Thursday, April 2, 2009

Banking Stress Increases/AIG

Good Afternoon Folks

What an interesting day today. All of the major indices soared around 3% today as FASB caved into corporate pressure and decided to change the mark to market accounting standards. Stocks were further fueled by the announcement that the G-20 pledged an additional $1 trillion towards fighting the economic crisis. Here is the FASB news:

"April 2 (Bloomberg) -- The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value accounting rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

Changes to fair-value, or mark-to-market accounting, approved by FASB today allow companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost net income. Firms could apply the changes to first-quarter results."

Quick Take:

The scariest part of the FASB ruling is it gives the companies holding the toxic assets the right to mark these assets at whatever price they feel represents true market value. If thats not asking for trouble I don't know what is. Get ready for Enron part 2,3,4,5,6, and 7. This is what happens when you give the keys to the bank to a group of criminals.

The market loved it of course. Why wouldn't they? The fraud has officially been allowed to roll on. Good job FASB! Great Work! NOT!

AIG Scandal

I am not sure if this will get legs but if it does watch out. A highly influential, well respected banking consultant group called Institutional Risk Analytics(IRA) came out with a scathing report around AIG. They basically called this company a complete fraud and accused the Treasury(via the bailout) and all of the major banking institutions of all being in on the scam.

The IRA call AIG the Bernard Madoff of the banking world. Here is the article and its shocking claims:

"In an effort to resolve this conundrum, over the past several months The IRA has interviewed a number of forensic experts, insurance regulators and members of the law enforcement community focused on financial fraud. The picture we have assembled is frightening and suggests that, far from just AIG, much of the insurance industry has been drawn into the world of financial engineering and has thus become part of the problem. Below we present our preliminary findings and invite your comments.

One of the first things we learned about the insurance world is that the concept of "shifting risk" for a variety of business and regulatory reasons has been ongoing in the insurance world for decades. Finite insurance and other scams have been at least visible to the investment community for years and have been documented in the media, but what is less understood is that firms like AIG took the risk shifting shell game to a whole new level long before the firm's entry into the CDS market.

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are "valid legal contracts" is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering."

The article concludes:

"Are the CDS Contracts of AIG Really Valid?

The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between "fees" paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG's operations."

Quick Take:

Hopefully Congress starts digging into this. AIG is a complete fraud and the bailout by the Treasury smells just as bad. The IRA is a serious organization folks. they are major players in DC. The accusations above are shocking and could potentially bring down this whole deck of cards.

Bank Stress Rising

I wanted to share the IRA's most recent graph that measures bank stress:

Quick Take:

The IRA's stress index uses a variety of measures to gauge how health a bank is. Here is an example of what metrics they use to rate a bank's stress(PNC Bank is the example here). The IRA analyzes everything from a banks capital position to its percentage of loan defaults in order to come up with a a stress score which is used to calculate a rating for each bank.

As you can see by the chart above, bank stress in general is soaring according to the IRA. Gee how funny... Didn't Citi, BofA, and JP Morgan all tell us how great things are recently? HA! Bull****! Look above. These asshats come out and tell us Jan and Feb were great and then come out a few weeks later and admit that March was slow. What a bunch of lying thieves. Something tells me the IRA's stress test will show even more stress in the first quarter. I will be following this very closely going forward.

The Bad Loans Continue

One more graph and I will call it a day. Perhaps things got better for the banks in January by doing more bad loans?:

Final Take:

This is from the Fed and its obviously something they're watching closely as they desperately try to fuel more lending from the banks. Looking above, it appears that the banks have dropped their lending standards since the near meltdown in October on certain products like subprime and prime loans. Whats also interesting here is that they still have no desire to do more commercial business/consumer loans.

My head is now banging off my desk as I write this. My conclusion here is they are beginning to do bad loans again. Could it be that since the Fed is guaranteeing all of this garbage they said to themselves "what the hell lets do more bad subprime loans!". Thats the way I read it. These lending standards should be tightening not loosening! This is what got us into this mess in the first place!!!!!

