It’s my serene conviction, by the way, that this sucker actually is going down, right now, even as I clatter away at the keys — perhaps in slow motion, so that not many other bystanders have noticed yet, and the few who have noticed are mostly too crosseyed with nausea to speak.

It’s perhaps useful to define even what we mean when we say “this sucker.” Everybody knows what a sucker is, of course — say, a Midwestern public employees’ union pension fund snookered into buying a fat slice of equity tranche in a Goldman Sachs-engineered CDO. But “this sucker” is something else: a rather large cargo of commercial relations, entailed obligations, hopes, expectations, habits of daily life — indeed millions of whole lives — loaded onto the rather creaky vessel we call modern civilization. “This sucker” was such an apt term coming from someone whose understanding of civilization was like unto that of a boy who found a PlayStation under the Christmas tree.

It’s also perhaps useful to define what we mean by “going down.” To my mind it means an awful lot of money disappears and nobody can pay for anything and an awful of things that have kept going on promises to pay and to get paid will stop keeping going. I don’t think that the idea of money disappears — that is, paper certificates representing claims on future work — but there will be a lot less of it to go around.  Eventually the idea of money could go, too, at least in its current form as Federal Reserve notes. But mostly for some years it will just be a lot of people, companies, and governments who are broke.

“Going down” will mean a society with no money and an infrastructure for daily life that requires gobs of money to run, and a populace too dazed, confused, and inflamed to do anything useful in the way of organizing new infrastructures for daily life for their new circumstances. In retrospect, the Great Depression of the 1930s will look like “The Philadelphia Story” compared to what we wake up to ten years from now.

President Obama’s speech at Cooper Union last week was a remarkable performance. It managed to appear forceful and serious without containing any really serious or forceful proposals to discipline a banking system that is running a hostage-and-ransom racket on civilization. If this is finally what the Obama Experience is all about than his detractors have been right all along: he is a tool. Finance reform aside, there are still plenty of laws left on the statute books that could be applied to the frauds and rackets that ran absolutely amok on Wall Street the past few years. I would still like to know why buying CDS “insurance” against your own issue of bonds deliberately engineered to default is NOT a form of insider trading, to put it as simply as possible.

The SEC action against Goldman Sachs is likely to open a Pandora’s box of troubles for that company, and perhaps all of the Too Big To Fail banks. But even so, I believe this sucker is going down before 99.9 percent of it is sorted out. Anyway, there was a lot about the SEC action that seemed curious, to put it mildly, from the timing of it, to the brevity of the document, to the strange fact that it emerged at all from an agency whose principal activity the past few years has been the viewing of internet porn, and which has otherwise behaved so indifferently in the face of numberless offenses to common decency, not to mention the public interest, that it might as well have been staffed by a thousand head of Holstein cows rather than licensed attorneys and graduates of accredited colleges.

This sucker is going down because the train of bankruptcies underway has a remorseless self-reinforcing power to provoke more and more bankruptcies at every stop along the line as every promise to pay is welshed on. The mortgages will not be paid and securities will not pay their investors and the banks will choke on the bad paper promises in their vaults and the pension funds will not pay their beneficiaries and the states and counties and municipalities will go broke and not pay their employees and creditors, and the federal government will not be able to “print” new money in sufficient quantities fast enough to compensate for all the money not being paid up-and-down the line… and one morning we will wake up and discover that all those promises to pay were sham promises based on no productive activity whatsoever… and that will be a sad day. Perhaps the Dow Jones Industrial Average will hit 35,000 on that day.

Nothing can stop this chain of bankruptcy. It’s already baked in the cake. There is probably some wish on the part of those in charge, like Mr. Obama, to try everything possible to postpone it.  And there is likewise surely a huge effort underway in the banking sector right now to cream off as much cash as possible so that when this sucker does go down they will bethink themselves better positioned to survive the consequences.

