretaries is the so-called Volcker Rule, formulated by former Federal Reserve Chairman Paul Volcker, a top economic adviser to President Barack Obama.

Obama surprised the financial markets in late January when he announced the proposal, which calls for new limits on banks' ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.

Volcker told the banking committee earlier this month that a failure to adopt trading limits would lead to another economic crisis and warned "I may not live long enough to see the crisis, but my soul is going to come back and haunt you" if proprietary trading is not curbed.

The five former Treasury secretaries -- Michael Blumenthal, Nicholas Brady, Paul O'Neill, George Shultz and John Snow -- said in their letter that banks should not be involved in speculative trading activity and still receive taxpayer backing.

"We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform," their letter said. "It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities."

A Fitting Award for Alan Greenspan

Inhale deeply of the madness and illusions of the financial engineers.

Greenspan was a magnet for the enablers, the spokesman for those primarily responsible for the fraud that led to the series of financial crises. But more Meinhof than Baader, one might say. The monied interests are often not famed economists, having more of a yearning for either raw power or opaque solitude. Their recognition must wait for another day and a different venue.

And as for Bernanke, his time has come, and he may eclipse even Greenspan given a little more tenure at the Fed.

Young Tim is no economist, just a useful pair of hands, the hired help.

For Immediate Release
22 February 2010

Greenspan wins Dynamite Prize in Economics

Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers have won the first–and hopefully last—Dynamite Prize in Economics.

In awarding the Prize, Edward Fullbrook, editor of the Real World Economics Review, noted that “They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.”

The prize was developed by the Real World Economics Review Blog in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, Black Swan event.

In reality, the public perception that economic theories and policies helped cause the crisis is correct.

The prize winners were determined by a poll in which over 7,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review . Each voter could vote for a maximum of three economists. In total 18,531 votes were cast.

Fullbrook cautioned that not all economics and economists were bad. “Only neoclassical economists caused the GFC. There are other approaches to economics that are more realistic—or at least less delusional—but these have been suppressed in universities and excluded from government policy making.”

“Some of these rebels also did what neoclassical economists falsely claimed was impossible: they foresaw the Global Financial Crisis and warned the public of its approach. In their honour, I now call for nominations for the inaugural Revere Award in Economics, named in honour of Paul Revere and his famous ride. It will be awarded to the 3 economists who saw the GFC coming, and whose work is most likely to prevent another GFC in the future.”

Dynamite Prize Citations

Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.

Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.

Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.

In total 18,531 votes were cast. The vote totals for the other finalists were:

Fischer Black and Myron Scholes 2,016
Eugene Fama 1,668
Paul Samuelson 1,291
Robert Lucas 912
Richard Portes 433
Edward Prescott and Finn E. Kydland 403
Assar Lindbeck 375

The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting.

Note: By way of disclosure, I voted for Fama, Greenspan, and Summers. - Jesse

Modern Economic Myths and The Failure of Financial Engineering

"The whole history of civilization is strewn with creeds and institutions which were invaluable at first, and deadly afterwards." Walter Bagehot

The housing bubble did nothing for real median incomes in the US but it did wonders for the insiders in the financial sector.

This is why the average Joes in the States went into debt to continue to maintain their consumption.

Until this situation is addressed, there will be no sustained economic recovery in the US. The US Census Bureau only goes to 2007, but it is highly likely that the median income has taken another serious downturn in the latest financial crisis.

Very little has been done by the Obama administration to address this problem.



Trickle down or supply side economics does well for the upper percentiles of income but does much less for the median wage.



Why care? For several reasons.

First, the median wage is the bulwark of general consumption and savings, and the prosperity of a nation. It must match the character of the social fabric, or place a severe strain on the contract between classes and peoples. A nation cannot survive both slave and free without necessarily resorting to repression.

Second, in any relatively free society, the reversion to the mean in the distribution wealth and justice is never pleasant, and often bloody and indiscriminate.

There are several economic myths, popularized over the last thirty years, that are falling hard in the recent series of financial crises: the efficient market hypothesis, the inherent benefits of globalization from the natural equilibrium of national competitive advantages, and the infallibility of unfettered greed as a ideal method of managing and organizing human social behaviour and maximizing national production.

