Most mornings, I scour the news services finding the obscure reports that don't make front page headlines. If, like many people, you get much of your news from television, radio, and mainline internet portals, these articles are not glaringly reported. Yet, they tell us more important things that go largely ignored or overlooked. While any of us certainly appreciate confirmation & validation in what we think and/or feel, the truth of the matter is the truth itself, not in our perception, feelings & attitudes about it. I leave no doubt as to my supposition America is in DEEP TROUBLE. And, while the politicians, pundits & mainstream media show & tell you the "house" is fine, beautiful & sound by its showy exterior, I am the independent "house" inspector...I point out the cracked & deteriorating foundation, the termite infestation & damage, the rotting wood, the moldy & mildewed interior walls. Buyer beware, if you're swallowing their sales pitch. This is no mere fixer-upper, this "house" should be condemned...Wall St.'s Big, Dirty Secret (See below) may surprise you given the recent index rise. To know it was all done by computer manipulation & speculation, should make you MAD as heck, and just as suspicious. And, given that the FDIC is broke (See below), all our savings & 401K's are just smoke & mirrors. Maybe the machines have taken over..._______________
NEWS & OPINION________________
Millions face shrinking Social Security payments
____________________The FDIC is broke
Exclusive: Vox Day proves there's no deposit insurance on your bank account
Posted: August 24, 2009, 1:00 am Eastern
By Vox Day
The two hallmarks of the Great Depression were unemployment and bank failures. While the same economists who denied there was a recession for the first nine months of the economic contraction are now insisting that it is over and the recovery has begun, I am extremely dubious. Since the crisis became apparent, I believed that 2009 would be the equivalent of 1930, that being the year that everyone expected recovery to be waiting around the corner. But while there are some statistical green shoots, there are also numerous signs that the perceived recovery is illusory, and in fact, the economic situation is more dire now than it was 79 years ago.
In the first year of the Great Depression, unemployment reached 8.7 percent. The present unemployment rate is 9.4 percent. As I have shown previously in this column, bank failures in 2008 and 2009 are also worse than they were in 1930 and 1931 when measured in terms of bank deposits rather than the number of banks. Since that July column was published five weeks ago, 28 more banks have failed and driven the percentage of failed bank deposits up to one percent, which is more than I'd projected for all of 2009. At the current rate, bank failures over the last two years will equal 4.65 percent of total bank deposits, which is more than twice the two percent of failed deposits in 1930 and 1931.
Despite these widespread banking collapses, the American public has remained relatively quiescent, mostly because they believe their deposits are safely insured by the Federal Deposit Insurance Corporation. The problem is that the FDIC has now run out of money; the losses caused by the 81 bank failures this year has completely exhausted the Deposit Insurance Fund. At the beginning of 2008, the DIF had a balance of $52.8 billion. At the end of the year, during which 25 banks failed and caused $17.9 billion in FDIC-estimated losses, the fund was down to $17.3 billion.
At this point, I should mention that some observers of the banking system are careful to point out that it's not correct to simply subtract estimated losses from the reported DIF balance because the FDIC brings in money every quarter through the insurance premiums it charges. This is true, but on the other hand, it's even more important to remember that estimated losses reported are merely estimates. An examination of the last five quarters shows that the net impact of a bank failure on the DIF balance is approximately twice the level of the estimated losses. For example, the $2.3 billion in estimated losses from the 21 bank failures reported during the first quarter further reduced the insurance fund by $4.3 billion, to $13 billion. What has happened since then can be seen in the chart below, which shows the FDIC's running fund balance with each of the subsequent 60 bank failures that occurred after March. The blue bars are based on estimated losses reported, while the red bars are based upon projected fund balance reductions, which over the last five quarters have been 1.94 times greater than the estimated losses.
While the FDIC does have the ability to borrow money from the U.S. Treasury, the chart shows that for the first time in its history, it has been forced to tap its $30 billion credit line. And while Congress can elect to intervene and bail out the FDIC as it bailed out the banks and other institutions, contrary to most depositors' assumptions, it is under no obligation to do so. An advisory opinion posted on the FDIC's own site makes it clear that the so-called federal guarantee is nothing more than non-binding reassurance made for the public's benefit.
