Generational Dynamics Forum - New Site

Had circumstances been less dire, the news of four urgent phone calls from a New York bank in a single day likely would have been easier to ignore. "Nobody's historically more suspicious of outsiders than South Dakotans,'' Bill Janklow, the former governor of South Dakota, told FRONTLINE in a recent interview.

But it was 1980, South Dakota's economy was a mess, and suspicion was an instinct that Janklow could not afford. "We were in the poor house,'' he recalled. "It cost 42 cents a bushel in 1980 to haul wheat. When something's only selling for $2.20 a bushel, you certainly can't afford to be paying almost 50 cents a bushel to ship it.''

The calls were from Citibank, which was having a serious problem of its own. "It was very simple,'' said Walter Wriston, then the chairman of Citibank. "We were going broke.''

The bank had lost more than $1 billion on its audacious foray into the credit card business, and the future looked even worse. The trouble, simply put, was that the rate of inflation exceeded the amount of interest Citibank was allowed to charge its credit card customers under New York usury laws.

But this time around it's not just another boring announcement. In fact, the letter reads more like a page out of The Grinch Who Stole Christmas. In the letter, Ken Stork of Citibank's South Dakota Customer Service Center informs me that effective November 30, Citibank, will increase the variable APR for purchases on my Advantage Citicard to 29.99% APR.

But more important, I believe, is what this says about what's really going on in these banks. Many simply put this out there as a "response" to the pending credit-card legislation, and note with irony that the bank that is most-owned by taxpayers (Citibank) is the one doing the worst screwing of the consumer.

But is it that simple? After all, given the extraordinary support that the taxpayer has put into Citibank (they would be literally out of business several times over but for our support) would not Treasury stomp on this sort of abuse? Remember, Barack Obama is supposedly "for the people" and "change in Washington and on Wall Street", right?

Perhaps there something more dangerous - and hidden thus far - going on here? Perhaps what we're really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives!

Why do I believe this is a plausible, even likely explanation for this behavior by Citibank? That's simple: This sort of "terms change", which is an effective declaration of default even against those who haven't defaulted (see above; the same 30% rate is being applied to defaulted and non-defaulted accounts!), will drive two consumer behaviors that could ultimately destroy Citibank's credit card business and perhaps the bank as a whole.

Higgenbotham wrote:http://www.pbs.org/wgbh/pages/frontline ... /rise.html

Had circumstances been less dire, the news of four urgent phone calls from a New York bank in a single day likely would have been easier to ignore. "Nobody's historically more suspicious of outsiders than South Dakotans,'' Bill Janklow, the former governor of South Dakota, told FRONTLINE in a recent interview.

But it was 1980, South Dakota's economy was a mess, and suspicion was an instinct that Janklow could not afford. "We were in the poor house,'' he recalled. "It cost 42 cents a bushel in 1980 to haul wheat. When something's only selling for $2.20 a bushel, you certainly can't afford to be paying almost 50 cents a bushel to ship it.''

The calls were from Citibank, which was having a serious problem of its own. "It was very simple,'' said Walter Wriston, then the chairman of Citibank. "We were going broke.''

The bank had lost more than $1 billion on its audacious foray into the credit card business, and the future looked even worse. The trouble, simply put, was that the rate of inflation exceeded the amount of interest Citibank was allowed to charge its credit card customers under New York usury laws.

http://www.huffingtonpost.com/eva-norly ... 27709.html

But this time around it's not just another boring announcement. In fact, the letter reads more like a page out of The Grinch Who Stole Christmas. In the letter, Ken Stork of Citibank's South Dakota Customer Service Center informs me that effective November 30, Citibank, will increase the variable APR for purchases on my Advantage Citicard to 29.99% APR.

http://market-ticker.denninger.net/arch ... rning.html

But more important, I believe, is what this says about what's really going on in these banks. Many simply put this out there as a "response" to the pending credit-card legislation, and note with irony that the bank that is most-owned by taxpayers (Citibank) is the one doing the worst screwing of the consumer.

But is it that simple? After all, given the extraordinary support that the taxpayer has put into Citibank (they would be literally out of business several times over but for our support) would not Treasury stomp on this sort of abuse? Remember, Barack Obama is supposedly "for the people" and "change in Washington and on Wall Street", right?

Perhaps there something more dangerous - and hidden thus far - going on here? Perhaps what we're really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives!