One has to wonder what would have happened if some more coherent, approachable science, had put forward a system of management that relied upon the nearly perfect rationality and unnatural goodness of men as a critical assumption in order to work? They would have been laughed out of the academy. Yes, there is a certain power to befuddle and intimidate common sense through the use of professionally specific jargon, supported by pseudo-scientific equations.

Why doesn't 'greed is good' work? Because rather than work harder, a certain portion of the population, not necessarily the most productive and intelligent, will immediately seek rents and extraordinary income obtained by unnatural advantages, by gaming the system, by cheating and coercion, by the subversion of the rule of law, which saps the vitality of the greater portion of the population which does in fact work harder, until they can no longer sustain themselves. And then the lawless few seek to expand their reign of greed, and colonies and empires are born.

What will take the place of these modern economic myths? Time will tell, and it will vary from nation to nation. But the winds of change are rising, and may soon be blowing a hurricane.

Gold and Silver Weekly Charts - Explosive Silver Situation Intensifies

Gold Weekly

Gold held against two determined bear raid this past week, centered around 'announcements.' The first was the re-announcement of the IMF gold sale, and next was the largely symbolic gesture by the Fed in raising the Discount Rate to 75 basis points, without touching the target rate. That announcement was made AFTER the bell, rather than before as is more usual. There was noticeable front running of the miners before each announcement.

There is likely to be another bear raid, since this coming week is metals options expiration, and there is a cluster of contracts around 1100. There is also something brewing under the surface which is creating tension on the tape, with a violent back and forth motion in the spot price of gold. We can only speculate for now, but choose to wait and see what is revealed.

The most interesting speculation is that metals bears target is not gold, but rather silver.

Silver Weekly

Silver is in a potential inverse H&S formation that targets $30 per ounce. There are two or three big bullion banks that are massively short silver, that cannot possibly cover their short positions without significant pain, including a risk of default if a higher price fuels demand and breaks the confidence of the paper market.

If this is true, it is a big problem for the US government, because unlike gold, the central banks have no ready store of silver to sell into the markets, having exhausted their strategic stores some years ago.

If silver explodes because of a paper default, gold will follow. The central banks view that as a very risky development since several of the banks are already breaking ranks with the ECB, BofE, and the Fed over this issue of the de facto dollar reserve currency regime.

We do not anticipate a resolution of this quickly. DO NOT try and trade this for the short term. The 'beta' of the silver market could be terrific. The forces aligned around this market are determined and not easily moved. The small specs can get crushed if the titans start shoving.

These sorts of big changes tend to drag out over long periods of time. But we are aware of the situation. The breakout is at 19.50 and the pattern is negated with a drop below 12.

Look for more old arguments of the metals to resurfaces, and nonsensical arguments to be put forward by those banks and funds talking their books through contacts in the media and analyst community.

I cannot stress enough that if there is an all out stock market crash and liquidation both gold and silver will get deeply sold off, with everything which is what happens in a general liquidation of assets. Then we would begin to look for opportunities to buy in as the dust settles.

Miners 'Gold Bugs Index' Weekly

If silver breaks the paper shorts, the miners will break out, targeting 600 on this index. The silver plays would be remarkable.

What could trigger this? We suspect it would have to be a strong indication from the nations of the developing world for a bi-metallic content in the proposed SDR replacement for the dollar reserve currency.

Since central banks currently do not hold any significant silver bullion positions, the resulting buying panic could rival that of the 'Hunt corner' in the silver market. Therefore we would expect a maximum effort to control it ahead of time. A default on paper positions is certainly within the realm of probability.



Keep an Eye on the Long End of the US Bond Curve

This has been a long trend change as can easily be seen from this chart. The trend is bottoming and may be starting a reversal. Again, these things tend to play out over long periods of time. Don't expect to start day trading this next week.



Disclosure: I added initial positions in the gold and silver miners last week. I expect to add to them if the markets confirm. I have been hedging them against a 'market crash' in US equities such as the panic selloff in late 2008 which took us into the market lows.

"How Could I Be So Selfish and So Foolish"

Were Lloyd and Jamie and the pigmen of Wall Street and Washington taking notes during Tiger Woods' apology?

Doubtful.

