"This Is True, The Plumber Is Clearly Smarter Than The Ben Bernanke"

I can't think of one thing that I disagree with in this. As an aside, I love when people use extraneous "the"s. Such as, "The Ben Bernank"[sic].



HT: O

Paul Ryan Dismantles The Health Care "Reform" Legislation On The Congressional Floor

Wisconsin Representative Paul Ryan is quickly establishing a reputation in the republican community as an impassioned, logical, freedom loving voice of reason. A throwback republican of sorts. While certainly not our ideal politician, he's closer to the kind of republican that makes TILB still have hope for the GOP.

Here he blasts several of the most popular health care myths on the floor of the House of Representatives. He shows how it does nothing remotely close to reducing the debt, he rails against the legacy of leverage that we leave to the next generation to shoulder, and he lambasts the idea of government rationing health care rather than individuals making private decisions with their care providers and insurers.

Sadly, nobody listens; nobody cares.

The Anatomy Of A Failed T Bill Auction

So, the auction didn't actually "fail", per se. But this excellent Seeking Alpha piece breaks down a very strange Treasury Bill auction earlier this week. Very little buying from traditional sources forced primary dealers and - perhaps - The Fed to step into the breach. Here is an excellent breakdown on what was a very weak Bills auction yesterday.

We recommend clicking the above Seeking Alpha link and reading the article in its entirety, in order to understand how a Treasury auction works and what makes for a "strong" vs. a "weak" auction. What happened on February 23rd was unquestionably "weak", though to be fair, zero percent interest rates wouldn't drive me to bid either.

Here is a partial description from his article:

Now here’s where things get odd.

Of the competitive bids (meaning those bids coming from folks who care about yield), roughly 70% went to Primary Dealers (investors who HAVE to buy the debt and who usually turn around and try to sell it afterwards). To put this number into perspective here is the percentage of competitive purchases made by Primary Dealers in the last four 4-week Treasury issuances:


Date of 4-Week Treasury Auction
Primary Dealers as % of Competitive Buys

January 5 2010
42%

January 12 2010
70%

January 20 2010
60%

January 26 2010
67%

February 2 2010
51%

February 9 2010
51%

February 17 2010
61%

February 23 2010 (yesterday)
70%

You’ll note that during the stock market correction that took place during the end of January/beginning of February, Primary Dealers didn’t need to buy many Treasuries since investors were fleeing stocks and buying short-term Treasury debt as a safe haven.

You’ll also notice that yesterday’s auction featured MORE buys from Primary Dealers than almost any of those occurring in 2010. Remember, Primary Dealers HAVE to buy Treasuries. So to see them buying a high percentage of Treasuries at debt auctions means that few investors who can pick and choose what to buy are actually looking to buy US debt.

In plain terms, a debt auction that features a high percentage of competitive buys coming from Primary Dealers is BAD NEWS. It means investors generally aren’t buying US debt. It also means that foreign governments (those who have funded US debt auctions for decades) aren’t buying much anymore either.

So the fact we’ve have three short-term auctions in which more than two thirds of competitive buys came from Primary Dealers is worrisome to see the least.

Now here’s where it gets even worse.

Of the remaining competitive buys (about $8.86 billion), only 32% came from Direct Bidders or those who bought debt directly from the Treasury: orders that can easily be tracked. The other 68% ($5.9 billion) came from Indirect Bidders: folks who we cannot track.

Even more bizarre, only $5.9 billion in Indirect Bidder competitive buys were ACTUALLY OFFERED. So we had a 100% acceptance rate for Indirect Bidder competitive buys.

Let’s put this in perspective:

Date of 4-Week Treasury Auction
Indirect Bidder Acceptance Rate

January 5 2010
71%

January 12 2010
22%

January 20 2010
77%

January 26 2010
43%

February 2 2010
63%

February 9 2010
87%

February 17 2010
82%

February 23 2010 (yesterday)
100%

This means that the Treasury took up EVERY single cent of competitive bids coming from indirect buyers. Remember, indirect buyers are usually assumed to be foreign governments (even the Treasury website admits this).

If this was the case yesterday, then foreign governments barely bought much of anything in yesterday’s auction (only 19% of total debt issued). Moreover, it implies that Primary Dealers (those having to buy) had to gorge on the auction to make up for the fact that few if any foreign governments are interested in buying our debt anymore (including even short-term debt).

Or…

One could potentially argue that this indirect buying came from the Fed covertly buying under the guise of an indirect bidder (the Treasury recently changed the definition of what qualifies for an indirect bidder to make it more vague). It IS rather odd that every single cent of competitive bidding coming from indirect buyers was filled. It’s almost as if the indirect buyers knew precisely WHAT yield to accept… OR were simply trying to take up the slack in what was already a VERY weak auction.

I cannot tell you which of the above is true. Heck, neither of them could be and something completely different could be happening. But regardless, something very, VERY strange is going on in US debt auctions.

I wrote earlier this year that bonds, not stocks, would be the big story of 2010. We’re only into February and there are already some very unusual things happening on both the long (30 year) and the short (4 week) ends of the Treasury curve. And with the Fed’s Quantitative Easing Program scheduled to end in March, things are about to get a whole lot more interesting (barring of course an extension of the QE or QE 2.0).

Keep your eye on US Treasuries. Stocks, despite being so popular with investors are usually the LAST to get what’s coming down the pike. And investors just parked $30 billion for a month with Uncle Sam at virtually NO YIELD yesterday.

Put another way, someone(s) is/are willing to not make money just for the sake of insuring return OF capital (the US can always print money to return it) rather than any return ON capital.

[HT: TD]

Help Solve The Federal Debt - Timothy Geithner Has It Licked

Good news, the U.S. Treasury has figured out how to solve the problem of runaway deficits (and thus runaway debt and ultimately currency collapse). On the Treasury Direct website, under the FAQ section, you'll find the below gem within the Financing the Debt subheading:

How do you make a contribution to reduce the debt?
Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to:

Attn Dept G
Bureau of the Public Debt
P.O. Box 2188
Parkersburg, WV 26106-2188

We're sure that P.O. Box is an extra large, to handle the volume of inbound mail.

