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“More Market Losses to Come”

As Markets Surge, Jim Bianco Urges Caution:

“Expect More Losses to Come”

By James B. Driscoll, August 31th, 2011                       

A week ago the market was gripped with fear and talk of a “retest” of the August lows of 1100 filled the airwaves. Today, markets are surging and the bulls are giddily predicting a run to S&P 1250, 1300 and beyond.

Building on last week’s 4.7% gain, the S&P was recently up 2.83% to 1210 while the Dow was higher by 2.26%.

Bucking the rising trend, Jim Bianco of Bianco Research says investors should take a “risk-off attitude.”

While most observers (and investors) focus on the equity market, Bianco is focused on the credit markets, which he notes “continue to worsen” and are “not confirming a bottom in stocks.”

Clearly, there’s not nearly as much stress in credit markets today as in 2008, but Bianco sees similarities between the current environment and the summer of 2008, when the stock market was “attempting rallies” even while the credit market worsened. “Eventually, the stock market gave it up and corrected back to the credit markets,” he recalls.

While Bianco is not predicting the kind of “calamity” that befell stocks in 2008 and early 2009, he expects the stock market will soon revisit its August lows, and possibly break below them with risk to S&P 1070. This negative view is buttressed by a forecast the economy will soon slide into another recession, meaning “the $100 per share earnings consensus estimate for the S&P 500 might be 30% to 40% too high.”

More…

In sum, Driscoll believes investors are better off selling this rally and positioning themselves for another downdraft by sticking with defensive stocks like utilities. “There isn’t a safe place [to hide],” he says. “I expect more losses to come. Returns between now and year-end will have a minus sign.”

Given that fairly dire outlook, Driscoll continues to recommend annuities that are guaranteed and have a good return but there’s no downside risk,” he says.

http://www.jamesbdriscoll.com

James B. Driscoll, President – Senior Services

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Categories: Economic Update

Wall Street Gets $1.2 Trillion in secret loans

Wall Street Aristocracy Got $1.2 Trillion in Fed’s Secret Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Brendan Smialowski/Bloomberg

Chief executive officers from eight of the largest U.S. banks receiving government aid testify at a House Financial Services Committee hearing in Washington, D.C on Feb. 11, 2009.

Chief executive officers from eight of the largest U.S. banks receiving government aid testify at a House Financial Services Committee hearing in Washington, D.C on Feb. 11, 2009. Photographer: Brendan Smialowski/Bloomberg

Aug. 22 (Bloomberg) — The Federal Reserve’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money. The largest borrower, Morgan Stanley, got as much as $107.3 billion, while Citigroup Inc. took $99.5 billion and Bank of America Corp. $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress. Erik Schatzker and Sara Eisen report on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

Aug. 22 (Bloomberg) — Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc., talks about $1.2 trillion of public money the U.S. Federal Reserve secretly loaned to Wall Street banks and other companies. Eisenbeis, speaking with Mark Crumpton on Bloomberg Television’s “Bottom Line,” also discusses the outlook for Fed monetary policy and the U.S. economy. (Source: Bloomberg)

Aug. 21 (Bloomberg) — Robert E. Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis, now vice president at the Kansas City, Missouri-based Kauffman Foundation, Richard Herring, a finance professor at the University of Pennsylvania, Roger Lister, a former Fed economist who’s now head of financial-institutions coverage at credit-rating firm DBRS Inc., and Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard University, talk about the U.S. government’s $1.2 trillion bailout of the banking system and the outlook for regulatory overhaul of the industry. (Source: Bloomberg)

Aug. 22 (Bloomberg) — Neil Barofsky, former special inspector general for the Troubled Asset Relief Program and a Bloomberg Television contributing editor, talks about the Federal Reserve’s emergency loans during the financial crisis. Fed Chairman Ben S. Bernanke’s effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress. Barofsky speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

Aug. 22 (Bloomberg) — Charles Peabody, an analyst at Portales Partners LLC, and Bloomberg reporter Bradley Keoun discuss the Federal Reserve’s emergency lending programs and the capital position of U.S. banks. They speak with Erik Schatzker and Michael McKee on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

Enlarge imageFed data chart

Fed data chart

Fed data chart

Bloomberg

To view the Bloomberg interactive graphic of the Fed’s financial bailout, click on the link in the seventh paragraph of the story.

To view the Bloomberg interactive graphic of the Fed’s financial bailout, click on the link in the seventh paragraph of the story. Source: Bloomberg

Enlarge imageWall Street Aristocracy Got $1.2 Trillion From Fed

Wall Street Aristocracy Got $1.2 Trillion From Fed

Wall Street Aristocracy Got $1.2 Trillion From Fed

Bloomberg

Citigroup Inc. and Bank of America Corp. were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

Citigroup Inc. and Bank of America Corp. were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits. Source: Bloomberg

Enlarge imageWall Street Aristocracy Got $1.2 Trillion

Wall Street Aristocracy Got $1.2 Trillion

Wall Street Aristocracy Got $1.2 Trillion

Scott J. Ferrell/Congressional Quarterly/Getty Images

Lloyd Blankfein, CEO of Goldman Sachs; Jamie Dimon, CEO of JPMorgan Chase and Co.; Robert P.Kelly, CEO of the Bank of New York; Ken Lewis, CEO of the Bank of America; Ronald E. Logue, CEO of State Street; John Mack, CEO of Morgan Stanley; Vikram Pandit, CEO of Citigroup; and John Stumpf, CEO of Wells Fargo, testify during the House Financial Services oversight hearing of the Troubled Assets Relief Program (TARP).

