Econ 2009

[fivemack]

I think there's a fair amount of double-counting of the Dubai debt to RBS; people in national treasuries aren't entirely naive, and may well already have counted Dubai debt as not entirely likely to be recovered.

Obviously they won't publish the spreadsheets with this assumption in, since it would be a substantial diplomatic offence to Dubai, but I don't think governments would invest taxpayer's money on the assumption that Dubai semi-state-owned debts were guaranteed to be repaid in full and on time.

Slightly surprised that there don't seem to have been enormous CDS bets against Dubai World, but I suppose we've had eighteen months in which enormous CDS bets have not been terribly popular.

[ewmayer]

Originally Posted by fivemack

I think there's a fair amount of double-counting of the Dubai debt to RBS; people in national treasuries aren't entirely naive, and may well already have counted Dubai debt as not entirely likely to be recovered.

Obviously they won't publish the spreadsheets with this assumption in, since it would be a substantial diplomatic offence to Dubai, but I don't think governments would invest taxpayer's money on the assumption that Dubai semi-state-owned debts were guaranteed to be repaid in full and on time.

Slightly surprised that there don't seem to have been enormous CDS bets against Dubai World, but I suppose we've had eighteen months in which enormous CDS bets have not been terribly popular.

Apparently it was not so much the debt situation in Dubai which surprised many investors/banks/governments - rather, it had been widely assumed that Dubai's oil-rich neighbor and serial financial sponsor Abu Dhabi would step in and bail out its overleveraged (and oil-poor) spendthrift little brother. That may still happen, but given its own significant sovereign debt load and a sovereign wealth fund whose value appears to have dropped significantly from the $500B touted before last year`s worldwide financial blowup I suspect Abu Dhabi will first wait and see how the various interested parties respond - if Dubai can negotiate a payment delay and/or debt restructuring with significant haircuts to the creditors, that would be the best outcome for Abu Dhabi.

ZeroHedge has an interesting piece on the intrigues regarding the controversial post-9/11 agreement - which the EU is keen to renegotiate - allowing the U.S. to snoop on the European SWIFT bank-transaction data network:

Pulling a SWIFT One

Given the backbone nature of the SWIFT network, it was the natural home for the (eventually scandalous) Terrorist Finance Tracking Program, in no small part part of the large rift that grew between the most recent Bush administration and Europe. Brusselsblogger explains:

The move of SWIFT the data server to Switzerland would be an excellent opportunity to stop the nearly unlimited access of US authorities on EU bank transactions. But EU justice and interior minister are apparently keen agree a deal as soon as possible, on 30 November. Why 30 November? Because one day later, on 1 December 2009, the EU’s Lisbon Treaty will be in force and would allow the European Parliament to play a major role in the negotiations of the deal with the USA. A deal one day before will be a slap in the face of democracy in the EU.

SWIFT handles 15 mio bank transactions daily for more than 9000 banks worldwide. Nearly every transnational bank transaction within the EU is recorded in the SWIFT data centers, including amount, sender, recipient, and transaction comments. The agreement will even allow to transmit “other personal data”.

This will allow US authorities to establish a huge data mining database, allowing to query [sic] every substantial business link within the EU. No question that the United States will never admit that openly.

Interestingly, the agreement is not bilateral. The EU enjoys no reciprocity in data sharing. For the United States here it is all take and no give. In its role as the latest American lapdog, Switzerland is unlikely to hinder the New Moon-like U.S. thirst for the financial lives of others (like tax evadersterrorists, for instance). Nice work if you can get it.

U.S. mainstream media last night and today full of optimistic stories about [allegedly] "big" Black Friday shopping crowds and "strong" sales - I can believe that plenty of folks were at the malls, but everything I've heard and seen tells me folks were mainly focused on finding the best discounts and were really watching their spending (this is by reckless-spending 21st-century American ConsumerBot^tm standards, mind you ;). I don't even listen to the blather from the various self-interested retail tracking outfits - "show me the sales tax receipts...". I hit a couple online sites that had some really great Black Friday specials (e.g. Amazon had the 2009 "Star Trek" DVD for $9 - bought 1 for me and 2 for friends so got free shipping, too) - but avoid the malls the day after Thanksgiving.

Just watched local surprise college football team of the year Stanford come back to beat Notre Dame 45-38 in a barnburner ... nice!

[ewmayer]

Getting tough with mortgage lenders: Under new Treasury procedures, loan servicers must detail plans to assist borrowers long-term. Laggards could face penalties and sanctions

NEW YORK (CNNMoney.com) -- Struggling to stem the swelling foreclosure tide, the Obama administration announced new steps Monday to pressure banks to help homeowners long term.

The administration said it will require top loan servicers to report their plan to reach a decision on each loan for which they have all the needed documentation. Also, these servicers must explain to Treasury how they will communicate the decision to borrowers.

Servicers will also be required to report the status of each modification. Those failing to meet their obligations could face penalties and sanctions.