"[A] joint resolution of Congress (H.R. Con. Res. 290) adopted in March 1982, which reaffirmed that the United States pledges its full faith and credit behind the federal deposit insurance funds, may have served as a moral pledge on the part of Congress to support the deposit insurance funds should they ever need it, but, because of its status as a non-binding resolution, did not serve to create any legal liability on the part of the United States Government to support the funds. … it is our opinion that Title IX of CEBA merely represents an expression of the intent of Congress to support the FDIC's deposit insurance fund should the need arise.
– Full Faith and Credit of U.S. Government Behind the FDIC Deposit Insurance Fund
If there is one thing that has been made clear by the response of the monetary and fiscal authorities to the economic crisis, it is that they will not lift a finger to help the general public. When they could have spent millions to prevent homeowners with mortgages from falling into default and foreclosure, they instead chose to spend billions to reduce the impact of the failed mortgages on the giant zombie banks. If one looks closely at the mechanisms underlying the Homeowner Stability Initiative, the Making Home Affordable plan and the Cash for Clunkers program, one will see that they are not designed to help the homeowner or the car buyer, but rather the banks that finance the purchases.
Given recent history, it would appear to be most unwise to assume that the federal government will do much more than permit the FDIC to borrow the additional $70 billion by which its credit line was increased in May, especially should depositors become aware of the increasingly fragile state of the banking system and begin to withdraw their funds from it. Banking holidays and other restrictions on the public's ability to access its money are probably more likely than an outright bailout, especially since a bailout will cost around $225 billion merely to maintain the status quo if Meredith Whitney's calculation of 300 bank failures is correct. In any case, the ability to ask permission to borrow from an unpredictable institution already $11.7 trillion in debt and expecting a further $9 trillion in deficits is not insurance nor can it reasonably be described as a guarantee of any kind.
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United States: 'Too big to fail'?
William J. Murray warns, history full of great nations, empires that collapsed
William J. Murray is the chairman of the Washington, D.C.-based Religious Freedom Coalition.
AIG, the largest insurance company in the world has been bailed out by taxpayers three times. Although it was "too big to fail," it failed. General Motors, also "too big to fail," went into bankruptcy. The great Merrill Lynch brokerage went belly up, but was saved by the taxpayers and given to Bank of America by the Bush administration. In turn, Bank of America had to be bailed out by taxpayers. Citibank has been bailed out more than once, as have other banks that were "too big to fail."
The Soviet Union is gone. In the 1960s and 1970s, the CIA reported that this massive nation that covered almost one-third of the land area of the world was just "too big to fail." Presidents were told by our security agencies that America would face this daunting enemy for generations. By the 1990s the Soviet Union was in the trash heap of history. A nation "too big to fail" had failed, and had broken apart into numerous smaller states that began battling each other.
History is full of nations and empires that were "too big to fail." The Roman Empire is gone; the Holy Roman Empire is gone; the Byzantine Empire is gone. The great British Empire on which "the sun never set" is now a tiny Island in near bankruptcy.
But don't worry: The United States is "too big to fail."
The United States no longer has a real manufacturing base, and almost 90 percent of the economy is based on consumption, mostly of imported goods. But don't worry, our leaders say that the American consumer society is so big it can't fail. The leadership believes that the Chinese and the Saudi royals will continue to loan us money to consume because our nation and our economy are just "too big to fail." Congress and the president believe that the leaders of rich nations understand they must bail out America from time to time, sort of the way American taxpayers had to bail out AIG, GM, Merrill Lynch, Bank of America, Citibank and others.
Denial is not a river in Egypt. Denial is the state in which the American people and the American leadership live. The trillions of dollars the Bush and Obama administrations have spent to "stimulate" the economy have to be paid back from the future income of taxpayers. Translation: Our children and grandchildren are yoked to a huge debt they cannot possibly repay. Far from being too big to fail, the United States has become too big to survive.
The American problem is not just debt, it is the sheer size of the government. The federal government is so involved in so many of the aspects of the everyday life of Americans that it simply cannot keep track of its own activities, or of how much is spent or even how it is actually spent.