Personally, I believe that the damage was mostly done during the tenure of poor dim George W. Bush, and his predecessor Bill Clinton. I suspect that Mr. Obama learned at the height of 2008 election campaign — during those days of the Lehman collapse and the TARP — just how completely the government — and the people of the USA — were in fact hostage to the banking system, and that it has been his unfortunate role to pretend that there is some other fate to bargain for besides this sucker going down. It is probably why he continues to smoke so much. He must be lighting one Marlboro off the tip of another, one after another, in whatever inner sanctum he repairs to when the midnight chimes toll around the White House.  It’s sad to think of this graceful, still rather young man going down in history as the chump-of-the-century, a reincarnation of Herbert Hoover on steroids, with sugar on top.

Animosities brewing as they are among the white trash elements of the country, I just hope this sucker doesn’t resolve into an ugly bout of attempted ethnic cleansing. Certainly Obama’s racial make-up has inspired a revival of the Ku Klux spirit around the Nascar ovals. I’m sincerely worried that the misdeeds of people name Blankfein, Rubin, and Madoff could provoke a red-white-and-blue pogrom.

The big mystery for the moment is how come a few good men of stature in important places have not stepped forward to say the right thing or do the right deed. How come no US congressperson challenged the knavish behavior of Republicans who condone malicious idiocy that they know to be false like the so-called “birther” activity. How come no putative “progressive” has called the Democrats on their disingenuous failure to call illegal immigrants what they are. How come no state attorney general has filed charges against TBTF bank misconduct even if the US attorney general lies in state over at the US DOJ. How come no political figure of any stripe has called for the resignation of Summers, Rubin, Gensler and other Goldman Sachs “sleepers” infesting high levels of government. How come Dylan Ratigan is the only visible figure in any major newsroom willing to identify the precise nature of the meta-swindle.

When this sucker goes down, our primary task will be reorganizing American life on a much more local and de-complexified basis. It’s a very big assignment and especially daunting against a possible background of political disorder. The losses will be epic and the changes severe, but it doesn’t have to mean the end of recognizably American culture. There will be very little money around, and it may end up being a certificate backed by gold issued by a bank other than the Federal Reserve. Or maybe we’ll just be swapping stuff for the makings of dinner.

So many forces are roiling around ‘out there’ now that it’s hard to believe that the authorities in government and banking can keep the illusion of normality going a whole lot longer. The possible litigation against Goldman Sachs-style frauds by a thousand aggrieved victims is enough to paralyze the system. Meanwhile, trillions in credit default swaps are ticking away like dirty bombs. Greece is going down, with Portugal, Spain, Ireland, and the UK standing by to go next. Nobody can pay their bills. Before long, the old folks won’t get their checks. Then the poor folks. Lately, I wonder if there will even be an election six months from now.

Regards,
James Howard Kunstler
Whiskey & Gunpowder

April 29, 2010

Modern Civilization: This Sucker Is Going Down was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Jeffrey Christian’s Dangerous Idioicy

Zero Hedge did an excellent analysis of Jeffery Christian’s interview on Financial Sense Newshour. Because Whiskey & Gunpowder recently featured my article “Survivalism in the Suburbs” and it stirred up some good discussion I thought I would hone in on some of Christian’s comments that have been lost in the kerfuffle.

Mr. Christian said, “If you look at fishes and loaves of bread, the ratio of derivatives transactions to physical underlying it’s 5 to 1; if you look at aluminum or copper it is about 15 to 1.” During his CFTC testimony he downplayed the implications of shortages, “Another thing is that there are any number of mechanisms allowing for cash settlements”.

Cash Settlements and Empty Bellies

Using Mr. Christian’s logic about always being able to use cash settlements instead of delivery is ludicrous. How helpful is cash settlement of commodities for the people in Haiti and Chile? But then again, Mr. Christian is from Goldman Sachs and their CEO thinks they are ‘doing God’s work’. But last I checked while one can eat cash, like they can eat gold, neither are very nutritious.