To help borrowers through the process, the administration is providing more information on the documents they need to submit to be considered for a permanent modification. Federal, state and local officials will increase outreach to delinquent homeowners.

The administration's move is its latest attempt to jumpstart its $75 billion loan modification plan, which many fear will fall far short of its goal to help up to 4 million delinquent homeowners.

A growing number of borrowers are complaining that they are stuck in trial modifications. Some 650,000 homeowners are currently in this preliminary phase, but only a small fraction have received permanent assistance.

About 375,000 people should receive long-term relief by year end, said Treasury officials in their first estimate of how many permanent modifications would be made this year. The administration is set to release its first report on the conversions in coming weeks.

My Comment: Hmmm ... I wonder what Treasury`s definition of "a small fraction" is in this regard? Ah yes, here we go:

U.S. Treasury to Push Lenders to Finish More Home Modifications

Nov. 30 (Bloomberg) -- The U.S. Treasury Department plans to intensify public pressure on lenders to finish modifying more home loans to troubled borrowers under a $75 billion campaign against the record tide of foreclosures.

Almost 651,000 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of last month, from about 487,080 as of September, according to the Treasury. None of the trial modifications through October had been converted to permanent repayment plans, the Treasury data showed. That failure is getting the administration’s attention.

So, of the 650,000 homeowners taking part in the HAMP program, despite more than enough time having passed for the related paperwork to have been taken care of for many of the in-progress revisions, precisely ZERO have actually been revised. Zero is indeed "a small fraction", so the folks at Treasury are being quite truthful there. As to the "375,000 should receive relief by year`s end", well - let`s just say one hopes they're not holding the breath.


Bernanke On Self-Promotional "Let Me Keep Saving The World" Blitz

While Ben Bernanke (whose confirmation hearings for re-nomination as Fed Chair by President Obama are this Thursday) will likely be confirmed for another term "because he`s done such a fabulous job handling the economic crisis and the markets would react badly were he not confirmed", the hearings promise to be the most contentious in memory for that post. I have no interest in twisting myself into knots to attempt to give a pro-Bernanke side of the argument by way of being "fair and balanced" - I think he has done little other than put present and future generations of taxpayers on the hooks for multiples of the GDP in order to paper over the results of a debt-bubble-caused crisis he and his predecessor had a large role in causing and further to bail out the Wall Street crooks who benefited from the mania. I will however point the interested reader to a self-promoting op-ed our esteemed "Dear Chairman" wrote in last week`s Washington Post. On the less-hagiographical side of the argument, here are some links to articles by prominent skeptics in the blogosphere about Mr. Bernanke`s fitness for the job:

Mike Shedlock: Ben Bernanke Pleads For His Job; My Response to Bernanke

The Greenspan Fed, of which you were a part, blew an enormous housing/credit bubble to bail out banks from stupid loans made to dotcom companies and Latin America.

You are back at it once again, only bigger.

Your policy is and always has been to blow repetitive bubbles of increasing amplitude, each bigger than the last, hoping to bail out the system. You have learned nothing from 2001, from, Japan, or from the Great Depression.

You are a complete disgrace in your inability to learn anything from history, and unfortunately the US is held hostage to your foolish policies.
...
It is imperative to stop the Fed's power grab. The Fed bailed out banks and the bondholders of banks, illegally, at taxpayer expense. Moreover, the Fed would do it again in a flash. While the bondholders were made whole (the same applies to Fannie and Freddie), taxpayers are footing the bill.

Moreover the Fed has expanded its balance sheet by $trillions and no one really knows exactly what is in it, how much it is worth, or how much taxpayers might be on the hook for it.

While making claims of transparency, the Fed has fought to kill mark to market accounting at banks and the Fed certainly does not mark its own books to market. The whole thing is a huge shell game. The FDIC and the entire banking system is insolvent.

Bernanke's self-serving mission is to make sure the Fed is not accountable for its actions and my uphill battle mission is to help move along Ron Paul's bill [HR 1207] so that Bernanke does not succeed.

Denninger: It appears that Ben Bernanke has his knickers in a bit of a bind this morning...

You should not have bank regulatory powers. The reason is simple: You have abused them and willfully ignored the abuses served upon the people ... The Federal Reserve is one of the primary architects of the current economic malaise and indeed the credit bubble that led to it. For you to come to The People of this Nation and ask for more power and authority, say much less keeping that which you have had but refused to exercise in the best interest of the people, is an outrage.

You "arrested" the crisis through lies, chicanery and papering over the truth of insolvency. Not one step has been taken by The Fed since the inception of the crisis to address the root causes of the collapse ... Indeed, had The Federal Reserve exercised its already existing authority to demand that banks never lend out more unsecured than they have in "owner's capital" - that is, the total amount of bond and stockholder equity - there would have been no "systemic risk" or "crisis." Instead those who had done imprudent things would have simply gone bankrupt, as businesses do each and every day, but the banking system as a whole would have been just fine.