Another gem from the same Financing the Debt subheading is this question:

Why does the debt sometimes decrease?
The Public Debt Outstanding decreases when there are more redemptions of Treasury securities than there are issues.

What we appreciate most about this is that it's so shocking that the U.S. debt might actually decline that it demands a frequently asked question to reassure people that, no, the debt is not actually declining. It's simply a timing issue on when the Treasury issues and redeems notes.

Phew! Glad we don't have to worry about the debt actually decreasing.

Gold Hits $1215/Ounce

And we're off to the races. Luckily the Fed thinks gold is a "side show," so it's no big deal. Somewhere Bernanke smiles, so don't worry.

To the moon...

Ford Union Members Reject New Contract

This news is a month old and it's bothered us the whole time. At some level, how can this possibly surprise us?

Ford union members reject a contract that would have put their compensation inline with GM and Chrysler. The article begins with the following:

Autoworkers in Missouri and Michigan overwhelmingly rejected a new contract with Ford Motor Co., a sign that the automaker and the United Auto Workers union are having trouble convincing some workers to accept changes that would lower Ford's labor costs.

Think about this from the UAW's perspective: if you agree to Ford's demands, you end up with lower wages but Ford stays viable and value accrues to equity and debt holders. Instead, if you reject Ford's demands, one of the two following scenarios plays out:

1) You maintain higher wages yet somehow Ford remains solvent. This is better for you than agreeing to Ford's demands;

2) Ford goes bankrupt. You observe that in the Chrysler Traveschammockery the UAW ended up taking the lower pay but also owning 55% of the post-reorg equity and in GM's case the UAW ended up taking the lower wages and owning at least 17.5% of post-reorg equity. You easily assume that if Ford goes bankrupt, you'll then take lower wages and own 20% - 55% of post-reorg Ford equity. This is better for you than agreeing to Ford's demands today.

So Ford's reward for being the best managed of the Big Three? Emasculation. Ford's entire cost structure has been co-opted by the reality of the UAW's preferred position in The Administration. The unintended consequences of the government's disgusting actions continue to compound...

Inflation Vs. Deflation: Peter Schiff Gives The Definitive Interview

Peter Schiff apparently agrees with The Singularity thesis. This is the best interview I've heard about the inflation/deflation argument.

Schiff comes out on the side of inflation. He notes that deflationists are right, but only if they price assets in gold which is what their set of comparable history is relative to. Gold can't be printed and so credit collapses and their natural outcomes should be measured against that benchmark, rather than fiat currency.

Schiff also addresses why the U.S. will not be "fortunate" enough to have the Japan outcome (as TILB has said several times, Japan is our upside case). The differences are stark and important: Japan was a creditor nation, Japan had huge government and private savings, Japan had a budget surplus, Japan was a net exporter, the rest of the world didn't slow down with Japan, Japan's underlying economic engine remained robust throughout the period, etc., etc.

Enjoy.

Jim Rogers Gives An Extended Interview To The F.T.

"At the moment, I'm terribly pessimistic for the foreseeable decade or two..."
- Jim Rogers

"...and I do expect a currency crisis or semi-crisis in the next year or two...If you were Icelandic, you'd know what a currency crisis was. Some currencies will just totally lose value. This time it may be the U.K., it may be the U.S."
- Jim Rogers

We cannot seem to find a simple way to embed the video, so here's a link to the interview.

Great stuff.

[HT: Max Headroom]

Professor Niall Ferguson On The Decline Of America

The ever bombastic Niall Ferguson says that the U.S. is "an empire in decline. There are no solutions." Long time readers know that we love Ferguson's thoughts. He's in agreement with TILB's Singularity (coming soon to a blog post near you) that interest payments for Federal deficit alone could easily be 20% of all federal tax receipts. He's also a long-term China bull (he's not opining on their stock market, rather on the geopolitical strength).

Enjoy.

The FDIC Announces Intention To Rob The Rich To Give To the Poor

We assure you that it was never our intention to become a site dedicated to unmasking the shitshow that is the FDIC, but we play the hand we are dealt.

The most recent FDIC ridiculousness, which we will address below, should not surprise loyal TILB readers as we have been stating over and over again that, using the FDIC's own numbers, the FDIC is insolvent.

Last week, we proved mathematically that the FDIC DIF is now negative and chewing through its reserves. While its liabilities exceed its assets, a portion of those liabilities are reserves that will be used to offset actual losses and pay its creditors (depositors of failed banks). This conversion of reserves into realized losses will keep the DIF alive for a period of time, but the FDIC will soon hit a wall in which it still has "assets" but those assets just don't happen to be "cash". In fact, we also noted that a huge portion of its assets are illiquid assets that are amongst the toxic of the toxic. This of course would not be a problem if they could pay depositors with toxic mortgages, but alas...

After losing another $650 million of value to the Deposit Insurance Fund (DIF) last week (basically $850 million of insured losses offset by $200 million of accrued premium and guaranteed fees), the DIF's capitalization now stands at worse than negative one billion!

As we have said many times, if the FDIC were a bank under the regulation of the FDIC, it would have been seized a long time ago. As American citizens, we find this all very embarrassing.

So, that leads us to this week's FDIC announcement: the FDIC is considering asking sound banks to pay their regular deposit insurance premiums in advance of the normal timeframe (while not asking unsound banks to do the same [note: calling all sellside analysts, you now have a great question to ask the banks you track!!!])

This announcement tacitly equates to stating the following:
1) Oh, shit - we're out of money! ...but not really, but we do need cash, but don't worry, everything's great!
2) In order to remedy this problem, we are going to make all of our lend us their insurance premiums until the premiums come due (don't worry though, this isn't a backdoor special assessment - next quarter we'll credit you for it - wink, wink...)
2a) Oh, and we're not going to make relatively weak banks pay this advance payment...it just feels more fair that way
3) For the time being, our real problem is a "cash" problem rather than an asset problem - don't you see all our pretty reserves? We keep those reserves right there on our balance sheet offset by assets (e.g., toxic, unpurchasable mortgages)

What the deuce is going on here? Are we the only people on Earth that think taking capital out of the banking system to prop up the banking system makes no sense? Isn't Bernie Madoff in jail until he dies for f'ing fewer people behind their backs?

