Treasury-Fed-Goldman Sachs: An Axis of Evil

The crooks at Golden Calf are in the news again, thanks to a loud and damning resignation letter...

Some of the best analysis I have seen on the issue is by Bill Frezza. He’s one of the good guys. He writes in Forbes Magazine, often training his razor sharp darts at the crony crapitalist rip-off artists and the big government buffoons who enable them.

I am certain that you will be hard pressed to find systematic illegal activity at Goldman Sachs. These people are lawyered up to the hilt. They know more about securities regulations than the people who wrote them (which I suppose isn't saying much). They know exactly how close to the line they can operate.

No, Goldman Sachs is not a law breaker. With all the former executives and cronies it has parachuted into the halls of government and all the money it showers on politicians running for office, it is actually a law maker. And that is the problem.

TARP was an inside job.  The crooks are still on the inside...

Thanks to this last banking crisis, the lines between the Treasury, the Federal Reserve, the Executive branch, and Goldman Sachs have all but disappeared. Using the entirely legal means of calling in chits from both political parties in its hour of need, Goldman Sachs looted the Treasury to save it from a liquidity crisis, cover its speculative investment errors, and make good on winning gambling bets that would have been uncollectable had Uncle Sam not stepped in to bail out counterparties like AIG.

Feel Poorer:  The bailouts stole money from you and me, devalued our savings and eroded our spending power...

Paying back the bailout money to the one entity that has the power to print it does not forgive the sin. In fact, the very act of printing that money stole value from its rightful owners, whose currency was debased, never to be made whole. The notion that the financial system would not have recovered if not for the federal bailouts is a self-serving lie. Yes, some of our largest financial institutions would have been swept away. Yes, their stockholders would have been wiped out-and deservedly so. But the underlying assets would have still been there, ready to be apportioned by a bankruptcy judge. And a lesson would have been learned not soon to be forgotten.

Think more government regulation will fix it?

The Dodd-Frank legislation does nothing but institutionalize their too big to fail status, while making it harder for would-be competitors to rise to challenge them.
This is not real market capitalism as it once was, should be, and could be again. This is crony capitalism of the worst order. (Bill Frezza)

... And it's all brought to you by corrupt politicians, clueless bureaucrats, and the Wall Street moles who infest our government.

Fear-Driven Economy

The Wall Street Wiz Kids took a whizz on us all and destroyed the economy to boot.  Dodd-Frank will only ensure that there is a bigger crowd of clueless government bureaucrats in the bleachers when the next spectacular crash happens...

Jeffrey Snider is a smart man who understands the murky world of modern-day global finance, and he has a gift for explaining it. His articles are not short, and they are complex, but arcane artifices such as Gaussian Copulas do not lend themselves to shorthand. Still, he does a good job helping the ordinary Joe understand very complex financial subjects.

In The Fed is Actually Bailing Itself Out, he explains Credit Default Swaps.

“It all worked so well, until it didn't.”

“Since credit default swap trading had been growing in substance and depth since their first use in the 1980's, this market-based correlation assumption fit nicely into the expectations of structured credit investors and traders, offering real-time pricing of the previously illiquid asset class.

The proliferation of securitization came directly from this complex math, which itself was nothing more than a shortcut of circular logic (the market needs estimates of future default correlation to price assets, so the assets get their correlation estimates from the market).”

They constructed mathematical models to price previously-unquantifiable tranches of securitized debt. The models relied heavily on recent history, violating the simple truth, “Past performance is no guarantee of future returns.”

You don’t need to be a math genius to see the tragic flaw to all of this: Hubris. And a naïve credulity and blind obeisance to mathematical modeling, all at the expense of common sense, human nature, and financial history. The greedy bastards chucked it all over for the fantasy of an eternal fountain of wealth.

The Loop: “correlations of greater than 100%”

A rush of demand for default swaps pushed many idiosyncratic instruments in the same direction at the same time. Since the Gaussian copulas interpreted similar moves as correlation, this meant that the mathematical indication of correlation "measurements" rose with these new fears. And of course, as interpretations of rising correlations made their way into the math of pricing models, tranche pricing became even more problematic. That forced incrementally more demand for credit default swaps, feeding back into estimates of correlations rising even higher, further heightening fear and the need to hedge, and so on.

[…] it was not uncommon for traders to quote various mortgage bond tranches in correlations of greater than 100%. Of course that makes no logical sense within the confines of what correlation is supposed to confer or what mathematics actually defines, but the market realities of the period introduced by David Li's shortcut undercut the ability of the marketplace to make sense of itself.

This is the result of the folly that government-funded central planning and sophisticated modeling can replace human nature and common sense. More insidiously, it takes away our economic freedom and erodes our savings and buying power through monetarism’s manipulation of fiat currency. It is the antithesis of the free market.

Streets of Fire

"The financial crisis in 2008 didn't stop the practice of economic management by printing money. Burning streets will.”

Andy Xie of Rosetta Stone Advisors, has written a particularly pessimistic piece of what the near economic future holds. He starts by making the case that North Africa unrest that has spilled over into the Middle East was touched off by economic issues like unemployment and rising prices. He ends by saying it could spread to Europe and the US.

In 2009, 14.3 percent Americans lived in poverty, according to the U.S. Census. Including ones that have given up on looking for a job, one sixth of American workers are underemployed or unemployed.

A huge chunk of American people have no cushion against massive increases in the cost of food and energy. In addition, the prices of imported consumer goods that low income Americans depend on are rising and are likely to rise much more, later in the year. Fifty million Americans are not so different from Egyptians in their economic plight. Riots could come to American cities.  (Hot Money, Fast Riots)

Here's a good explanation of the effects of inflation...

Inflation is redistributive, usually unfairly. First, low income people tend not to have debt, because they are usually not qualified to borrow from banks. When inflation surges, as it is happening now, their bank deposits erode in real value. Where do their losses go? The people who have debt and real assets like property speculators gain the same amount. Inflation essentially robs the poor and gives to the rich.

Second, low income people tend to have insecure jobs and cannot bargain wages up along with inflation, especially when inflation surges like now. The reduced purchasing power for their wages pushes them into an unsustainable situation. They simply cannot make ends meet. (Hot Money, Fast Riots)

Paul B. Farrell, pessimistic liberal investor, wonders when the revolution will start...

Only a revolution will stop Wall Street’s self-destructive capitalism. And watching the people revolt against dictators like Mubarak and Gadhafi reminds us of the spirit that sparked America’s revolution in 1776.

Economist Peter Morici: “Capitalism is broken, America’s government is two bankrupt political parties bankrupting the country.”

BusinessWeek recently asked analyst Mary Meeker to run the numbers. How bad is it? America really is bankrupt, with a “net worth of a negative $44 trillion.” Bankrupt. (Paul B. Farrell)

Farrell laments that it is too late to frog march the Wall Street banksters off to the slammer.  Our corrupt political class lacks the will (and credibility) to do it anyway; they were co-conspirators. But he lists four factors that could cause a revolutionary explosion right here in the US of A:

Wealth gap, Wall Street immorality, Wars, World Population Explosion

The NY-DC Axis of Evil is raping and robbing us.  When will we have enough?