Citigroup – the bank that was propped up after its crash in 2008 with $45 billion of TARP funds, over $300 billion in asset guarantees and more than $2 trillion in low-cost loans from the New York Fed, is now effectively an unregulated stock exchange operating in the dark and annualizing at over $1 trillion in dollar volume in stock transactions. Simultaneously, it is operating insured deposits banks spread across America – all at a time when it has flunked its stress test with the Federal Reserve, which doesn’t have confidence in it to manage its affairs in a sharp downturn.
Citigroup’s previous dark operations – hiding tens of billions of dollars of debt off its balance sheet – contributed to the bank’s collapse in 2008 and its stock losing 60 percent of its value in just the week of November 17-21, 2008. Its regulators were too busy schmoozing with it to see the disaster that was about to befall the bank and the nation.
Under the current market and regulatory structure and lack of meaningful, transparent probes by the U.S. Department of Justice, the public has a very solid basis for distrusting Wall Street.--Wall St on Parade
In 2008 the securitized mortgage market was a liquid multi-trillion dollar market that became a no-bid market and remains so today. If he is correct, and I expect time will prove he is, the five-trillion dollar corporate bond market, like the market for mortgage backed securities would disappear over the course of a few months, as bond yields soar far above their highs of 1981. The stock market will not be immune from a disaster in the bond market as many listed companies trading on nation’s stock exchanges will also be deeply involved in the coming bond market debacle.--these posts are out of order--Yahoo board are bad--readthe posts as Bonds and then Bonds 2, 3,4.--thanks.
As I’ve noted many times before; gold and silver * DO NOT * benefit from monetary inflation, financial assets like stocks, bonds and real estate do. Gold and silver, as well as other precious metals and mining shares benefit from deflating financial assets. As people once again flee from deflation, they will seek the safety of investments in gold and silver. With many trillions of dollars, euros, and yen bidding for the limited supply of market available gold and silver, don’t be surprised when the precious metals markets become no offer markets. In a world where ivy-league academics control the volume of credit and money circulating in our economy, it would be unwise to expect a positive outcome. Gold, silver and the depressed precious-metal miners never looked so good.
Significantly, the CI gives us the bond market’s appraisal of the ability of issuers of lesser quality investment grade bonds to service their debts to term. Since 1999, the bond market, (as seen by Barron’s CI), has an increasingly maligned view of American bond issuers’ ability to service their debts to term – and for good reason.
In early July David Stockman, President Reagan’s former budget director called the five trillion dollar corporate bond market “the IEDs of monetary central planning that will soon be exploding along Wall Street.” Here few snippets of what he said:
But today’s bond market has real problems. I may be the only market commentator today who regularly publishes Barron’s Confidence Index (CI), but I’m glad to do it as the CI has been an excellent forecaster of future economic conditions since the 1930s. It’s important to understand that the CI is not a bond market timing tool. In fact it’s a horrible tool for timing the bond market. The CI increased during most of the 1950-81 bond bear market, and declined during the 2000-2014 bond bull market. So, what good is it?
The real problem with bonds is that they’re a relic of the gold standard, an anachronism that for investors serves no purpose in our world of unrelenting monetary inflation. Below are the plots of the component yields used in Barron’s Confidence Index (CI); these yields are from bonds rated investment grade. Bear markets are seen as rising bond yields, bull markets in falling yields. If bond market history has one lesson to teach investors, it’s that buying bonds when yields are low is a mistake. Currently, yields for investment grade bonds are at levels not seen since the 1960s. Unfortunately, to retired people choosing between 0.15% offered for their savings at the bank or 5.50% from an “investment grade” bond (Red Plot below), the bond market today is deceptively enticing.
Citigroup's settlement will not change the tradeoffs from what Citigroup's top management saw in 2006. As a result, in the future bankers are likely to make the same decisions that they did in 2006.
Did the Banks Have to Commit Fraud?
Friday, 18 July 2014 05:23
Floyd Norris has an interesting piece discussing Citigroup's $7 billion settlement for misrepresenting the quality of the mortgages in the mortgage backed securities it marketed in the housing bubble. Norris notes that the bank had consultants who warned that many of the mortgages did not meet its standards and therefore should not have been included the securities.
