Wednesday, February 4, 2009

Crisis of Confidence


Karl Denninger of the blog Market Ticker had a great post/plea today entitled;

To Obama: Confidence Levels Critical.

He also included an attachment, of a mea culpa by a mortgage industry 'insider' that will truly turn your stomach. Please, please take the time to read it. I urge you to pass it on to friends and family as well, hell even your elected reprsentative and senators.

I have re-printed the later half of Karl's post below while the full content can be viewed clicking the link above.


Our government has utterly refused to address these issues at their root. The truth is that those banks and other institutions that were involved in this trash-passing have no meaningful way to survive. Government cannot guarantee several trillion in bad assets - it just can't. What's worse is that the "pumped" value of homes that was created as a consequence of this fraud is in fact false value. We are discovering this as home prices contract. This contraction in turn exposes the fact that those "assets" are not worth what is claimed and in many cases are worth nothing - whether "AAA" rated or not.

If government attempts to "guarantee" these "assets" it will in fact guarantee that monstrous, unacceptable, and possibly un-fundable losses will be taken by the taxpayer.

Instead of encouraging and even forcing that contraction, which will clear the market, our government is hellbent and determined instead to hide the fraud that occurred, along with its consequence. As a result we have turned what was a nasty housing correction into a near-certain economic Depression.

Worse, as our government has refused to call out those institutions that are responsible for this mess and close them down our citizens have lost faith in the banking system. Slowly at first, but now at an accelerating rate.

President Obama, passing "stimulus" bills that spend millions of dollars on birth control and analog TV converter boxes will not fix our economy. Nor will it shore up confidence in our financial markets.

No, in order to do that we must arrest the fraudsters, close the banks and other institutions that were complicit, transfer off the good assets to other, non-involved firms and take the bad assets (in receivership, costing the government nothing) onto the FDIC's balance sheet. From there we can recover that which is recoverable via an RTC-like process - although for fraudulently-procured and processed loans, recovery is likely to be small.

What we cannot and must not do is continue to lie to the American people. We have heard lies for more than two years Mr. President, going back to the winter of 2007 when the first Asian market selloff triggered this crisis. We have been repeatedly told that "the economy is fundamentally strong" and that "subprime is contained." We have been told by Sheila Bair that "our banks are strong" when the market says otherwise. And we have been told not to worry, while we see our neighbors lose their jobs and be foreclosed upon.

Mr. President, you can no longer snow the American People nor can you allow others in the government to do so. They've figured it out - that this was one gigantic layered Ponzi Scheme, and frankly, they don't trust their government any more. They don't trust the FDIC. They don't trust Ben Bernanke and The Fed. They don't trust a Treasury Secretary that you appointed and pushed through confirmation despite the fact that he cheated on his taxes.

I know you're out of touch Mr. President, as most politicians are, but here in the real America where people go to work for a living every day firearm and ammunition sales are off the charts, as are concealed carry permit applications. People are afraid. They're afraid that the government no longer exists to protect individual rights and prosecute wrong-doers, but instead now exists to steal hundreds of billions of dollars from them and their children and give it to a group of greedy banksters who willingly looked the other way while the nation was looted so they could pay their bonuses.

They have seen Bernanke take actions that have never before occurred, that are arguably beyond his lawful authority in The Federal Reserve Act, and which can (and have) exposed taxpayers to loss - hundreds of billions of dollars of loss - without Congressional approval or debate.

They've seen your first acts, which were not to address the greater fraud, but to pander to labor unions. It's all fine and well to repay a constituency that help elect you, but what good will having a bunch of signs taken down in union shops do when all those businesses close and the union workers wind up unemployed?

Bluntly, America doesn't trust Washington DC and they're not sure they trust you.

We need a leader Mr. President - someone who will discharge the Office Of The President in The Executive Branch. We need a tough CEO for this nation. If you're that man - the man we elected - then now is the time for you to stand up and prove it.

The American People have great hope, and great promise. We believe in our nation and we believe in ourselves. We can do great things - we put men on the moon, we mechanized automobile production, we invented powered flight, we developed the personal computer and we built The Internet. Unlike Al Gore, I really was a part of making the latter "real". I know what America can do, because I've seen it with my eyes and felt it with my fingers.