But The Fed didn't do that, because forcing Wall Street and other big banking interests to live within their capital would mean they would make less money when times were good.

Leverage multiplies both risk and reward. There is nothing wrong with using it, provided that the risk you take is your own - that is, it entirely belongs to the owners of the firm (the aforementioned stock and bondholders.) But when you allow leverage to extend beyond a firm's capital you force the risk on to other, non-affiliated and non-consenting parties.

This is an outrage, and yet it is part and parcel of The Fed's mantra for the previous twenty years or more. We have seen repeated instances of this, beginning with LTCM, extending into the Latin American and Asian debt crises, and then again into the Tech Wreck in 2000. Time and time again the solution has been to reduce the margins between systemic insolvency and operating leverage.

This time you went too far and the system failed. Rather than admit this, you now come to the people of this nation and demand even more control, after proving that you're a financial arsonist with both a big can of gasoline and an insatiable smoking habit.

[ewmayer]

Tobin Harshaw, author of the NYTimes online column The Opinionator, collects articles from the English-language world press and opinions about the debt crisis in Dubai. The most interesting bit for me was the "Three narratives" take by the NYT`s own Paul Krugman:

As far as I can tell, there are three ways to look at it — three stories, if you like, about what Dubai means.

First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.

Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.

Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.

At the moment, I’m leaning to a combination of two and three. For what it’s worth (not much), US bond prices are up right now, suggesting that the Dubai thing hasn’t raised expectations of default.

Anyway, we continue to live in interesting times.

My Comment: I think Door #2 is the most-apt analogy, but Krugman then attempts to downplay the potential significance by dodging into Door #3, "it`s really unlike anything else". Sorry, you can`t first argue that Dubai is "just another commercial real estate bust" (albeit a really, really big one) but then - instead of drawing the obvious comparison with the deeply troubled CRE sectors in the U.S. and elsewhere - try to have your cake and eat it too by claiming some (unexplained) exceptionalism. "Oh, it`s that weird place way out in the desert of the Middle East" ... that sort of vague bullcrap. In fact, Krugman has it exactly right with choice #2: Dubai was simply one of the most-egregious of the overleveraged boom-time speculative CRE ventures the Greenspan bubble (which was global, because other countries were drinking from the same punch bowl of debt-expansion-as-miracle-economic-growth-tonic) bequeathed the world. Like so many of the its fellow ventures, Dubai is doomed, and was only able to play the "extend and pretend" game for a limited time. In Dubai`s case the default - because in Dubai CRE *was* the economy - immediately led to what is effectively a sovereign default. Others will similalrly follow, just with a longer time lag. Thus, getting back to our game-show metaphor, signs point from Door #2 back to Door #1, not to the bogus Door #3.

[ewmayer]

Fed reduces AIG's debt by $25 billion: Two life insurance companies sold to Federal Reserve Bank of New York in completion of deal.

NEW YORK (CNNMoney.com) -- AIG announced Tuesday that it completed a deal wiping out $25 billion of its debt to taxpayers by selling stakes in two subsidiaries to the Federal Reserve Bank of New York.

The troubled insurer gave the New York Fed preferred shares of two of its international life insurance companies, including $16 billion of American International Assurance Co. and $9 billion of American Life Insurance Co. The deal was originally announced in March.

The deal brings the New York-based insurer's debt to the New York Fed down to $17 billion. AIG also still owes the U.S. Treasury $44.8 billion from a separate Troubled Asset Relief Program (TARP) loan, so the insurer still owes taxpayers just under $62 billion.

My Comment: More outrageous stuff here - the obvious let-the-market-set-the-valuation approach here would have been for AIG to sell the units to private investors and use the proceeds to repay the government. Especially so now that the credit markets are oh-so-much-more-stable according to the very same Fed officials who pull this sort of crap. Given that there was no kind of transparent valuation process or parallel attempt at a public offering - and given the NY Fed`s previous scret shenanigans in paying off certain "preferred AIG creditors" at par last Fall, costing the U.S. taxpayer billions of dollars - I have little doubt that "we the taxpayer" grossly overpaid for the above 2 AIG subsidiaries. How does doing this sort of no-transparency-no-bid price-setting with what are effectively taxpayer monies not amount to gross malfeasance on the part of the NY Fed?


In Wake of Dubai, Trying to Predict the Next Blowup: Like overstretched American homeowners, governments and companies across the globe are groaning under the weight of debts that, some fear, might never be fully paid back.

As Dubai, that one-time wonderland in the desert, struggles to pay its bills, a troubling question hangs over the financial world: Is this latest financial crisis an isolated event, or a harbinger of still more debt shocks?
...
From the Baltics to the Mediterranean, the bills for an unprecedented borrowing binge are starting to fall due. In Russia and the former Soviet bloc, where high oil prices helped feed blistering growth, a mountain of debt must be refinanced as short-term i.o.u.’s come due.

