Sunday, July 5, 2009

Wall St's OFF Balance sheet expansion, hockey stick era inflated by leverage - a stealth, counterfeit money supply aka CASH?

The US Treasury controls the printing of money for circulation. The Federal Reserve is charged with regulating the money supply. The NY Fed is charged with watching and regulating whom? Its district's MEMBER banks, long ago American Express cardholders were told what? Membership has its privileges. The SEC is charged with overseeing securities issuers and market participants; except due to legal loopholes, private placement, unregistered securities, off balance sheet entities and hedge funds.

[Note: US taxpayers PAID the salaries of all employees of the US Treasury, Federal Reserve, NY Fed, and the SEC and the creators and overseers of same; our elected officials of all stripes - past and present. Ever notice the patterns of career track? Right into the first chair orchestra of the regulated entities. Talk about a principal agent conflict of interest brewing on the taxpayers' dime. Recall the Defense Depts. ban on soon going to work for contractors?]

Trader think - "So, (by the way, did you happen to notice that "so" is today's leading popular narrative segue previously known as and a replacement for the versatile, "Uh"), when you can take mortgages, package them together into derivatives, like many in the sausage trade, create investments called Mortgage backed securities then, because we be so smart and technically gifted, slice them and dice them like pieces of exotic sushi into mild to spicy to nuclear hot, that creates risk and what? The potential for return, returns like sushi, from mild to nuclear.

Trader think - "Oh so we'll create a market; but because some of the sushi is so hot; we'll need to keep it private (created, traded and valued in and as a result of over the counter markets - read in the privacy of darkness) because this particular sushi is not suitable for just anyone or everyone; first you have to have a proprietary model and two you need to have money to get into the sushi bar. Hindenberg-like OFF balance sheet entities, like these private sushi bars, were set up by a few, not ALL, Wall St banks / brokerage firms.

Off balance sheet entities of some few US financial institutions.

