Friday, March 27, 2009

Is Balance Sheet “Cleansing” PC for Money Laundering?

Open Subscription for the Bair, Bernanke & Geithner LP Hedge Fund.

The cover story in the March 25, 2009 Financial Times discussed the conundrum created by the ill-conceived FDIC and Federal Reserve “Toxic Asset” purchase program. By establishing a heavily discounted “fair market” reverse auction price for these assets, reserve liquidity required by banks post sales will actually need to be enlarged in a market where capital flows are already severely constrained. It came as no surprise that neither Citi nor Bank of America would comment to FT on this fly in the ointment. It came as no surprise that the market celebrated the government’s plan with the same lack of critique that they accepted, well…, no-doc loans, CDO, CDS, TARP, and any other acronym you can imagine and the market lurched forward on shrilled enthusiasm that we may have turned a corner.

Well folks, we haven’t. As the AIG bailout remains a diaphanous money-laundering exercise to pad CDS alleged counterparties at the taxpayers’ expense (the Treasury couldn’t officially just give them money), so the “Toxic Asset” program is a less-thinly veiled racket that, in the final analysis, may temporarily create the illusion that the Federal Reserve and FDIC are not as insolvent as they actually are. After all, as a partner in the purchase of these heavily discounted “assets”, the resulting accounting scams that become options to create illusory variable value assets for both the Fed and FDIC come at a critical time in both organizations’ histories. And the best part about this is that the newly constructed Bair, Bernanke & Geithner LP Hedge Fund is that Congress has no mechanism to oversee or control its actions. Seldom, if ever, have so few been granted such unsupervised control. After all, Congress is only now considering whether it should regulate hedge funds while the Executive branch of government is creating the mother of all hedge funds! And, are we surprised that the same fund managers who tanked billions of dollars of managed funds in the now discredited, careless CDO and CDS mess are stepping to the front of the line saying that they’re in on this scam?

While I’ll write more on this linguistic cultural observation, I thought I might introduce a tiny window into an observation which may bear deeper consideration. We may benefit from a consideration the terms “credit” and “debt” as I believe that has been in the blurring of these important words and their attendant constructs that we may have lost our way. Credit (from the Latin term meaning to confide or entrust), a term that implies a productivity or character based future option, was created to provide capital in the present for a bountiful, more than adequate return derived from accretive value. A farmer received credit in the spring which would be repaid – with return – from the excesses of the harvest. And a letter of credit – made ubiquitous by the Knights Templar – was a conveyance of trust ensuring that there was adequacy in provisions at either end of a counterparty exchange. Debt, on the other hand, was an instrument of scarcity and bondage. Inherent in debt was the control by those who minted the lendable resource over those subordinate to them by virtue of scarcity or station. Anecdotally, you never heard of a credit prison did you? In our less-than-a-full-century addiction to balance sheets, we blurred the line between debits (not to be confused with debts) and credits. And when we took the industrial revolution’s balance sheet, for which this accounting innovation was a means of measuring industrial output efficiency, and applied it to the financial markets, we fully confounded the notion of credit and debt.

When the Nixon administration formalized our modern belief that without debt markets, neither our currency nor our wonton consumption could be supported, we lost our way. When CNBC, CNN, Fox News and others say that we need to open the credit markets, unfortunately neither they nor the politicians for whom they serve as mouthpieces get it. We haven’t had credit markets since we decided to discontinue our productivity-based GDP in favor of debt-ridden, knowledge and service-based consultancies which generate value in the immediate with limited future excess productivity and value. Our plan to repay our debt doesn’t come from an abundant surplus. Rather it comes from our ability to refinance. And that’s the bet that BB&G LP are banking on. In short, the whole system is wired to keep in place a dependency which, in a perverse sense, can only survive when consumers blindly spend themselves into ever deepening holes. The way this mythical Colossus falls is when one component of the scam disengages from the madness.

Last night on CNN’s Larry King, I watched Ed Norton promoting the energy-conserving hour long black-out known as Earth Hour scheduled for this Saturday evening. Let’s take it one step further and give the over-taxed raw materials of the earth a breather too. For one day, let’s agree to go debt free. Let’s learn from our religious friends (Mormons, Muslims, and others who fast routinely) to go a day consuming nothing save the gifts that nature has given. Spend nothing that you don’t have in your pocket. Finance nothing. Extend credit only when and where you know that more than adequate bounty is befalling a counterparty. And then watch to see the Colossus crumble. After all, if we cannot model a life free from the debt-laundering nonsense that has enslaved our leaders, we’re ill-prepared to condemn it.

And one more thing – look around your community and find someone who still makes things – a small factory, a bakery, a printing shop, a semiconductor facility, a steel mill, an artist – and spend a few minutes seeing what productivity is again. And then ask yourself – isn’t it time that America re-discovered the value of credit linked to a bountiful, productive future?

Thursday, March 19, 2009

Blood Into Gold

CNBC Captured the Inverted Alchemy message in their coverage of the Blood Into Gold release...