Why do I believe this is a plausible, even likely explanation for this behavior by Citibank? That's simple: This sort of "terms change", which is an effective declaration of default even against those who haven't defaulted (see above; the same 30% rate is being applied to defaulted and non-defaulted accounts!), will drive two consumer behaviors that could ultimately destroy Citibank's credit card business and perhaps the bank as a whole.

aedens wrote:Remember the dark pool guys?

http://www.zerohedge.com/article/overvi ... t-facility

As more and more American retail and institutional investors realize the magnitude of the scam, the risk that equity markets will remain an isolated bubble in perpetuity where Primary Dealers simply play around with the Fed's excess capital, becomes tangible. And as long as there is no regulatory reform to commence the split of TBTF institutions, as long as financial system crutches persist and as long as the opportunity cost of being wrong is zero (and borne only by US taxpayers), US equity markets will continue to be a scam. Therefore, Zero Hedge advises all readers to immediately remove all their capital from the stock market, until such time as proactive steps are taken to remedy these numerous concerns, or alternatively suffer the consequences of not only another Fed inflated market bubble, but the even sadder consequences of its unwind.

Higgenbotham wrote:

aedens wrote:Remember the dark pool guys?

http://www.zerohedge.com/article/overvi ... t-facility

As more and more American retail and institutional investors realize the magnitude of the scam, the risk that equity markets will remain an isolated bubble in perpetuity where Primary Dealers simply play around with the Fed's excess capital, becomes tangible. And as long as there is no regulatory reform to commence the split of TBTF institutions, as long as financial system crutches persist and as long as the opportunity cost of being wrong is zero (and borne only by US taxpayers), US equity markets will continue to be a scam. Therefore, Zero Hedge advises all readers to immediately remove all their capital from the stock market, until such time as proactive steps are taken to remedy these numerous concerns, or alternatively suffer the consequences of not only another Fed inflated market bubble, but the even sadder consequences of its unwind.

Zero Hedge sees it the same way we do:

"My feeling is that the stock market has gone from being a casino to being a carnival.

If the banks have taken TARP money and gambled on the stock market as others have suggested (and that seems like a reasonable conclusion), the public should stay away and let the banks take the hit when the market collapses. Unfortunately, the pension funds will probably continue to buy in and many workers will lose most of their retirement money."

I've read since that the pension funds are reducing allocations to equities.

Another thread has the story about the Obama admin rejecting Volcker's admonitions to separate the TBTF.

aedens wrote: Tue Jun 16, 2009 6:30 pm
Like posited before we will see who makes "survives" the October grade. Many will be making adjustsments then.
All I would like to forward as history conveys is who posted earnings during the great shake then as today is conveying
again. P/E is a tool which to be frank I set aside for the time being myself since EBIT will sort them out.
I feel to many are prone to tools "angle" rather than hard work. As stated nuetral until the pretty boys
in the suits find out the hard way what value does mean. Of course my anemic 3.2% is something I live with this
YTD. Be carefull and will be seeking this fall for a few EBIT based investments only. Overall i see a massive amount
of wasted time in the Capital Markets which is a sign of the apathy Mr Market will have to cure in the current uncoupling
to persist from gross Global malinvestments which have really not played out in to many supply side markets.
Until dollar to crude is broken so we will be also to effective course change. Energy will smother out whatever
process we consider but no one cared in the 70's either since look who is holding the beast at the Consumers expense.
Maybe this time more will degrid which will idicate the consumer is growing up. All we can do is point the obvious out.
The piggyback globalist have screwed in bright spots they consider correct. Find them, "supply side" and you find the problem
or adjustments you need to pursue.

Good indications to macro issue linked below.

http://suddendebt.blogspot.com/

Jason wrote: > John, you are going to hate this information...

> Mortgage Backed Asset Securitization was already legalized in
> 1970, when the oldest GenXer was around 10 years old.

> Many blame mortgage securtization for being the root cause of the
> current "World Financial Crisis" or WFC. ...

> "In February 1970, the U.S. Department of Housing and Urban
> Development created the transaction using a mortgage-backed
> security. The Government National Mortgage Association sold
> securities backed by a portfolio of mortgage loans"

> Looks like the lethal combination of Boomers and Silent Generation
> gave birth to this evil baby.

> Of course the usual suspects, a "greedy nihilistic Gen X" must
> take the blame, as always..... hehehe. .