At least the mainstream press is catching on a little bit to the debacle that is the FDIC. That said, the press is confused in its rationale for why big banks "support" this. They obviously support it because they don't want yet another "special" assessment and if paying their normal assessment early helps them avoid said special assessment, they certainly will be in favor of that. However, the article goes on to state big banks don't want the FDIC to borrow from taxpayers...er, the Treasury.

This we are skeptical of.

To say that this would be construed as a taxpayer bailout of banks, is ridiculous. It's a taxpayer bailout of the government. And by the way, the FDIC's entire purpose is to provide bailouts. That's what the FDIC inherently is: a taxpayer guaranteed bailer-outer...but the bailout is to depositors, so to bailout the FDIC is to bailout depositors. While banks, of course, benefit from this in the form of reduced risk of bank runs, that is a statement that is always true, not true just now.

This proposal does not begin to address the FDIC's core problem: THE FDIC IS INSOLVENT. IT HAS LIABILITIES THAT MASSIVELY EXCEED ITS ASSETS. Borrowing more money does not generally address solvency (actually, it often makes the problem worse). What this solution does is simply delay the inevitable; kick the can down the road. As we said on SeekingAlpha last week, the FDIC's core problem is that while it has "reserved" $30 billion for losses (before Q3), it does not actually have $30 billion in cash. In fact, depending on how you calculate "cash" the FDIC had $20 billion or so of cash on June 30th (which is down by about $12 billion so far this quarter). Its largest asset was actually $22 billion of the most toxic loans from the most toxic banks: assets that buyers of failed banks were not willing to purchase ($22 billion as of June 30th, much bigger now).

...and, as we noted, the problem is compounding because the FDIC has been underreserving and its assets are almost certainly overstated. Because the FDIC has been extremely reticent to sell siezed assets, these generally non-performing loans have been sitting on their books stagnant, largely unmanaged and thus suffering deteriorating value as the likelihood of ultimate recovery declines by the day

[Note: generally when a bank fails, the FDIC sells some portion but not 100% of the assets of the failed bank. It retains the balance for disposition at a later date, generally through auctions]

And so this frames the FDIC's problem. It can pull cash forward by a few months, but that just means that unless the new payment cycle becomes permanent, the problem is worse three months hence. The FDIC can borrow from the Taxpayers...er, the "U.S. Treasury", but that does not address solvency - it simply adds another liability to the FDIC's balance sheet. Unless the Treasury makes an "equity" injection into the FDIC, we are not talking about "if" the FDIC is insolvent, we are simply talking about "when" people realize it.

When the FDIC files its September 30th balance sheet for the DIF, unless they start gaming their reserving (which is why bankers go to jail, mind you!), Sheila will have to admit that the DIF is technically insolvent.

The FDIC will have some modicum of claims paying ability that lasts for another two quarters perhaps, but it hits a wall soon unless she starts converting toxic assets into cash. TILB has been following the whole loan mortgage market for the past few years in a variety of capacities - we strongly suspect that the FDIC will not be able to move those assets at anything close to carrying value. When Q3's new basket of bank failures is added, the FDIC's total will exceed $30 billion of super-toxic loans. This is an enormous volume of this type of asset. Extracting value from these kinds of loans requires lots of time and manpower - the likely buyers are niche oriented.

Of course, if these toxic assets start actually trading to new hands (so that the FDIC can raise cash), these sales will have a depressing impact on the realizable value of similar assets on what are theoretically solvent banks, leading to yet more bank failures.

And so here we sit, staring at a Federal government operated trainwreck that's playing out in slow motion. Nobody seems to be paying any attention, yet we find ourselves mesmerized and not able to turn out attention away. We deal with it by standing tall and sharing our views with the our readers.

This is our world and we suppose it's indicative of the role that we play. If the mainstream media will not talk about the Emperor's lack of clothes, we'll go ahead and let you know: Sheila Bair is naked. No, not that way. She's naked in that she is managing a debacle of a regulatory body that has failed at its mission, is insolvent and is introducing all sorts of despicable incentives into the system. She's naked because she is now undertaking in all the despicable acts that she so rightly criticizes and regulates. She's playing favorites, mismarking her assets and understating her liabilities. But time is running out. The paintrain is coming - our view is man-up and admit the situation.

Don't "borrow" from Timmy G; rather, ask for an infusion of new "equity". Frankly, the truly appropriate thing to do would be to seek private capital, recapitalize the FDIC, spin it out completely from the government and operate it as a for profit insurer.

But what is the FDIC's response?

Pretend it's not happening.

Head in the sand, just hoping taxpayers keep walking by pretending there isn't some crazy bastard suffocating under the weight of the beach around them.

Is The FDIC Deposit Insurance Fund Broke; TILB Provides The Analysis

We are rolling out a new regular series on TILB today. We will update this periodically during the next year and a half.

As we noted recently, the FDIC Deposit Insurance Fund (DIF) took another $400 million hickey over the weekend. We have written several times about the de facto bankruptcy of the FDIC, including:

Now, now, we know the US Treasury guarantees the DIF, so depositors need not fear [other than for their tax dollars and the global incentive system], but hopefully this recognition of functional insolvency allows us to get past the ruse that the FDIC has fulfilled its duty of charging appropriate insurance premiums and providing capable regulatory oversight. In fact, the FDIC's has been an abject failure at these core functions. If the FDIC DIF were were an actual insurer, the FDIC Deposit Insurance Fund itself would have been taken over and killed by the government.

Keep that track record in mind when the FDIC "experts" espouse their opinions on the "solutions" to our current ills.