No one is perfect, of course. Everyone makes mistakes, everyone sins. We are all weak, and insufficient in ourselves. And yet we attempt great things, in fear and trembling. The spirit endures and abides.

But there are moments in history that are epidemic with excess, a pathological pursuit of lust, greed, and deceit with a nihilistic determination that is more like a fashion of the age than an aberration. Chic to be above conventional morality and the law, lacking all proportion. Accepted, and even admired.

Tiger himself is what they call 'small potatoes,' the personal foibles of a star athlete. What is more significant is the festival of fraud going on in the financial world, centered around Chicago and New York.

Tiger's words could be the new American Anthem for a generation of reckless, selfish, and self-destructive behaviour by those most blessed by its freedom, offered the greatest opportunities and privileges, sometimes undeserved, and most often paid for by the sacrifice of others.

Most of them still have no regrets, except of course for the fear of discovery. They will have to somehow grow a conscience for that. Or face the withdrawal of support by their sponsors. In the case of Tiger it was Nike. In the case of the Banks it is the US government. And in the case of the US government it is a gullible and complacent public.

"Many of you in this room know me. Many of you have cheered for me, have worked with me, always supported me. Now, every one of you has good reason to be critical of me. I want to say to each on of you simply and directly I am deeply sorry for my irresponsible and selfish behaviour I engaged in. I know people want to find out how i could be so selfish and foolish.

I knew my actions were wrong but I convinced myself that the normal rules didn't apply. I never thought about who I was hurting. Instead, I only thought about myself...

I felt that I had worked hard my entire life and deserved to enjoy all the temptations around me. I felt that I was entitled.

Parents used to point to me as a role model for their kids. I owe all those families a special apology. I want to say to them that I am truly sorry.

I recognize I have brought this on myself and I know, above all, I am the one who needs to change.

I was wrong. I was foolish. I don't get to play by different rules."

Managing Perceptions: Fed Raises Discount Rate After the Close

"The last duty of a central banker is to tell the public the truth." Alan Blinder, former Vice Chairman of the Federal Reserve

In a largely symbolic move, the Fed raised the Discount Rate after the bell by 25 basis points to .75%.

As you know, the Discount Rate is the interest rate that the Fed charges banks who borrow from them short term on an emergency basis.

This is the shaping of perception by the Fed. It does not raise rates for the consumer or businesses, and does not affect the rates and guarantees in the many Fed and Treasury programs which are still supporting the commercial banks.

One has to wonder why the Fed chose to jawbone at this time. Is this a move to help them with next week's $100+ Billion Treasury auction? We are discounting rumours that the nose counts among the Primary Dealers showed the risk of another 'failed' auction was rising.

Or was this mainly to provide another opportunity for the bullion banks to take the prices down ahead of their option expiration next week? Plan B stands for Bernays.

"We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K." Eddie George, Bank of England Governor to Nicholas J. Morrell

Its all about managing perception.

When the Fed starts backing off on quantitative easing, we will know that things are truly changing. Bernanke is all too aware of the Fed's policy error in 1931 of raises rates prematurely, which caused the second leg down to the trough of the Depression in 1933. So let the Fed wave their hands all they want, but watch the Adjusted Monetary Base. In other words, its not what they say, but rather what they do.

One wonders if Obama is also aware of Hoover's policy error in trying to balance the budget as the nation slid into the most serious part of the Great Depression. He is certainly no FDR, and the nation is unlikely to be on the road to recovery during his hapless Administration. Will he, like Greenspan, later confess that he erred for a theory, a mistaken belief? A small comfort for those they have ruined.

Man wird nie betrogen, man betrügt sich selbst.
[We are never deceived; we but deceive ourselves.]
Johann Wolfgang von Goethe

WSJ
Fed Raises Discount Rate Quarter Percentage Point
By LUCA DI LEO And JON HILSENRATH

WASHINGTON— The U.S. Federal Reserve Thursday raised the rate it charges banks for emergency loans by a quarter percentage point, but emphasized that the step didn't represent a broader tightening of credit.

In a widely expected move, the U.S. central bank said the increase in the discount rate to 75 basis points from half a point was part of its step away from its emergency-lending efforts. The increase will be effective from Friday.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement...