Larry Fink’s $12 Trillion Shadow

Though few Americans know his name, Larry Fink may be the most powerful man in the post-bailout economy. His giant BlackRock money-management firm controls or monitors more than $12 trillion worldwide—including the balance sheets of Fannie Mae and Freddie Mac, and the toxic A.I.G. and Bear Stearns assets taken over by the U.S. government last year. How did Fink rebound from a humiliating failure to become the financial fulcrum of Washington and Wall Street? Through a series of interviews, the author probes his role in the crisis, his unique risk-assessment system, and the growing concern he inspires.

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IMF is $318 billion short of solvency

Those observing the emperor’s lack of clothing are multiplying. Earlier today, someone opened their mouth, and remarked on the blatantly obvious. Next thing you know Hungarian CDS was 30% wider, Romanian bond auctions were failing, the euro was tumbling, the PPT was scrambling, US markets closed green with nobody trading, etc. Yet the “letting the genie out of the bottle” award of the day has to go to the head of IMF’s policy-steering committee, Youssef Boutros-Ghali who said that the IMF is essentially insolvent in its current form of being the go to backstop for a European bailout. “If we are going to start including funds made available to Europe, then the IMF is not properly resourced,” Youssef Boutros-Ghali told Reuters, adding that IMF members were talking of doubling the amount of SDRs. The means the IMF is $318 billion short of solvency. And what is the IMF long? Why gold…3,005 tonnes worth.

The IMF has to have more resources after the support for Greece and needs to “very significantly” increase the amount of special drawing rights, the head of the Fund’s policy-steering committee said on Friday.

What does this mean in English? The IMF currently has 204 billion in allocated SDR to member countries (or $318 billion). Boutros-Ghali has basically said that in order to preserve its front-man status as a world bailout force (just because the Fed knows that the political whiplash of it being the bailout provider of last resort would mean the end of it, thus needing a strawman such as the IMF), the IMF will need to raise another $318 billion. Where will the IMF get that money? Here’s an idea: the IMF holds 3,005 tons of Gold. At today’s fixing, this equates to just over $116 billion (and much more should the price of gold mysteriously skyrocket). Of course, any fiction that the SDR is backed by gold will then disappear, but it’s not as if anyone even remotely pretends that any fiat currency (and the SDR is no exception) has any value left whatsoever. And since the US will end up having to fund the bulk of the SDR allocation, at least US taxpayers would be on the hook for a far more manageable $200 billion that the IMF needs in order to fully bail out Greece and everyone else in Europe.


U.S debt to rise to $19.6 trillion by 2015

June 8 (Reuters) – The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress.

 The report that was sent to lawmakers Friday night with no fanfare said the ratio of debt to the gross domestic product would rise to 102 percent by 2015 from 93 percent this year.

“The president’s economic experts say a 1 percent increase in GDP can create almost 1 million jobs, and that 1 percent is what experts think we are losing because of the debt’s massive drag on our economy,” said Republican Representative Dave Camp, who publicized the report.

He was referring to recent testimony by University of Maryland Professor Carmen Reinhart to the bipartisan fiscal commission, which was created by President Barack Obama to recommend ways to reduce the deficit, which said debt topping 90 percent of GDP could slow economic growth.

The U.S. debt has grown rapidly with the economic downturn and government spending for the Wall Street bailout, the wars in Afghanistan and Iraq and the economic stimulus. The rising debt is contributing to voter unrest ahead of the November congressional elections in which Republicans hope to regain control of Congress.

The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds. The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year.

U.S., U.K. 'most stretched' by debt, Moody's says

Uncle Sam isn’t in danger of losing his top credit rating, but he’s not in the greatest shape, either.

So says Moody’s Investors Service in its quarterly assessment of triple-A-rated countries.

Paying the interest on their debt remains manageable for these countries, Moody’s says, so their governments aren’t in any immediate danger of a downgrade.

But among the AAA countries, the U.S. and the U.K. are “most stretched” by their debt obligations, Moody’s says.

The debt ratings are important because a downgrade raises a country’s borrowing costs. And virtually every big country faces a difficult challenge in removing bailout and stimulus money quickly enough to avoid inflation and slowly enough to keep the weak recovery going.

“This exposes governments to substantial execution risk in the implementation of their exit strategies, which could yet make their credit more vulnerable,” says Arnaud Mares, senior vice president in Moody’s sovereign risk group and the main author of the report.

Buffett's 2010 Letter To Shareholders

For those who care what the man whose corporate existence is intimately tied to the government’s bailout of the financial system, has to say, below we present Buffett’s 2010 letter to shareholders. 