Isn't it also interesting that the lending standards dropped just a few months after getting massive capital injections by the Treasury? My guess is the pigmen are being pressured by the Fed/Treasury to lower their lending standards in order to stabilize the housing market.

BWAAAAAA! Idiots. The Fed/Treasury is obsessed with trying to keep this bubble inflated. Its not gonna work fellas! These loans will fail just like the others did. This debt bubble has popped. Give it up already!

Bottom Line:

I picked up some shorts on the bounce today ahead of the jobs number. I bought some SDS and TBT which short the S&P and treasuries respectively. The bond auctions today were ugly, and one of the primary dealers announced that they wanted out of the process. Perhaps they realize bidding against the Fed in treasuries isn't a profitable way of doing business? Yields actually rose in one of the auctions that the Fed bought into via their QE program. This is exact opposite effect that the Fed wants. Ooops Ben! Perhaps they don't wanna play your game?

In my eyes ladies and gentleman this is all a giant cluster****. I don't believe a word from anyone on CNBC claiming that they are seeing signs of an economic recovery, I don't believe any of the bank speak, and I don't believe a word of what the government is saying to us around this crisis. Job losses are worsening, the economic fundamentals remain horrible, and the government continues to dig itself deeper and deeper into debt. This will not end well.

Feel free to buy into this rally. I'll pass thanks. IMO this is a ticking time bomb that could go off at any second.


Anonymous said...

Oh common Jeff you have to admit that at least if nothing else on CNBC Squawk Box, Becky is hot. If it wasn't for her I bet we would be looking at S&P 475 levels right now.
With this market disconnect it's as good a reason as any.


Jeff said...

Becky is smokin hot.

My fav by far!

John Maynes said...

Are you nuts. That biyatch is frigging ugly!!!

Peter said...

I am trying to convince myself that I am wrong about this and that perhaps this is how the Bush haters felt when he took over.

If that is not the case then I believe we are living in some sort of novel. This can't be reality.

Did anyone see one peep in the media about the IRA report. Imagine if the media had treated Deep Throat like this? The entire TARP/AIG fiasco is hard enough to swallow, but to hear that it is all based on a ponzi scheme created by the bankers is incredible. And our country just stands by and does nothing. Our elected officials who represent us, we are their bosses, do nothing.

Is this the Hitchhikers Guide To The Galaxy? Is it all someone's experiment?

Jeff said...


I hear you.

I am pretty numb at this point. The IRA report was shocking to me as well. Thats a very legitimate news source that would never print such a story without facts.

This could be another DeepThroat/ Watergate type event if the media would do their job.

Sometimes I think the crisis is so bad that the media is afraid of sparking a revolt.

Each day we realize how much of a fraud this all is.

Anonymous said...

Hi Jeff,

your blog is great.

Forget about "the media", just useless. Remember the "official" coverage of the 2008 caucasus conflict in Georgia?

At least there are blogs like yours that try to look behind the fassade.

I think the extent of distortion by the media is just becoming more visible since we are not stuck in our local/national media bubble anymore. Hopefully all those spin doctors are getting into real trouble because people like us use the net and their brains to understand the big picture.

Maybe it is the right time to read the works of Le Bon to understand what is going on.

Funny that the english meaning for the french word "foules" is "masses", just found out.

Regards form Germany,

Jeff said...


Thanks for the support from Germany!

Your government has certianly been more responsible and conservative in reaction to this mess.

I think the spin is beginning to wear off over here. There are a bunch of protestors in New York today.

We lost another 660k+ jobs in MArch. The sheeple are beginning to get restless.

If things continue to get worse its going to get real ugly. I wouldn't want to be a banker right now.

Thanks for the support and Good luck across the pond.

Jeff said...

The 10 year is soaring today.

QE isn't working. Market is going to get crushed if yields continue to rise.

Keep an eye on this today!! We are almost back to 3% yields!

teddy bear said...

but in the meantime it is insane ...


jeff said...

LOL Teddy

Love it

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