Rep. Alan Grayson Applauds Upcoming Partial Victory in Senate

“There is deep bipartisan support for a full audit of the Federal Reserve, in both the House and the Senate. The Sanders Amendment takes a significant step in that direction. I will work hard to help Dr. Paul and Senator Sanders to get a full Fed audit in the final bank reform bill. It is time for America to know what happened to our money.”

If Senator Sanders’ Federal Reserve Transparency Amendment passes in its current form, as we hope and expect, then America will finally find out about every secret bailout and ‘help for our friends’ slush fund established and perpetrated by the Federal Reserve in the past three years. This includes not only the so-called “Section 13(3) facilities,” but importantly, foreign currency swaps and mortgage-backed securities as well.

The Fed will be brought to account for its favoritism for the benefit of huge failed banks from 2007 through today. We expect that when we finally see what the Federal Reserve has been up to, the public will be outraged. Releasing this information will show that the Federal Reserve’s arguments for secrecy are — and have always been — a ruse, to cover up the handing out of hundreds of billions of dollars like party favors to the Wall Street institutions who brought the American economy to the brink of ruin.

The continued government lobbying against the Sanders Amendment should end now. Fed Chairman Ben Bernanke doesn’t want an audit because Ben Bernanke doesn’t want to be audited. Treasury Secretary Tim Geithner, the former head of the New York Fed, doesn’t want an audit because Tim Geithner doesn’t want to be audited. This is stating the obvious. But we cannot let legislation be determined by the personal vested interest of high government officials. What matters is not what’s good for them, but what’s good for America.

Yet when it does pass, the Sanders Amendment is only a partial victory. The most important improvement over what the Sanders Amendment offers would be to subject the Fed to audit for what it does going forward. To say that America can learn about only what the Fed has done already is like trying to drive a car by looking only in the rearview mirror.

The Fed is an institution that has the power to hand out hundreds of billions of dollars on a whim. Because of that power, the Fed must always be subject to independent audit — completely, and without reservation.

AUDIT THE FED.

Last I heard, Ron Paul is still opposing the Sanders Amendment. I will update this post if that changes.

http://georgewashington2.blogspot.com/2010/05/congressman-grayson-now-backs-sanders.html

With the threat of sovereign default and contagion now pervasive within the Eurozone periphery, it is relevant to quantify the relative exposure of various banking centers’ assets as a percentage of host countries’ total GDP. The reason for this is that in Europe for many countries a sovereign default would not have as great an impact, as a risk-flaring contagion impacting these countries’ primary financial entities, whose assets account in some cases for multiples of host GDP. For example in Switzerland, the assets of the top two banks, UBS and Credit Suisse, alone account for nearly 600% of the country’s GDP. And while Switzerland is relatively isolated from the budget and deficit crises in the PIIGS and STUPIDs, other countries such as Italy, Belgium and ultimately France, Germany and the UK, are much more exposed.

Belgium – Dexia: 180%of GDP
France – BNP Paribas, Credit Agricole, SocGen: 237% of GDP
Germany – Deutsche Bank: 84%
Italy – Unicredit, Intesa Sanpaolo: 101%
Netherlands – Fortis: 155%
Spain – Banco Santander: 92%
UK – RBS, Barclays, HSBC: 337%
Compare that to the top 5 banks in the US (a list which excludes hedge funds such as Goldman Sachs).

US – JP Morgan, Citigroup, Bank of America, Wells Fargo and Fannie: just 56% of GDP.
The question which pundits should be focusing on is once the Greek crisis flares up and takes down several peripheral non-hosted banks, just what the interplay of a “falling domino” scenario will be not only on neighboring European countries, but also on the holdings of their domestic banks. Because it is inevitable that the same kind of bank run witness in Greece, will become a pervasive phenomenon and impact Portugal, Spain, Italy, etc, which would be the precursor to a global bank run.