This is all happening in front of our very eyes and with another 300+ banks tee'd up to fail, if we assume the average failure costs $200 million (vs [$252] million per failure since 6/30/09), the FDIC will burn through another $60 billion of capital between now and the end of 2010.

So the natural thought arises, "TILB, you say the FDIC is broke, but on June 30th the DIF had $10.4 billion remaining. That seems like a lot of money, so why should I worry?"

Thus begins our regular tally of the DIF. We'll give you a sneak preview: the FDIC is bankrupt.

Deposit Insurance Fund Status:
+ $10.4 billion: DIF balance as of 6/30/09 (FDIC reported)
- $11.1 billion: Insured losses from 6/30/09 - 9/5/09 (FDIC reported)
- $0.2 billion: DIF operating expenses from 6/30/09 - 9/5/09 (estimate based on last 12 quarters)
+ $1.7 billion: Insurance assessments
+ $0.4 billion: TLGP fees (TILB estimate of 65bps p.a. on $339 billion outstanding guaranteed debt at 6/30/09)
+ $0.1 billion: Transaction Accounts Guarantee Program ($736 billion guaranteed at 10bps p.a.)
= $1.3 billion: Total DIF as of September 5th, 2009.

So, on a $4.7 trillion insured deposit base, that $1.3 billion represents less than 3 bps of reserve cushion. While Chairmen Bair, Bernanke and Geithner rail against the evils of overlevered banks and insurers, they share a hand in a government run insurer that is levered 3615 times its reserve base.

Don't you just feel secure? Thanks FDIC: you rock!

Green shoots.

As we noted last week, we expect the DIF to lose more than $60 billion between now and the end of 2009. If the FDIC were analyzing itself, it would look at its equity capital base of $1.3 billion, look at its likely losses of $60 billion (perhaps $20 of which would have already been reserved) and note that the stated net worth of the FDIC would be negative $18.7 billion with more losses on the way.

Given the higher insurance premiums it now charges, the FDIC generates about $10 billion per year in pre-reserving cash flow (i.e., it takes $10 billion of bank capital and sucks it out of the system, ironically weakening the banks it insures by precisely that amount), we suspect the FDIC would need the better part of a decade to "earn" its way out of this mess.

So, by its own standards not only would the FDIC would be on the problem bank list, the FDIC is broke. It is, in fact, a failed financial institution (and a big one at that).

Yes, these are the people in charge of the banking system (in combination with state regulators and the Fed, each of whom acquitted itself miserably over the past decade). As these bureaucrats make recommendations on future regulatory frameworks and on the future financial industry banking business model, please keep in mind that they themselves are proven abject professional failures.

While it is the FDIC that insures banks, it is the US Treasury that insures the FDIC and We The People that insure the U.S. Treasury. As such, the awful management of the FDIC and its failed practices leave you, TILB and the rest of us on the hook. Luckily, nobody is paying attention - Chairmen Bair, Bernanke and Geithner maintain robust credibility with the traditional media.

While they are busy negotiating our future amongst themselves, with not a dash of politics involved we're sure, We The People all sit back in our oversized ergo-chairs made to comfortably support either our 115 pound wives or our 300 pound friends that have a medical condition called "eating too much" and are brain-numbed by our 50 inch Chinese assembled plasmas and watch with placid stares of confusion and would-be bemusement as our country is systematically weakened from above.

Don't worry though, a "great" president frequently invoked by our modern incarnation once said "the only thing we have to to fear is...fear itself."

And spiders.

And snakes.

And werewolves.



-------------------------

If you find this enlightening, concerning, bemusing or some combination of the above, please let us know and share this with other folks. Spread the word.

We should not accept the revised regulatory profferings of the damned as the pathway to a sin-free future.

Be skeptical.

Be wary.

Most importantly, be angry.

The Good Ship U.S.S. Bank Failure Keeps A Chipper Pace

With three more failures this week, each of which was a good sized bank ($400 million to $1 billion in assets), the FDIC further dug its hole. While The Sheila Bear may not cop to being broke for a while yet as she authorizes the FDIC to keep playing games like underestimating losses on failures by entering long-tail loss-sharing agreements and levying special assessments on its constituents, I cannot imagine there is a thinking person in the U.S. that has looked at the FDIC's own statistics and thought there is a chance in hell they do not tap the U.S. Treasury for emergency funding (is pre-authorized "emergency" funding really an emergency, or just an eventuality?).

Our bank death scoreboard for the July 1st, 2009 through September 30, 2010 period stands at:

39 down: 211 (minimum) to go

Everyone and their mother refers to the FDIC's published data on the size of its Deposit Insurance Fund (DIF) when discussing its size. For instance, in this paragraph from the 8/31/09 WSJ, we can see the DIF is $10.4 billion:

We're referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.

What they fail to mention is that by the FDIC's on estimates, in the bank failures that happened in July and August alone, the FDIC self-reports that it lost $10.7 billion!!! Now, obviously it has continued to receive guarantee fees for its monoline-esque business and it continues to bring in premium. Those probably total $3 billion in the past two months. That means that the DIF has less than $3 billion remaining.

THE FDIC IS BROKE. As we noted last week:

Now, now, we know the US Treasury guarantees the DIF, so depositors need not fear, but hopefully this recognition of functional insolvency allows us to get past the ruse that the FDIC has fulfilled its duty of charging appropriate insurance premiums and providing capable regulatory oversight. In fact, the FDIC's has been an abject failure at these core functions. If the FDIC DIF were were an actual insurer, the FDIC Deposit Insurance Fund itself would have been taken over and killed by the government.

Keep that track record in mind when the FDIC "experts" espouse their opinions on the "solutions" to our current ills.

This is all happening in front of our very eyes and with another 300+ banks tee'd up to fail, if we assume the average failure costs $200 million (vs $274 million per failure since 6/30/09), the FDIC will burn through another $60 billion of capital between now and the end of 2010.

Happy days!

Luckily, our government shits out $50 billion like it ain't no thing these days. The Fed will continue its backdoor monetization as it attempts to inflate away our debt problem without anyone noticing via a variety of lightly masked helicopter drops (we'll address this another day as we can only put so much angst into one post). We're sure nobody will so much as blink an eye at this.

