Monthly Archives: June 2011

June 27, 2011

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The markets last week were alert to the two dominant stories of Greece’s crisis and the release of oil from U.S.’s strategic reserve.

The U.S. government’s release of 30 million barrels of oil Thursday really made no sense. The price of oil has been declining for weeks on its own, dropping 15 percent. In reaction to the release, the markets panicked on the news and sold off hard. This appears to be a panic move by politicians in an attempt to remove energy cost inflation from the economy. But it just is not enough oil to accomplish this. The IEA global release of strategic reserves totaled 60 million barrels, the U.S. contribution half this release, which amounts to 16 hours of global oil supply.  Yup, just 16 hours. Smart money says in just a few weeks oil will be not that far from where it started before the release thereby making the lowering price a temporary outcome.  But instead putting us in a precarious situation as we no longer have those reserves for a time when we may really need them.

As for Greece, I found an article by Shah Gilani from The Money Map Report where he outlines just how Greece got into this mess fascinating.  If you happen to have been watching what is transpiring, it is definitely worth the few minutes it will take to read.  If they had any left to blacken, it would be one more for GS.

The Real Greek Tragedy

In 2000, Greece wanted to join the European Union. The Maastricht Treaty mandates that, for a country to be accepted into the Union, its deficit cannot amount to more than 3% of its GDP. Greece’s was closer to 5%.

So the country turned to financial engineering experts Goldman Sachs to build a “bridge to nowhere,” temporarily parking its debts out of sight.

Here’s how it went down.

First, in a 2000 deal, Greece offset some of its debt by “selling” the future revenue streams from its national lotteries. The next year, Greece “sold” future revenue streams from its airports’ landing fees.

(These deals were termed “sales,” because, at the time they were constructed, they couldn’t be called “loans.” A loan would have to be paid back, and would remain on the balance sheet as debt.)

But still more money was needed to lower the deficit-to-GDP ratio. So Goldman arranged a $10 billion currency swap. Instead of using spot rates to price the currencies being exchanged, Goldman used historic rates. Due to the pricing mismatch, Greece got to keep an extra $1 billion in the deal.

And – just like magic – Greece passed the Maastricht test and traded in its old drachmas for shiny new euros.

Of course, Goldman wasn’t going to just give Greece a billion dollars. So, to pay back the favor, the parties entered into an interest rate swap.

Greece had outstanding bonds on which it was required to pay a fixed interest rate of 4%. Goldman kindly offered to pay 4% if Greece would swap it for an obligation of its own – a floating rate equal to LIBOR plus an additional 6.6%! In other words, Goldman gets at least 6.6% and pays out 4%, netting 2.6% on $10 billion – at least $260 million a year. That’s how Greece paid Goldman back for its fancy financial footwork.

Then in 2005, Goldman sold the balance of the swap to the National Bank of Greece, for yet another tidy fee. At that point Greece (by then an E.U. member) owed almost $9 billion on the debt swap to the new holder of that debt – its own National Bank.

But the country was far from over its addiction to borrowed money…

The “Hellenic Swap”

As the global credit crisis was unfolding and the ECB was dishing out cheap money, the National Bank of Greece couldn’t get any handouts. It didn’t have any collateral.

What it did have was that loan it was holding from Greece itself, which was being paid back from tax revenues from airport landing fees, lottery earnings, and road tolls (the one Goldman had packaged).

Goldman to the rescue… The firm arranged another interest rate swap between the NBG and the Greek government. Only this time, the Bank got the higher rate, and what amounts to an annual sum of about $201 million.

But that’s chump change for the Bank. It really wanted a big chunk – billions – from the ECB.

So Goldman set up a Special Purpose Vehicle (SPV) to issue notes in the amount of $6.96 billion with an interest rate 4.5%, which – guess what – it swapped with the NBG for its 7.4% interest payment stream. The Bank ended up with the SPV’s notes and used those as collateral to borrow from the ECB.