Towards the end of the piece Norris comments:
"And it may well be true that actions like Citigroup’s were necessary for any bank that wanted to stay in what then appeared to be a highly profitable business. Imagine for a minute what would have happened in 2006 if Citigroup had listened to its consultants and canceled the offerings. To the mortgage companies making the loans, that might have simply marked Citigroup as uncooperative. The business would have gone to less scrupulous competitors."
This raises the question of what purpose is served by this sort of settlement. Undoubtedly Norris' statement is true. However, the market dynamic might be different if this settlement were different.
Based on the information Norris presents here, Citigroup's top management essentially knew that the bank was engaging in large-scale fraud by passing along billions of dollars worth of bad mortgages. If these people were now facing years of prison as a result of criminal prosecution then it may well affect how bank executives think about these situations in the future. While it will always be true that they do not want to turn away business, they would probably rather sacrifice some of their yearly bonus than risk spending a decade of their life behind bars. The fear of prision may even deter less scrupulous competitors. In that case, securitizing fraudulent mortgages might have been a marginal activity of little consequence for the economy.
Between July 14 and July 15, contracts representing 126 tonnes of gold was sold in a 14-minute time window which took the price of gold down $43 dollars. No other market showed any unusual or extraordinary movement during this period.
To put contracts for 126 tonnes of gold into perspective, the Comex is currently reporting that 27 tonnes of actual physical gold are classified as being available for deliver should the buyers of futures contracts want delivery. But the buyers are the banks themselves who won’t be taking delivery.
One motive of the manipulation is to operate and control Comex trading in a manner that helps the Fed contain the price of gold, thereby preventing its rise from signaling to the markets that problems festering in the U.S. financial system are growing worse by the day. This is an act of financial terrorism supported by federal regulatory authorities. Another motive is to help support the relative trading level of the U.S. dollar, as we’ve described in previous articles on this topic. And, of course, the banks make money from the manipulation of the futures market....
The only explanation for this is that the Government is complicit in the price suppression and manipulation of gold and silver and welcomes the insider trading that helps to achieve this result. The conclusion is inescapable: if illegality benefits the machinations of the US government, the US government is all for illegality.--PC Roberts site
With The Fed proclaiming bubbles in some of the most-loved segments of the stock market and explaining that the economy is doing "ok" but they must remain dovish for longer for feasr of "false dawns"... what better time than now to dump $2.3 Billion notional in futures... of course the dump in gold's anti-status quo price coincided with an odd v-shaped recovery in stocks... Gold remains above its pre-June FOMC levels still.
The break was precipitated by the sale of over 17,000 contracts (or over $2.3 Billion notional)...
Well it is pretty obvious who somebody is and when you are Mrs. Central Printer or her agent (GS, JPM?) its pretty easy to dump $2.3 of fiat. Someday these games will end as witness the unsustainable debt bubble, but until then we will watch the fun and games and take advantage of any falls BGEIX
Here's one way to understand how reliance on ever-expanding debt hollows out the economy. Let's say the average interest on the $60 trillion in total debt is 4%. (Recall that charge-offs for defaulted loans must be included as debt-related expenses. The interest paid to lenders is only one expense in the debt system; the other is the losses taken by lenders for defaulted credit card loans, mortgages, etc.)
That comes to $2.4 trillion annually.
Now take the $16 trillion U.S. economy and reckon that real growth in gross domestic product (GDP), even with questionable hedonic adjustments and understated inflation, is about 1.5% annually. That's an increase of $240 billion annually.
That means we're eating over $2 trillion every year of our real wealth, i.e. our seed corn, to support an ever-increasing mountain of debt. That is not sustainable. Even if the economy were growing at a faster pace, it wouldn't come close to offsetting the interest payments on our ever-expanding debt.
This leaves the entire Status Quo increasingly vulnerable to any sort of credit shock; either rising rates or a decline in the rate of debt expansion will cause the system to implode.--Charles Hugh Smith
Roughly a month ago IMF bureaucrats released an official report which stated, among other things, that Bulgarian banks are “stable and liquid.”
Talk about epic timing. Because less than two weeks later, Bulgaria’s banking system was in the throes of a full-blown crisis.