The chart below demonstrates graphically the ratio between a given bank’s asset and the GDP of its host country. Unfortunately for Europe, there is a dramatic concentration of bank assets precisely in some of the most precarious regions. Which is why Germany may have kicked the can down the road for at least a month, but the issue will come back with a vengeance for the simple reason we have noted from the start of this crisis: only Bernanke has a money printer. Everyone else actually has to produce “stuff”, sell it and collect taxes if they want to fill catastrophic budget deficits. And the latter, as we have seen, is something the developed world has been horrible at doing over the past decade, courtesy of the Goldman-facilitated innovation explosion.

http://www.zerohedge.com/article/presenting-total-bank-assets-percentage-host-countries-gdp

http://www.zerohedge.com/article/hugh-hendry-greek-bailout-really-bailout-french-banks

European banks have more at-risk assets in Portugal and Spain than in Greece. European lenders are holding Portugal debt issues of $240.5 billion — including $47.4 billion by German banks and $44.9 billion by French firms, according to BIS figures from the end of 2009 quoted in a Bloomberg report.

And as Tyler Durden points out, France Germany and the UK are getting hit with wider credit default swap spreads:

With a stunning $630 million, $558 million and $370 million in net notional derisking, France, UK and Germany are the top three most active recipients in negative bets in the prior week, not just in sovereigns but in all names…

Zero Hedge’s outside bet to be the first core country to blow up, thanks to its massive PIIGS exposure, France, finally made the top spot in net derisking, with $629 million in net notional, or 189 contracts. The smart money is now massively betting that Europe’s core is done for; as the PIIGS have demonstrated, the blow out in spreads for the core trifecta can not be far behind.

Given that central bankers have – for several years – focused on credit default swaps as the most important economic indicator (see this and this), widening spreads are a bad sign, indeed.

http://georgewashington2.blogspot.com/2010/05/are-france-and-germany-in-trouble.html

French banks have the biggest exposure to Greece among European lenders, accounting for $78.8 billion of the $193.1 billion of total claims European banks have on Greece, according to the Bank for International Settlements. They also have the second-largest claims on Portugal and Spain, after German banks, and are the biggest holders of Italian debt, BIS figures show.

Bond prices from Italy to Ireland slumped after Standard & Poor’s cut Greece’s credit rating below investment grade on April 27 and lowered Portugal as well. A day later the rating company downgraded Spain’s debt. Contagion from the Greek crisis is “threatening the stability of the financial system” like the Ebola virus, Organization for Economic Cooperation and Development Secretary General Angel Gurria said.

Credit Agricole’s Emporiki Bank of Greece SA has 1.4 million clients and 22.7 billion euros ($30 billion) of loans. The French bank’s main risk in Greece comes from possible loan losses as the economy shrinks, said Jaap Meijer, an analyst at Evolution Securities Ltd. in London. Paris-based Credit Agricole also has stakes in Banco Espirito Santo SA, Portugal’s biggest publicly traded bank by market value, and in Spain’s Bankinter SA.

“The main French banks have direct exposures on Greek sovereign debt and Credit Agricole has the biggest exposure all in all, when including possible losses on its domestic loan book,” Meijer estimated. He and other analysts said a lack of precise data from banks makes it hard to pinpoint who holds what.

For a table of European financial institutions’ stated exposure to Greece and Portugal, click here. The figures were provided to Bloomberg News in interviews and e-mails, or culled from company reports and presentations.

Contagion Concern

Credit Agricole, France’s biggest bank by branches, said yesterday it has 850 million euros at risk from Greek government debt, including 600 million euros at Emporiki. A company spokeswoman declined to provide further detail.

Societe Generale, France’s No. 2 bank by market value, owns 54 percent of Greece’s Geniki Bank SA, which has 4 billion euros of loans and advances, according to the Athens-based lender’s Web site. Geniki’s customer deposits stood at 2.7 billion euros at the end of 2009. A Societe Generale spokeswoman declined to comment on the bank’s risks in Greece.

Banks in Greece face worsening asset quality, pressure on profitability, negative lending growth and rising loan losses as the economy contracts and the state tries to curb the country’s budget deficit. Geniki has made losses every year since 2003, while Emporiki’s 2009 net loss widened to 583 million euros.