I was present in the Soviet Union for the coup and for the Great Collapse. Soviet communism failed because of the size of government. As a nation the Soviet Union simply could not afford to pay all of the accumulated debt, pensions and health care, and also spy on all dissidents and field an army. Despite being an oil rich nation, the Soviet Union collapsed because of central planning and the inability to pay its obligations. Rather than being too big to fail, it was so big it had to fail.
Having witnessed the Soviet failure firsthand, the parallels with the current path of the United States are all too clear. The more the federal government does, the greater its role in our lives, the greater its debt, the higher the taxes, the greater the central planning – the closer we are to failure as a nation-state.
Fortunately the people of the Untied States have a safety net in the individual states. Once our "too big to fail" federal government defaults and fails, the various states will still remain functioning democratic entities. The states will be able to provide the core services needed by the people, including law enforcement and education. When will this happen? Soon enough that state governments should be planning now for the possibility.
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The Man Who Sells America’s I.O.U.’s
By ROBERT PEAR
WASHINGTON — The brightly illuminated room looks like mission control for a space flight. Seven people, wearing headphones, stare intently at computer screens. Three minutes before the deadline, a disembodied voice exclaims, “We have coverage.”
This is no shuttle launch. It is an auction of United States Treasury securities, and $32 billion has just been sold in a blink. It was another successful operation for Van Zeck, the commissioner of the public debt, who has the world’s biggest credit card.
Mr. Zeck has worked for the federal government for 38 of his 60 years. He is a very busy man these days because the government is floating on a sea of red ink, as it borrows more and more money to stimulate the economy, bail out banks, shore up auto companies, aid struggling homeowners and fight foreign wars.
In a city full of pompous politicians and bombastic bureaucrats, Mr. Zeck quietly runs one of the government’s truly indispensable operations. He is not a policy maker. He does not decide how much to borrow. He just makes sure the money is borrowed, in a regular and predictable way, at the lowest possible cost to the government over time.
“We are the back office, the plumbing,” Mr. Zeck said. “We are borrowing a ton of money. It has to be done right.”
Public attention will focus on the debt this week because the White House and the Congressional Budget Office plan to issue dueling estimates of federal spending and revenue for the next 10 years. In a preview, the White House said Friday that it saw the cumulative total of deficits over the next 10 years adding up to $9 trillion, or $2 trillion more than it anticipated in February. That means much more government borrowing.
Last year alone, Mr. Zeck auctioned off $5.5 trillion of Treasury securities, to replace maturing debt and to meet new borrowing needs. Wall Street dealers expect the figure to exceed $8 trillion this year — an average of more than $253,000 every second.
In the first eight months of the current fiscal year, the government issued more Treasury bills, notes and bonds than in all of last year. Mr. Zeck expects to conduct more than 280 auctions this year, up from 263 last year and about 220 a year from 2004 to 2007.
Mr. Zeck and his colleagues have a passion for precision. They keep track of federal debt to the penny.
Debt held by the public stood at $3.4 trillion when President George W. Bush took office in 2001. When President Obama was inaugurated in January, the debt was $6.3 trillion. Since then, it has grown by $1 trillion, to $7.3 trillion.
When Mr. Zeck tells people he works at the Bureau of the Public Debt, he said, they often quip, “You will have work forever.”
Even when the economy begins to expand, the bureau will still have plenty to do, as tax receipts typically lag in a recovery. Moreover, the government will need to borrow money to help finance entitlement programs for baby boomers.
Mr. Obama’s budget predicts that debt held by the public will soar, exceeding 60 percent of the gross domestic product in a few years. The share has never exceeded 50 percent in the last 50 years.
“Debt as a percentage of G.D.P. is rising and nearing a postwar high,” the Treasury said this month.
Treasury auctions are an arcane business, and Mr. Zeck runs them so smoothly that Treasury secretaries and Congress rarely interfere. Mr. Zeck said he had not been called to testify before Congress in about 15 years.
Other agencies have lost track of large sums because their financial records were a mess. “That’s just not acceptable to us,” Mr. Zeck said.
Referring to the accountants who keep a daily tally of the federal debt, Mr. Zeck said: “These are people who reconcile their checkbooks. The idea of missing a penny would drive them crazy.”
Treasury auctions have become larger and more frequent. The auction calendar is extremely crowded. On almost every work day, the Treasury is announcing, conducting or settling auctions.
