Tuesday, November 1, 2011

With loaded dice, why wouldn't you roll them?

The stock markets took a big dive for the second day, dragged down by bank stocks based on their exposure to Euro bonds, or perhaps on the fact that they aren‘t really viable businesses but simply bonus generators for the people who run them. The panic started after the bankruptcy filing of MF Global, an investment bank run by former NJ Gov Jon Corzine. It appears the bank’s problems may have started when the former Goldman Sachs CEO went short in a big way on US Treasuries (betting that the downgrade would drive up interest rates, it did the opposite) He also bet heavily on Euro bonds and lately MF Global couldn’t meet margin requirements as they were leveraged 40 to 1.

There are reports that 100s of millions, perhaps a billion in customer funds are missing, perhaps from trying to cover margin calls. It’s not clear if in fact what they did is a crime in the age of decriminalization for Wall Street hoodlums. Stealing from the poor and giving to the rich has been the law of the land since Reagan made it trendy. Of course they were stealing from the not so poor, so it could go either way. Bernie Madoff has dibs on the top bunk.

MF Global was a small player compared to the big zombie banks. The biggest bank, JP Morgan has exposure to 85 trillion in derivatives and in order for holders of their bonds to insure them they are paying through the nose. Last week they sold one billion in bonds with the spread over Treasuries of 335 basis points or 3.35% over the rather low interest that Treasuries pay. This was a big improvement from a few weeks ago when the spread was 675 bp. This sounds wonkish but it just means that people are catching on to the banking collapse and are trying to make money in the short run.

As it becomes more apparent that all of these banks are really the walking dead, the interest rates they must pay is likely to increase sharply. At some point it becomes impossible for them to do business and it’s bail out time again. As the tide goes out then still more ponzi schemes will be left flopping on the beach.

Italy is being caught in a tight spot even though their economy is really quite strong. They are paying a six percent spread over German bonds and this is not sustainable. The Eurozone has put itself in a self fulfilling death spiral, as more countries become unable reissue debt at a rate they can pay, the disease starts to spread. The problem is that the European Central Bank doesn’t seem to understand basic economics or know anything about the traditional function of central banks.

The ECB is repeating the same mistakes the Federal Reserve made between 1926 and 1933, and you know where that led. It strains credulity however that in either case, then or now, that these big bankers don’t know what they are doing. These banking principles are hundreds of years old and to do the opposite suggests they want the outcome that will certainly follow their failure to act.

The Greek PM wants to hold a public referendum on the bailout/austerity deal in January and this will certainly fail. The uncertainty between now and then is bad news in itself. All of these problems could be fixed by the masters of the universe who caused them but that’s the reason they won‘t be.

It seems incredible that that the bankers would go down this path given the suffering and death toll involved in such a course. For the one percent however, it’s business as usual as they’ve always killed people to get what they want. The only difference is the unprecedented scale, and the pay off is so huge they can’t pass it up. It’s not everyday you get to roll the dice to take over an entire planet, and they have loaded the dice to only roll their number. www.prairie2.com