[Update: August 27th, 2012]
Central Banksters meet in Jackson Hole this week to debate another round of monetary dopium. Wall Street is making the usual (self) destructive threats as to what will happen if they don't get their next fix on time.
Historically the Fed doesn't act this close to an election, so the junkies on Wall Street may be forced to go cold turkey...
Nothing has Changed
Just last week (under the radar), it was announced that the Volcker Rule, intended to put an end to banks speculating with depositors' money, has now been pushed back to the end of this year. Meanwhile, full implementation won't be due until July, 2014, almost two years from now ! In other words, best case scenario (assuming it ever happens), it will take over 5 years from the depths of the largest bailout in U.S. history to finally get Wall Street to stop gambling with public money. Wow, anyone who calls me a pessimist at this juncture, either has a frontal lobotomy or is free-basing Prozac...
[Original Post: May 10, 2012]
Deja Vu of 2008, tonight JP Morgan announced that its proprietary trading desk had accumulated massive losses over the past several weeks. Given the recent dislocations affecting the European credit markets, one would assume that these losses are related to bets on sovereign debt or CDS (Credit Default Swaps) which are essentially insurance contracts covering bonds. Of course, these types of massively leveraged 'proprietary trades' (i.e. trades made with the bank's own capital) were assumed to have ended after the Lehman episode and the ensuing taxpayer led bailouts; but only a fool believes anything really changed.
It's reminiscent of 2007/2008, because before Bear Stearns went bust, two of its proprietary hedge funds collapsed in June of 2007, which turned out to be the canary in the subprime coal mine. Fast forward to spring of 2008 when the 85 year-old investment bank itself collapsed and ironically it was JP Morgan who bought them for a mere $2 per share. Bear Stearns had survived the Great Depression, but it couldn't survive the subprime debacle.
The Gift that Keeps on Giving
As we learned in 2008, there is never just one financial cockroach in the cupboard. Once one appears they start pouring out in a deluge. Ironically, the 'Volcker Rule' which is the one post-2008 rule change that to date has somehow survived the gauntlet of banking special interest groups, is slated to go into effect in July of this year. Supposedly, if the Volcker Rules were in effect, this type of loss just announced by JP Morgan would be avoided, but I somehow doubt it. There is an exception in the Volcker Rule that allows banks to make proprietary trades under the guise of 'hedges', the definition of which will likely be so wide that you could drive a truck through it. Meanwhile, Jamie Dimon (JPM CEO) has been one of the most vocal critics of the pending Volcker Rules, so given this latest fiasco, he looks like just the latest bankster jackass. It's a testament to the overwhelming corruption of the political system that 4 years have passed since the Lehman collapse and yet no major changes to the proprietary trading rules have been put into effect. Compounding the risks at this juncture is the amount of liquidity now sloshing around in the system, which dwarfs what existed at the time of the Lehman/subprime crisis, thereby raising financial leverage to a correspondingly insane level. Worse yet, the Fed and its global Central Bank counterparts are 'All In' on monetary policy, ostensibly to support the global economy, but as we know, it's really to prop up markets and maintain the illusion of solvency. Therefore, they will have no new tricks in their bag and no credibility when another round of liquidations gets underway.
Like dominoes falling, it's not hard to predict what will happen as the unwinding of the global credit ponzi goes into overdrive: Each new 'revelation' will lead to risk liquidation and repositioning of assets to perceived 'higher ground', which will in turn reveal the next layer of insolvent assets, leading to another round of liquidation etc. etc. It will be the gift that keeps on giving. As I wrote way back in 2007, hedge funds are essentially call options. They take risks with other people's money and if the trade goes bad and the fund tanks, the managers walk away. If a strategy works for a year and garners a large bonus, then you can assume that it will be tried again and again, each time with the maximum leverage until it blows up in someone's face. That's exactly what happened this week to JP Morgan.
In addition to the JPM revelation, there are many other nascent signs of credit duress. This week, the Spanish government nationalized one of its banks (Bankia) and forced the others to raise more capital. Where will they get the capital from ? The Spanish government ! The problem is that the Spanish Government itself is teetering on default and its own bonds are reaching multi-month lows (highs in yield). You can't make this stuff up. Spanish banks are collapsing from owning too much government (and consumer) debt, so the government is going to bail them out. It's like tying two rocks together to see if they float.
In addition to the JPM revelation, there are many other nascent signs of credit duress. This week, the Spanish government nationalized one of its banks (Bankia) and forced the others to raise more capital. Where will they get the capital from ? The Spanish government ! The problem is that the Spanish Government itself is teetering on default and its own bonds are reaching multi-month lows (highs in yield). You can't make this stuff up. Spanish banks are collapsing from owning too much government (and consumer) debt, so the government is going to bail them out. It's like tying two rocks together to see if they float.
This Time WILL Be Different
What will be different this time, is that there won't be any TARP bailout program to save the banks, as there was in 2008. Many of us recall that the original TARP was killed in the House in September 2008, during the first vote. Only after the stock market tanked did the second vote pass, a week later. Even back then there was tremendous voter outrage over that first bailout which is why it got blocked in the House - i.e. there was a grassroots movement to block it. Imagine this time around, given that these greedy bastards are back at their same tricks having squandered trillions of taxpayer money (aka. monetary 'stimulus').
Without a bailout, there will be no multinational banks left standing, because they are all sitting on massive yet unquantified risk trades put on by overconfident greedbots who are angling for the biggest bonus they can get regardless of how much long-term risk is involved. Unfortunately none of these various 'carry trades' that are financed by monetary stimulus programs, are built to handle a mass global asset liquidation.
And when the global credit ponzi finally collapses, the Idiocracy will say 'we never saw it coming', because to them it will be yet another totally unpredictable Brown Swan Event.
-----------------------------------------------------------------------------------------------------
Postscript: I still like short-term Treasuries here - steady as a rock, and the least worst house in a VERY bad neighbourhood. (invest at your own risk).