Financial shares tumbled in European trading yesterday, pushing the 52-company Bloomberg Europe Banks and Financial Services Index down 1.2 percent, on concern the Greek debt crisis will spread. Portugal’s Banco BPI SA slumped 8.3 percent. Credit Agricole dropped 3.4 percent, bringing its decline since the start of this week to 10 percent.

Portugal, Spain

Fortis, the owner of Belgium’s biggest life insurer, lost 7.4 percent. The insurer, based in Brussels and the Dutch city of Utrecht, had holdings of Greek and Portuguese government bonds totaling 7.2 billion euros at the end of last year, according to a March 10 presentation.

The cost of insuring against a default on government bonds of Greece, Portugal and Spain rose to records on April 28.

BNP Paribas SA, France’s biggest bank by assets, has “negligible” risks tied to Greek banks, Chief Executive Officer Baudouin Prot told French radio BFM yesterday. Natixis SA, based in Paris, also said it has “negligible” risk tied to Greek government debt and “insignificant” exposure to Portugal.

Banks have more at risk in Portugal and Spain than Greece. Claims on Portugal by European lenders amount to $240.5 billion, including $47.4 billion by German banks and $44.9 billion by French firms, according to BIS figures from the end of 2009.

European banking claims on Spain stand at $832.3 billion, with German financial institutions accounting for $238 billion and French companies $211.2 billion.

Commerzbank AG holds 3.1 billion euros in Greek sovereign debt, while Deutsche Postbank AG owns 1.3 billion euros of Hellenic government instruments. Hypo Real Estate AG, the German lender taken over by the state following the credit crunch, has 7.9 billion euros in Greek government bonds and 1.7 billion euros in Portuguese state debt, according to a March presentation on the company’s Web site.

http://www.bloomberg.com/apps/news?pid=20601087&sid=amdu_4fc.JAg&pos=4

Serious debt problems in Europe are becoming more evident as Greece, Portugal and now Spain hit financial hardship.

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Greece cheated its way into the single-currency club, lied about its deficit for years, and now brings the shame of becoming the first junk-rated member after losing investment-grade status at Standard & Poor’s this week.

Greece’s punishment? A 30 billion euro ($43 billion) handout from its neighbours, with Germany on the hook for almost 8.4 billion euros, followed by France for 6.3 billion euros and 5.5 billion euros from Italy. The rest of the gang members are expected to contribute pro rata, based on their capital subscriptions to the European Central Bank.

Portugal, for example, is in line to lend Greece about 774 million euros repayable in 2013 at 5 per cent, even though the bond market was charging the Lisbon government more than 5.6 per cent for its own three-year money this week. The bailout – misguided, misconceived and muddleheaded – makes less and less sense as the region’s crisis of confidence worsens.

This chapter didn’t feature when the euro script was written more than a decade ago. So it’s time for investors to start thinking about how the movie might end: badly. The common currency may start to unravel in exactly the way its critics over the years predicted, as the folly of binding disparate economies to a single monetary policy without an accompanying fiscal alignment becomes clear.

Priced for imperfection

“Debt restructuring in euro-area member states is not an option,” European Union spokesman Amadeu Altafaj said this week.

Tell that to the bond traders pricing two-year Greek notes at 76 per cent of face value, suggesting they are discounting a loss of 24 per cent on their investment as the rescue plan fails and the Athens government reneges on its obligations. Or to S&P, which followed this week’s rating cut with a warning that investors may recover as little as 30 per cent of their money in the event that Greece can’t meet its payment schedules.

S&P also slapped downgrades on Portugal and Spain, providing further evidence that the sovereign-debt crisis isn’t contained and that investors have every reason to be concerned about contagion across the euro region.

The problem with the rescue package as currently designed is that it ends a day early and is a euro short. Greece needs more than 30 billion euros from Europe and 15 billion euros from the International Monetary Fund, and it needs more than one year of funding. IMF managing director Dominique Strauss-Kahn told German lawmakers yesterday that Greece may need as much as 120 billion euros.

