Goodbye, Geithner?
caseyresearch.com
You have likely seen the story out this morning that the New York Fed, at the time under Timothy Geithner’s leadership, actively encouraged AIG to hold off revealing the payments the insurer had made to Goldman Sachs and other big banks on their credit default swaps.
As has already been revealed, the failing insurance company used a large amount of the billions provided by taxpayer bailouts to pay off the big banks in full on their default swaps, rather than negotiate a more favorable settlement.
Whether those 100% payoffs should have occurred is not really the issue in this chapter of the saga; in our view, AIG should have been allowed to tank and its creditors then required to follow normal channels and procedures to collect what they could from the smoking ruins. Rather, it is that Geithner’s operation deliberately encouraged AIG to hide the extent of the payoffs in its public disclosure. In order, most likely, to avoid revealing that the NY Fed didn’t do much of a job of negotiating, a revelation that would have attracted unfavorable public attention and charges of blatant favoritism.
Goldman Sachs: “Okay, so AIG is broke and can’t pay us the money it owes us. What do you suggest we do about it? ”
Geithner: “Listen, the financial markets are in ruin and investors are losing hundreds of billions, trillions even. And we recognize that you thought AIG was an upstanding firm and all that. Obviously, your analysts got that wrong. So, how about we use taxpayer funds to pay you off in full?”
Goldman Sachs: “In full, as in 100 cents on the dollar?”
Geithner: “Yep.”
Goldman Sachs: “Is that the best you can do?”
Geithner: “Sorry, but I just don’t think I can go any further out on a limb than that.”
Goldman Sachs: “Okay then, I guess it will have to do.”
Geithner: “Glad we could see eye to eye. Whom should I make the check out to?”
As the economy continues to hit turbulence and the government’s soaring deficits continue to soar, Obama is going to have to find a scapegoat – and, with this latest revelation, I don’t think he’ll have to look further than Geithner to find one.
Of course, what’s actually important in all of this is the confirmation – as if we needed it – that high government officials are willing to take active measures to keep the public in the dark on matters that would be inconvenient if revealed.
Do you really trust GDP numbers? CPI? Unemployment? The real cost of the war in Afghanistan? The scale of the bad debt now buried in the books of the banks?
Do most people have even the slightest idea of what goes into those numbers?
I don’t think so.
But I do think that, with a bit of effort (and the help of our computer appendages), you can discern what’s actually going on in the real economy by looking at stories such as this from National Real Estate Investor…
CMBS Delinquencies Rise to All-Time High in December, But Bond Spreads Narrow
Call it the winter of discontent for the troubled U.S. commercial mortgage-backed securities (CMBS) market. The loan delinquency rate climbed 42 basis points in December to reach 6.07%, making history in the process.
The percentage of loans 30 days or more past due climbed above 6% in December for the first time ever, according to commercial real estate data and analytics firm Trepp LLC.
“It is a scary threshold to have breached,” says Manus Clancy, senior managing director at New York-based Trepp, which tracks some 60,000 CMBS loans totaling $725 billion. “We continue to add 35 to 45 basis points of additional delinquencies per month, so that really doesn’t seem to be subsiding at all.”
Clancy says that he wouldn’t be surprised if the delinquency rate were to steadily rise to near 8% by mid-2010, but he is quick to point out that Trepp generally doesn’t forecast this type of information.
nreionline.com
As you know, the portfolios of the nation’s financial institutions are littered with CMBS paper – which means yet more bank failures. If there is one thing Ms. Market likes to see less of, it’s bank failures… and she’ll really dislike it when the already busted FDIC itself has to be bailed out.
The CMBS problem doesn’t necessarily mean a crash in the economy in 2010 – this is just another in a long list of sharp swords dangling overhead – because the government has been, and continues to be, willing to pump out fiat money in prodigious amounts to keep things afloat.
While we can’t know in advance the specific point at which Ms. Market will slap the government hard on the face and turn on her heels, we can reliably observe the rising tide of money created out of thin air and prepare for the inevitable consequences.
Am I concerned that I’ll glance at my hand one day soon and read the DJIA is off 700 points? Absolutely. But as no one can anticipate the timing of such an event, I must focus on what I can anticipate.
Easy to anticipate at this point is that the U.S. is becoming trapped in a monetary death spiral with its mind-numbing deficits leading to rising interest rates that, in turn, increase the cost of debt servicing, resulting in yet larger deficits and even higher interest rates.
As Bud Conrad points out in this month’s edition of The Casey Report, Weimar Germany entered its quintessential hyperinflation with its ratio of government borrowing to spending at 60%. In the U.S. today, that ratio has now crossed the 40% line – meaning the U.S. government is now borrowing over 40 cents of every dollar it spends – putting us in dangerous territory, indeed. And the U.S. isn’t in the worst shape of the world’s many sovereign deadbeats.
It’s worth taking a moment out of your busy lives to contemplate the definition of money. The government defines money as the electronic bits it can conjure up at will and in great quantities with a series of well-placed strokes on a keyboard. But the rule of money is that each new unit of money you make ultimately reduces the value of all existing units.
Gold, by contrast, has been good money for millennia – and can only grow in supply by the quantity the much denigrated miners can manage to scrape from obstinate soil… the new mine supply now totals about 3% a year, but even that modest amount, which runs well behind population growth, is declining as the easy deposits are depleted.
Of course, the fiat currencies still have their place – for the time being. But by the time this is over, I’ll be shocked to my core if we don’t see the experiment in fiat money come to an unhappy end, with something – anything – more substantial replacing the stuff.
(As I wrote the word “stuff,” I found myself thinking, “Hmm, I don’t think that’s the right word.” Because other than the penny or so worth of paper and ink that represents some of the government’s money, most of it these days is nothing more than electrons… so, calling money “stuff” is actually a misnomer. In fact, most of it doesn’t even have the molecular value of air.)
Speaking of numbers, our own Jake Weber has been crunching the numbers on the nation’s growing bankruptcy problems. Here’s his report…
Spurred by 2005’s record-setting 2+ million filings, Congress “reformed” the bankruptcy code in an attempt to restrict consumers’ ability to erase their debts and limit businesses’ ability to reorganize without interference from creditors. Their efforts have, however, been stymied by the current recession as personal and business bankruptcies continue rising and filers changed tactics.
According to electronic court record keeper AACER, of the 1.33 million U.S. bankruptcy filings through November 2009, 71% fell under Chapter 7 in which debtors essentially wipe their slates clean. Only 28% were Chapter 13 filings that require repayment of at least some of the debt, down from 33% in 2008. AACER’s president expects a 15-20% increase in 2010 filings.
But bankruptcy law firms won’t be the only businesses booming in 2010. Whether you are buying the green-shoots storyline of economic recovery or not, real investment opportunities abound in these difficult times. |