Even in rich nations like the United States and Japan, which are increasing government spending to shore up slack economies, mounting budget deficits are raising concern about governments’ ability to shoulder their debts, especially once interest rates start to rise again.

The numbers are startling. In Germany, long the bastion of fiscal rectitude in Europe, government debt is on the rise. There, the government debt outstanding is expected to increase to the equivalent of 77 percent of the nation’s economic output next year, from 60 percent in 2002. In Britain, that figure is expected to more than double over the same period, to more than 80 percent.

The burdens are even greater in Ireland and Latvia, where economic booms driven by easy credit and soaring property values have given way to precipitous busts. Public debt in Ireland is expected to soar to 83 percent of gross domestic product next year, from just 25 percent in 2007. Latvia is sinking into debt even faster. Its borrowings will reach the equivalent of nearly half the economy next year, up from 9 percent a mere two years ago.

Like Latvia, the Baltic states of Lithuania and Estonia remain worryingly exposed, as do Bulgaria and Hungary. All of these nations carry foreign debt that exceeds 100 percent of their G.D.P.’s, said Ivan Tchakarov, chief economist for Russia and the former Soviet states at Nomura bank. External debt is often held in a foreign currency, which means governments cannot use devaluation of their own currencies as a tool to reduce their debt when they run into trouble, according to Maurice Obstfeld, an economics professor at the University of California, Berkeley.

Few analysts predict a major nation will default on it government debts in the immediate future. Indeed, many maintain that rich nations and the International Monetary Fund would intervene if a government needed a bailout.

But there are no assurances that companies in these nations, which, like governments, gorged on debt in good times, will be rescued. Dubai’s refusal to guarantee the debts of its investment arm, Dubai World, may set a precedent for other indebted governments to abandon companies that investors had in the past assumed enjoyed full state backing.

“I see very good reasons to be worried that at some point in 2010 we are going to see more cases of ring-fencing because governments realize they can’t afford to guarantee the debts of these companies,” said Pierre Cailleteau, managing director of the global sovereign risk group and chief economist of Moody’s.

Kenneth Rogoff, a Harvard economist whose recent book, “This Time Is Different,” chronicles 800 years of financial crises, said: “I think right now every vulnerable country has one or two deep-pocketed backers that pretty much rule out a sudden run.” But Mr. Rogoff said he expected a wave of defaults about two years from now, when the countries now serving as implicit guarantors turn their focus to economic problems at home.

My Comment: Note the underlined comment about issuing debt in one`s own currency ... the question is, when debt-to-GDP levels become sufficiently large, is devaluation really that different from sovereign default?

I notice that officials of the various governments which are attempting to borrow-nd-spend their way back to the illusory prosperity of the Greenspan Bubble decades are of course inclined (or paid) to see things quite differently - for example in today`s NYT reader letters section we see this:

Letter: The British Economy

To the Editor:

“In Britain, Visions of Japan’s Decade of Stagnation” (Business Day, Nov. 21) is unduly negative about the British economy.

The measures the British government took to respond to the global economic crisis were described as “bold and wide-ranging” by the International Monetary Fund. We acted early and decisively to support the stability of Britain’s financial system and to prevent the recession from turning into a depression.

Concerns about the British budget deficit need to be put in context. Britain entered this crisis with lower levels of debt than every other Group of 7 country except Canada. In line with that commitment to sound public finances, the government has undertaken to pass legislation that will oblige it to halve the deficit in the lifetime of the next Parliament.

The British government expects the nation’s economy to return to growth at around the turn of the year; the International Monetary Fund, the Organization for Economic Cooperation and Development and other independent experts agree. Indeed, the O.E.C.D. has upgraded its view of growth prospects for 2010 and 2011, forecasting growth of over 2 percent in 2011.

The greatest risk to recovery is complacency. But presenting our economy in a balanced and contextualized way is important to genuinely understanding its prospects.

Dominick Chilcott
Deputy Head of Mission
British Embassy
Washington, Nov. 23, 2009

My Comment: I beg to differ - in my opinion, the greatest risk to recovery is deeply misguided and debt-burdening government policies to prop up failed businesses and play the "extend and pretend" game, based on a combination of political spinelessness and delusional "tomorrow will be so much better" expectations. Note that Mr. Chilcott is mum as to what the alleged drivers of all that expected "economic growth" will be - based on the level of government deficit spending, 2 percent is in fact not "growth" at all; it`s deflation temporarily being masked by mostly-wasteful and real-economy-nonstimulative deficit spending.

[Fusion_power]

Currency devaluation.

What strange effects this is having now. Japan is goosing the economy with high levels of liquidity (translate this to mean lots of easily borrowed money at low interest rates) in order to fight deflation. Canada's Loonie is 95.5 to the dollar. This should prompt an intervention to push it back down by Canada's banking sector but now that Russia has announced it is stockpiling Loonies, there is no way it can be kept sub par with the dollar. Some countries national debt is denominated in another countries currency. This means currency devaluation can NOT be used to manipulate the debt.