Nor will anyone talk about the fact that the FDIC continues to steal from the poor and give to the rich in absolute violation of its mandate with nearly each and every bank failure. This was yet another week in which every depositor, whether or not they had deposits in excess of $250,000, was fully preserved. THIS IS JUST AN ABSOLUTE ABDICATION OF RESPONSIBILITY AND FIDUCIARY DUTY! Tell me one other insurance company that volunfuckingtarily provides insurance to its customers for events that both parties agree were not actually covered by the policy.

Tell me one.

Half the time you cannot get a private insurer to pay for things that you thought were insured!

F!!!

F!!!

TILB hereby challenges anyone from the FDIC to justify why on fucking Earth they provide insurance to depositors that are over the $250,000 limit. LaJuan Williams-Dickerson, are you listening? And Lajuan Williams-Dickerson, don't you dare tell me that this is needed to keep the public calm; if that is the case and everyone agrees it is necessary (we do not agree, but assume everyone excluding us for the time being), then at least charge for the service provided (gasp!). This is not rocket science.

Lord willing we will see a series of congressional hearings that end this theft going forward.

In any case, on to this week's stats:

Red Jersey of Shame Leaderboard - California picks up one point:
Georgia 18, Illinois 13, California 9, Florida 6.

Weekly Failure Summary:

Bradford Bank, Baltimore, MD
Assets: $452mm, FDIC Losses: $97mm, Losses as a Percentage of Assets: 21.5%

Mainstreet Bank, Forest Lake, MN
Assets: $459mm, FDIC Losses: $95mm, Losses as a Percentage of Assets: 20.7%

Affinity Bank, Ventura, CA
Assets: $1000mm, FDIC Losses: $254mm, Losses as a Percentage of Assets: 25.4%

Straight Average Losses as a Percentage of Assets: 22.5%
Weighted Average Losses as a Percentage of Assets: 23.3%

Happy Happy, Joy Joy.

The FDIC Goes Broke; Guaranty Bank Find Its Way To The Dustbin Of History (And Three Other Banks Fail)

The FDIC is trickling bank deaths at its New Normal steady state of four or five per week. As we predicted a ways back, at least 250 banks would die before the end of September 2010.

Our bank death scoreboard on the July 1st, 2009 through September 30, 2010 period stands at:

36 down: 214 (minimum) to go

Should be fun.

We also had our second $10+ billion asset bank fail in as many weeks.

This week, Guaranty Bank of Austin Texas took a Glock single shot to the dome...and the FDIC dragged its feet long enough on reforming its rules that govern private equity ownership of banks that We The People ended up placing Guaranty in the hands of Spain's second largest (and probably best run) bank, Banco Bilbao Vizcaya Argentaria (BBVA). Technically BBVA's Birmingham, Alabama based subsidiary BBVA Compass is the acquiror (the South(ern banking capital of Birmingham) will rise again!).

This transaction cost the FDIC Deposit Insurance Fund (DIF) a cool $3 billion on Guaranty's $13 billion asset base (23%). As a citizen guarantor of the DIF, aren't you comforted by the FDIC's desire to keep private capital bidders out of these auctions? Nothing like suppressing capital to get a full and fair price on our behalf!

Jackasses...

Of the other three banks that failed, two were in Georgia (numbers 17 and 18 for the year) and one was in Alabama (its second in two weeks). And for the fourth time in less than three months, Stearns Bank of Minnesota acquired a failed bank (this time an internet bank ostensibly located in Atlanta, Georgia called eBank). This puts the Red Jersey of Shame leaderboard at: Georgia 18, Illinois 13, California 8, Florida 6.

Weekly Failure Summary:

eBank, Atlanta, GA
Assets: $143mm, FDIC Losses: $63mm, Losses as a Percentage of Assets: 44.1%

First Coweta, Newnan, GA
Assets: $167mm, FDIC Losses: $48mm, Losses as a Percentage of Assets: 28.7%

CapitalSouth Bank, Birmingham, AL
Assets: $6170mm, FDIC Losses: $151mm, Losses as a Percentage of Assets: 24.7%

Guaranty Bank, Austin, TX
Assets: $13,000mm, FDIC Losses: $3,000mm, Losses as a Percentage of Assets: 23.1%

Straight Average Losses as a Percentage of Assets: 30.1%
Weighted Average Losses as a Percentage of Assets: 23.4%

...another brutal week.

Per the FDIC's own estimates, since July 1st alone the DIF has lost $10.5 billion! Mind you, at March 31st the DIF stood at $13 billion and while the FDIC has taken in rich TLGP guarantee fees during that period, when the 4/1/09 - 6/30/09 losses (which we don't have at our fingertips but are substantial) are taken into account we can safely state that the DIF is, for all intents and purposes, broke.

Now, now, we know the US Treasury guarantees the DIF, so depositors need not fear, but hopefully this recognition of functional insolvency allows us to get past the ruse that the FDIC has fulfilled its duty of charging appropriate insurance premiums and providing capable regulatory oversight. In fact, the FDIC's has been an abject failure at these core functions. If the FDIC DIF were were an actual insurer, the FDIC Deposit Insurance Fund itself would have been taken over and killed by the government.

Keep that track record in mind when the FDIC "experts" espouse their opinions on the "solutions" to our current ills.

As an aside, the FDIC continues its rampant and unrighteous theft from its US citizen guarantors by providing deposit insurance to accounts over $250,000!

Memo To Sheila:
As if your horribly managed insurance "business" was not screwing us all enough, you have decided to insure depositors that - in essence - have not paid for insurance! What the deuce?! For the love of all that is holy, this gift to certain rich depositors is a regressive tax to end all regressive taxes. You are providing free deposit insurance to rich people paid for by the deposits of the portion of the population that does not happen to have two hundred fifty thousand dollars cash on hand. Are you kidding me? At least stop pretending like you don't insure these deposits and charge banks for this insurance. Otherwise, stop violating your mandate and stealing from U.S. citizens out of some sense of unfounded paranoia.
-TILB

The below video is intended to deliver TILB's message to the FDIC. Anytime it refers to Arthur, his cohort, or the English just substitute The Sheila Bear, her cohort, or the FDIC. Yes, we accept the roles as the French guys. It can be summarize as, "I fart in your general direction, your mother was a hamster and you father smelled of elderberries...you fuckers."

