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Guest Post: Front Running the Fed

Served by Jesse from Le Café Américain

I had a friend from the old neighborhood who was the Comptroller of a major casino in Las Vegas in 1970-80s, where I also was married in 1981. Only lasting win from there, ever.

According to this dour son of Italy the way he could spot a problem, besides the more aggressive methods of observation and detection, would be to examine the returns on a table basis. In the short run they will vary, but in the longer term each game will provide a statistical return that rarely deviates from the forecast, unless someone is cheating. We would walk through the casino, and he would point to a table game and say “at the end of the month, this table will bring in xx percent.”

It was he who introduced me to Bill Friedman’s book, Casino Management, which is a useful read if you wish to learn more about that end of the speculative business from the house perspective.

Attached is some information from a reader. I cannot assess its validity, not being in the bond trading business. But it does sound like someone has tapped into the Fed’s buying plans to monetize the public debt and is front running those buys, essentially ‘stealing’ money from the public. Its what they call ‘a sure thing.’

To try and figure out who might be doing it, I would look for some big player who is showing extraordinary returns on their trading, with consistent profit that is not statistically ‘normal,’ too consistently good. The problem with cheaters is that they sometimes get greedy and call attention to themselves.

In Las Vegas the bigger cheats were often taken out into the desert for further inquiry and final disposition. On Wall Street they are somewhat more arrogant and persistent, defying resolution with that ultimate defiance, “We’ll just find other ways to cheat again.”

Time for a trip to the desert?

Here are a reader’s observations from the bond market.

From a reader:

I used to work for a BB on a prop desk until the financial crisis took hold and they fired the less senior guys on the desk. I now trade US Treasuries, for a small prop firm in xxxxx, to scalp basis trades in mostly on the run securities. Occasionally, I will also take position in the repo markets for off the runs if I see something “mispriced.” Your recent article piqued my interest because we too have noticed “shenanigans,” of sort, in the QE program of USTs.

What we noticed, especially in smaller issues like the 7 Year Cash is that before a Fed buy back would be announced the price would pop significantly as buyers would run through all the offers on two major electronic exchanges (BGC Espeed and ICAP BrokerTec). This occurred more than several times as the 7 Year Cash would be overvalued both by its BNOC by 20-30 ticks and its relative value to similar off the runs. This buyer(s) would lift every offer they could, driving the price substantially above its “value” for sometimes a week at a time. After this buying would occur, the Fed would then announce the purchase of that security sometimes a handle above its approximate value. This “luck” did not just occur in the on the run 7 Year sector, it also occurred in the 30 Year Cash, 3 Year Cash, and more than several off the runs. Again, it was especially prevalent in the less liquid treasury products. Often the “appetite” for these securities would begin approximately 2 weeks to 1 week before the official Fed announcement. The buying was well organized and done in such a way as to completely knock it off kilter from its relationship with like cash Treasurys and the CME Ten Year Contract. If you examine the charts of some of the selected buy backs before the official announcement, you will see a similar occurrence.

While I have not broken this down into a paper to prove it (and I see nothing positive coming out of contacting the ESS-EEE-SEE about this issue), I can assure you that it was occurring on a consistent basis across the entire curve.

A certain issuance would be bid up through the market (substantially above value, as derived by several metrics) only to be later gobbled up by the Fed at the unreasonable price. These player(s) had substantial pockets as we, the small guys (but with a decent capital base), would take the other side of what seemed to be an obvious fade. While this did not occur in every single issuance of the QE program, it occurred often enough to be obvious to any learned observer.

While I am not sure if this can be attributed to purposeful Fed policy or someone at the Fed talking to his pals, I am certain it transpired.”

Corruption is inevitable when the government is engaged in manipulating the markets with public monies. That portion of the Fed’s activities needs to be scrutinized by the GAO on a continual basis. And the activities of the Exchange Stabilization Fund and the Treasury in market intervention should be subject to review by the legislative branch on behalf of the people.

Of course another option is to keep the Fed and the Treasury out of the public markets altogether excepting short term interest rates and specifically identified emergencies.

Guest Post: $38 Billion Tax Break Granted to Citigroup to Help Improve the TARP Results

Served by Jesse of Le Café Américain

Maybe it’s a mistake. Did Timmy have time to run their return on TurboTax?

Well, at least it will make the results of the TARP program look better on paper if it drives up Citi’s stock price by inflating their financial results. That’s a plus, right?

I guess raising the credit card rates to 26% and free money from Ben was not enough to push Citi over its capital objectives in time for bonus season. We’ll all have to really tighten our belts for this one.

Change you can believe in.

Washington Post
Citigroup gains massive tax break in deal with IRS
By Binyamin Appelbaum
Tuesday, December 15, 2009; 8:05 PM

The federal government quietly agreed to forgo billions of dollars in potential tax payments from Citigroup as part of the deal announced this week to wean the company from the massive taxpayer bailout that helped it survive the financial crisis.

The Internal Revenue Service on Friday issued an exception to longstanding tax rules for the benefit of Citigroup and the few other companies partially owned by the government. As a result, Citigroup will be allowed to retain $38 billion in tax breaks that otherwise would decline in value when the government sells its stake to private investors.

While the Obama administration has said taxpayers likely will profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.

The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions from its tax bill by buying the ailing bank Wachovia.

“The government is consciously forfeiting future tax revenues. It’s another form of assistance, maybe not as obvious as direct assistance but certainly another form,” said Robert Willens, an expert on tax accounting who runs a firm of the same name. “I’ve been doing taxes for almost 40 years and I’ve never seen anything like this where the IRS and Treasury acted unilaterally on so many fronts.”

Treasury officials said the most recent change was part of a broader decision initially made last year to shelter companies that accepted federal aid under the Troubled Assets Relief Program from the normal consequences of such an investment. Officials also said that the ruling benefited taxpayers because it made shares in Citigroup more valuable and asserted that without the ruling, Citigroup could not have repaid the government at this time. (Thank God. Just in time for prime bonus season – Jesse)

“This guidance is the part of the administration’s orderly exit from TARP,” said Treasury spokeswoman Nayyera Haq. “The guidance prevents the devaluing of common stock Treasury holds in TARP recipients. As a result, Treasury can receive a higher price for this stock, which will benefit the financial system and taxpayers.” (George Orwell would have fun with this one. Let’s give them a lot more money, so that when they give some back it will make our government program look better – Jesse)

Congress, concerned that the Treasury was rewriting tax laws, passed legislation earlier this year reversing the ruling that benefited Wells Fargo and restricting the ability of the IRS to make further changes. A Democratic aide to the Senate Finance Committee, which oversees federal tax policy, said the Obama administration had the legal authority to issue the new exception, but Republican aides to the committee said they were reviewing the issue.

A senior Republican staffer also questioned the government’s rationale. “You’re manipulating tax rules so that the market value of the stock is higher than it would be under current law,” said the aide, speaking on condition of anonymity. “It inflates the returns that they’re showing from TARP and that looks good for them.” (And a nice accomplishment for Timmy’s year end performance review – Jesse)

Read the rest here.

The Tide of History and The Resilience of the Human Spirit

Served by Jesse of Le Café Américain

Why do so many people continue to turn their noses up at an investment with returns like those listed below? And not only that, why do small groups continue to aggressively attack the very notion that it is genuine, a real trend, a development with appeal across many nations and people, a sustained market trend that is telling us something?

Returns, I might add, that are supported by very strong fundamentals of supply and demand. Coming off a twenty year bear market in which supply was diminished, and burdened by years of central bank selling that seemed to be non-profitseeking and bureaucratically determined to crush any rallies, the market turned off the bottom in 2001 and has barely looked back since except for brief corrections.