Bouncers at door

The best solution would be to let Greece go bust. Extending the rescue net for longer, and throwing even more cash at the country, is almost a guarantee that the bond vigilantes will turn on Portugal, then Spain, and so on. And, now that it’s clear that Greece should never have been allowed through the door in the first place, the bouncers should grab the nation by the scruff of its indebted neck and toss it out.

Politically, the EU seems unwilling to contemplate such an amputation. So the gangrene will spread.

You know what’s coming next. ECB president Jean-Claude Trichet will recall his comments earlier this month to the Kellogg School of Management in Illinois, when he said “crisis management requires agility and innovation to meet the idiosyncrasies of a specific crisis.”

He’ll bend and twist the rulebook to come up with some way for the central bank to start buying government bonds in the market, capping the yield increases seen this week in an effort to halt the contagion.

Greece v Lehman

And he’ll bring forward planned rule changes on the collateral requirements to ensure that Greek banks can continue to exchange their government debt at the ECB for cash, even though it’s now junk at one rating company, headed for downgrades at the others, and trading well below its face value all along the maturity spectrum.

Twinning the debt crisis engulfing Athens with the largest bankruptcy in US history is increasingly popular. A Google search combining “Greece” and “Lehman” takes about 0.23 seconds to generate 933,000 references.

The analogy, however appealing, is mistaken. The US authorities let Lehman Brothers go bust in the mistaken belief that the finance industry had ample warning to prepare for the consequences of allowing economic Darwinism to finally take its course. The guardians of the euro, by contrast, are reading from an older playbook, the one that suggested it was a good idea to bail out Bear Stearns.

And we know how well that turned out.

Bloomberg

Australia has so far been shielded from the Greek financial crisis, the Reserve Bank of Australia assistant governor Guy Debelle says.

But he warned that while the crisis hadn’t yet affected nations outside the Eurozone, it may do so if market conditions deteriorate.

Australian banks have so far not been affected by the crisis, Mr Debelle told an audience at the Mortgage and Finance Association of Australia on Wednesday.

“So far it hasn’t had any effect at all, actually — so far being up to last night,” Dr Debelle said in response to a question.

“Its pretty much been confined to Europe. We’ve seen re-borrowing costs and borrowing costs in some countries in Europe go up quite a lot, but we haven’t seen any effect on Australian banks’ funding costs or on mortgage-backed securities.

“It hasn’t affected countries outside of Europe but, obviously, if financial markets deteriorate, some of these things are going to go back.”

The situation in Athens deteriorated overnight after ratings agency Standard and Poor’s downgraded Greece’s debt to junk status amid mounting fears that the debt crisis in Europe is spiralling out of control.

In a statement on Tuesday, S&P said it was lowering its rating on Greece’s sovereign debt to BB+ from BBB-, which means that the country’s debt does not carry an investment grade rating.

The agency is warning debt holders, too, that they have an average chance only of between 30 to 50 per cent of getting their money back in the event of a debt restructuring or default.

The downgrade of Greece follows S&P’s decision change Greece’s long term rating to A- from A+ and its short term rating to A-2 from A-1.

AAP

“We must immediately put in place the 30 billion euros,” Fillon told France’s lower house of parliament.

BONDS | GLOBAL MARKETS

He added he had “no doubt” that German Chancellor Angela Merkel would adopt the same position as France, concerning Greece. ($1=.7508 Euro) (Reporting by Sudip Kar-Gupta; Editing by Sophie Taylor)

http://www.reuters.com/article/idUSPAB00833020100428

NABL proposed the notice in a letter sent to the Securities and Exchange Commission and the Municipal Securities Rulemaking Board late Tuesday.

The notice would warn investors using the Electronic Municipal Market Access site that, prior to making a decision to buy or sell a muni bond, they should check with Fitch Ratings and Moody’s Investors Service, which have either taken action or announced plans to recalibrate their municipal ratings based on a “global” or uniform rating scale that applies to corporate debt.