The Moral of the Story (If There Is One)

So Goldman intentionally helped Greece cheat its way into the E.U., took its future tax revenues to get them in, made billions in the process, and then helped both the country and its biggest bank borrow even more money it could never pay back.

Actually, that sounds more like comedy…

The real tragedy is that Goldman and other big American banks are doing this all over the world. Many of the world’s economies are being leveraged up by a corrupt strain of capitalism that enriches itself while pushing the world towards another precipice.

June 20, 2011

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Policy experts have focused on alternative ways of eliminating Social Security’s 75-year financing gap, but lost in the debate is the fact that even under current law Social Security will provide less retirement income relative to previous earnings than it does today. Combine the already legislated reductions with potential cuts to close the financing gap, and Social Security continues to lose ground as the mainstay of the retirement system for many people.

In 2002, the frequently quoted replacement rate for the “medium earner” who earned about $42,000 in today’s dollars and retired at age 65 was 41%; that is, Social Security benefits were equal to 41% of the individual’s previous earnings. Under current law, three factors will reduce this replacement rate: 1) the extension of the full retirement age; 2) the increase in Medicare premiums; and 3) the taxation of Social Security benefits.

1. The Extension of the Full Retirement Age
Under current law, the full retirement age is scheduled to increase from 65 for those reaching 62 in 2000 to 67 for people reaching age 62 in 2022. This increase is equivalent to an across-the-board benefit cut. For those who continue to retire at age 65, this cut takes the form of lower monthly benefits; for those who extend their work lives, it takes the form of fewer years of benefits. Thus, as reported in the Social Security Trustees Report, the replacement rate for the medium earner will drop from 41% to 36% for people who retire at age 65 in 2030.

2. The Increase in Medicare Premiums
The rising cost of Medicare will also affect future replacement rates. For the medium earner, Medicare premiums, which are automatically deducted from Social Security benefits, are scheduled to increase from 5% of benefits for someone retiring in 2002 to 12% for someone retiring in 2030.

3. The Taxation of Social Security Benefits
The third factor that will reduce Social Security benefits is the extent to which they are taxed under the personal income tax. Under current law, individuals with less than $25,000 and married couples with less than $32,000 of “combined income” do not have to pay taxes on their Social Security benefits. (Combined income is adjusted gross income as reported on tax forms in addition to nontaxable interest income and half of your Social Security benefits.) Above those thresholds, recipients must pay taxes on either 50% or 85% of their benefits. In 2002, only 20% of people receiving Social Security had to pay taxes on their benefits, so median earners typically did not pay any taxes. But the thresholds are not indexed for growth in average wages or even for inflation so, by 2030, as real benefits and other income increases, many medium earners will pay tax on half of their benefits.

The bottom line is that the net Social Security replacement rate for the medium earner will decline from 39% in 2002 to 29% in 2030 under current law. Should the decision to close the financing gap include a benefit reduction provision, the replacement rate percentage will slip even further down, continuing the trend of increasing the individual’s responsibility for his or her own retirement security.

Source: Alicia Munnell

June 13, 2011

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If I only had a crystal ball it would solve all our investing problems. I would know exactly what to do and when.  We’d all be rich. If only … There is at least one person who may not know exactly what will happen but he definitely controls all the buttons and levers so what he does in essence determines much of the fate of investors across the globe.  So it makes sense why people hang on the words of arguably the most significant (money) man in the world, Ben Bernanke the Chairman of the Board of Governors of the Federal Reserve System.

It seems our future looks a bit brighter as earlier this week at the International Monetary conference in Atlanta, our esteemed Fed Chairman stated he sees better growth ahead.

“Growth seems likely to pick up somewhat in the second half of the year.” Ben Bernanke

Considering the head of the US central banking system is optimistic about our future bodes well and suggests we should be too. Or should we?  Let’s take a look at some pearls from Mr. Bernanke’s past and see how accurate he has been.