“Historically,” Mr. Zeck said, “we did not do auctions on Fridays. But now we are doing some.”
In February, the Treasury announced it was bringing back the seven-year note, for the first time since 1993, and it doubled the number of 30-year bond auctions, to eight a year. Just three months later, it announced a further increase in the frequency of 30-year bond auctions, to 12 a year.
On Aug. 5, the Treasury told investors they “should expect auction sizes to continue to rise in a gradual manner over the medium term.”
When Treasury officials plan these auctions, they try to keep the size and mix of securities predictable for investors and prevent any surprises that could disrupt the market and thereby increase borrowing costs.
Mr. Zeck, who received the government’s highest civil service award 10 years ago, borrows huge sums from big investors on Wall Street and around the world. But he is also mindful of small investors who entrust their retirement savings to the government.
“We have a fiduciary responsibility to individuals who have invested $1,000 or $5,000 or $10,000 in savings bonds and other Treasury securities,” Mr. Zeck said.
The Treasury installed a completely automated electronic auction system in April 2008, just in time for the surge in borrowing.
“From an operational standpoint,” Mr. Zeck said, “it’s just about as easy to sell $30 billion as $20 billion” of government securities.
Federal officials have been pleasantly surprised to see the demand for Treasury securities keep pace with the growing supply. Invariably, they get “coverage,” meaning that the bids exceed the amount of securities being offered — a great relief to federal money managers. When the government auctioned $32 billion of four-week Treasury bills last week, the bids totaled $114 billion.
Foreign investors have generally shown a strong appetite for federal debt. China, the largest foreign holder of Treasury securities, sent a chill through credit markets in March when its prime minister said he was “a little bit worried” about China’s investments in the United States. The Treasury secretary, Timothy F. Geithner, quickly assured the Chinese that their assets were “very safe” here.
The federal government enjoys economies of scale, and it is borrowing on a scale never seen before, so the cost per auction has gone down slightly. The cost of running a Treasury auction — an average of $237,636 per auction — is tiny compared with the amounts borrowed. The cost includes safety precautions to make sure auctions are not disrupted by power failures, terrorism, cyberattacks, natural disasters or pandemic illness.
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Meredith Whitney Predicts More Than 300 Bank Failures (Update2)
By Lynn Thomasson and Margaret Brennan
Aug. 21 (Bloomberg) -- Meredith Whitney, the analyst who predicted that Citigroup Inc. would cut its dividend last year, said the number of U.S. bank failures will quadruple as lenders struggle with bad loans.
“There will be over 300 bank closures,” Whitney said in an interview with Bloomberg Television from Jackson Hole, Wyoming. “The small-business owner on Main Street continues to see liquidity come away.”
Unemployment has risen to the highest since the early 1980s and Americans are falling behind on mortgage payments at a record pace, forcing regulators to seize 81 lenders in 2009, the most in 17 years. Ebank of Atlanta was closed today for being “critically undercapitalized,” the Office of Thrift Supervision said. Colonial BancGroup Inc. was shut Aug. 14 and taken over by BB&T Corp. in the biggest failure since Washington Mutual Inc. collapsed in 2008.
The FDIC plans to ease rules to allow private-equity investors to acquire insolvent banks, the New York Times reported today, citing unidentified people briefed on the situation. The move would help reduce the number of failed banks the FDIC needs to support as their number increases, the newspaper said.
Whitney said that even though the panic of the financial crisis has passed, investors have been “overzealous” in estimating bank profits for the next few years. Analysts polled by Bloomberg project earnings for the industry will surge more than ninefold this year and 57 percent in 2010 as lenders recover from the worst crisis since the Great Depression.
“Many banks may be OK for while, but the real driver for the economy, which is consumer spending, I don’t expect that to come back anytime soon,” she said.
Financial companies in the Standard & Poor’s 500 Index have collectively rallied 140 percent in the past five months after falling to the lowest level since 1992.
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Arrest Over Software Illuminates Wall St.'s Dirty, Big Secret
By ALEX BERENSON
Flying home to New Jersey from Chicago after the first two days at his new job, Sergey Aleynikov was prepared for the usual inconveniences: a bumpy ride, a late arrival.