What if the next major bubble being blown in the world economies is a currency bubble? What extreme turmoil will some economies suffer as currency imbalances mushroom..... and implode.

Peter peter money eater had a currency but couldn't keep her. Put her in a pumpkin shell and there her currency began to smell.

Just a thought or two for a late afternoon.

DarJones

[ewmayer]

...not that there`s anything wrong with that:

GM's Henderson Resigns From Helm of Automaker; Whitacre Is Interim Chief: General Motors Co. Chief Executive Officer Fritz Henderson stepped down after running the biggest U.S. automaker for eight months, and Chairman Ed Whitacre took over on an interim basis.

“They’re looking to rebuild the company in a completely different form,” Maryann Keller, president of consultant Maryann Keller & Associates, told Bloomberg Television today. “They’re looking to bring in someone who has a completely different perspective.”
...
Henderson “has done a remarkable job leading the company through a time of challenge, and momentum has been building over the past several months, but we all agreed changes needed to be made,” Whitacre told reporters. He didn’t take questions or elaborate on the executive shake-up.

That assessment differed from the one Whitacre gave in a Nov. 10 interview at his office in Texas, when he said directors backed Henderson, whose posts at GM included serving as chief operating officer and chief financial officer under Wagoner.

“We have some momentum now, there’s a lot of enthusiasm,” Whitacre said. “We’re all cautiously optimistic. The board is fully behind Fritz; he’s working hard.”

My Comment: Hmmm ... there would appear to be more to the story than the pundits (e.g. Ms. keller quoted above) admit - Henderson, in his TV ads promoting "The New GM", certainly wasn't touting himself as "just a short-term caretaker kind of guy". But it appears (based on followup stories) that the board did not see 25-year GM veteran Henderson as the kind of innovator needed to reshape the company into a viable 21st-century enterprise.


Junk mortgages: It just gets worse: In 2007 we dissected one toxic issue. The horror story continues, but can we still learn from our mistakes?

NEW YORK (Fortune) -- Back two years ago when the mortgage meltdown was heating up, we wrote an article called "Junk Mortgages Under the Microscope" dissecting a particularly wretched mortgage-backed securities issue peddled by Goldman Sachs.

We wanted to show how these complex securities really worked and how Moody's and S&P, the rating agencies, aided and abetted the process by giving two-thirds of an issue backed by ultra-risky second mortgages the same safety rating they gave to U.S. Treasury securities.

We thought this was a cautionary tale -- but it's turned into a horror story. All the tranches of this issue, GSAMP-2006 S3, that were originally rated below AAA have defaulted. Two of the three original AAA -rated tranches (French for "slices") are facing losses of about 90%, and even the "super senior," safer-than-mere-AAA slice is facing losses of 25%. How could this happen? And what lessons can we take away from it?

Let's revisit the way this security was put together, and how and why it fell apart. And for the first time, we can even estimate the value -- low -- of the mortgages backing it, thanks to a new service called ABSNet Loan HomeVal.

Our tale begins in April 2006, when Goldman Sachs sold $494 million of securities to institutional investors seeking yields somewhat above those that were available on U.S. Treasuries or high-rated corporate bonds.

It was an especially hinky offering, because it was backed by second mortgages rather than by traditional first mortgages. A first mortgage rarely becomes completely worthless, because a house is usually worth something.

But often all it takes is a decline of 20% in a home's value to wipe out a second mortgage, which is typically piled on top of an 80% first mortgage. In our case, borrowers' stated equity in their homes averaged less than 1% -- 0.71%, to be precise. Even that was doubtless overstated because a majority of the mortgages were low-documentation and no-documentation.

Despite these problems, the formulas used by Moody's and S&P allowed Goldman to market the top three slices of the security -- cleverly called A-1, A-2 and A- 3 -- as AAA rated. That meant they were supposedly as safe as U.S. Treasury securities.

My Comment: To echo Denninger, "Where are the indictments?"

[axn]

Originally Posted by Fusion_power

Canada's Loonie is 95.5 to the dollar.

?

[ewmayer]

Originally Posted by axn

?

Wait for it ... it'll get there before too long at this rate.

And speaking of radical currency debasement (and no, by "debasement" I don't mean "de place below de ground floor", except in a metaphorical sense), pity the poor North Koreans ...