“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”  - 7/2/05 interview on CNBC

“Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear…At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained”. – March 28 2007 – Testimony before the Joint Economic Committee, Congress

“We will follow developments in the subprime market closely.  However, fundamental factors–including solid growth in incomes and relatively low mortgage rates–should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system” – June 5, 2007 speech – the 2007 International Monetary Conference

“The Federal Reserve is not currently forecasting a recession.” Jan 10 2008 – Response to a Question after Speech in Washington, D.C.

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” 6/10/08 – Remarks before a bankers’ conference in Chatham, Massachusetts

“[Fannie Mae and Freddie Mac are] adequately capitalized. They are in no danger of failing… [However,] the weakness in market confidence is having real effects as their stock prices fall, and it’s difficult for them to raise capital.” – July 16 2008 – Testimony before House Financial Services Committee

“The TARP’s purchases of illiquid assets from banks and other financial institutions will create liquidity and promote price discovery in the markets for these assets. This in turn will reduce investor uncertainty about the current value and prospects of financial institutions, enabling banks and other institutions to raise capital and increasing the willingness of counterparties to engage. More generally, increased liquidity and transparency in pricing will help to restore confidence in our financial markets and promote more normal functioning. With time, strengthening our financial institutions and markets will allow credit to begin flowing again, supporting economic growth.” — October 7, 2008. At the National Association for Business Economics 50th Annual Meeting, Washington, D.C.

“Currently, we don’t think it (unemployment rate) will get to 10 percent. Our current number is somewhere in the 9s.”  May 5 2009 testifying before Congress’s joint economic committee

“I am 100% sure inflation will remain under control and will not soar higher.” – 60 minutes interview December 2010

I don’t know about you but I think I need to somehow find my magic 8 ball, broken or not.  “It is certain” or “Don’t count on it” seem like a better chance of being right.


June 6. 2011

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I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and -restored to the people, to whom it properly belongs. – Thomas Jefferson

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What do you do when you are the main driver and beneficiary (via either massive profits or taxpayer bailouts) of an equity bubble (and crash), a real estate bubble (and crash) and another equity bubble (and crash) all within within a decade? Well of course it only makes sense to create another great “opportunity” from which to profit and extract wealth.  A recent WSJ article does a great job of outlining our leading banking institutions Modus Operandi. I apologize if it makes you sick to your stomach but the story has to be told ….

“Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost banks’ profits.

A group of 10 large banks—including Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and Barclays PLC—saw their commodities revenues increase by 55% in the first quarter, according to Coalition, a firm that analyzes the performance of investment banks. After a disappointing 2010, commodities was the fastest-growing segment in banks’ fixed-income businesses in the first three months of this year, even though it still accounts for just 7% of banks’ total fixed-income revenues, Coalition said.

Commodities trading is a bright spot for institutions that face new regulatory clampdowns on practices that previously fattened bank profit margins, such as trading with their own capital and slapping customers with hefty “overdraft” fees. Oil is up about 10% so far this year, settling at $100.29 a barrel Wednesday, and commodities such as gold and copper are close to all-time highs.”

These businesses, which were once the oil in the engine of American capitalism have become nothing more than gigantic casinos and are helping to cannibalize the US economy. The 3-6-3 model (borrow at 3%, lend at 6% and hit the golf course by 3PM) has been replaced by the 2-20-0 model (rape the client at 2%, then rape them again at 20% and experience 0% of the downside).  It’s not even remotely surprising that this financialization of the commodities markets has resulted in this:

And when it all comes crashing down Wall Street will lobby Congress to bail them out again, no one will go to jail and the big banks will change the casino game to another market.  Until then, pay your executives as much as you possibly can and extract as much wealth from the middle class as humanly possible.  Lord knows this revenue source won’t last forever…

Is this really the type of behavior we want to support with our hard earned dollars?  Let’s think about this long and hard and vote with our wallets.  Small, community banks and Credit Unions and are all worthy of our consideration. If we work together maybe, just maybe we can get back to some sort of financial normalcy our founding fathers envisioned.