Government deficits are generally funded by inflation. Inflation is used as a weak excuse for ineffective price controls. Price controls lead to shortages. These artificial, yet real, shortages lead to rationing. If shortages are too acute and in this case if the Federal Reserve is unable to turn their colored coupons or derivatives into actual physical loaves and fishes, like Jesus did, then the shortages can and will lead to starvation and death.

The attempt by government to disable the chief numeraire to mask the effects of inflation indirectly acts as a price control on all goods and services; particularly raw materials such as commodities which should be viewed as competing currencies. This treasonous policy is fraught with tremendous societal risk. While no one knows precisely how it will play out; my gold chips are on the outcome that it will not end well.

GATA warned about this in the WSJ advertisement:

The objective of this manipulation is to conceal the mismanagement of the U.S. dollar so that it might retain its function as the world’s reserve currency. But to suppress the price of gold is to disable the barometer of the international financial system so that all markets may be more easily manipulated. This manipulation has been a primary cause of the catastrophic excesses in the markets that now threaten the whole world.

A Life Hedge

As a basic life hedge I recommend a three month supply of food and a 72 hour kit. These will provide protection against the vast majority of probable scenarios. Just to be clear, for the extremely dense ones, I recommend taking physical possession of the food and not relying on another institution who engages in fractional reserve food storage at a 100:1 or even 5:1 ratio. When I am hungry I do not appreciate a waiter’s promise of cash settlement instead of my giant steak.

For the truly risk averse who want to ensure the safety of their family then what is the 72 hour kit for? To get somewhere else; like a cabin…or for the lazy and social: La Estancia De Cafayate. As with everything just weigh the risk and probability, perform your value calculation and implement your decision. We all have different risk preferences; for example some people want meteorite insurance but I do not.

Conclusion

The entire worldwide financial and economic system is a Ponzi scam and will evaporate. No one knows how this will play out but those who are farsighted and understand the Austrian school of economics know this is extremely serious. I was in Chile a few weeks before the massive earthquake. Upon small hinges the wide arc of our lives turn.

The massive imbalances in the gold and silver markets and the entire worldwide economy will not be quickly corrected nor easily played for profit. Too many adhere to the cult of government for that to happen quickly and without too much disruption. But “Daybreakers” is a good primer so simply be prepared with every needful thing. Tell me, what do you think?

Disclosures: Long physical gold, silver and platinum with no interest in the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.

Regards,
Trace Mayer, RunToGold.com
for Whiskey & Gunpowder

April 13, 2010

Inflation, Shortages and Starvation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Mr. Obama has really offered no satisfactory explanation for why he larded his department of the US government from the get-go with so many agents and recent graduates of Wall Street’s biggest firms.  Nor has any clear reason emerged for the absence of criminal prosecution – or even investigation – by the Attorney General in such obvious cases of criminal fraud and insider trading as Goldman Sachs’s double-window technique for hedging its own issues of mortgage-backed securities. By comparison, the Savings-and-Loan scandal of a decade ago led to thousands of criminal convictions.

Last week, the Right Reverend Lloyd Blankfein, still “doing God’s work,” announced in a “cash-for-pitchforks” deal that the top thirty executives of his company, Goldman Sachs, would not receive dollar bonuses this Christmas but instead will get stock that ostensibly can’t be sold for five years. Those of us in the USA who enjoy a good mystery are wondering exactly what fine language in this memorandum drawn up by a team of thousand-dollar-an-hour lawyers contains the magic catch that frees up the GS execs to convert this stock into money, say, on February 2, 2010 – because you know it’s got to be in there somewhere.

Anyway, insofar as the top 30 GS employees is made up strictly of people who are already multi-deca-millionaires, notice that the other 31,670 employees of GS, including not a few hundred in the upper income tranches, will be receiving cash bonuses as usual this year from a bonus pool that amounts to about $16 billion (sixteen thousand million dollars). Of course, being a publicly-held company, GS will have to announce soon what those cash bonuses are. Perhaps this is why the news also got out about GS employees seeking handgun permits in bunches. Exactly how they get around New York City’s special “Sullivan Law,” which supercedes the New York State permitting rules, has not been explained.