Lloyd Blankfein, CEO of Goldman Sachs; Jamie Dimon, CEO of JPMorgan Chase and Co.; Robert P.Kelly, CEO of the Bank of New York; Ken Lewis, CEO of the Bank of America; Ronald E. Logue, CEO of State Street; John Mack, CEO of Morgan Stanley; Vikram Pandit, CEO of Citigroup; and John Stumpf, CEO of Wells Fargo, testify during the House Financial Services oversight hearing of the Troubled Assets Relief Program (TARP). Photographer: Scott J. Ferrell/Congressional Quarterly/Getty Images

Enlarge imageFinance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Jeremy Bales/Bloomberg

Two weeks after Lehman Brothers Holdings Inc.’s bankruptcy triggered a global credit crisis, Morgan Stanley countered concerns that it might be next to go by announcing it had ‘strong capital and liquidity positions.’

Two weeks after Lehman Brothers Holdings Inc.’s bankruptcy triggered a global credit crisis, Morgan Stanley countered concerns that it might be next to go by announcing it had ‘strong capital and liquidity positions.’ Photographer: Jeremy Bales/Bloomberg

Enlarge imageWall Street Aristocracy Got $1.2T in Loans

Wall Street Aristocracy Got $1.2T in Loans

Wall Street Aristocracy Got $1.2T in Loans

JB Reed/Bloomberg

A Wall Street sign stands outside the New York Stock Exchange in New York, U.S. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

A Wall Street sign stands outside the New York Stock Exchange in New York, U.S. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret. Photographer: JB Reed/Bloomberg

Enlarge imageWall Street Aristocracy Got $1.2T in Loans

Wall Street Aristocracy Got $1.2T in Loans

Wall Street Aristocracy Got $1.2T in Loans

Robert Caplin/Bloomberg

Citigroup Inc., along with Morgan Stanley and Citigroup Inc., were the biggest borrowers under seven U.S. Federal Reserve emergency-lending programs.

Citigroup Inc., along with Morgan Stanley and Citigroup Inc., were the biggest borrowers under seven U.S. Federal Reserve emergency-lending programs. Photographer: Robert Caplin/Bloomberg

Enlarge imageThe Fed’s Secret Liquidity Lifelines

The Fed’s Secret Liquidity Lifelines

The Fed’s Secret Liquidity Lifelines

Bloomberg

The Federal Reserve provided as much as $1.2 tillion in public money to banks and other companies from August 2007 through April 2010 to head off a depression.

The Federal Reserve provided as much as $1.2 tillion in public money to banks and other companies from August 2007 through April 2010 to head off a depression. Source: Bloomberg

Enlarge imageFinance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Peter Foley/Bloomberg

Morgan Stanley, along with Citigroup Inc., and Bank of America Corp., were the biggest borrowers under seven Fed emergency-lending programs. The three banks’ combined $298.2 billion in hidden Fed loans was triple what they received in publicly disclosed bailouts from the U.S. Treasury.

Morgan Stanley, along with Citigroup Inc., and Bank of America Corp., were the biggest borrowers under seven Fed emergency-lending programs. The three banks’ combined $298.2 billion in hidden Fed loans was triple what they received in publicly disclosed bailouts from the U.S. Treasury. Photographer: Peter Foley/Bloomberg

Enlarge imageFinance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Jeremy Bales/Bloomberg

Bank of America Corp., along with Morgan Stanley and Citigroup Inc. was one of the biggest borrowers under the U.S. Federal Reserve’s emergency-lending programs. The three banks’ combined $298.2 billion in hidden Fed loans was triple what they received in publicly disclosed bailouts from the U.S. Treasury.

Bank of America Corp., along with Morgan Stanley and Citigroup Inc. was one of the biggest borrowers under the U.S. Federal Reserve’s emergency-lending programs. The three banks’ combined $298.2 billion in hidden Fed loans was triple what they received in publicly disclosed bailouts from the U.S. Treasury. Photographer: Jeremy Bales/Bloomberg

Enlarge imageFinance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Simon Dawson/Bloomberg

The Royal Bank of Scotland took $84.5 billion in loans from the U.S. Federal Reserve’s emergency-lending programs.

The Royal Bank of Scotland took $84.5 billion in loans from the U.S. Federal Reserve’s emergency-lending programs. Photographer: Simon Dawson/Bloomberg

Enlarge imageFinance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Gianluca Colla/Bloomberg

UBS AG, Switzerland’s biggest bank, got $77.2 billion in loans from the U.S. Federal Reserve’s emergency-lending programs.

UBS AG, Switzerland’s biggest bank, got $77.2 billion in loans from the U.S. Federal Reserve’s emergency-lending programs. Photographer: Gianluca Colla/Bloomberg

Enlarge imageFinance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Scott Eells/Bloomberg

Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets.

Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets. Photographer: Scott Eells/Bloomberg

Enlarge imageFinance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Judith White/Bloomberg

U.S. Federal Reserve borrowings by Societe Generale SA, France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorizedstock-index futures bets by former trader Jerome Kerviel.