One of the great things about running a totalitarian government is that when you want to do something, even if it will cause immense suffering for your citizenry, you just do it. For instance, say you`re running North Korea, and have bled your country dry for decades to prop up an oversized military which (among other things) makes sure you stay in power as long as the troops are well-fed and the generals have access to all the rent-free housing, western porn/action-flicks/sports-TV, booze, gold watches and hookers they want. Now this has trashed your real economy, and the only way for you to buy anything you need - that is most everything above the level of "half-rations of subsistence food" - from abroad is to run the government money-printing-presses 24/7, paying your poor-slob citizenry for real labor with Ponzi money whose value is far less than the labor is worth. No need to try to do it on the sly like the U.S. Federal Reserve, by engaging in complex "mortgage-backed asset-purchase programs" and "temporary emergency lending facilities" ... no, you simply tell your citizens one day, "All your money is worthless, you need to work extra-hard just to keep yourself fed with substandard Kimchee and keep us from confiscating your stuff":

Chaos reportedly erupts after North Korea revalues currency: Move restricts amount of old bills that can be traded for new, wipes out personal savings

TOKYO -- Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

The revaluation and exchange limits triggered panic and anger, particularly among market traders with substantial hoards of old North Korean won -- much of which has apparently become worthless, according to news agency reports from South Korea and China and from groups with contacts in North Korea.

The sudden currency move appeared to be part of a continuing effort by the government to crack down on private markets, which have become an essential part of the food-supply system in chronically hungry North Korea.

In recent years, some market traders have stashed away substantial amounts of cash, while establishing themselves in profitable businesses that the government struggles to control.

But under the rules of the new currency system, the wealth of these traders has largely disappeared, unless it is held in Euros, dollars or Chinese yuan.

The revaluation replaces 1,000 won notes with 10 won notes, but strictly limits the amount of old currency that can be exchanged, news reports said.

According to two web-based groups with sources in the North, that limit was set Monday at 100,000 won, which at current black-market rates amounts to just $40. All North Korean currency that individuals possess in excess of that amount becomes worthless, under the revaluation.
...
Amid widespread protests, the limit was slightly raised to 150,000 won (about $60) in cash and 300,000 won ($120) in bank savings, according to DailyNK, an online news organization that has informants in the North.

"I worked like a dog for two months for the winter, but the money became useless paper overnight," a resident of Sinuiju, a city that borders China, was quoted as saying on the web site of Good Friends, a Seoul-based aid organizations with informants in the North.

China's Xinhua news agency said in a report from Pyongyang that state-run shops were closed Tuesday as sales staff posted new prices on goods.

The exchange of old currency for new began Monday and will end on Sunday, Xinhua said, adding that the government did not explain why the revaluation had occurred.

The move shocked local markets in the North Korean capital, according to Yonhap, a news agency in Seoul.

"Many citizens in Pyongyang were taken aback and in confusion," according to a person quoted by Yonhap. "Those who were worried about their hidden assets rushed to the black market to exchange them for yuan or U.S. dollars. The yuan and the dollar jumped."

In the past year, North Korea has put increasing pressure on local markets, closing several large ones and limiting the range of goods that can be sold in them.

The government has also criminalized everyday market behavior, while creating a new kind of gulag for those it deems economic criminals, according to a report released this fall by the East-West Center, a research organization established by Congress to promote understanding of Asia.

The report says security forces in North Korea have broad discretion to detain without trial nearly anyone who buys or sells in the local markets. But if traders can pay bribes, security officials will often leave them alone, the report says.

If the currency move substantially cripples the operation of local markets in the North, the consequences could be severe for the millions of people who now depend on them for food. U.N. officials have estimated that as much as half the calories consumed by North Koreans comes from food bought in markets.

South Korean officials said last month that North Korea appears to be on the brink of another severe food crisis, with stocks of food likely to run short by March of next year.

My Comment: Ah, the irony of a government which has no compunction robbing its people blind while at the same time "creating a new kind of gulag for those it deems economic criminals". The gang of criminal psychopaths running N. Korea makes the cabal of criminal kleptocrats rinning the U.S. seem almost benign in comparison ... almost. The really amusing thing is the numerous parallels between the economies of North Korea and the latter-day U.S., once you get beyond all the flag-draped "truth, justice and the American way" jingoism:

o Both have monstrously bloated militaries relative to the size of their economy;

o Both evade being called to account by using the threat (explicit for NK, implied for USA) of their nuclear arsenal;

o Both have government operations which run ongoing deficits and can only be sustained thanks to the largesse of China.

Imagine if the U.S. wasn't blessed with a disproportionate share of the world's richest topsoil (rapidly being degraded - e.g. in Iowa roughly half of all that rich topsoil accumulated over multiple cycles of glaciation and intervening warmth has been lost due to farming in the past 100 years) and was not able to keep its citizens well-fed with ridiculously low effort...

[ewmayer]

ZeroHedge: Senator Sanders: "Ben Bernanke Is Part Of The Problem"

Ben Bernanke's low-road approach of taking the Fed's "noble mission" of bailing out Wall Street at any and all costs directly to the people seems to have come at curiously opportune time, a mere week ahead of his December 3 Senate Banking Committee hearing for his second 4 year term nomination. It also seems to have backfired as some people in high standing seem less than enthused by the oodles of human lactic acid kindness that suddenly overflow from each and every floor (yes, even the 3rd sub-basement which houses the 10 consistently overheating druckmaschinen) of the Marriner S. Eccles building.