Steven Rattner Gets His Very Own Expose By New York Magazine

NY Mag's in-depth view into Steven Rattner's professional life is excellent, albeit perhaps not the way S-Ratt, as our hat tipped friend CM refers to him, would have penned about himself. After a career as journalist, BSD i-banker, private equity fund manager, and Car Czar with a disdain for contract law, S-Ratt seems caught in a pay to play scandal surrounding his days as head of Quadrangle (his PE Fund). These paragraphs from the NY Magazine article lay the groundwork for the rest of the story. Enjoy:

Six months after taking the job, Rattner (who declined to comment for this story) had helped to perform a seeming magic trick, rewriting the understanding between the car companies and the unions while bending the companies’ financiers—his friends and peers—to his will. With what seemed a cool, almost arrogant confidence—his casual dismissal of GM CEO Rick Wagoner reflected this quality—he had played a large role in restructuring the American car industry, accomplishing what few had thought possible a few months earlier, and in record time.

Then, on July 13, Rattner announced that he was stepping down. His resignation took most of Washington and New York by surprise. Though the work of the task force was winding down, Rattner had let friends know that he’d planned to stay in Washington, a financial samurai ready to attack the next problem the president set before him. The announcement was accompanied by praise for his performance, but the applause was almost drowned out by a scandal Rattner had left behind in New York. He hasn’t been accused of anything, yet Rattner had become ensnared in a “web of corruption,” as it was sometimes called, in order to get state pension money for his private-equity firm to manage.

In Rattner’s conception, money was necessary but not sufficient. He wanted to be useful, to give back—noblesse oblige, after all. But Rattner’s previous life pulled him back, and faced with the reality of politics, where appearances matter, Geithner and Summers didn’t push for him to stay. “If this thing gets worse, and it sounds like it might, if they jam him,” explains a Treasury source, reflecting the view at the top, “and [New York attorney general Andrew] Cuomo makes things hotter, it’s untenable. Everyone decided it was better for him to go.”

TILB already doesn't miss you Steve. Thanks for helping to destroy America.

U.S. National Debt; A Running Tally

We have rediscovered a favorite webstite: www.usdebtclock.org. Amazing. We can watch it for hours with unending fascination.

The good news is the unfunded liabilities are only about sixty trillion dollars or, thought of another way, more than 4x annual GDP. That should work out nicely.

Here's a screenshot of the site from back when the debt was smaller, like, now. No, now. Okay, now. No, now...

Dammit. That sucker just won't stop growing...

From the hills of the hinterlands, the wind carried on its lips one word: gold.

US Debt Clock Screen Shot

[Hat tip: Colonel Smith]

Third Failed Auction In China In Two Weeks

China again fails to sell the amount of bills it hoped to sell. This is getting relatively little press. This is the third failed auction for Chinese Treasuries of one term or another in two weeks. It is particularly worrisome given it is short-term paper. Imagine the buyer strike in long maturity offerings...

We believe this news spells danger for the US.

As we see demand for non-US auctions drying up (despite, arguably, a better currency in China) and the US Treasury continuing to ramp issuance volume, one cannot help but wonder where incremental demand for US Treasury absorption will come from (more than $2 trillion of incremental issuance in CY 2009). Simple math shows that even if all existing buyer cohorts increase their buying by enormous amounts, the funding gap in 2009 alone will be close to half a trillion dollars. Many people point to the growth in money market fund assets as the bridge. Of course, green shooters often claim those same money market dollars as there own when they talk about "all the excess cash sitting on the sidelines in money market funds". This alleged "excess" cash will apparently be able to fund both the US Treasury and serve as a catalyst for risk assets ("just wait until that money comes flooding back into small cap equities!"). Alas, both cannot happen without a substantial and unlikely increase in leverage.

Fed monetization is a virtual certainty.

As to the aforementioned failed auction in China, here are some highlights from Bloomberg. All emphasis added:

China’s government failed to sell as much debt as it planned for the third time in two weeks on speculation the central bank will push up money-market rates to prevent bubbles in stock and property prices.

The finance ministry sold 18.51 billion yuan ($2.7 billion) of the six-month bills, less than the 20 billion yuan on offer, Chinabond said in a statement on its Web site. The average winning yield was 1.6011 percent, higher than the 0.85 percent rate at the last sale of 182-day bills on June 19.[rates double in one month?!?!]

Yields on similar-maturity treasury bills have risen 45 basis points this month on concern the country’s 4 trillion yuan ($585 billion) fiscal stimulus package will stoke inflation. Loans rose almost fivefold in June from a year earlier to 1.5 trillion yuan and the government yesterday reported that economic growth accelerated to 7.9 percent in the second quarter.
...

The Shanghai Composite Index has jumped 75 percent this year, a performance second only to Peru among 88 global stock benchmarks tracked by Bloomberg. Home prices in China’s major cities rose in June for the first time in seven months, the government reported last week. [money printing driving prices for "investment" assets]
...
Demand for debt is cooling as investors favor assets that will benefit most from the economic recovery and this month’s resumption of new shares sales prompts investors to free up cash. China State Construction Engineering Corp. said on July 13 it got approval for what may be the nation’s biggest initial public offering in two years. [in order to participate in IPOs in China, you have to set aside the case, so apparently many are pointing to this giant IPO as a demand drain from the auction]

The government barely met its sale target in a 28 billion yuan three-year debt auction on July 15, drawing bids for 1.16 times the amount on offer, after attracting insufficient demand in two sales last week. The so-called bid-to-cover ratio at today’s sale was 0.925 times, compared with an average of about 1.5 at successful sales this year. [trouble]

[HT CM]

CIT Bondholders Leading Last Minute "Rescue"; Would Buy Breathing Room

This basically looks like CIT bondholders (led by PIMCO) are willing to gamble that this "injection" will make CIT more regulator friendly and perhaps get them better options from the FDIC. Structured as a high interest rate bridge that buys CIT some time to undertake a series of exchange offers. This alone wouldn't fix their liquidity problem, but would give them breathing room. If this deal were to happen, our view is that at best it most likely postpones the inevitable. In any case, CIT has no balance sheet flexibility to make new loans right now as all new capital is desperately needed to pay off existing creditors. In fact, it has every incentive to be incredibly aggessive with existing borrowers in order to recover as much cash now as possible. As such, from a systemic standpoint, CIT is as good as dead already...