The only section that is relevant to us, and which continues to demonstrate why Berkshire is a walking moral hazard (contrary to his conedmnation of financial weapons of mass destruction), is the disclosure on derivatives.



Two years ago, in the 2008 Annual Report, I told you that Berkshire was a party to 251 derivatives contracts (other than those used for operations at our subsidiaries, such as MidAmerican, and the few left over at Gen Re). Today, the comparable number is 203, a figure reflecting both a few additions to our portfolio and the unwinding or expiration of some contracts.

Our continuing positions, all of which I am personally responsible for, fall largely into two categories. We view both categories as engaging us in insurance-like activities in which we receive premiums for assuming risks that others wish to shed. Indeed, the thought processes we employ in these derivatives transactions are identical to those we use in our insurance business. You should also understand that we get paid up-front when we enter into the contracts and therefore run no counterparty risk. That’s important.

Our first category of derivatives consists of a number of contracts, written in 2004-2008, that required payments by us if there were bond defaults by companies included in certain high-yield indices. With minor exceptions, we were exposed to these risks for five years, with each contract covering 100 companies. In aggregate, we received premiums of $3.4 billion for these contracts. When I originally told you in our 2007 Annual Report about them, I said that I expected the contracts would deliver us an “underwriting profit,” meaning that our losses would be less than the premiums we received. In addition, I said we would benefit from the use of float. (more…)

EU sues Goldman over volcanic ash

European Commission President Jose Manuel Barroso announced late Sunday that the European Union has filed suit against investment banking giant Goldman Sachs for the fallout of ash from Iceland’s Eyjafjallajökull volcano.  The volcanic ash, which has blanketed the skies over most of Europe for the last four days, has grounded almost all European air traffic, stranding travelers and disrupting economic activity throughout the European Union.

In a statement delivered in Romansh, the official EU language of the month, Barroso said, “We have uncovered evidence that this so-called ‘natural disaster’, which is costing the EU hundreds of millions of Euros, is in fact an Act of Goldman, and we intend to hold the Zionist-American cabal in charge of the firm accountable.”  “First the profligate Americans drag the world into a near-depression and now they crap all this ash on us.  Who the hell do they think they are?” added Greek Prime Minister George Papandreou from Athens, where he was chairing a conference on Greek sovereign debt entitled, “How American Speculators Forced Us to Cook the Books, Lie to Our European Partners, and Pretend We Don’t Need A Massive Bailout”.

The EU complaint alleges that Goldman operated a proprietary wind-blowing strategy to direct the volcano’s ash into Europe’s stratosphere.  Goldman is accused of profiting from the fallout by buying complex Flight Cancellation Swaps that are netting Goldman millions of dollars every time another European flight is cancelled.  The complaint cites a smoking gun email from Francois Tubbey, a 16-year old Goldman vice president, to an unidentified woman at “[email protected]&$*[email protected]” stating, “That’s right, baby, Fat Franky’s in charge of the weather.”

Several European banks who are counterparties to the FCS’s are alleged to be suffering billions in losses with no end in sight, apparently because they continue to sell the FCS’s to Goldman.  Reached for comment, the Chairman of Royal Bank of Scotland, one of the counterparty banks, said, “Yes, we know almost all European flights are cancelled, but our advisor is Goldman Sachs, and they keep urging us to sell these FCS’s to them, so we do.  We intend to hold them fully responsible.”

Goldman issued a statement saying that it intends to “vigorously defend itself,” adding that the EU’s charges are “unfounded in meteorology and probably also in fact.”

In a related development, the InterGovernmental Panel on Climate Change said today it is considering investigating Goldman’s role in climate change.  “We’re going to get the documents, proceed cautiously, and determine precisely when Goldman started melting the Polar icecaps.” [via email]

IMF Seeking Boost In Lending Cap By $250 Billion To $1 Trillion

In the latest sign yet that things in the world are roughly 25% worse than expected (give or take), the FT reports that the IMF will seek an imminent rise in its lending cap from $750 billion to $1 trillion to build safety nets that could prevent financial crises. “Even when not in a time of crisis, a big fund, likely to intervene massively, is something that can help prevent crises,” Dominique Strauss-Kahn, the IMF managing director told the Financial Times. “Just because the financing role decreases, doesn’t mean we don’t need to have huge firepower … a $1,000bn fund is a correct forecast.” At this point it is glaringly obvious that without the explicit support of the various central banks and of such fake international but really US organizations as the IMF, the already prevalent liquidity crisis would simply destroy the world. The troubling theme is that instead of taking away incremental worries, we have now gotten to the point where one bailout, like a butterfly in China, merely requires 10 more down the road. Alas, instead of a virtuous Keynesian dynamic, this is anything but.