U.S. Federal Reserve borrowings by Societe Generale SA, France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorizedstock-index futures bets by former trader Jerome Kerviel. Photographer: Judith White/Bloomberg

Enlarge imageFinance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Finance ‘Aristocracy’ Took $1.2 Trillion in Loans

Antoine Antoniol/Bloomberg

U.S. Federal Reserve borrowings by Societe Generale SA, France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorized stock-index futures bets by former trader Jerome Kerviel.

U.S. Federal Reserve borrowings by Societe Generale SA, France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorized stock-index futures bets by former trader Jerome Kerviel. Photographer: Antoine Antoniol/Bloomberg

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis.“You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

(View the Bloomberg interactive graphic to chart the Fed’s financial bailout.)

Foreign Borrowers

It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees.

The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default.

The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.

Peak Balance

The balance was more than 25 times the Fed’s pre-crisis lending peak of $46 billion on Sept. 12, 2001, the day after terrorists attacked the World Trade Center in New York and the Pentagon. Denominated in $1 bills, the $1.2 trillion would fill 539 Olympic-size swimming pools.

The Fed has said it had “no credit losses” on any of the emergency programs, and a report by Federal Reserve Bank of New York staffers in February said the central bank netted $13 billion in interest and fee income from the programs from August 2007 through December 2009.

“We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the U.S. taxpayer,” said James Clouse, deputy director of the Fed’s division of monetary affairs in Washington. “Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses.”

While the 18-month U.S. recession that ended in June 2009 after a 5.1 percent contraction in gross domestic product was nowhere near the four-year, 27 percent decline between August 1929 and March 1933, banks and the economy remain stressed.

Odds of Recession

The odds of another recession have climbed during the past six months, according to five of nine economists on the Business Cycle Dating Committee of the National Bureau of Economic Research, an academic panel that dates recessions.

Bank of America’s bond-insurance prices last week surged to a rate of $342,040 a year for coverage on $10 million of debt, above where Lehman Brothers Holdings Inc. (LEHMQ)’s bond insurance was priced at the start of the week before the firm collapsed. Citigroup’s shares are trading below the split-adjusted price of $28 that they hit on the day the bank’s Fed loans peaked in January 2009. The U.S. unemployment rate was at 9.1 percent in July, compared with 4.7 percent in November 2007, before the recession began.

Homeowners are more than 30 days past due on their mortgage payments on 4.38 million properties in the U.S., and 2.16 million more properties are in foreclosure, representing a combined $1.27 trillion of unpaid principal, estimates Jacksonville, Florida-based Lender Processing Services Inc.

Liquidity Requirements

“Why in hell does the Federal Reserve seem to be able to find the way to help these entities that are gigantic?” U.S. Representative Walter B. Jones, a Republican from North Carolina, said at a June 1 congressional hearing in Washington on Fed lending disclosure. “They get help when the average businessperson down in eastern North Carolina, and probably across America, they can’t even go to a bank they’ve been banking with for 15 or 20 years and get a loan.”

The sheer size of the Fed loans bolsters the case for minimum liquidity requirements that global regulators last year agreed to impose on banks for the first time, said Litan, now a vice president at the Kansas City, Missouri-based Kauffman Foundation, which supports entrepreneurship research. Liquidity refers to the daily funds a bank needs to operate, including cash to cover depositor withdrawals.

The rules, which mandate that banks keep enough cash and easily liquidated assets on hand to survive a 30-day crisis, don’t take effect until 2015. Another proposed requirement for lenders to keep “stable funding” for a one-year horizon was postponed until at least 2018 after banks showed they’d have to raise as much as $6 trillion in new long-term debt to comply.

‘Stark Illustration’

Regulators are “not going to go far enough to prevent this from happening again,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and now aneconomics professor at Harvard University.

Reforms undertaken since the crisis might not insulate U.S. markets and financial institutions from the sovereign budget and debt crises facing Greece, Ireland and Portugal, according to the U.S. Financial Stability Oversight Council, a 10-member body created by the Dodd-Frank Act and led by Treasury Secretary Timothy Geithner.

“The recent financial crisis provides a stark illustration of how quickly confidence can erode and financial contagion can spread,” the council said in its July 26 report.

21,000 Transactions

Any new rescues by the U.S. central bank would be governed by transparency laws adopted in 2010 that require the Fed to disclose borrowers after two years.

Fed officials argued for more than two years that releasing the identities of borrowers and the terms of their loans would stigmatize banks, damaging stock prices or leading to depositor runs. A group of the biggest commercial banks last year asked the U.S. Supreme Court to keep at least some Fed borrowings secret. In March, the high court declined to hear that appeal, and the central bank made an unprecedented release of records.

Data gleaned from 29,346 pages of documents obtained under the Freedom of Information Act and from other Fed databases of more than 21,000 transactions make clear for the first time how deeply the world’s largest banks depended on the U.S. central bank to stave off cash shortfalls. Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.

Morgan Stanley Borrowing

Two weeks after Lehman’s bankruptcy in September 2008, Morgan Stanley countered concerns that it might be next to go by announcing it had “strong capital and liquidity positions.”The statement, in a Sept. 29, 2008, press release about a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial Group Inc., said nothing about Morgan Stanley’s Fed loans.