One such among them is Senator Bernie Sanders who earlier said on ABC's "This Week" that Bernanke will be renominated over his dead body (metaphorically speaking):

"No, I absolutely will not vote for Mr. Bernanke. He is part of the problem. He's the smartest guy in the world, why didn't he do anything to prevent us from sinking into this disaster that Wall Street caused and which he was a part of? No, I will not vote for Bernanke to stay on as chairman."

And even as the dollar moves increasingly underwater and is now even more "collateralized" by worthless and completely unwanted (except by the Fed) MBS and Agency securities, less and less people buy Bernanke's strong dollar Kool Aid: it was not enough for Bernanke to launch the greatest bail out in history using the Mutual Assured Destruction threat as the "end of the world as we know it" event that would occur if Goldman Sachs shareholders were to get wiped out. No, now he has to destroy the US middle class to ensure that Wall Street has one more, maybe two years, of good bonuses, before the main show of commingled feces and precariously balanced cards can collapse with impunity.

As senators consider how much money their Wall Street backers will stuff in their Christmas lobby stockings, we present a modest proposal of 15 or so questions that those in Washington with even half a conscience should ask the Chairman before making sure that nothing ever changes and we are set on a catastrophic bubble collapse of even more epic proportions...

My Comment: The 15-questions list is recommended reading ... If I were allowed to asked Mr. Bernanke just one question, it would be "Why do you feel it is reasonable to attempt to address the effects of the collapse of one asset-price bubble fueled by excessive leverage (that is, debt) by encouraging the taking-on of even more debt by consumers, financial institutions and the Federal government?"

[UPDATE: With the committee vote looking to be very close, it appears Senator Sanders has upped the ante:]

NYTimes: Senator Sanders To Place "Hold" On Bernanke Reconfirmation, Chairman Will Need 60 Senate Votes To Override

The move is unlikely to derail Mr. Bernanke’s reappointment, but it could slow the confirmation process and give the Fed’s critics additional opportunity to press their case. As a practical matter, it means Senate Democratic leaders will have to line up 60 votes in favor of Mr. Bernanke rather than a simple majority at a time when the Federal Reserve is under increasing populist attacks from lawmakers on both the right and the left.

Mr. Bernanke will testify on Thursday at his confirmation hearing before the Senate banking committee. He is expected to face criticism for not doing more to prevent the financial crisis, and calls by some lawmakers for a sharply reduced regulatory role in the future.

Mr. Sanders, an independent, is not a member of the Senate banking committee, but he has frequently accused the Federal Reserve of bailing out Wall Street firms and the banking industry at the expense of ordinary citizens.

Kudos to at least one leading MSFM publication, Forbes for coming out in favor of the Paul/Grayson bill to audit the Fed:

Bring On Fed Transparency: By all means, we should let Congress audit our central bank.

There`s a good chance the call for the Government Accountability Office to audit the U.S. Federal Reserve will lead to nothing. Still, it`s a proposal worth enacting. Ron Paul, the Libertarian-leaning Republican representative from Texas, teamed up with lefty Democrat Alan Grayson of Florida to get this very good idea into the Financial Stability Improvement Act of 2009.

Some say this threatens the Fed`s independence. It doesn`t. Fed Chairman Ben Bernanke is a brilliant man who may well go down in history for having spared us "Depression II: Buddy Can Ya Spare An iPhone?"--but he isn`t a king. He can be audited and still get his job done. The Fed might even be better off for being forced to explain itself in greater detail to the public it`s supposed to serve.

But the Fed is pulling out all the stops to get Bernanke reappointed and to preserve the sanctity and secrecy of The Temple -- Today`s defense of Templar secrecy comes courtesy of Fred "Iceman" Mishkin, a.k.a. "The Man Who Singlehandedly Destroyed Iceland":

Mishkin Calls Paul's Proposal to Audit Fed Policy `Incredibly Dangerous': U.S. Representative Ron Paul’s proposal to allow audits of the Federal Reserve’s monetary policy is “incredibly dangerous” and could stoke inflation, said Frederic Mishkin, a former Fed governor.

“The Ron Paul bill is incredibly dangerous,” said Mishkin, who is now a Columbia University professor, in a Bloomberg Radio interview. “It is remarkable the kind of attacks that are occurring on Fed independence.”

Fed Chairman Ben S. Bernanke has opposed the proposal by Paul, a Texas Republican, saying it might open the door to interference in monetary policy. A separate proposal in the Senate backed by Banking Committee Chairman Christopher Dodd would strip the Fed of authority to supervise banks.

Paul’s bill “would be very dangerous in terms of promoting inflation,” Mishkin said. “If you make the central bank beholden to politicians on a short-run basis, you get very bad outcomes: high inflation and less of the ability to deal with shocks like the ones we had recently.”