He was not expecting Special Agent Michael G. McSwain of the F.B.I.
At 9:20 p.m. on July 3, Mr. McSwain arrested Mr. Aleynikov, 39, at Newark Liberty Airport, accusing him of stealing software code from Goldman Sachs, his old employer. At a bail hearing three days later, a federal prosecutor asked that Mr. Aleynikov be held without bond because the code could be used to “unfairly manipulate” stock prices.
This case is still in its earliest stages, and some lawyers question whether Mr. Aleynikov should be prosecuted criminally, or whether a civil suit may be more appropriate. But the charges, along with civil cases in Chicago and New York involving other Wall Street firms, offer a glimpse into the turbulent world of ultrafast computerized stock trading.
Little understood outside the securities industry, the business has suddenly become one of the most competitive and controversial on Wall Street. At its heart are computer programs that take years to develop and are treated as closely guarded secrets.
Mr. Aleynikov, who is free on $750,000 bond, is suspected of having taken pieces of Goldman software that enables the buying and selling of shares in milliseconds. Banks and hedge funds use such programs to profit from tiny price discrepancies among markets and in some instances leap in front of bigger orders.
Defenders of the programs say they make trading more efficient. Critics say they are little more than a tax on long-term investors and can even worsen market swings.
But no one disputes that high-frequency trading is highly profitable. The Tabb Group, a financial markets research firm, estimates that the programs will make $8 billion this year for Wall Street firms. Bernard S. Donefer, a distinguished lecturer at Baruch College and the former head of markets systems at Fidelity Investments, says profits are even higher.
“It is certainly growing,” said Larry Tabb, founder of the Tabb Group. “There’s more talent around, and the technology is getting cheaper.”
The profits have led to a gold rush, with hedge funds and investment banks dangling million-dollar salaries at software engineers. In one lawsuit, the Citadel Investment Group, a $12 billion hedge fund, revealed that it had paid tens of millions to two top programmers in the last seven years.
“A geek who writes code — those guys are now the valuable guys,” Mr. Donefer said.
The spate of lawsuits reflects the highly competitive nature of ultrafast trading, which is evolving quickly, largely because of broader changes in stock trading, securities industry experts say.
Until the late 1990s, big investors bought and sold large blocks of shares through securities firms like Morgan Stanley. But in the last decade, the profits from making big trades have vanished, so investment banks have become reluctant to take such risks.
Today, big investors divide large orders into smaller trades and parcel them to many exchanges, where traders compete to make a penny or two a share on each order. Ultrafast trading is an outgrowth of that strategy.
As Mr. Aleynikov and other programmers have discovered, investment banks do not take kindly to their leaving, especially if the banks believe that the programmers are taking code — the engine that drives trading — on their way out.
Mr. Aleynikov immigrated to the United States from Russia in 1991. In 1998, he joined IDT, a telecommunications company, where he wrote software to route calls and data more efficiently. In 2007, Goldman hired him as a vice president, paying him $400,000 a year, according to the federal complaint against him.
He lived in the central New Jersey suburbs with his wife and three young daughters. This year, the family moved to a $1.14 million mansion in North Caldwell, best known as Tony Soprano’s hometown.
This spring, Mr. Aleynikov quit Goldman to join Teza Technologies, a new trading firm, tripling his salary to about $1.2 million, according to the complaint. He left Goldman on June 5. In the days before he left, he transferred code to a server in Germany that offers free data hosting.
At Mr. Aleynikov’s bail hearing, Joseph Facciponti, the assistant United States attorney prosecuting the case, said that Goldman discovered the transfer in late June. On July 1, the company told the government about the suspected theft. Two days later, agents arrested Mr. Aleynikov at Newark.
After his arrest, Mr. Aleynikov was taken for interrogation to F.B.I. offices in Manhattan. Mr. Aleynikov waived his rights against self-incrimination, and agreed to allow agents to search his house.
He said that he had inadvertently downloaded a portion of Goldman’s proprietary code while trying to take files of open source software — programs that are not proprietary and can be used freely by anyone. He said he had not used the Goldman code at his new job or distributed it to anyone else, and the criminal complaint offers no evidence that he has. (
edited for content)