There was a run on two of the nation’s largest banks—several hundred million dollars had been withdrawn in a matter of hours.
And the Bulgarian central bank had to step in and take over both of them or risk a collapse in the entire system.
This is the modern miracle of fractional reserve banking.
The lesson here is clear: The people in charge of regulating the system and making these proclamations about bank safety are totally clueless.
Clearly, Bulgaria (and Portugal) shows that the entire system can really be a bunch of smoke and mirrors.==Silver Doctors
I'm pretty sure there's a little lockbox with your name on it that contains that 189K you've shoved into FICA--I'm from the gov and you can trust me. :)
I suppose the real "challenge" is maintaining the sense that the assets possess value that can liquidate the debt and provide for life maintenance. In our recent ZIRP environment the wildly fluctuating value of "assets" seems to hold little hope of this, thus the reason for the serial bubbles and busts that are the hallmark of the excessive and increasing debt we are saddled with.
I don't think you have any guarantee that gold is like a #$%$ for a certain amount of goods and services--its just a way of storing value (excess of earnings over life maintenance?) and based on historic valuation, might be a better choice now than junk bonds or general equity stocks or even US Treasuries.
In an environment like we are in--a period of general stagnation, asset prices move radically and sometimes it is best to choose investments like mining stocks that possess potential even though they have been at the bottom of the scoreboard for some time (before recent quarters). In a stagnate economy you can't just invest in stocks for the long haul, like you might have in 1982.
[..] … the riskier the bond, the more vulnerable it is to rising rates. Wall Street firms are warning clients that if fund investors who view bonds as safe are hit with sudden losses, there could be something akin to a run on the bond market. The worry isn’t only that investors’ bottom lines would take a hit. It’s that a mass selloff could swamp the market, with demands for redemptions forcing fund managers to unload their bonds at rock-bottom prices. The ensuing losses would encourage even more investors to redeem, perpetuating the downward spiral...
So let me ask you, what do you think will happen to stocks when the Fed decides to take away the punch bowl and raise rates? I don’t know, but if I were you, I would not walk under any open windows down on Wall Street.---Automatic Earth
Wall Street’s Worst-Case Scenario: A Run on Bonds
All it takes is a few mouse clicks to buy shares in the Scout Unconstrained Bond Fund, an exchange-traded fund that tracks a concoction of debt tied to the government, financial firms, mortgage pools, and other entities. And all it takes is a few mouse clicks to sell—something that has begun to worry Wall Street. Since the financial crisis, $900 billion has flowed into bond mutual funds and ETFs such as Scout Unconstrained, bringing the industry’s total holdings to $3 trillion. Fund investors who sell shares get their money back almost immediately, as if they were making a withdrawal from a money-market fund. The bonds that the funds own are far less liquid [..]
If too many people decide to get out of bond funds at the same time, the wave of selling could lead buyers to sit on their hands, bringing the system to a halt. [..] The Fed’s low-interest-rate policy reduced the yields on safe, short-term vehicles such as money-market funds, savings accounts, and CDs, and led investors to seek higher returns from bond funds, including ones that invest in risky high-yield debt and other speculative issues. Unlike money-market funds and CDs, though, bonds lose value when rates rise …
On a related note from Ask Fleck:
Mr Skin's comments "However, "margin debt" as reported by the brokerage community, doesn't mean what it used to. In the old days, when the "public" was heavily involved in the market, "margin debt" rising to extreme levels in a bull trend was a pretty good indicator. " Securitized lines of credit have been huge. The wire houses have been lending money at short term rates under 1.5%. Small businesses have been the biggest borrowers as its much easy to use and cheaper than bank loans. When the fireworks commence, expect this to be one of the problems none saw coming.
Ironically, a Portuguese bank, Banco Espirito Santo SA missed a bond payment and its bonds did a cliff-dive…
That’s what the graph of Enron looked like before it collapsed. This is what the entire bond market will look like when the derivatives bombs start to explode…
What’s missing from the analysis is the OTC derivatives that are tied to the credit condition of this bank. The Bloomberg article mentions credit default swaps but doesn’t explain the implications. The implications are that somewhere, some bank or asset manager is on the hook for any “insurance payments” that will need to be made as part of the bet that was made when institutional investors and Wall Street banks placed their bets on Portuguese banks using OTC derivatives. Eventually someone on the hook for the payment won’t be able to make it and the fun begins. This exactly what happened with AIG/Goldman Sachs.
