Sunday, October 25, 2009

The U.S. As A Failed State

This commentary from Paul Craig Roberts, who's professional and educational accomplishments speak volumns and who is critical of both political parties, just published a must-read commentary on the state of systemic decay in this country:
Costs are out of control, and priorities are skewed in the interests of rich organized interest groups at the expense of the vast majority of citizens...The one percent that comprise the superrich are laughing as they say, "let them eat cake."
Here is the link:  Let Them Eat Cake

Here's an observation I shared with some people this weekend, in the context of a tragic story that made me sad for our country and incredulous that we stand by idly while the politically connected Wall Street elite completely loot our system with Obama's blessing:

The system is clearly 100% corrupted and broken. Obama is making things even worse. I heard a heartbreaking story last night about a struggling mother living in her broken down truck with her child, yet still keeping her child in middle school and making sure he had clean clothes for his school band performances.  She made money by salvaging scrap metal from residential and commercial dumpsters and selling the metal to scrap dealers.  She was trying to do the right things to survive.  She may have hit a wall this week because the system would not help her or her child.  Her loyal, well-trained dogs were towed away with her truck and she may lose custody of her child.  Why are the people running our biggest banks raking in 10's of millions of dollars when they are the ones forcing the weak and the poor into oblivion? Thanks for that Change, Barak.  While you fly in pizza from St. Louis for your lavish parties to entertain your corrupt, wealthy supporters, you are defecating on the people who voted you into power.


  1. Dave,
    indeed while the banks are posting record profits and shoveling massive bonuses to their employees who are about as talented as a roll of wet toilet paper, the average US citizen is facing the most difficult environment of the last 30 years. Nver before has there been such a disconnect between Wall Street and Main Street. How long until Main Street decides to take back from Wall Street?

  2. gyc, more like since the Great Depression. What is most enraging is that this charlotan Obama ran on a campaign of Change and Hope. The only Change he's delivered is he's taken the spare change from the pockets of the middle class and given it to Wall Street and the labor unions.

    The only Hope he's delivered is the Hope, among everyone who understands how corrupt he really is, is the Hope that he only lasts one term.

  3. LOL, especially if you're the St. Louis Rams, Tennesse Titans or Tampa Bay Bucs

  4. Dave,
    It is a 1st pick in the draft derby out there.

  5. Hey Dave, the "let them eat cake" URL doesn't work. Also, I just made a comment about the Goldman profits post you made a few days ago.

  6. Julia, thanks for the heads up on the Let Them Eat Cake link - it's fixed now.

    Regarding GS's earnings, if you read thru their earnings release carefully, you will see that majority of their FICC-related trading profits are the result of marking up positions. I don't have time to go thru specifics here, but we will be able to get a much better idea of what % of their GAAP earnings actually produced real cash and how much was paper gains when they release their cash flow and balance sheet with their 10-Q (probably in another 3-4 weeks).

    You also have to take into account that they are part of the process by which the Fed is buying toxic assets. Goldman is in position to cross toxic paper from institutions into the Fed's bid. I know precisely how this works because when I traded junk bonds in the 1990's, we would buy illiquid paper out of the RTC, hold it for a day or two and flip it into buyers our salesmen had tee'd up to take the paper. We earned enormous riskless spread on this business, although we would hold in position for 24-48 hours in order to avoid the 5% mark-up limitation rule the NASD (now FINRA) had established for riskless, non-principle trades. I asssure you Goldman is doing the same.

    Also, I did an very in-depth analysis of Goldman's numbers for 1999-2008, which was done before I had this blog. What I found was quite stunning. Most of Goldman's cash from operations came from growing the asset side of its balance sheet and generating cash from these by increasing its borrowing. In fact, I was quite stunned by the degree to which its net income was derived from using its balance sheet as a massive "carry trade" of sorts. I probably have the work somewhere saved on an external disk, but suffice it to say that I recall that Goldman's cash return, after compensation, on assets for that period time was roughly 2% per year.

  7. Yeah, marking up of assets probably helped every bank including Goldman with their "credit products and mortgages".

    I have been asked bombarded/asked about the "hundreds of trillions of derivatives" floating out there waiting to explode the financial universe etc. So I took some time reading thru the current break down of the different types of derivatives (from the data provided by BIS). Turns out, of the 600 Trillions of OTC derivatives, most are interest rates swaps.

    If Fed tips JPM and GS about interest rates direction, these swaps are essentially "riskless" and "costless" profits as you need not to "borrow" any money and the principals are not exchanged in these swaps.

    Your observation about the Carry trade, on the other hand, requires "real skills" as in pre-cognition of the Forex trend. Sometimes it backfires like last fall when Yen strengthened. Unless, of course, some other "entity" tips them off these as well. Ha.

  8. Actually, my use of the term "carry trade" in reference to Goldman refers more to the idea that Goldman is borrowing from the Fed at near-zero to zero percent and investing in Treasuries and agency paper and other slightly higher yield paper. THAT trade requires no skill.

    Actually, if you go over the earnings releases for the all of the big banks for all three quarters this year, you'll see that marking up positions was the majority of the GAAP earnings in every single case.

    Makes sense now that FASB changed the mark to market rules, right? This rule change by FASB was implemented in order to allow the banks to manufacture "healthier" looking financials. But all it's really done is help reinflate financial bubbles in the system. You have to ask yourself, "why are the banks fighting the implementation date of the FASB rule requiring brining level 3 assets back "onto" the balance sheet?" The banking industry successfully lobbied to have this rule delayed until November 15, 2009. And now it's been delayed until each banks' new fiscal year AFTER Nov. 15. What are the banks afraid of? LOL. The REAL fact of the matter is that every big bank in this country is hopelessly insovlent on a mark-to-market basis. Much of this has to do with counterparty collateral calls if derivatives were properly marked to market. That's what sunk AIG and the U.S. taxpayer has been busy monetizing this problem and paying AIG people very well for doing nothing.

    As for the interest rate swap argument, it is true that a large portion of the derivatives underwritten have been interest rate swaps. But the risk with derivatives is counterparty default. So even interest rate swaps have much bigger risk than people realize or understand.

    The whole problem with our derivatives system is that the cost of default has not been properly priced into anything, because if it were, the majority of the OTC derivatives would have never been underwritten - they would have been way too costly. But that topic is worthy of a long essay

  9. Obama and his Czars would never use any of the $10 million+ Norway trip with FLOTUS and Ophra in their personal Gov. 757, for the woman and child.

    The woman and child are white.

  10. In this case, if GS or JPM is really holding these in-the-money interest rate swaps, they will have to be written off if the counterparties default. The question is who is holding the liabilities generated from these interest rate swaps (Too-big-to-fails?). Seems like the financials are still one default away from another Lehman Armageddon. The moral of this story is, I don't even how to put it.

  11. Julia, OTC derivative are the financial equivalent of an earth-incinerating arsenal of nuclear bombs - it is not a question of "IF" these weapons will detonate - they already have in the case of Enron, Refco (oh yeah, what happened to Refco?), Amaranth, FNM, FRE. Bear, LEH and AIG.

    Shoring up AIG, Wash Mutt, Wachovia and MER is what they are doing to prevent GS and JPM from metlting down.

    What really pisses me off if they are using trillions in taxpayer money (directly plus the Treasury guarantees behind all the Fed money) and the fuckers at GS and JPM are paying themselves a king's ransom with taxpayer money.