“Since the start of the decade gold has been in a strong secular bull market in which it has had only one negative year (2001) while the S&P 500 has had four. Gold’s strong performance has produced a cumulative return of 311.54% for an annualized return of 15.18% per annum this decade. In stark contrast, the S&P 500 has been in a secular bear market in which its cumulative return has been a negative 24.52% for a negative 2.77% annualized return. While gold has had periods of volatility (risk), what the above numbers indicate is that gold has had a superior investment profile relative to the stock market..” Chris Puplava, Gold and Newton’s First Law of Motion

Central banks are now net buyers in the aggregate for the first time in many, many years. This is a significant change since they were a major source of marginal supply. The post Bretton Woods dollar regime created by Nixon in 1971 is shaking hard, trembling the foundations of a world currency system based on financial engineering, empire, and oil.

When the unthinking mob starts buying, and gold and silver are no longer considered eccentric but essential, and local shops and banks start buying and selling the metal, then it will be the time to sell. But probably not before.

This is a phenomenon, a generational occurrence. Personally, it is fascinating, and worth having retired early to see it unfolding day by day.

I have analyzed this market trend repeatedly over time, from many different dimensions, and have listened to every argument, pro and con. It holds water, it makes sense, adds up; it seems grounded in free market principles, historical trends, the invisible hand of the market. It is a keystone of Austrian economics.

And unless it is otherwise impeded, it will most likely continue for some time, until the financial engineering of bubble-nomics subsides, and returns on paper become ‘real’ again. When the world of fiat currency and finance becomes less arbitrary and more predictable, more stable and just. More rational and some might say, conventional.

The rally in precious metals sparks fear and envy in many; it makes them genuinely angry and emotional, even otherwise intelligent and rational people. And one must surely ask, “Why?”

I remember vividly a warm spring day in Red Square in 1996, watching a small group of the old guard, long time Communists, demonstrating against Yeltsin and the reforms of Gorbachev. They did not like the changes, and railed against them, dressed in their shabby clothes with their once mighty banners, now drooping.

Their savings in roubles were decimated, and the worst devaluation was yet to come with the debt crisis of 1998. The once mighty Soviet republic was in disarray. They clearly did not like it, violently opposed it, denied it, while yearning for the past. There was no one in the queue at Lenin’s tomb, and even though it was absolutely deserted in the middle of the day, the young soldier on guard yelled reflexively at us to “hurry, move along” in an almost surreal way. He did not know what else to do.

And no one cared, except for a few curious onlookers like our small group. No one noticed. They were being made extinct by change which they would not, could not, accept because it conflicted with their view of how the world had been and how it should continue to be. They held to their familiar, conventional wisdom, and became out of synch with the times, an oddity, almost atavistic.

There were vibrant business opportunities although the risks were high. Shortages and ‘criminal gangs ‘ were in the ascendancy, to a notorious degree, but the surface was peaceful overall. Life goes on, always. I had long conversations with many entrepreneurs, including those who were acting to solve the problems that were plaguing many Western corporations, who were in business to make things work, to find opportunity in the change, who were trying to make their way. One door closes, but another door opens. We made a good business of it, and some friends who are remembered fondly to this day.

The discussions we had about value were grounded in practicalities but were profoundly philosophical, as is so common among the long-suffering. Such is the character of the Russian people. I loved the land and the culture with a natural affinity that was almost surprising. But on the whole, people are the same everywhere, but with their own particular attractions and character which makes them uniquely interesting. The spirit permeates the world.

The tide of history rolls in, and does not conduct focus groups, or popularity polls, or honor the consensus of the crowd. The smart money tests it, and then moves early with it, or at least does not fight it. The only traces of the trend are what the few are doing and where their money is flowing. The tide moves slowly, inexorably, but is there for any and all to see if they would just look past their preconceptions, their ideologies, their desire for what once was, but can no longer be.

At this point in history, gold is a harbinger of change. People of the status quo fear change and change agents, always. And despite their best efforts to stop it, to discredit the messenger, obliterate its effects, to silence the message, the tide of history comes and washes over them, and the landscape is changed. And the familiar is a thing of the past.

We live in remarkable times. If you do not like to hear about change, if it upsets you, then do not read Le Cafe, and stick to the mainstream media. Documenting and analyzing and surviving change in the financial sphere is what this is all about. No matter where reason and the data may lead, no matter what icons may fall, après déluge.

This is history.

Live it, and not the myth.

Guest Post: Gold Is Rallying Because…

Served by Jesse of Le Café Américain

Gold is a superior store of value.