Edward Chancellor in Devil Take the Hindmost, a history of financial speculation wrote: > "No actual delivery of tulips took place during the height of the
> boom in late 1636 and early 1637 as the bulbs remained snug in
> the ground. A market in tulip futures appeared, known as the
> <i>windhandel</i> (the wind trade): sellers promised to deliver a
> bulb of a certain type and weight the following spring, buyers
> took the right to delivery -- in the meantime, cash settlement
> could be made for any difference in market price. Most
> transactions were expedited with personal credit notes which also
> fell due in the spring when the bulbs would be dug up and
> delivered. Gaergoedt boasts of having made 60,000 guilders from
> his tulip speculations but admits that he has only received
> "other people's writing." By the later stages of the mania the
> fusion of the <i>windhandel</i> with paper credit created a
> perfect symmetry of insubstantiality: most transactions were for
> tulip bulbs that could never be delivered because they didn't
> exist and were paid for with credit notes that could never be
> honoured because the money wasn't there." (pp. 16-18)

Nouriel Roubini wrote: > [Could we see the stock market run continue?]

> Yes, in the short run what's happening is that there's a wall
> of liquidity, not just in the United States but around the world,
> that's chasing assets -- it's equities, it's commodities, it's
> gold, it's emerging market asset classes.

> And now we have even the mother of all carry trades. Everyone is
> borrowing short, shorting the dollar, borrowing and investing in
> assets all over the world. Global equities, comodities, credit,
> emerging market asset classes.

> The risk is however, right now people are borrowing at zero
> percent interest rates in the United States. Effectively the rate
> of borrowing is negative, because with the dollar falling -- ?? in
> the capital gain, -- you're buying any asset around the world.
> All these assets are perfectly correlated.

> Eventually, the dollar cannot keep on falling. Once the dollar
> stops falling, it reverses. Yo7 have a sudden reversal of the
> dollar, you have to close your shorts, you have to dump assets,
> and you could have a market crash all over the world. That's a
> risk.

> [Is that anywhere near happening?]

> No, it's not near happening because for the time being the Fed is
> keeping short rates at zero, expected to remain zero, and the Fed
> is becoming the biggest seller of volatility because it's buying
> $1.8 trillion of Treasuries, agency debt and RMBSs, so volatility
> on the long end is low, and on the short end is zero, so this game
> is played until ????.

> [Question about central banks]

> There's a gap between what you have to do for the real economy,
> and what you have to do for financial stability. The real economy
> is still weak. There's deflation actually in the economy. Look
> at the cycle 2001-2006. They kept the fund rates all the way down
> to 1% through 2004, three years after the recession was over.
> Then they did step by step [raises of] 25 basis points every six
> weeks.

> This time it's the same, only worse. Output has fallen 4%, not
> 0.4%. Unemployment rate is going to peak at 10%, not at 6.5. We
> have actual deflation rather than risk of deflation.

> So if the Fed wants to target the real economy and avoid
> deflation, it has to keep the Fed funds rate at 0 for longer. But
> if it does that, then you create another huge asset bubble.

> With the carry trade, that asset bubble is now becoming global,
> and everyone has to follow U.S. monetary policy by intervening in
> a non-sterilized way. That eases money at reduced rates, and
> therefore we're exporting our monetary policy to the rest of the
> world.

> And that's leading to a global asset bubble. And once there's
> the unraveling of that carry trade that eventually is going to
> occur, because the dollar cannot keep on falling, then you can
> have a market crash on a global basis.

> [q: Is this current asset bubble worse than the one that preceded
> the fall of Lehman?]

> It could become worse because if the Fed keeps the rates at zero,
> and if the Fed keeps controlling and reducing volatility on the
> long end, then everybody is playing the same game. Everybody is
> buying dollars and going long in risky assets all over the world.

> [Have we put out one fire, only to create another one?]

> I think we have two objectives here -- stabilize the real
> economy, and avoid financial instability. But we're using one
> target, the Fed funds rate, to target the real economy, but we're
> creating a new asset bubble, bigger than the previous one, and
> that's a mistake we're doing right now.

• The Fed's zero percent interest rate policy is creating a "wall
  of liquidity."
• Investors are using the carry trade -- borrowing dollars at zero
  interest rates, and buying risky assets around the world -- equities,
  commodities, emerging market asset classes. This is creating a new
  asset bubble, bigger than the previous ones.
• This will continue as long as the dollar keeps falling. But
  eventually the dollar MUST stop falling.
• At that point, the carry trade will reverse, and investors will
  have to return the dollars they've borrowed. This means that they'll
  all sell their equities, commodities, emerging market asset classes,
  all at the same time, creating a global market crash.