  • A few, too large to fail, Wall St banks and/or brokerage firms, perhaps not illegally or fraudulently, for maximum, IMPORTANTLY, in this order 1) paydays for it's employees; then 2) profits for their shareholders, began to supply these entities with cash believed at least in part, subject to proof, diverted from public customers' money market funds into affiliated banks, then loaned NOT to arms-length public customers as the bank's charters require, but their own off balance sheet-sponsored entities, then leveraged into all manner of derivative securities. Of course, in a major bout of facetiousness, the banks did not "control" the OBS they merely sponsored them - that might force the PCOAB certified, independent accountants, auditors to suggest OFF switches like a transexual to ON, such that there may result abomination -- UNnatural financial statement consolidation - there goes another "C" word again.
  • Reported leverage was about 2000% to 3000% (20 to 30x). If underlying equity increased just by 1% - paper profits increased by 20% to 30%!
  • Trader think - "Wow, if we increase the leverage to 50 or 60 to 1 then a 1% equity increase generates a 50 or 60% PAPER profit and the beauty is we CAN get paid in cash NOW - because we CAN tweak our black box models to lock in this strategy for 10 years, let me whip out that HP 12c - how soon CAN we start minting our own money?"
  • During the hockey stick years these paper profits surged - because, in large measure, the increasing leverage in these entities.
  • In the "when not if" 2006/2007 era the the music began to fade such that those tidy paper profits began to correct in the opposite direction because mortgage borrowers started to forget to pay the monthly nut and the value of the underlying collateral, valued by the TOO smart to fail, proprietary, shiny, sleek, whiz bang models (by Wall St adult, professionals) went BANG and the poor little LEVERAGED collateral was no longer worth what was once gleaming in the darkness. And equity went south for a generation.
  • In 2008, Bear Stearns, Fannie Mae, Freddie Mac were bailed out. Lehman Bros declared BK in Sept and Merrill Lynch was forced to merge with Bank of America. AIG was given hundreds of billions so that counterparties could be protected from what? Their own failures to perform due diligence - but they have an excuse - the music was playing so beautifully, loud and oh for so long like an opponent's deafening end zone they missed the signals over and over and over again.
  • US Taxpayer money was GIVEN to TARP institutions.
  • Congress never got a straight answer to 'what did you do with the money?" As if these entities did not have millions of dollars devoted to accounting systems or basic books and records requirements - amazing!
  • But as I surmise, subject to proof, Congress never directly asked if any of the TARP money was directed to any (as opposed to none) off balance sheet sponsored entity, related contracts, securities, partnerships, or counterparties.
  • Want to join with me in suggesting Congress rephrase that line of questioning?
  • FDIC TLGP report tucked neatly in the last line of the table reveals that certain insured and NON FDIC insured (not a typo) affiliates debt - table as of May 2009. See? $285 Billion was backed for insured and NON insured affilates.
  • Monthly Reports on Debt Issuance Under the Temporary Liquidity Guarantee Program
    Debt Issuance under Guarantee Program (dollar figures in millions) May 31, 2009
  • Insured Depository Entities No. Debt O/S Cap1 for Group %Share of Cap
    Assets <= $10 Billion 46 $ 1,636 $ 3,097 52.8%
    Assets > $10 Billion 21 $ 58,900 $315,171 18.7%
    Bank and Thrift Holding Companies,Non-Insured Affiliates
    34 $285,242 $466,741 61.1%
    All Issuers 101 $345,778 $785,009 44.0%
  • A FOIA Request for the break out of the names and the amounts guaranteed for the NON Insured Affiliates was submitted June 24, 2009. Log #09-1132.
  • Link
  • (Now the FDIC can compete with American Express and create a new class of card holder - the "Affiliate" such that Affiliation has mucho grande privileges than mere membership" - then in the not distant future, because Mandarin Chinese will be the dominant language of all things finance, Da (big) privileges.)
  • Seriously, why, taxpayers may rightfully, ask (AND victims of Hurricane Katrina, and any and all victims of floods, tornadoes who do not have insurance or the millions of Americans who do not have health insurance) - why are NON insured bank and thrift affiliates benefitting from the explicit US treasury guarantee in the TLGP program?
  • Only after the CASH paydays to the traders, Accounting rules, like fabric softener, were changed, freshened up, with new packaging such that the laundry would go thru a gentle cycle with new, kinder, gentler valuations upon the heretofore easy to value but now distressed, difficult to value investments would be a tad more generous to the "institution" that created the charade (er excuse me, investment securities) to begin with, Insurance reserves were relaxed aka tapped.
  • Dissecting interests - banks and brokerage firms perform two ways:
  • 1) For public customers' accounts,
  • 2) For their own accounts - in the past called proprietary trading ON balance sheet - but in the hockey stick era, where? OFF balance sheet (out of regulators' view) through entities like SIV's - Structured Investment Vehicles.
  • This calls into question do the public customers' interests or shareholders and employees' interests come first? What is the institutions's boards' duty, audit and compensation committees to monitor this fundamental issue? What does the banks' charter state? Why do banks exist as they do? Is it to serve customers' interests first? Or second?
  • Was there a stealth - hidden - band (er banks) strumming music called the Dynamix? Indeed, Dynamic while it was oh so soothing, those oh so smart, professional, mature, adult traders' yet like a hot stick of dynamite tossed to the US Treasury and US taxpayer? Trader think - with feelings oh so hurt, fretting, boo hoo, "my models betrayed me, so sorry, sans that important piece of musical instrument called "cash"!
  • Don't you wish you were a "music" major.

Public vs. Private "Information"

Joseph Stiglitz, was awarded a Nobel prize for ~ "Assymetric Information Advantages" - perhaps the Nobel committee, pre-hockey stick era, was signaling what would or could result in the creation, enablement and cover - up of the largest financial fraud yet reported.

Perhaps US Congress and the agencies and GSE's (US Treasury, Federal Reserve, SEC, Fannie Mae, Freddie Mac included) felt / decided that the average Joe would not understand or connect the dots; or perhaps maybe it might beckon their previous oversight (undersight / myopia), or some of their own personal, hockey stick era real estate deals (buys, sells, refi's) or some of their supporters into the brightness of sunshine?

Wall St banks / brokers were in "full compliance" tells us what?

If Wall St banks / brokerages can say they were in full compliance with any and all rules and regs - it by definition, tells us this. That the problems occurred where? In the UNregulated entities, the root source, causes of the urgent need for TARP and related relief funded by the US taxpayer last fall. AIG was 100% compliant in its regulated insurance operations, BUT not when it came to the Financial Products Group FPG. Why? Very simple, because FPG was UNregulated!

Why no lawsuits filed by Wall St to recover losses????? (When public customers / investors lose money they often sue the brokerage firm.)

It's more than curious, that certain Wall St banks / brokerage firms, having suffered the largest losses known to man, HAVE NOT, I repeat have NOT filed any lawsuits to recover their losses. Could it be that all the answers lie inside? I'll bet you might know the answer.

Where is the VOICE of the people? US Congress, State, County and City Elected officials and the media in failing to tell the story to the people?

  • Why should the states, counties or cities care? Because moneys committed to the TLGP could be used for state purposes. The best decisions are usually "local".

Another perspective of siesta on the taxpayers' dime.

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