It resists the attempts by the monetary authorities to debase it, because except for concerted attempts to suppress its price through non-profitseeking selling at key market points by central banks, and naked short selling by the global commercial banks in the paper markets, gold cannot be created and controlled by financial engineers like Ben Bernanke.

It provides a refuge, a store of wealth for private citizens during a period of general currency risk.

A simple chart should suffice.

As part of the quantitative easing regime, the Fed has so debased the financial system that dollar debt is paying negative interest rates once again as it did in the 1970′s.

In other words, it is costing money to hold dollar financial assets because of the mispricing of risk being engineering by the G7 central banks.

So, people and some central banks are seeking refuge in a stable currency that is beyond the control of the financial engineers.

“With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” Fredrich August von Hayek

“The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments.” Ludwig von Mises

Alan Greenspan himself states the case most eloquently in his famous essay from 1966 Gold and Economic Freedom.

“This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

When the currencies of the US and Europe are debased by the financial engineers for the sake of the banks, when spendthrift governments run enormous deficits to fill the pockets of their special interests, informed wealth seeks a refuge in places where it cannot be so easily consumed for the exclusive benefit of the political elite.

This is sadly the case today, especially within the Anglo-American sphere of influence, from which the dollar had become the new opium trade, viciously addictive and debilitating. And so we have seen an historic flight to safety that began in the developing world, but is gaining momentum as the global dollar regime falters.

If you hold dollars, the Fed and the Treasury can confiscate your wealth, virtually at will. That is real power.

When the Fed lifts interest rates to again provide a positive return against inflation, then gold may stop rallying and reach a stable equilibrium price. This will be more difficult to do than it was to debase, as it is always easier to destroy than to create.

And it may be difficult to determine when that time comes, because the US bureaucrats have so thoroughly altered the Consumer Price Index over the past ten years that it is no longer a fair measure of inflation. Therefore it is a challenge to determine what is real and what is not, what is priced fairly and what is not. This is the hallmark of the modern western bankers and their accountants, and their demimonde in politics and the media.

Still, the message of the market is quite clear, to anyone who will listen.

A pleasant Thanksgiving holiday to my American friends, and a reminder to the rest of the world that you must muddle through without the direction of Wall Street for the next few days.

How fitting that Thanksgiving was declared a national holiday by Lincoln in the depths of the Civil War, and made official by the Congress in 1941, at the end of the Great Depression, on the cusp of a terrible world war.

And Lloyd [Blankfein], I would not join the many and be happy at all if you took your own life as you have recently confessed that you feared they would. But there might be a cause for celebration if a master of the universe such as yourself would simply take this timeless message into you heart, and make it the light of the rest of your life. That is the right pricing of risk, the proper valuation of all that you are.

“Come, let us sing to the Lord; let us make a joyful noise to the rock of our salvation. Let us come before His presence with thanksgiving; let us make a joyful noise to Him with songs of praise. For the Lord is a great God, and a great King above all. In His hand are the deep places of the earth, the heights and strength of the hills. The sea is His, for He made it, and His hands formed the dry land. Come, let us worship respectfully, let us kneel before the Lord our Maker. For He is our God and we are the people of His pasture and the sheep of His hand. Now, if you will but hear His voice.” Psalm 95

No time for despair, now is the time to be surprised by joy.

“I do not think of all the misery, but of the glory that remains. Go outside into the fields, nature and the sun, go out and seek happiness in yourself and in God. Think of the beauty that again and again discharges itself within and without you, and be happy.” Anne Frank

Guest Post: US Dollar Very Long Term Chart and Empirical Observations

Served by Jesse of Le Café Américain

Here is an update of the US Dollar (DX) Very Long Term chart last shown on 3 April 2009 when the Eurodollar short squeeze was still abating.

We do not see any reason to change the longer term targets based on what appears to be a confirmation of the continuing decline.