“During this period of recalibration there may be some market confusion as to the applicable rating on any given municipal security,” NABL president Kathleen McKinney wrote in a letter sent to Martha Mahan Haines, the SEC’s municipal securities chief, and MSRB executive director Lynnette Hotchkiss.

http://www.bondbuyer.com/issues/119_315/ratings-warning-sought-1010590-1.html

That’s what the municipal bond market is telling investors. It’s also telling them not to fret about state and local economies, beset as they are by budget deficits, pension shortfalls and rising health-care costs.

Of course, this market doesn’t speak in English, but in numbers. Sometimes, such as when tax-exempt bonds yield double their U.S. Treasury counterparts, the numbers shout. More often, and in the present case, they imply and infer.

What is the municipal market saying when the Los Angeles Unified School District borrows money for 10 years at 3.54 percent, or Seminole County, Florida, does the same for 3.49 percent, or the town of Rye, New York (a natural Aaa credit from Moody’s Investors Service) pays 2.93 percent?

California, Florida and New York are all looking at oceans of red ink right now, and for the foreseeable future. The market says: Don’t worry about it.

These aren’t isolated examples. Every week, hundreds of municipalities sell bonds. It’s business as usual. The Bond Buyer’s 20-General Obligation Bond Index, the oldest gauge of what it costs these places to borrow money for 20 years, is 4.34 percent, well below its average for the last 10 years of 4.79 percent, and within calling distance of its recent record low of 3.94 percent. That rate, not seen since the days of U.S. President Lyndon Johnson’s administration, was reached in 2009.

There has rarely been a better time for a municipality to borrow money. That’s a good thing because they will need it.

It’s Munigeddon

The news is bad. The headlines are worse, especially on the blogs, where a mixture of misinformation and hysteria typically holds sway. California is Greece! All the states are going bust! It’s Munigeddon!

Let me repeat: The news is bad. I can’t remember when it was ever worse, in terms of tax revenue and investment returns falling, and defaults rising.

Add to that the refusal of public officials to fire government employees and instead contemplate Chapter 9 municipal bankruptcy; labor unions digging in their heels; the Department of Justice’s investigation into anticompetitive practices among dealers; and now a Capitol Hill proposal to do away with tax- exempt borrowing altogether.
It’s not surprising that some people are starting to think the municipal market resembles the trailer for last year’s movie called “2012.” You may remember it: Actor John Cusack is racing his car ahead of a convulsive suburban landscape.

Scarce Commodity

The municipal market isn’t a disaster movie. There are no terrific explosions. States and localities rarely go out of business. They muddle through.

The municipal market isn’t the stock market. With equities, bad news has a real minute-by-minute impact. Yet here we are in the depths of Munigeddon, and it’s business as usual. One of the reasons for that is because municipal bonds are relatively inert within a few weeks after they are first sold. As the old municipal-market axiom has it: All bonds go to bond heaven. They are tucked away in safe deposit boxes until they mature or their owners are called.

The biggest reason tax-exempt yields are declining even in the face of bad news by the barrel is because there are fewer tax-exempt bonds. Tax-exempt, fixed-rate issuance fell 6 percent to $39.2 billion during the first two months of this year from the comparable 2009 period, based on Bloomberg figures. Taxable offerings, driven by the Build America Bonds program, were almost 16 times as plentiful, at $19.1 billion, the data show. Public offerings of the BAB subsidy deals began in April 2009.

It’s a simple matter of supply and demand. The issuers are selling more taxable bonds because the government’s 35 percent subsidy makes it cheaper for them to borrow that way than in the tax-exempt market. And the government aims to extend the BAB program, and expand other ones that would replace exemptions with tax credits. Even if Senators Ron Wyden and Judd Gregg go nowhere with their overhaul of the tax system, the tax-exempt market is dying a slow death. One way or another, the federal government will kill it off.

The scarcity premium trumps the hysteria discount.

http://www.businessweek.com/news/2010-03-09/-bond-heaven-defies-the-disasters-in-munigeddon-joe-mysak.html