Meanwhile, all the stops are being pulled out to produce a mighty wall-of-sound in dubiously-reported statistics pertaining to national unemployment and retail sales – the first way down and the latter up, supposedly – in an attempt to squeeze one last giant potlatch Christmas out of the dying “consumer” economy. Jew though I may be, I confess that Christmas is for me. I’m sorry, fellow Chosen People, but Hanukkah is just plain boring – the equivalent of Danish Modern furniture for the spirit. Give me Christmas, with its pagan yule logs, feasts, and revels! One can enjoy the holiday doings and trappings without subscribing to either the divinity of Santa Claus or the Babe of Nazareth. But Christmas does invite us to indulge in all kinds of “hopes” and delusions, and the main one crackling through the American zeitgeist this year is the wish that our national life will resume the yeasty expansion of goodies that most living citizens regard as baseline normality – namely, a never-ending orgy of credit card spending and real estate flipping.

This wish is doomed to disappointment. The cold boney finger of reality, like Dickens’s spectral Ghost of Christmas yet-to-come, points to many a tableau of desolation in the decade ahead… of a lost “normality,” of evictions, foreclosures, tragedies, ruinations and most of all dashed expectations – assuming that the vast public clings to habits and behaviors no longer suited to the mandates of new circumstances in our world.  And it is the greatest disservice of all at this holiday time for respected authorities to pimp that wish.  What a shabby thing it has become anyway – a sordid spectacle of multitudes moiling in chain store checkout lines en route to the certain anguish of buyer’s remorse in the parking lot.

Can’t we come up with a better American Dream, even one that includes Christmas?  I think we can.  It would require the liberation of American citizen’s minds from their thralldom to bigness in every realm from work to worship to recreation.  If you think Barack Obama is a hostage to Wall Street, reflect for a while on the people’s self-surrender to the tyranny of everything that diminishes us to mere “consumers.”  We’re on a journey – and we don’t know it – back to a nation of communities where your character really matters, and where character rests on whether your deeds comport with truthfulness. Many will be dragged kicking and screaming upon that journey, and many a dark night will be passed in the cold and damp on the way. But it will take us to a place where the hearths are burning brightly and the estranged spirits of our national character await a reunion with us: fortitude, patience, generosity, humor. That will be a Christmas to live for and remember!

Regards,
James Howard Kunstler

December 16, 2009

Obama Hostage to Wall Street, Americans Hostage to Consumerism was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

If the winds are all blowing in one direction, it takes a brave and confident person to stand against those gusts and forge ahead into a new path. This is what two traders at Goldman Sachs did last year, and their bet paid off. These two traders, with a stronger stomach and a greater appetite for risk than most, went against the common thought on Wall Street and are now being lauded as financial heroes for their efforts.

In early 2006, like almost every other investment bank in the world, Goldman Sachs was exposed greatly to the booming subprime mortgage market. Goldman was doing a lot of business with the mortgage-backed securities that wound up exploding a year later, crippling many of Goldman’s immediate rivals. So why didn’t Goldman suffer the same fate as Merrill Lynch, Bear Stearns or any of the other once-giant investment banks? The answer is quite simple: they took a huge risk.

Michael Swenson, 40, and Josh Birnbaum, 35, with the help of mortgage department head Dan Sparks, 40, were able to convince the higher-ups at Goldman that things would soon come crashing down around them. Swenson and Birnbaum, traders in the firm’s mortgage department, were convinced that the subprime market would fail. Their convictions were not new, but they were in the minority opinion.

As early as December 2006, The New York Times reported on a study that predicted foreclosures for one in every five subprime loans. The report was conducted by the Center for Responsible Lending and was the first of its kind relating to the subprime market. The report stated that about 2.2 million borrowers who took subprime loans from 1998-2006 would be likely to lose their homes.