That was the same day as the firm’s $107.3 billion peak in borrowing from the central bank, which was the source of almost all of Morgan Stanley’s available cash, according to the lending data and documents released more than two years later by the Financial Crisis Inquiry Commission. The amount was almost three times the company’s total profits over the past decade, data compiled by Bloomberg show.

Mark Lake, a spokesman for New York-based Morgan Stanley, said the crisis caused the industry to “fundamentally re-evaluate” the way it manages its cash.

“We have taken the lessons we learned from that period and applied them to our liquidity-management program to protect both our franchise and our clients going forward,” Lake said. He declined to say what changes the bank had made.

Acceptable Collateral

In most cases, the Fed demanded collateral for its loans –Treasuries or corporate bonds and mortgage bonds that could be seized and sold if the money wasn’t repaid. That meant the central bank’s main risk was that collateral pledged by banks that collapsed would be worth less than the amount borrowed.

As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasuries. By late 2008, it was accepting “junk” bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation.

Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an “unknown rating,” according to the documents. About 25 percent of the collateral was foreign-denominated.

‘Willingness to Lend’

“What you’re looking at is a willingness to lend against just about anything,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta and now chief monetary economist in Atlanta for Sarasota, Florida-based Cumberland Advisors Inc.

The lack of private-market alternatives for lending shows how skeptical trading partners and depositors were about the value of the banks’ capital and collateral, Eisenbeis said.

“The markets were just plain shut,” said Tanya Azarchs, former head of bank research at Standard & Poor’s and now an independent consultant in Briarcliff Manor, New York. “If you needed liquidity, there was only one place to go.”

Even banks that survived the crisis without government capital injections tapped the Fed through programs that promised confidentiality. London-based Barclays Plc (BARC) borrowed $64.9 billion and Frankfurt-based Deutsche Bank AG (DBK) got $66 billion. Sarah MacDonald, a spokeswoman for Barclays, and John Gallagher, a spokesman for Deutsche Bank, declined to comment.

Below-Market Rates

While the Fed’s last-resort lending programs generally charge above-market interest rates to deter routine borrowing, that practice sometimes flipped during the crisis. On Oct. 20, 2008, for example, the central bank agreed to make $113.3 billion of 28-day loans through its Term Auction Facility at a rate of 1.1 percent, according to a press release at the time.

The rate was less than a third of the 3.8 percent that banks were charging each other to make one-month loans on that day. Bank of America and Wachovia Corp. each got $15 billion of the 1.1 percent TAF loans, followed by Royal Bank of Scotland’s RBS Citizens NA unit with $10 billion, Fed data show.

JPMorgan Chase & Co. (JPM), the New York-based lender that touted its “fortress balance sheet” at least 16 times in press releases and conference calls from October 2007 through February 2010, took as much as $48 billion in February 2009 from TAF. The facility, set up in December 2007, was a temporary alternative to the discount window, the central bank’s 97-year-old primary lending program to help banks in a cash squeeze.

‘Larger Than TARP’

Goldman Sachs Group Inc. (GS), which in 2007 was the most profitable securities firm in Wall Street history, borrowed $69 billion from the Fed on Dec. 31, 2008. Among the programs New York-based Goldman Sachs tapped after the Lehman bankruptcy was the Primary Dealer Credit Facility, or PDCF, designed to lend money to brokerage firms ineligible for the Fed’s bank-lending programs.

Michael Duvally, a spokesman for Goldman Sachs, declined to comment.

The Fed’s liquidity lifelines may increase the chances that banks engage in excessive risk-taking with borrowed money, Rogoff said. Such a phenomenon, known as moral hazard, occurs if banks assume the Fed will be there when they need it, he said. The size of bank borrowings “certainly shows the Fed bailout was in many ways much larger than TARP,” Rogoff said.

TARP is the Treasury Department’s Troubled Asset Relief Program, a $700 billion bank-bailout fund that provided capital injections of $45 billion each to Citigroup and Bank of America, and $10 billion to Morgan Stanley. Because most of the Treasury’s investments were made in the form of preferred stock, they were considered riskier than the Fed’s loans, a type of senior debt.

Dodd-Frank Requirement

In December, in response to the Dodd-Frank Act, the Fed released 18 databases detailing its temporary emergency-lending programs.

Congress required the disclosure after the Fed rejected requests in 2008 from the late Bloomberg News reporter Mark Pittman and other media companies that sought details of its loans under the Freedom of Information Act. After fighting to keep the data secret, the central bank released unprecedented information about its discount window and other programs under court order in March 2011.

Bloomberg News combined Fed databases made available in December and July with the discount-window records released in March to produce daily totals for banks across all the programs, including the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, discount window, PDCF, TAF, Term Securities Lending Facility and single-tranche open market operations. The programs supplied loans from August 2007 through April 2010.

Rolling Crisis

The result is a timeline illustrating how the credit crisis rolled from one bank to another as financial contagion spread.

Fed borrowings by Societe Generale (GLE), France’s second-biggest bank, peaked at $17.4 billion in May 2008, four months after the Paris-based lender announced a record 4.9 billion-euro ($7.2 billion) loss on unauthorized stock-index futures bets by former trader Jerome Kerviel.