The reasons for this decline are obvious, but so many miss this that we have to wonder what people are thinking. Despite the credit writedowns, and even a potential unwinding of the dollar carry trade which may be a bit overblown even as the demand for dollars in commercial lending is slack, most analysts are missing the bigger picture of a huge overhang of eurodollars that are becoming increasingly less useful to foreign holders, especially if the power of the petrodollar further declines.

There is a potential double bottom to be made at 71, with a possible target in the higher 80′s based on the charts.

The fundamental scenario we would see supporting a reversal rally is a significant equity market dislocation and/or an exogenous geopolitical event that caused another artificial short term demand for dollars and the T bills. Currency dollars are, after all, sovereign debt of zero duration and in any panic there is a rush to the short end of the curve, to the point of accepting negative rates of return for the safety of capital as was seen in the last financial panic leg down.

But after that event, the decline of the dollar will gain again in momentum lower unless there is a profound financial systemic reform and a restructuring of the federal budget deficits.

A genuine reform may be unlikely, since even a reform Administration in the US seems to be attracted to maintaining several costly mega-banks, to act as the potential instruments of national financial policy on the world stage. But even clever frauds can work only so many times, and there is nothing particularly clever or sophisticated about Wall Street’s latest antics, excepting of course their size and their audacity which the average mind cannot well grasp.

The US should not be surprised if the rest of the world does not view new proposals of financial innovations with AAA ratings as favorably as in the past. And as the 700 military bases around the world have proven, large inefficient constructs of empire are expensive to maintain, especially those in the financial world not so easily controlled and certainly more well paid than the usual deployment of ‘weapons of mass destruction.’

With regard to the shift of some dollar heavy central banks into a greater portfolio diversity, including some gold and even silver in the case of developing economies with less dollar reserves, this should come as no surprise to anyone who has been following the news, except those who dismiss anything the developing world might attempt to do in managing their own financial affairs. As stated at the bottom of the news piece here, the entire gold reserves of the IMF are not enough to slake the desire for a harder reserve asset like gold should China continue on its current diversification.

Interestingly enough, none of this has yet shown up in the NY Fed Custodial accounts, where the foreign central banks purchase US guaranteed debt obligations for their portfolios. But it should be remembered that this is a somewhat opaque set of holdings, and does not encompass all of the central bank dollar holdings at all, they being perfectly capable of purchasing dollar assets through commercial sources and open markets without the help of the NY Fed.

The TIC report helps a bit, but it also is not comprehensive and difficult to square with other sources because of some central bank secrecy and reporting lags and errors. Eurodollars have been even more difficult to track than usual, therefore, and as they are the one major component of M3 that is lacking, it makes it difficult to be estimated by those who generate faux M3 reports based on correlations and trends.

A Broader Trade Weighted Dollar Index

Here is an alternative index of the US dollar from the Federal Reserve that is much broader than the DX in its constituent components. It is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.

Broad currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia.

It shows the same Eurodollar squeeze and subsequent decline. As a point of order, the term eurodollar is a bit misleading from its historical roots. It basically refers to any US dollars being held overseas, and not just in Europe.

Guest Post: Bloodbath Coming in the US Banking Sector

Served by Jesse of Le Café Américain

The stock market rallied today because of a slightly better than expected ISM Services number. Considering how much ‘stimulus’ the government has given to the FIRE sector it should be doing slightly better than the real economy.

Another reason the market rallied in New York today was a bullish call on the banking sector by a Goldman Sachs analyst.

Here is a somewhat different analysis of the situation by Chris Whalen of Institutional Risk Analytics. Chris believes that he sees strong evidence that “the fourth quarter in the banking industry is going to be a bloodbath.”

Astounded by Goldman’s Upgrade Banks Heading Into Storm Says Whalen

Even if Goldman is wrong, and lots of investors take their advice and get hurt buying into banking stocks before an approaching “bloodbath,” they seem to have it covered, at least for themselves, with of derivatives delivering profits into their own pockets should those banks fail. At least this is the pattern shown in their dealings with CIT.

And they could be right. The government might be preparing fresh tranches of bailout money and there could be more toxic assets coming from off the banks’ off-balance-sheets to yours, via the Fed.

Place your bets. Or better yet, save your money, and don’t.