Highlights from the WSJ follow:

CIT Group Inc. was close to securing $3 billion in last-minute rescue financing from its bondholders Sunday in a deal that should keep the struggling firm -- once the largest issuer of small-business loans in the U.S. -- out of bankruptcy court, people familiar with the matter say.

The deal, which was being considered by CIT's board Sunday night, charges CIT very high interest rates, and it doesn't permanently fix the company's long-term financing needs, say people involved in the transaction. But it buys time for the lender to restructure itself, and minimizes bondholders' losses. Bondholders calculated they would lose more if CIT filed for bankruptcy and sold assets at fire-sale prices than if they offered the rescue.
...
If the deal is completed, it could help reduce CIT's debt load, strengthen its capital position and alleviate pressure on CIT to pay down $1 billion in debt that comes due in August. It may also preserve the U.S. Treasury's $2.33 billion investment made as part of the Troubled Asset Relief Program.
...
Still, CIT and its bondholders hope that their effort to stabilize the company will cause bank regulators to look more favorably on a CIT plan to transfer more of its loans from the holding company to its bank in Utah. CIT has trouble borrowing money, but its bank can finance itself by taking in deposits. To transfer more assets to the bank, however, CIT needs an exemption from the Federal Reserve and a nod from the Federal Deposit Insurance Corp.
...
Under the proposal, CIT would likely pay interest rates 10 percentage points above the London interbank offered rate, said these people. (As of Friday, three-month Libor stood around 0.5%.) CIT has also agreed to pledge some of its highest-quality loans as collateral on the $3 billion package.

The new loan could act like a "bridge" to a series of debt-exchange offers that CIT would launch in order to get bondholders to swap some of their bonds for equity in the company or for new debt that matures later.
...
At least one analyst viewed the deal as a stopgap measure. "Even if they put together a deal today and postpone a bankruptcy filing, CIT may be back in the same place in the not-too-distant future because unemployment rates, business-loan delinquencies and corporate default rates are climbing," said Martin Weiss, president of Weiss Research, an investment consulting firm in Jupiter, Fla. "The outlook for the next six months looks pretty rough for many banks, including CIT," he said.

Late Thursday night, CIT officials believed they had secured a $2 billion rescue-financing plan from J.P. Morgan Chase & Co. But that fell through by Friday morning, said these people.

J.P. Morgan would have considered lending if CIT were first to seek bankruptcy protection, but the bank "couldn't get comfortable with a deal outside (bankruptcy) court," said one person familiar with the matter.

Fannie And Freddie Will Allow 125% LTV Refinancings

Sickening. Just sickening. From the Washington Post article:

The effort is an acknowledgment by the administration that falling home prices limited the impact of its housing program, Making Home Affordable. Under the program, homeowners could refinance if their mortgage did not exceed the value of their home by more than 105 percent. Now, the administration is expanding the program to homeowners who are up to 125 percent underwater on their loan.

The refinancing program is central to the Making Home Affordable program, which also includes measures to help distressed borrowers stay in their home. But the refinancing program is focused on borrowers who are current on their mortgage but who can not take advantage of historically low mortgage rates because their home values have fallen. The refinancing program is still limited to borrowers with loans backed by Fannie Mae and Freddie Mac, the government-backed mortgage financing companies.

Who the deuce up in Washington thinks making terribly underwritten loans to borrowers that showed a fundamental lack of good judgement the first time around is a good idea? I think it was Ben Franklin that said the definition of insanity is doing the same thing over and over again and expecting it to come out different. If Franklin's right, then this is insanity.

We first reported on the ramifications of bumping LTV limits to 125% a few weeks ago. Apparently enslaving an entire swath of the population as indentured servants trapped under an untenable mortgage is part of The Administration's plan to ease the crisis. Good luck with that.

As friend of TILB Tom Woods will let anyone that's curious know, recognizing losses on bad debts and moving them through the system is inherent to creating a platform of stability that an economy can begin growing from. Allowing the system to self-cleanse lets people figure out who has capital, how much capital they have, and what is available to be invested in. Fairly useful questions. These are fundamental to capital owners choosing to deploy their capital.

Until then, capital will rest and wait. Any outcome that is not an outgrowth of natural cleansing is built off of a platform stabilized by twigs, string and hope.

The Tooth Fairy Economics of spending more money that we do not have as part of a solution continues unabated.

As an aside, can we please end the farce of these being publicly traded companies? The amount of loss that these two are going to eat and thus We The People are going to fund is going to make AIG look like child's play. Fan and Fred will generate hundreds of billions of losses before all is said and done.

Given that we are home renters, TILB is particularly offended by this sort of ugliness. It quite clearly brings to mind today's Liberty Quote of the Day by James Madison.

Sometimes we here at TILB feel like turning around, opening up our window, and verbally pillaging passerbyers with George Carlin's seven words.


[HT: KTB]

PPIP Faltering Before Ever Getting Launched: Shocker

The Journal, in its ongoing USA, Inc. series, discusses what many of us have assumed for a long time: banks cannot afford to sell so-called "toxic" assets at prices that generate acceptable returns to buyers (TILB last discussed that reality here). This, despite an incredibly generous financing proposal from We The People. That is how far reported bank balance sheets have diverged from reality.