It is THIS risk that is hidden away and deeply embedded in the bond market. It is hidden in your bond funds that your “trusty” registered financial adviser with fancy initials after his/her name put you into. You are exposed to this catastrophic risk. In just five minutes of using Google, I found several Black Rock bond funds that are exposed to Portuguese debt. Your genius adviser probably has you in one of these funds.
The bottom line is that you need to get out of your bond funds now before your money gets trapped and destroyed….
The only way to protect yourself from the coming destruction of the bond market is to move your money into physical gold and silver. If you want to try and get rich off of this, you need to own junior mining stocks…--Investment Research Dynamics
The Perfect Chart For Everyone Who Thinks A 1929 Style Crash Is Coming
Input the above into your browser. Very eye opening comparison of the 1920 boom to today--we are only in the similar 1926-1927 time frame if things were to follow the 1929 scenario. Also:
"When interest rates go up, prices of bonds go down. The longer the maturity, the more they go down. So, when the Fed *starts* raising rates, do you want to buy bonds right then and there? Or would you rather wait until the Fed is (nearly) done raising rates?
Buying bonds when rates are starting to go up is like signing up for a guaranteed loss in the first year(s). Why would you do that? Even putting your cash in the mattress for a year would be a better idea.
So, when the Fed starts raising rates it will first drive retail investor’s money out of long term bonds, and some of that money will find its way into stocks. And then at some point, when rates are attractive enough and stocks look really overvalued, then a sudden move in the other direction starts: stocks are being sold and the money flows into bonds (that perhaps yield 5 or 6% by then vs 2 or 3% right now).
E.g. look at 2005. The Fed funds rate started to go up. But that didn’t drive stocks prices down, on the contrary. Then 2007, when it looked like Fed was done raising rates, that was a good time to lock in those high rates by buying bonds. So stocks were sold and the money flowed into bonds. Notice that the crash didn’t start when the Fed started raising rates, the crash didn’t start until they were done raising rates. Same happened in 1986-87 for example. It is not always like that, because other factors can come into play, but it is a very common scenario.
The people who sell/short stocks when the Fed starts raising rates in 2015 will probably be very surprised to see stocks go up instead of down. And it is that short covering rally that can create an explosive move upwards like in 1929, followed by an implosion..."-Danny
Janet Yellen is a chatterbox of numbers, but most of them are “noise”. And that’s her term.
Yet here is a profoundly important set of numbers that you haven’t heard boo about from Yellen and her mad money printers. To wit, during the “difficult” economic times since the financial crisis began gathering force in Q1 2008, the S&P 500 companies have distributed $3.8 trillion in stock buybacks and dividends out of just $4 trillion in cumulative net income. That’s right, 95 cents of every dollar they earned—including the huge gains from restructurings, downsizings and job terminations—was flushed right back into the Wall Street casino...
Corporate stock buybacks thus function as a bubble cycle accelerator, meaning that they are making each new Fed reflation cycle more extreme and unstable. Prior to Greenspan’s irrational exuberance moment in December 1996 share buybacks amounted to about 1% of the S&P 500′s aggregate market cap. By the 2007 peak, they exceeded 5% and are heading in that direction once again—this time accompanied by a rising rate of regular dividend payouts, as well (not shown).
It does not take much analysis to see that this kind of financial engineering results in the inflation of existing financial assets, not the creation of new productive capacity...
Also unremarked is the fact that the share buyback mania leaves competitively challenged businesses in a precarious position and unable to weather downturns in the general business cycle or in their own sector. Radio Shack is a prime example. It is now tottering on the edge of bankruptcy, and there is no doubt whatsoever that this is owing to a giant strategic error by its management and board. To wit, during the past 13 years it repurchased $3 billion of stock on the back of only $2.1 billion in cumulative net income. Indeed, in seven of those years it flushed back into the market more than 100% of its earnings—including $400 million of buybacks in 2010 on only $200 million of net income.-D Stockman