Morgan Stanley’s top borrowing came four months later, after Lehman’s bankruptcy. Citigroup crested in January 2009, as did 43 other banks, the largest number of peak borrowings for any month during the crisis. Bank of America’s heaviest borrowings came two months after that.

Sixteen banks, including Plano, Texas-based Beal Financial Corp. and Jacksonville, Florida-based EverBank Financial Corp., didn’t hit their peaks until February or March 2010.

Using Subsidiaries

“At no point was there a material risk to the Fed or the taxpayer, as the loan required collateralization,” said Reshma Fernandes, a spokeswoman for EverBank, which borrowed as much as $250 million.

Banks maximized their borrowings by using subsidiaries to tap Fed programs at the same time. In March 2009, Charlotte, North Carolina-based Bank of America drew $78 billion from one facility through two banking units and $11.8 billion more from two other programs through its broker-dealer, Bank of America Securities LLC.

Banks also shifted balances among Fed programs. Many preferred the TAF because it carried less of the stigma associated with the discount window, often seen as the last resort for lenders in distress, according to a January 2011 paper by researchers at the New York Fed.

After the Lehman bankruptcy, hedge funds began pulling their cash out of Morgan Stanley, fearing it might be the next to collapse, the Financial Crisis Inquiry Commission said in a January report, citing interviews with former Chief Executive Officer John Mack and then-Treasurer David Wong.

Borrowings Surge

Morgan Stanley’s borrowings from the PDCF surged to $61.3 billion on Sept. 29 from zero on Sept. 14. At the same time, its loans from the Term Securities Lending Facility, or TSLF, rose to $36 billion from $3.5 billion. Morgan Stanley treasury reports released by the FCIC show the firm had $99.8 billion of liquidity on Sept. 29, a figure that included Fed borrowings.

“The cash flow was all drying up,” said Roger Lister, a former Fed economist who’s now head of financial-institutions coverage at credit-rating firm DBRS Inc. in New York. “Did they have enough resources to cope with it? The answer would be yes, but they needed the Fed.”

While Morgan Stanley’s Fed demands were the most acute, Citigroup was the most chronic borrower among the largest U.S. banks. The New York-based company borrowed $10 million from the TAF on the program’s first day in December 2007 and had more than $25 billion outstanding under all programs by May 2008, according to Bloomberg data.

Tapping Six Programs

By Nov. 21, when Citigroup began talks with the government to get a $20 billion capital injection on top of the $25 billion received a month earlier, its Fed borrowings had doubled to about $50 billion.

Over the next two months the amount almost doubled again. On Jan. 20, as the stock sank below $3 for the first time in 16 years amid investor concerns that the lender’s capital cushion might be inadequate, Citigroup was tapping six Fed programs at once. Its total borrowings amounted to more than twice the federal Department of Education’s 2011 budget.

Citigroup was in debt to the Fed on seven out of every 10 days from August 2007 through April 2010, the most frequent U.S. borrower among the 100 biggest publicly traded firms by pre-crisis market valuation. On average, the bank had a daily balance at the Fed of almost $20 billion.

‘Help Motivate Others’

“Citibank basically was sustained by the Fed for a very long time,” said Richard Herring, a finance professor at the University of Pennsylvania in Philadelphia who has studied financial crises.

Jon Diat, a Citigroup spokesman, said the bank made use of programs that “achieved the goal of instilling confidence in the markets.”

JPMorgan CEO Jamie Dimon said in a letter to shareholderslast year that his bank avoided many government programs. It did use TAF, Dimon said in the letter, “but this was done at the request of the Federal Reserve to help motivate others to use the system.”

The bank, the second-largest in the U.S. by assets, first tapped the TAF in May 2008, six months after the program debuted, and then zeroed out its borrowings in September 2008. The next month, it started using TAF again.

On Feb. 26, 2009, more than a year after TAF’s creation, JPMorgan’s borrowings under the program climbed to $48 billion. On that day, the overall TAF balance for all banks hit its peak, $493.2 billion. Two weeks later, the figure began declining.

“Our prior comment is accurate,” said Howard Opinsky, a spokesman for JPMorgan.

‘The Cheapest Source’

Herring, the University of Pennsylvania professor, said some banks may have used the program to maximize profits by borrowing “from the cheapest source, because this was supposed to be secret and never revealed.”

Whether banks needed the Fed’s money for survival or used it because it offered advantageous rates, the central bank’s lender-of-last-resort role amounts to a free insurance policy for banks guaranteeing the arrival of funds in a disaster, Herring said.

An IMF report last October said regulators should consider charging banks for the right to access central bank funds.

“The extent of official intervention is clear evidence that systemic liquidity risks were under-recognized and mispriced by both the private and public sectors,” the IMF said in a separate report in April.

Access to Fed backup support “leads you to subject yourself to greater risks,” Herring said. “If it’s not there, you’re not going to take the risks that would put you in trouble and require you to have access to that kind of funding.”

Categories: Economic Update

Happy Birthday=Social Security / 75 years! Can we save it???

Are You Ready For A

Social Security System Overhaul?