Yahoo Finance
The “Real” Economy Is Dying: Q4 “Going to Be a Bloodbath,” Whalen Says
by Aaron Task
Oct 05, 2009 01:49pm EDT

Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.

But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market’s robust rally.

“Why is liquidity going into the financial sector? It’s because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they’re liquid at the moment,” Whalen says. “That’s not a good sign.”

The banking sector’s assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. “The real economy is shrinking because of a lack of credit.”

The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn’t yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)

“Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath,” says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.

“When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring,” Whalen says.

In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other “prophets of the apocalypse” who’ve once again been raising red flags in recent days.

Guest Post: Do Ben and Tim = Thelma and Louise?

Served by Jesse of Le Café Américain

One cannot help but note that Team Obama is trying to derail serious proposals regarding financial reform for Wall Street at the G20 meeting, as we suggested they would.

The concerns raised by US revelations at the G20 today about new intelligence regarding Iran’s secret underground nuclear facility have overshadowed financial reform and economic problems, and Gordon Brown’s prescription yesterday that the G20 would become the new governing council for the world. It also smothered coverage of the hearings on HR 1207, the audit of the Fed today.

Why waste a crisis indeed. Especially when you get a two-fer.

Yesterday we put forward a somewhat lengthy piece on the Fed and reverse repos being considered titled Fed Eyes US Money Market Funds.

There is a key quote in there that we would like to highlight today.

The central bank is now considering dealing with money market funds because it does not think the primary dealers have the balance sheet capacity to provide more than about $100 billion… Money market mutual funds have about $2.5 trillion under management…”

Only 100 billion in available capital for a relatively risk free short term investment in the global banking system including the Primary Dealers, does seem a bit tight for a set of such ‘well capitalized’ banks, especially since they aren’t making many loans, preferring to speculate in the markets.

BNP Paribas Securities Corp., Banc of America Securities LLC, Barclays Capital Inc., Cantor Fitzgerald & Co., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Daiwa Securities America Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc. , Jefferies & Company, Inc., J. P. Morgan Securities Inc., Mizuho Securities USA, Morgan Stanley & Co. Incorporated, Nomura Securities International, Inc., RBC Capital Markets Corporation, RBS Securities Inc., UBS SecuritiesLLC.

Couple that with the revelation reported some time ago at ZeroHedge and covered here, that the Fed is taking on more than 50 percent of the longer dated Treasuries, and there is only about Ten Billion left on their balance sheet for expansion, and you get the picture of a financial system not cruising into recovery but heading straight at a confrontation with reality.

We have considered the possiblity that the Fed is doing this to place exclusively AAA and Treasuries on the balance sheets of the Funds, aka the Shadow Banking System, who are holding some seriously awful garbage. This is why we highlighted the at odds relationships the funds have had with the commercial banks and the Fed in the past. This does not quite make sense unless those reverse repos are of a very long duration or rolled over automatically for a long period of time. A proper program such as was extended to the banks where the Fed buys the assets outright would be that solution. It made more sense to us that the banking system is still very tight on good capital assets and liquidity.

Here is an update from ZH that is somewhat compelling if one understands the implications. Visualizing the Upcoming Treasury Funding Crisis.

“Summary: foreign purchasers are congregating exclusively around the front end
of the Treasury curve, meaning that the primary net purchaser of dated bonds has
been the Federal Reserve. As everyone knows by now, the Fed only has $10 billion
left out of the $300 billion total allotted for Treasury QE. That should expire
next week. … The time of unraveling may be upon us sooner than most think.”

Do Tim and Ben = Thelma and Louise?

As the Eagles sang:

“Take it, to the limit, one more time…”

Guest Post: Obama to Make a “Major Address on the Financial Crisis” on Monday

Served by Jesse of Le Café Américain

This news has appeared on the Agence France-Presse (hat tip Michel Proulx) and I have translated this into English for now.

One has to wonder if the great Speech Organizer will actually say anything that is worthy of the adjective, “major.”

Someone has possibly told him that if he makes speeches often, it will reassure the people of his country, in the manner of Franklin Roosevelt’s “fireside chats” from the 1930′s.