That discrepancy is the real story here, but it continues to be completely unreported: selling these assets, even after a massive credit rally and with subsidized non-recourse funding, still generates a loss to the seller that is so big banks cannot afford to take the hit.

The implication, of course, is that bank balance sheets do not remotely reflect market realities. As such, we can expect the drag of realized losses to be an anchor on bank earnings reports for the foreseeable future. Green shoots, though.

Anyway, here are some highlights from the WSJ.

The government's plan to enable banks to dump troubled assets is facing troubles of its own.

Markets initially rallied when Treasury Secretary Timothy Geithner announced in March a two-pronged plan to offer favorable government financing to entice investors to buy bad loans and toxic securities from banks.

But that initiative -- called the Public-Private Investment Program, or PPIP -- has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits.

The program's problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets. That in turn could hinder efforts to revive the nation's economy.

A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend.

...

The slimmed-down program will focus not on bad loans, but on toxic securities, which are a problem for a relatively small fraction of the nation's banks. That is bad news for hundreds of smaller banks burdened with growing piles of defaulted loans. [TILB comment: once again small banks get the wide end of the shaft] These banks are less able to tap capital markets than their larger rivals, so they have been eager for U.S. help unloading loans as a way to bolster their capital cushions. Many of them can face big problems if just one or two large loans go bad. Seventy banks, most of them community institutions, have failed since the start of last year. Analysts are bracing for hundreds of lenders to collapse in the next few years.

...

During the last banking crisis, nearly two decades ago, the government established the Resolution Trust Corp. to sell off the bad loans and securities of banks that had failed. Many experts credit the RTC with helping defuse that crisis.

This time around, efforts to rid banks of soured assets have sputtered repeatedly. In late 2007, federal officials helped cobble together a plan for a bank-financed fund to buy securities held by bank investment funds, but the effort was aborted. In 2008, the Bush administration established a $700 billion program to buy banks' soured assets. Partly because of the complexity of valuing those assets, the U.S. abandoned that plan, instead opting to directly pump taxpayer money into banks.

...

On March 23, when Mr. Geithner unveiled PPIP, the Dow Jones Industrial Average surged nearly 500 points, or 7%, its biggest gain since October, on hopes that the program would nurse the banking industry back to health.

Many bank executives were skeptical about whether the program could succeed. Even before it was announced, some had grumbled that federal officials weren't consulting them, and instead were crafting the initiative with input from would-be investors. Some banking executives say they warned that they would be loath to sell at the kind of prices investors were likely to demand.

Executives at Citigroup Inc. shared those concerns, according to people familiar with the matter. While the New York bank was sitting on at least $300 billion of risky loans and securities, selling them at discounted prices would require painful hits to its already thin capital ratios, these people say [TILB: "already thin"? Didn't you see the stress test results - Citi almost qualified as well capitalized!].

Some Citigroup executives had a different idea: Maybe they could turn a profit by bidding on their own toxic assets at discounted prices, using government financing, according to the people familiar with the talks [TILB: If this had happened, I would have fucking moving out of the country.]. Other big banks also talked about setting up distressed-asset units to snap up troubled loans and securities, including from their parent companies, with taxpayer financing.

FDIC Chairman Sheila Bair later publicly shot down the idea. Citigroup declined to comment.

Meanwhile, many small-town bankers hoped the program would help them unload the bad assets -- generally loans to finance commercial real-estate projects -- that were hurting their balance sheets. Some potential buyers had surfaced before PPIP was announced, but they were offering such low prices that few banks could afford to sell the loans without severely denting their capital cushions.

...

When PPIP was announced, big-name investors were intent on figuring out how to profit from it. Raymond Dalio of giant hedge-fund firm Bridgewater Associates, which oversees $72 billion in assets, initially expressed interest in participating. But within days, he was blasting it, saying buyers and sellers would have difficulty agreeing on pricing and fund managers that profited would be exposed to criticism from politicians. The way PPIP is set up "makes us not want to participate and it makes us question the breadth of interest that we will see in the program," he wrote to clients.

...

In conference calls with bankers and investors, FDIC officials emphasized that PPIP was critically important to cleanse banks of their bad assets. "I think you know the stakes are very high with this," Ms. Bair, the FDIC chairman, said during a March 26 call, according to a transcript. "We need this program to work." [TILB: On to Super SIV v6.0, or whatever number we are at]

...

Next month, the FDIC intends to use PPIP for a far narrower purpose: to auction loans the agency has seized from failed banks. Eventually, it hopes to resuscitate the loan-buying program so that smaller banks can benefit from it.

...

Many banking experts contend that the financial system won't fully stabilize until banks get rid of their bad assets.

Mr. Segal, the bank adviser, complains that federal officials have cited recent capital raising by big banks as evidence that "the system is OK." That may be true "for the top 15 or 20 banks," he says. "But for everybody else, there really needs to be more attention paid." [all emphasis added by TILB]

Confiscated U.S. Bearer Bonds "Clearly Fakes" Says U.S. Spokesman

I can't lie, I'm a little disappointed.

Also, what in the hell were these numnuts thinking? Did they think someone would simply accept bearer bonds with face values of half a billion dollars without at least trying to verify them?

From Bloomberg:

U.S. government bonds found in the false bottom of a suitcase carried by two Japanese travelers attempting to cross into Switzerland are fake, a Treasury spokesman said.
"They're clearly fakes," said Stephen Meyerhardt, a spokesman for the U.S. Bureau of the Public Debt in Washington. "That's beyond the fact that the face value is far beyond what's out there."
Italy's financial police last week said they asked the U.S. Securities and Exchange Commission to authenticate the seized bonds, with a face value of more than $134 billion. Colonel Rodolfo Mecarelli of the Guardia di Finanza in Como, Italy, said they were probably forgeries.
...
Had the notes been genuine, the pair would have been the U.S. government's fourth-biggest creditor, ahead of the U.K. with $128 billion of U.S. debt and just behind Russia, which is owed $138 billion.