Some more on the IMF’s feeble attempt at justifying the need for its exploding funding requirements, as well as its own attempt to validate that all is well:


South Korea, as this year’s president of the Group of 20 leading economies, is helping craft the plan. Seoul hopes to convince the G20 countries to back the increased IMF funding at a summit in South Korea in November. The G20 meeting in London in 2009 tripled IMF resources from $250bn. A US official said Washington was sympathetic to improved safety nets but needed more details on the Korean-IMF plan.

South Korean economists forged the plan because of their own bitter experience of their currency and stock market plunging in 2008. In spite of robust economic fundamentals, Seoul needed to be rescued from a dangerous liquidity shortfall by swaps from the US, Japan and China. (more…)

UBS On The Exasperating Euro

Strategist, UBS

For foreign exchange investors there’s nothing more exasperating than the euro at the moment. Having fallen from above 1.51 against the dollar in December to below 1.19 in June, the euro has since bounced smartly back to above 1.30. Defying predictions of a Eurozone break-up or a further perilous decline to parity, the euro has instead wrong-footed many in the currency market.

Indeed, exasperation explains one of the factors behind the euro’s correction, as investors had become increasingly bearish on the currency. The belated bailout of Greece, sharp bond spread widening within the Eurozone, concerns about competitiveness, and political tensions within Europe all convinced foreign exchange participants that the euro had become a one-way bet. Hence, the euro’s summer recovery has been the clear pain trade in the currency markets, forcing investors to close their shorts.

The reversal in the exchange rate has been driven by stronger data in the Eurozone and renewed concerns about the health of the US economy. In particular Germany’s super-competitive exporters have benefited from the slide in the euro in the first half of the year. An excellent reflection of this is the continuing strength of the Swiss franc. As Switzerland sends 20% of its exports to Germany, the franc is a proxy for the largest economy in Europe. In many ways it is a substitute for the old German mark.

In contrast, the dollar has fallen this summer as weaker US growth has forced Federal Reserve officials to consider resuming quantitative easing. As last year’s inventory bounce has begun to wear off, structural concerns about the health of the US housing and labour markets have come to the fore again.

In the near term the euro is likely to keep its gains; there are still shorts in the market and fears about the Fed will keep the dollar on the back-foot. But the longer-term picture remains bearish. The structural problems of high debts, low growth and diverging current account imbalances remain stubbornly high. Fiscal austerity will undermine Eurozone growth this year and next. The European Central Bank won’t be in a position to raise interest rates until well into 2011, at the earliest.

What are the risks to our long-term bearish euro view? The major concern of course is the Fed resuming asset purchases in order to expand US money supply. This would undermine the dollar as it did in March 2009 when the Fed started a year-long programme of buying Treasuries and mortgage-backed securities. The other concern is that the consensus among foreign exchange participants remains bearish on the euro. As a result, their positioning would keep the markets vulnerable to further exasperating rallies in the currency.

Tim Backshall On Europe: "Default Now Or Default Later" As EuroStat Complains That Greece Is Still Withholding Critical Data

There is one major problem with putting houses of card back together – they tend to fall…over and over. And while abundant liquidity in May and June served as an artificial prop to return European core and PIIGS spreads to previous levels merely as mean reversion algos took holds, the second time around won’t be as lucky. CDR’s Tim Backshall was on the Strategy Session today, discussing the key trends in sovereign products over the past few months, noting the declining liquidity in both sovereign cash and derivative exposure (we will refresh on the DTCC sovereign data later after its weekly Tuesday update). Yet the most interesting observation by Backshall is the declining halflife of risk-on episodes, which much like the SNB’s (now declining) interventions, are having less of an impact on the market, as ever worsening fundamentals can only be swept under the carpet for so long before they really start stinking up the place, and indeed, as Tim points out at 5:30 into the interview, even the IMF now realizes that soon the eventual second domino will fall, and it is better the be prepared (via the previously discussed infinitely expanded credit line), than to have to scramble in the last minute as was necessary in May. In other words, the storm clouds are gathering and only fools will invest in risk asset without getting some additional clarity on what is happening in Europe. The bottom line as Backshall asks is: “do they default now or default later.” And that pretty much sums it up. Buy stocks at your own peril.

Incidentally all this is happening as we read in an exclusive Bloomberg piece that “four months after the 110 billion- euro ($140 billion) bailout for Greece, the nation still hasn’t disclosed the full details of secret financial transactions it used to conceal debt” and that EuroStat still has not received the required disclosure about just how fake (or real) the Greek debt situation truly is. When one steps back and ponders just how bad (and unknown) the situation in Europe is, and that stocks are unchanged for the year, one must conclude, as Dylan Grice does every week, that the lunatics have truly taken over the asylum.

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