I don’t know about you, but I’m beginning to wonder about belonging to the sandwich generation. Not only am I taking care of my kids, but also my aging parents. And we’re all seeing less and less of our paychecks thanks to an ever increasing deficit in the funds pool for Social Security, among other things. With so many baby boomers signing up for Social Security over the next few years, is there any wonder why so many people in my generation are starting to think that there won’t be any money left by the time we retire?

Are You Ready For A Social Security System Overhaul?

Even the Congressional Budget Office is worried. For the first time since its inception, Social Security will actually be taking in less than it’s going to pay out. Experts agree that the deficit would last through 2013 before rebounding slightly and then slipping into the depths of oblivion forever.

I guess we should be thankful that it’s the Obama Administration’s goal to revamp everything that’s ever been wrong with this country over the four years he’s in office ;) . So, it looks like it’s Social Security’s turn to get a face lift. In my mind, this might be a good thing if it hadn’t been for the government spending the cash on other things that caused the deficit in the first place. Of course, they never intended for this to happen, but it seems as though bailing out Wall Street, two of the Big Three, and paying for the executive bonus packages and employee retention bonus program for AIG, not to mention supporting a big expensive war that doesn’t appear to be on the verge of victory any time soon, has left them more than a little strapped for cash.

social security system

So, here are some of the ideas that Obama and company are throwing around to revamp Social Security.

1. Edging up the retirement age. Currently, you can begin drawing Social Security benefits as early as 66 years of age. In the current design, this age would be increased to 67 by 2027, but some don’t think that this idea is aggressive enough to make a dent. Experts want to move this time table up by adding 1 month every two years. This sounds like a reasonable plan, but this will still only address about 20% of the expected shortfall.

2. Reducing the amount of benefits you’ll be entitled to. This one bugs me because of the selective nature of this recommendation. The plan is designed to hit middle and higher income earners only, while sparing low income workers, such that the first group will end up receiving less benefits than everyone else. It feels very Robin Hoodish-you know: steal from the rich and give to the poor, except that many people who are labeled rich aren’t truly rich — they are mostly regular people like you and me.

3. Raising taxes. You should expect our government to rely upon the obvious fallback — taxation. Yes, the Feds want to take a larger portion of your wages in order to make up for a deficit they created. And here’s the sad part: this is probably the only way the existing deficit will get addressed, at least in the short term.

Tip: Instead of relying entirely on social security benefits to fund your retirement, take matters into your own hands and plan for your own retirement. Here are some of our articles on retirement planning:

The fact is, neither Obama nor any other sitting president will allow Social Security to go by the wayside…at least not on their watch. I’m not sure what the solution is to this problem, but we’re not going towards privatization here, at least not yet. The privatization of Social Security, as once proposed by the Junior Bush, is currently on the backburner.

While I like the idea of deferring my contributions into a 401(k) style account that I can manage and grow, I can’t see this one being an option under the current administration. Employing a program this radical can have far-reaching ramifications and it’s not one that the government is interested in worrying about at this time. So maybe a cost of taxation raise isn’t out of the question.

Categories: Economic Update

DOW – drops 500 points? What Gives???

See how close this looks like 2008.

Scary chart-looks like the 2007-2008 crash.Dow Ends One Of Most Volatile Weeks in History Basically Flat — So What’s Next?

By James B. Driscoll, August 13, 2011

The past seven trading sessions have been nothing short of remarkable.

Last Thursday, after a couple of weeks of steady but relatively normal declines, the Dow suddenly tanked 500 points. Then, after a modest recovery on Friday, it fell 600 points. Then it soared 400 points. Then it plunged 500 points. Then it blasted off to another 400 point gain. And, today, after another 100+ point gain, it appears poised to end the week down, but within a couple of hundred points from where it started the week.

What gives?

Is this wild volatility the start of another massive market crash, along the lines of what happened in 2007-2009, or 2000-2002? Or was it just a “correction” — sharp and scary, but now over and done?

No one knows, but Aaron and I think the risks are still to the downside.

The market’s initial plunge was triggered by the European solvency crisis and the US debt downgrade. The shock of both has worn off, but the fundamental problems have not. Although the US economy is not definitely headed for a double-dip recession, as some pundits were asserting earlier this week, a recession certainly seems possible. And, regardless, the European situation and the US debt-and-deficit problems have no easy fix.

If the US can avoid a recession and the European crisis can be “contained” — a scary word, given the happy theory in 2007 that the subprime collapse would be contained — then the market may well have hit its lows for the year. If that happens, historians will likely attribute the recent plunge to investors adjusting to the country’s slower growth prospects after the recent slowdown — say, 2% a year instead of the 3%-4% economists were once expecting.

If Europe continues to blow up, however, or the US does sink back into recession, there’s almost certainly more downside for the market. The crash of 2007 began just this way, and it lasted far longer and was far more pronounced than most observers expected.

So, enjoy a well-earned weekend and rest up for the week ahead. It seems unlikely to top this one in terms of pure hysteria, but it’s unlikely to be boring.  Hold on and hope, or call me to be sure.

Categories: Economic Update

Interest Rates to stay low – Fed says.

Fed to keep interest rates low until 2013

By James B. Driscoll,  August 9, 2011: 4:58 PM ET

NEW YORK (CNNMoney) — The Federal Reserve painted a much gloomier picture of the economy Tuesday, and indicated it would keep cash cheap and easy for at least two more years.