Swenson echoed the study’s sentiment. In January 2006, the ABX debuted. The ABX, an index of tradable asset-backed securities and credit default swaps, gave investors a chance to gain broad exposure to the subprime market. At the time, Swenson was head of ABS trading at Goldman and participated in a panel discussion at the ASF 2006 conference.

“The market has become big — I mean really big,” Swenson said at the conference.

In late 2005, Swenson convinced Birnbaum to join the structured-products trading group at Goldman. Birnbaum was already a Goldman veteran and had developed a new security that was tied to mortgage rates. Swenson convinced Birnbaum to try trading in the first ABX index. Goldman instantly started making profits with its ABX trades, but Swenson and Birnbaum were forced to use Goldman’s own capital to execute the trades.

Late in 2006, Goldman still had huge exposure to the subprime mortgage market, due to its holdings of CDOs and other securities. David Viniar, Goldman’s CFO, suggested to the group that it adopt an even more bearish look on the subprime market. Swenson and Birnbaum could not agree more and the pair quickly got to work.

Swenson and his group of traders began shorting slices of the ABX. The depression of subprime lending had yet to hit the market and these credit default swaps they were buying were still very cheap. Goldman had a lot of work to do if it wanted to sufficiently hedge its position in the subprime market. Goldman’s exposure was high, and it took a lot of time and even more money to build enough swaps to fully hedge the bets.

Swenson and Birnbaum had bets focused on indexes in the ABX that reflected the riskiest portion of the index. The subsequent weakening of the index was twofold. As predicted in the 2006 study, many subprime loans had begun the foreclosure process. Also working at the same time was an increase in hedging activity involving the ABX index.

As reported as early as September 2006 in the Financial Times, the activity of hedge funds in the U.S. housing market had grown substantially. As a result of the hedging activity, the ABX index began declining. Home prices were falling, and the early signs of a collapse were all presenting themselves. The time to get into this short market was running out.

Luckily for Goldman, Swenson and Birnbaum had begun making their short trades nine months earlier. The appearance of CDOs, which were not as prevalent in the last housing slump, had buoyed the market and kept a bust from appearing. The mortgage shorting market was growing, but it had not yet topped out. Many on Wall Street believed that everything would be fine and that the housing slump would work itself out.

Meanwhile, back at Goldman, people were starting to get nervous. Despite the fact that Swenson and Birnbaum, with the heavy backing of Sparks, seemed to be correct in their bearish look, they were still investing a lot of money — Goldman’s money — in this idea. The idea of a single trader crippling a big company by making a bad decision was not new. We saw it in 1995, when Nicholas Leeson was held responsible for a $1.4 billion loss and the collapse of Barings PLC. As recently as yesterday, a single trader, Jerome Kerviel, 31, was discovered committing massive fraud and losing $7.16 billion for Societe Generale, France’s second largest bank.

Goldman’s chief executive, Lloyd Blankfein, was growing concerned with the amount of risk these two young traders had exposed Goldman to. Along with Goldman’s co-president, Gary Cohn, Blankfein demanded that Swenson’s group cut its risk in half. The position taken by Blankfein should not have been a surprise.

In June 2007, Blankfein, along with Merrill Lynch CEO Stanley O’Neal, spoke about his feelings on the subprime markets at a conference in London.

“It’s reasonably well contained,” O’Neal said at the conference. “There have been no clear signs it’s spilling over into other subsets of the bond market, the fixed-income market, and the credit market.”

Of course, O’Neal was wrong, and it cost him his job. As wrong as O’Neal was, Blankfein echoed his sentiments at the London conference. Swenson and Birnbaum couldn’t have disagreed more. The two believed that the housing markets, along with the credit and other surrounding markets, were still headed for dire areas.

As is usually the case, hindsight can be 20/20. Few were able to predict the fallout of the subprime market before it came. Many smart people thought that subprime lending would be a huge boon to the economy, and they were right.