Following a meeting with Peter Buffett in January, I had a dream in which I saw all of the attempts at alchemy in the world. In the dream I saw that the only thing that had been successfully turned into gold was the blood of humanity - both those explicitly oppressed and those who are enslaved by their obsessions. Peter and recording artist AKON took that dream and created a masterful song calling for accountability which will be debuted at the UN International Day of Remembrance of the Victims of Slavery and the Transatlantic Slave Trade, March 25, 2009. Please share this video with all you know and join in the effort to see the wealth in the essence of things and people rather than in the gold that from them can be extracted...
(Copy the link and paste it into your browser to avoid the mtv homepage)

Think, Inform, Act....

Saturday, March 14, 2009

De-nominating the Common Wealth

The Newtonian impulse to recognize as verifiable and real only that which can be named and measured finds itself at an untenable boundary. Most matter is “dark matter”. Most energy is “dark energy”. Most DNA is “junk DNA”. And most financial products are ephemeral bets against uncertainty – with the majority of them bets against a better future. After all, default swaps accounted for five times the global GDP before they unraveled in 2008. The Bank of International Settlements or BIS – the party responsible for establishing the framework for international banking standards – still puts on an equivalent footing, cash, cash-equivalents, and gold as surety against financial loss. Is it not ironic that in an age defined as the “knowledge economy” we have been entirely unimaginative in how we describe, measure and exchange value?

The time has come to free humanity from the tyranny of reductionism in the denomination of wealth. Part of that process is to carefully examine the consensus myths and their consequences around reflexive norms. Think for a moment. If gold sells for $1,000 per ounce and it takes 22 tonnes of ore to get one ounce, have we honestly priced gold? Could you move 22 tonnes of anything any distance for $1,000? Did we price in the cost of the expropriated land? Did we price in the oppression of labor? Did we price in the only alchemy that inhumanity has perfected – namely turning human blood into gold? Clearly, no. Are cash and cash equivalents a necessity for social exchanges of value or are they the reductionist efficiency for power structures to maintain control (and taxation basis)? Can the BIS bring accountability and transparency to the globe when the G-20 seeks to return to the asymmetries of the past?

The G-20 ministers met in London this weekend as I found myself in a sandstorm in Riyadh, Saudi Arabia. I was puzzled as I saw the economic leaders of the current paradigm struggling to find a path to bring accountability to a process that was explicitly set up to avoid it. Remember, the innovation of a corporation per se was a creation to buffer individuals from the liability of their enterprise. Limited liability and limited accountability go hand in hand. Humanity has a chance to have a voice right now - a clarion call to suggest that we don't want to go back but rather, we want to move forward. We want to have infrastructure built and financed in such a way as to allow for the immediate inclusion of innovation rather than waiting for a bond to expire and an asset to waste. We want to have exchanges between people, communities and cultures which don't have to be reduced to balance sheets. When "goodwill" is written off to zero and tangible assets are tested for impairment, is there any wonder that we aren't evolving into a more transparent and accountable future. The world is more complex than Excel displays it. It's time to take back the dimensionality of humanity and celebrate its complexity in the accountable stewardship to which we are being invited.

Monday, March 9, 2009

The AIG Shell Game – Part 2


If the Government wasn’t at the helm, the SEC would call this a Ponzi scheme

Many of my earlier writings going back to 1998, have pointed to the fundamental “weakest link” in the global capital markets which has been the disconnect between the understanding of collateral and the retail cost of capital leading to precipitous risks to the public and private investor. Long before it was thinkable, I commented to the executives at AIG that their opaque counterparty risk management products were going to result in global market calamity. In contrived bull market enthusiasm, such a warning was unheard. Even now, as President Obama and his team work to stem the hemorrhage of calamity in the markets, there is NO evidence that he or his advisors actually understand where the tumor is that is causing the spreading cancer. So, in an effort to shed some light on this, I’m going to take a basic approach to explain what’s going on and what to do about it.

Philosophically, we need to understand the ubiquitous nature of perceptions of risk and how it has allegedly been managed over the past 75 years. Established in 1933 as part of the Banking Act, the Federal Deposit Insurance Corporation (FDIC) was chartered to shield the public from economic disruption arising from liquidity crises and bank failures. In theory, by building public confidence in bank security, depositors would be comfortable supplying the reserve liquidity (in the form of deposits) to allow banks to issue credit. Sold to the public as a way to insure their safety, the FDIC was and remains, in truth, a tax on the public to incentivize private depositors to fund banks and their operations.

Recognizing how well the “public interest” insurance premium "tax" argument worked to entice depositors to support the U.S. banking infrastructure, other similar structures were equally incentivized. For example, the Pension Benefit Guaranty Corporation (PBGC) formed by the Employee Retirement Income Security Act of 1974, like the FDIC, receives its reserve funding through insurance premiums paid by the public. Like the FDIC, the PBGC is in a position of near illiquidity. While more indirect, federal tax policy has funneled the majority of tax-deferred investments into IRAs, 401(k)s, and other defined benefit programs which have consolidated asset allocations into a very limited swath of financial products – the bulk of which are bonds. This incentive has been used as a way for the Federal government to underwrite corporate and municipal debt without telling the public that they're actually being charged a tax. After all, the theory goes, this is an investment in the future productivity of the country. Which would be great it we had a GDP. This was, at inception, supposed to insure against wild volatility swings in equity markets and other investment products. However, this “risk management”-based-on-insurance strategy built a catastrophic risk overhang into the market which is moments away from full failure.