Following its fifth policymaking meeting of the year, the central bank also surprised Wall Street with several dramatic changes to its official statement.

Among those surprises were dissension among the ranks of the central bank, a “considerably slower” reading on the economy, and a bold statement that the Fed stands ready to enact further stimulus measures if needed.

Interest rates: The Fed indicated it plans to keep “exceptionally low” interest rates in place until at least mid-2013 as a way to continue to prop up the recovery.

The federal funds rate is the central bank’s key tool to spur the economy and a low rate is thought to encourage spending by making it cheaper to borrow money.

The Fed has kept the rate near zero since 2008, but has long been ambiguous on its future timeframe, saying it would keep the federal funds rate near zero for an “extended period.”

The new two-year time horizon was an unusual move because the Fed doesn’t typically signal its policies that far in advance, and because it was interpreted as an admission that the economy will remain weak until then.

 

“It surprised me that they boxed themselves into a corner that way,” said Professor Steve Wyatt from the Farmer School of Business at Miami University. “It essentially tells markets that they don’t see any hope that we will see a stronger economic recovery in the next two years.”

 

Dow soars 429 points in wild session

Disagreement within the Fed: Also surprising, was that three of the Fed’s 10 voting members formally dissented against using the new language. Multiple dissenting votes are rare among the Fed’s policy-making committee.

Regional Fed presidents Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia said they would have preferred to keep the “extended period” phrase instead of laying out the 2013 timeframe.

“What it’s telling us is, this was a very divisive meeting and there was a lot of back and forth,” said Sherry Cooper, chief economist with BMO Financial Group and a former Fed economist.

Aside from some other gloomier language about the U.S. recovery, the Federal Reserve did little else in response to heightened fears about a global economic slowdown.

“This was a very conservative statement,” Cooper said. “Basically, they did the least they could do, short of doing absolutely nothing.”

America’s job crisis

Gloomy outlook: The central bank acknowledged that economic growth in the United States is “considerably slower” than expected. That marks a change from prior statements, when the Fed had said the recovery was chugging along at a “moderate pace.”

“Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected,” the official Fed statement said.

The Fed also acknowledged that thejob market has recently deteriorated, consumer spending has flattened out and the housing sector remains depressed.

More stimulus ahead? Critics have pointed out that there’s little the Fed can do to tame volatile financial markets after Standard & Poor’s downgraded the country’s credit rating Friday. Having exhausted most of its traditional tools, the Fed also has few remaining options to try to prop up the sluggish economy and job market, many say.

But the Fed indicated it is considering a “range of policy tools available to promote a stronger economic recovery,” and “is prepared to employ these tools as appropriate.” This language was much stronger than in June, when the Fed seemed to take a more passive stance, saying it would “monitor the economic outlook” and “act as needed.”

0:00 / 2:32 Fed extends uncertainty until 2013

In June, the Fed completed a $600 billion stimulus effort known as the second round of quantitative easing, or QE2. That policy is widely credited with supporting stocks earlier this year, but is also blamed for driving oil and gasoline prices higher — an effect that spurred inflation and hurt U.S. consumer spending.

Some Fed members still fear that more monetary stimulus could drive inflation higher. But on the other hand, without stimulus, economists say the U.S. economy may risk falling into another recession.

At its prior meeting in June, the Federal Reserve cut its forecasts for U.S. economic growth to between 2.7% and 2.9% for the year overall.

Categories: Economic Update

What a Hellish Decade to come.

by James B. Driscoll
Monday, August 8, 2011           More bad news for ‘America’s Worst Decade’

Next decade? Toxic politics promises to make economic matters much worse than even today.

“The U.S. economy appears to be coming apart at the seams,” warned Columbia Professor Robert Lieberman earlier this year in “Foreign Affairs.”

“This Fight Ain’t Over: Think the debt ceiling gridlock was ugly? Congress is just getting warmed up. Here are eight more foreign-policy battles right around the corner” when they get back to sinking the economic recovery even deeper this fall.

All punctuated last week by S&P’s downgrade of the U.S. credit rating, as well as the one-day 513-point market drop into a double-dip recession.  Another “Foreign Policy” expert, James Taub, warns of what the “debt-ceiling deal tells us about the Tea Party’s grim vision of American power.”

A disaster ahead, Taub writes: “All Guns, No Butter … depleting the national treasury to pay for the military … when many Americans want to reduce the role of government at home and especially abroad, the debt deal just concluded is likely to preserve the country’s hypertrophied defense budget, at least if congressional Republicans get their way.”

And Mitch McConnell, the GOP’s Darth Vader, is doing just that, doubling down on his vow to make certain Obama is a one-term president, intentionally ignoring the collateral damage, killing economic recovery.

How? Ol’ Mitch is already sabotaging the new Congressional “Debt Super-Committee,” vowing to appoint only Republicans who have signed Grover Norquist’s “no new taxes” pledge.

Expect more deadlocks as economists warn that recovery is impossible without new revenues.

But it’s beyond toxic non-democratic pledges. America really is “coming apart at the seams.” Both parties: Dems for lack of strong leadership. The GOP and the Tea Party with their bizarre Shumpeterian conviction that destroying the economy is the only way to save America and pave the way for a revival of their anarchistic free market Reaganomics.