My Comment: Self-serving claptrap by another high-profile Fed lackey ... as the above Forbes piece points out, the Paul/Grayson bill makes the Fed no more "beholden to politicians" than the federal judiciary is. On the other hand hand, if the Fed eventually is subject to an audit - and you can see that is shaping up to be one hell of a nasty political and media fight - and we find out that some of those trillions of taxpayer liabilities incurred by the Fed in order to bail out Big Finance are as dodgy (or borderline illegal) as skeptics believe, then maybe it *will* prove time to make the Fed "beholden" to someone other than the banksters. I note Mishkin is unbelievably disingenuous regarding "the inflation threat" - if rampant money-printing and overpaying for toxic assets by the Fed in order to bail out the banks (who are not lending the money, but are certainly using a large part of it to speculate in the equity and commodities markets, knowing full well the Fed "has their back") ain`t inflationary, I don`t know what is. God, these arrogant idiots need to have their secretive shenanigans aired so badly ... the first step in ending the fraud is to expose the fraud.

One ZeroHedge reader puts it nicely: "Does anyone know if Mishkin has ever been on the payroll of an institution that had to endure the consequences of poor judgment?".

[ewmayer]

BofA to return $45 billion to taxpayers: Nation's largest bank said it planned to sell $18.8 billion in securities to fund move that would free it from government restrictions.
My Comment: I must say I`m impressed at the speed with which BofA was able to do this (can you say "year-end executive bonuses"? I knew you could) ... of course the extra revenues from rate-jacking millions of its credit card customers (including many with sterling credit scores) plus the effects of a seven-month-long government-liquidity-and-propaganda-aided bear market rally which has seen BofA`s share price more than quintuple from its early-March lows have surely helped rather a lot in that respect. Now there remain only the $40B-plus in FDIC-guaranteed debt.

Of course, getting out from under the TARP-associated restrictions has *nothing* to do with golden-parachute planning of BofA execs ... it`s strictly "the right thing to do to pay back America for savings our butts" ... and of course millions of credit-card accounts now yielding 29.9% usury rates are a much better long-term business-profitability model.


WSJ: Ben Bernanke should Not Be Reappointed

Federal Reserve Chairman Ben Bernanke faces his Senate renomination hearing today, amid signs that the confirmation skids are greased. We nonetheless think someone should say that, as a matter of accountability for the financial crisis and looking at the hard monetary choices to come, the country needs a new Fed chief.

We say this not because of Mr. Bernanke's performance during the financial panic of 2008, for which he has been widely and often deservedly praised. Like others in the regulatory cockpit at the time, he had to make difficult choices with imperfect information and when the markets were shooting with real bullets.

He supplied ample liquidity when it was most needed last autumn, and he has certainly been willing to pull out every last page of the central banker playbook. If some of those decisions were mistakes, the conditions the Fed faced were extraordinary. Anyone at the helm would have made calls that in hindsight he'd regret.

The real problem is Mr. Bernanke's record before the panic, with its troubling implications for a second four years. When George W. Bush nominated the Princeton economist four years ago, we offered the backhanded compliment that at least he'd have to clean up the mess that the Alan Greenspan Fed had made. That mess turned out to be bigger than even we thought, but we also didn't know then how complicit Mr. Bernanke was in Mr. Greenspan's monetary decisions.

My Comment: More evidence of the "greased skids" mentioned by the WSJ: After being "highly critical" of Ben the Mery Monetizer in public statements leading up to today`s confabulation meeting, Senate Banking Committee Chairman Chris Dodd said he will vote to give Bernanke another 4-year term.

[UPDATE: Faced with the prospect of a filibuster requiring 60 votes to override (as opposed to just 51 for a normal rubber-stamp confirmation) Dodd hinted that Bernanke`s confirmation may have to waikt until earely next year. Between the uncertainty of whether Bailout Ben will be there for 45 more years and strategic White House hints that tomorrow`s jobs report may look weak, markets sold off in the last hour. But no worries - tomorrow is another day, and another opportunity to restart the Ponzi Pumping.]


Fudging Losses Is Easy When the FDIC Does It, Too: No wonder so many banks are delaying their losses. The Federal Deposit Insurance Corp. keeps showing them how, by doing the same thing with its own.

Last week the FDIC, led by Chairman Sheila Bair since 2006, said its insurance fund’s liabilities exceeded assets by $8.2 billion as of Sept. 30. That marked the first time since 1992 that the industry-financed fund had shown a deficit. There’s plenty of reason to believe its financial health is much worse.

That’s because the FDIC has been underestimating its losses ever since the financial crisis began, which is another way of saying it has consistently overstated its insurance fund’s capital position. At the rate it’s going, the FDIC soon may have no choice but to borrow money from taxpayers by tapping its $500 billion credit line with the Treasury Department, an option it so far has avoided.

What’s just as troubling, though, is the example the FDIC is setting for the industry it’s supposed to regulate. Either the FDIC isn’t very good at gauging its obligations, or it has a habit of denying reality.

My Comment: Another great, probing piece by Bloomberg`s Jonathan Weil.