But we must have the rule of law Mr. President.

We must have wrongdoers punished, not rewarded.

We must both tell and hear the truth.

Government must stop trying to prevent asset prices from contracting to sustainable levels. The house prices of 2005 were driven by fraud; that "value" never really existed. Pretending that it did or does won't make it come back, but you can bankrupt America - literally - by continuing down that path.

Government must stop mollycoddling malfeasors and their enablers. Businesses who engaged in profoundly-unsafe or even crooked practices must be closed. This is a capitalist society - if we close one bank, another will rise to take its place. In addition, there are plenty of banks who did nothing wrong during these years, and they should be able to profit from the good loans and deposits that the bad actors are forced to disgorge. We have, over the last 20 years, refused to yank the licenses of malfeasing corporations; it is manifestly unjust that out of all the fraud from the 1990s to today only one firm, Arthur Anderson, paid such a price.

Those in Congress and other regulatory agencies, such as the SEC, who willfully looked the other way (or worse) must be ejected from public office, prosecuted when criminal wrongdoing can be shown, and safeguards put in place with full transparency to the public so as to insure that this never happens again.

The Fed must be prevented from attempting to make fiscal policy and guarantee asset prices. Monetary policy doesn't extend there, and Bernanke and his band of Merry Men have literally stolen that authority from The Executive and Congress. The Federal Government must take that authority back by whatever means are necessary, up to and including repeal of The Federal Reserve Act of 1913.

Treasury, if reports in the press are accurate, continues to insist that "bad assets" are worth more than the "market price" if held to maturity. You are being lied to by your own people in Treasury Mr. President; your Treasury Secretary, Mr. Geithner, was in part personallyand further, he was part of the "team" that ignored the risks of these institutions' 30:1 and greater leverage - one of the root causes of this mess. The market is never wrong on today's value, and it's the best guess we will ever have on tomorrow's. responsible for the "operations" performed on both Lehman Brothers and Bear Stearns The Dutch government just got scammed by ING on a similar deal to what your "bad bank" discussions would yield. Don't fall for it; the American People will not sit for being robbed again by the banksters, and Geithner is one of them. Read up above about the fraud in these products along with S&Ps recent ratings actions on similar assets and then tell us - how can you possibly believe these loans will perform?

Should confidence in our financial markets be lost in their entirety the consequences would be cataclysmic, and yet that confidence, today, is hanging by a thread. I see people on my forum and in my daily life talking about keeping in "The Bank of Sealey" daily - a clear reference to a refusal to trust the government, the FDIC and the financial system at its most-basic level. Precisely where the line is in the American psyche that leads to a feedback loop in our public consciousness culminating in the people refusing to trust any financial institution in any form is unknown, but that this line can be crossed is a certainty. My grandparents grew up during The Depression and to the day of their death they did not trust banks, they refused to invest in what they perceived as an intentionally-crooked marketplace and they did not believe a word that came out of government mouthpieces.

Our government must put a stop to this corrosive atmosphere, and it can only happen via true leadership, a new direction, a commitment to the truth under all circumstances and a demand that the law be enforced against all who have broken it.

You were elected to bring that our republic.

Now is the time.


Thanks for the post Karl.


Good speculating to you all and never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 2 units Ultrashort MSCI EAFE ticker EFU @ $89.80 stop at $89.80
Long 2 units Ultrashort S&P500 ticker SDS @ $69.80 stop @ $66.15
Long 2 units Ultrashort Real Estate ticker SRS @ $53.80 stop @ $47.18
Long 1 unit Ultra Crude ticker UCO @ $10.60 stop @ $9.38
Long 1 unit US Gasoline fund ticker UGA $21.85 stop @ $19.58
Short 2 units Darden ticker DRI @ $27.15 stop @ $28.70
Short 1 unit Wells Fargo ticker WFC @ $20.20 stop @ $22.43
Short 1 unit JP Morgan ticker JPM @ $27.35 stop @ $29.54
Short 2 units Morgan Stanley ticker MS @ $21.30 stop @ $23.82



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