Heralded as financial market innovation by brokers and academics alike, many saw pools of cash sitting in conservative yield financial products during the bull run of the late 90s and again in the first half of this decade as wonderfully under-utilized. Since most of the public didn't really "need" their money until retirement, the accountability for where it was double and triple leveraged wouldn't really matter, would it? As long as S&P, Moody’s, and Fitch were willing to sell their ratings to prop up unsubstantiated investment products and bless them as investment grade, conservative investment managers of reserve accounts leveraged these public insurance policies against increasingly ephemeral financial products. Among the providers of liquidity were insurance companies (like AIG, MBIA, FGIC, Ambac, and FSA) who used premium deposits (not income) as the collateral for short-term credit guarantees joined by a host of life insurance companies around the world. Also getting in the act were endowments from major universities, sovereign pensions like Singapore’s Central Provident Fund (CPF) or Canada’s Pension Plan Investment Board, and anyone else who had contractual requirements (supported by tax deferral policies) to hold the public’s money for future obligations.

Unfortunately, few people understood that these pension and annuity obligations were being put at risk and, since the managers of such programs were being incentivized to leverage their reserves for promises of short-term gains, they were being seduced into deepening their exposure by providing ever greater amounts of credit insurance. Credit insurance, by the way, is an interesting, Ponzi-like program where to gain investment grade ratings so that fixed income buyers can purchase bonds, other fixed income accounts (pensions, annuities, and insurers) provide balance sheet support for a fee. This fee – a credit insurance premium itself - is then used to support income which, in turn, is invested. Like any Ponzi scheme, the racket works as long as there are buyers and until the risk matures. Then, like every Ponzi scheme, the house of cards falls.

So imagine the irony when the house of cards begins to crumble. Based on their reports today, March 9, 2009, the FDIC has $41 billion. Not to worry. With over half of that set aside for the next 12 months of losses alone, Sheila Bair, the person at the helm of the FDIC has cast any concern for premium collection aside now saying that the FDIC has the “full faith and credit of the United States government”. “We can’t run out of money,” she said in a Reuters report.

On the same day of this announcement, the newly-minted federally insured bank, General Electric corporation, announced TLGP and FDIC backed debt in the amount of $8 billion to add to their existing Aaa (Moody’s) and AAA (S&P) corporate bonds. Why does the U.S. government need GE to originate these products? Well, quite simply, because it’s desperately trying to get someone to plug the gap in investment grade bond instruments to fulfill the quasi-statutory demands of pensions who are now both illiquid and, with the down-grading of credit insurance providers, no longer holding investment grade investments. Bottom line, there is insufficient inventory for annuities, pensions, endowments and other conservative long-term buyers to remain out of default so the government is attempting to shore this up with, you guessed it, a Ponzi-scheme. Is it any wonder that the SEC is making so much noise about the Madoff's of the world to distract from their own more egregious program? In short, the GE deal is part and parcel of the AIG cover-up.

The cover-up is quite simple and profound. Few, if any tax deferred pensions, annuities or endowments now have the funds to redeem their current or future obligations. If the public were to find this out, it would be a disaster far worse than we’ve already seen. Imagine a Depression-era run on pensions. Foreign investors, as evidenced by the Saudi Arabian, Singaporean, and other sovereign funds’ losses in the Citigroup bailout, no longer have an appetite to buy U.S. government debt so the U.S. government is pulling out its last chip before complete insolvency – shore up pensions with faux corporate debt. The problem with this strategy is simple. As soon as we see that the insurance liabilities at present outstrip the U.S. Government’s “full faith and credit”, the collapse is visible and there’s nowhere to hide. The very companies that were put in place to protect the investments of the public have long ago placed your deposits at risk, taken their fees, and are, by and large, in technical or actual default to you, the private citizen. Now, your pension fund is trying to buy FDIC-backed bonds and other fixed income products with your money. This is another bailout tax and you should not participate in it.

What can one do? Quite simply, an immediate review of tax-deferred investments is of immediate import. And by immediate, I mean today. Any investments that are covered under credit insurance programs should be carefully considered and probably re-rated as speculative. At this juncture, it appears prudent to review all equity investments which have balloon maturity debt (many companies financed acquisitions from 2002-2005 with short term maturing bonds and commercial paper) and exit them in favor of equities issued by companies which have reproducible revenue coming from essentials for health, food and food security, and logistics and an innovation pipeline supporting future efficiencies. And finally, realize that all of this problem grew out of the fear of the 1930’s and anything built on a foundation of fear will not yield good fruit. It’s time that we look forward, not at a fix of the old, but at the new. We are beginning to build the Idigna network which will allow the reintroduction of commodities and essentials as well as the introduction of innovation futures which will pay premium prices for creative new production into the new economy that is coming. We would love to enter into a dialogue with you on how these new (albeit inspired by ancient approaches) products can help you weather the storm.