Political Wars Sabotage Economy

Yes folks, our politicians really are out of control, utterly unable to manage the economy. They’re irrational, and worse, clueless and myopic in economics. No surprise the market crashed 513 points one day last week and 635 points on Monday, for the DOW to close at 10,809,89.   Nor that pundits are pointing to high tech multiples, warning of a new dot-com crash and double-dip recession. Warning of a collapse in commodities, in emerging markets and endless debt problems for Europe.   Warning, in short, that we’re headed into a perfect storm rivaling the disastrous political insanity of the 1930s that prolonged the depression, driving the economy into far reaching global problems that added fuel to an irrational zeitgeist and world war.   And more.

US is sinking - we are in a recession!

Double - Dip Recession

 

 

 

 

 

 

 

 

DOW’s Open and close on Monday will tell us about Reality

Shades of 2008: World Markets on Edge Ahead of Monday’s U.S. Open

By James B. Driscoll

Welcome to the new era.

Monday marks the first day of U.S. trading since America lost its coveted triple-A rating and traders are braced for everything from a genuine market crash to an early sell-off followed by a robust rally. (See: After S&P Downgrade, ‘Sunday Night, Pray’ and Other Thoughts From Traders)

U.S. futures are pointing to steep declines following a global sell-off as international markets reacted violently to S&P’s Friday evening downgrade:

  • Oil futures are sharply lower while gold surged to a new record near $1700 per ounce.
  • In Europe, the FTSE and DAX are trading down 1.6% and 2.3%, respectively.
  • Asian markets tumbled overnight with Japan’s Nikkei 225 and the Hang Seng falling 2.2%.
  • Middle Eastern markets tumbled overnight Sunday, with Israel’s benchmark TA-25 index falling 7%, its worst drop since October 2000.

As if the historic downgrade of America’s credit rating weren’t enough, traders are also closely watching developments in Europe, where interest rates on Spanish and Italian bonds plummeted after the ECB announced it would use the European Financial Stability Facility to buy debt of those countries in the secondary markets. The debt purchases will be made in exchange for promises of what the ECB calls “decisive and swift implementation by both governments” of measures designed to reduce debt-to-GDP levels.

In a separate but related development, the G7 issued a statement Sunday evening saying it is “ready to take action to ensure stability and liquidity in financial markets.” That’s code for a potential intervention in the currency markets, where the dollar was trading at a record low vs. the Swiss franc.

Following last week’s rout in global equities, the debts of Europe’s PIIGs and other so-called risk assets, the Sunday night announcements by the ECB and G7 recall the summer of 2008, when global policymakers struggled to contain the bursting of the subprime bubble. Talk of “bazookas” filling the airwaves on the financial news networks serves as another reminder of August 2008.

It wasn’t that long ago, but many observers seem to have forgotten the lessons of those thrilling days of yesteryear, including that debt matters far more than equities and the law of diminishing returns appears to apply to government bailouts. Oh, and that the global economy is only as strong as the banking system, which is built on a very shaky foundation of trust, confidence and derivatives contracts that nobody really understands.

Policymakers have presumably learned some lessons from the experience of 2008, but the reality is they’ve also spent a lot of bullets and lost a lot of credibility in the process.

Nobody knows what Monday will bring but, almost certainly, this latest chapter of the financial crisis isn’t over yet.

Weekend Warriors

As you might expect, the Sunday morning talk shows (and evening financial news networks) were chock-full of heavy hitters and A-list guests opining about S&P’s downgrade, Europe’s crisis or some combination thereof. Here’s some highlights:

Treasury Secretary Tim Geithner told CNBC that S&P showed “terrible judgment” and “stunning lack of knowledge” in its decision to cut America’s debt rating from AAA to AA-plus. But David Beers, S&P’s head of sovereign debt ratings, defended the decision in a separate CNBC appearance and said “we still see risk to the downside” for America’s credit rating. (Beers further deflected criticism by noting his team is separate from the one at S&P that put AAA ratings on subprime mortgages and other securities of dubious merit.)

Warren Buffett told Bloomberg TV that America “merits a quadruple-A rating” and that he doesn’t expect a ‘double-dip’ recession. Still, “financial markets create their own dynamics,” the Oracle of Omaha admits.

PIMCO’s Mohamed El-Erian said the loss of America’s triple-A rating means “things will be different” because the global financial system was “built on the assumption of AAA at its core.” U.S. creditors have a right to be “nervous,” he said, suggesting the downgrade will prompt sovereign wealth funds (like China’s) to seek diversification away from Treasuries. (On a related note, I can’t help think the loss of AAA is the latest step toward the dollar losing its reserve status, albeit not imminently thanks to Europe’s implosion and a lack of other alternatives.)

Former Fed chairman Alan Greenspan told NBC’s Meet the Press that S&P’s downgrade “hit a nerve that there’s something basically bad going on, and it’s hit the self-esteem of the United States, the psyche.” Without a trace of irony or self-awareness, Greenspan also said there is “zero probability” of a U.S. default “because we can always print money” to pay our debts. (Did I mention gold was trading at another new high? )

Stay tuned for additional coverage Monday morning and throughout the coming day.

http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1312804282421&chddm=8211&chls=IntervalBasedLine&q=INDEXDJX:.DJI&ntsp=0

Categories: Economic Update