In fact, Sen. John Kerry of Massachusetts wrote a letter to Freddie Mac and Fannie Mae in 1999. In his letter, the senator urged the two government-backed mortgage institutions to increase their dealings in the subprime industry. Kerry thought it would be a catalyst to help first-time and low-income families become homeowners. Kerry was right, and the boom in housing for Americans who could not afford to own houses unofficially began.

Years later, in December 2007, Kerry, along with several other democrats, signed a letter written by Sen. Chris Dodd and addressed to Fed Chairman Ben Bernanke. Dodd urged the chairman to enact strict controls on lenders who work in the subprime markets. Kerry’s endorsement of this letter says much about the man. Evidently, the senator voted for subprime lending before he voted against it.

Swenson and Birnbaum held fast to their convictions, but alas, the orders from above came down and they got out of their short positions. Believing they had left money on the table, Swenson and Birnbaum continued badgering for the authority to get back in the game. They would eventually get their wish, but not before Goldman started experiencing severe losses.

As the subprime and general housing market continued to shrivel, Goldman realized that it must begin selling off many of its risky CDO holdings. Just like Merrill and Bear Stearns, Goldman was exposed to these poisonous holdings, yet it began selling its shares quickly.

The shorting market had now become harder to break into, but Swenson and Birnbaum returned to the fray and continued their short position on these CDOs. In July 2007, the riskiest part of the ABX index finally succumbed and began to plunge. As Merrill and Bear Stearns were set on a rapid fall from grace, Goldman was covering its losses and raking in profits.

The position of Goldman stayed the same throughout the fall of 2007 as things somehow managed to get even worse. The firm posted record quarterly earnings. Goldman was back in the black, and the smart moves by the guys that got them there were not overlooked. Swenson, Birnbaum and Sparks each received bonuses between $5 and $15 million.

While saving one of the biggest investment banks in the country has earned Swenson and Birnbaum a lot of credit for their investments, they are not alone when it comes to these giant gains in the housing market.

John Paulson, the head of New York hedge fund Paulson & Co., shared a similar belief with Swenson and Birnbaum. Paulson’s hedge fund started two funds in the summer of 2006 that were concentrated solely on expecting a collapse. After his expected collapse arrived, Paulson’s fund garnered some $15 billion in 2007. Paulson’s trade is considered to be one of the biggest single moves in the history of Wall Street.

A lesser-known version of the John Paulson move was the dealings done by Michael J. Burry and his Scion Capital hedge fund. In May 2005, even before Swenson and Birnbaum got to work, Burry made the decision that the housing market was overvalued. He placed a bet that the subprime mortgage market would eventually collapse.

Much like Swenson and Birnbaum, Burry used credit derivatives that were essentially insurance against defaults. He entered into the riskiest parts of subprime mortgages, and at first, his investment appeared foolish.

Through the first nine months of his investment, Scion’s funds were down 16.4%, with most of that loss coming from his credit derivative positions.

Burry made a risky decision and put the poorly performing credit derivative positions in what is known as a side pocket. By doing this, he basically separated these investments from the main fund, whose performance they were seriously injuring. Investors became angry about this, because the side pocket locked up their poorly performing investment into a fund they were unable to exit.

But of course, the market started losing ground and eventually went into a free fall. Burry’s investment paid off, and all those furious investors who were not allowed to leave wound up walking away with huge profits.

Men like Swenson and Birnbaum, Paulson and Burry have one thing in common. They have guts. They had the foresight to see the future before the rest, and they had the courage to stake their reputations, livelihoods and millions of dollars on their gut feeling.

The country, especially the financial sector, is run by some very smart people. Men with high degrees from some of the most prestigious academic institutions in the world are making high-stakes bets with large amounts of money. Even men with these pedigrees can sometimes make mistakes. And a couple of young hotshots toiling on an obscure index can prove that maybe they are the smartest ones of all.

Until next time,
Jamie Ellis
January 25, 2008

Shorting the Subprime Market was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.