This sort of remedy wears thin quickly if one has nothing of substance or new to say. Roosevelt had a great flair for oratory, but first and foremost he was a man of substance and of action, like him or not. He was an experienced governor, and knew how to lead by action and example, as well as by words.

It also appears that he wishes to ‘send a message’ to the G20 about their upcoming meeting at the end of September. He is setting the tone, as he most recently did before the Congress with regard to his health care reforms.

President Obama may seem to many to be a man only of words, of rhetoric, treading lightly on the status quo especially when dealing with the corporate funders of his political party, the banks and the health corporations. This is a great obstacle to his Presidency.

He has perhaps another six months to change this perception, or deliver his Party to a serious setback in the 2010 mid-term elections.

In the meanwhile, gold and silver appear to be an attractive hedge against incompetence.

Agence France-Presse
Discours “majeur” d’Obama sur la crise financière lundi
Publié le 10 septembre 2009 à 20h44

(translation into English)

U.S. President Barack Obama will deliver a speech on this coming Monday, described as “major” by the White House, on the financial crisis, one year after the collapse of Lehman Brothers and ten days before the G20 summit, his administration announced Thursday.

It will address the strong measures that his administration has taken to move the economy from the abyss, its commitment to reducing the role of government after their recent interventions in the financial sector, and the need for the United States and the international community to prevent the repetition of such a crisis…

The developed countries and major emerging economies are striving to overcome their differences and agree on measures to prevent a repetition of financial crises, and also to appease those who are outraged by the excesses of the financial sector.

The G20 leaders will be in Pittsburgh on 24-25 September. Mr. Obama intends to advance the proposal for new “rules of conduct” in finance.

With the prospect of the end of the recession, Mr. Obama will also put the fight against unemployment at the center of their discussions.

Guest Post: A Plunge in Foreign Net Capital Inflows Preceded the Break in US Financial Markets

Served by Jesse of Le Café Américain

The peak of foreign capital inflows into the US was clearly seen in the second quarter of 2007, just before the crisis in the US that has rocked its banking system and driven it deeply into recession.

Are the two events connected? Had the US become a Ponzi scheme that began to collapse when new investment began to wane, and the growth of returns could not be maintained?

Watch the dollar and the Treasury and Agency Debt auctions for any further signs of capital flight, which is when those net inflows of foreign capital turn negative. And if for some reason the unlikely happens and it gains momentum, the dollar and bonds and stocks can all go lower in unison, and there is no place to hide except perhaps in some foreign currencies and precious metals.

The sad truth is that US collateralized debt packages and their derivatives have become toxic in the minds of the rest of the world, and there is little being done to change that, except an orderly winding down of the bubble, with the remaining assets being divided largely by insiders, and not price discovery and capital allocation mechanisms driven by ‘the invisible hand’ of the markets.

Unfortunately the Net Inflow Data is quarterly, and subject to revisions. But we have to note that the spectacularly rally off the bottom in the SP 500, not fully depicted above, is not being matched by a return of foreign capital inflows.

If that inflow does not return, if the median wage of Americans does not increase, if the financial system is not reformed, if the economy is not brought back into balance between the service and manufacturing sectors, exports and imports, then there can be no sustained recovery in the real, productive economy.

The rally in the US markets is based on an extreme series of New Deal for Wall Street programs from the Fed and the Treasury, monetization, and the devaluation of the dollar.

Guest Post: When At First You Don’t Succeed, Bring In the Reserves

Served by Jesse of Le Café Américain

Someone asked why Bernanke seemed so positive about the US recovery, and what he would do if his prediction turned out to be incorrect.

The first answer is rather straightforward. He is ‘jawboning’ or trying to increase confidence in the system to motivate businesses to spend and consumers to buy. The Fed can only set the playing field, but the players have to be confident enough to take the field. We think he is underestimating the neglect that the American consumer has taken over the last twenty years in terms of their overall poor condition (real income), and the disrepair of their equipment (household balance sheets), not to mention the rocks and snares and pitfalls remaining on the field from the gangs of New York and the economic royalists.

But let’s assume Bernanke’s first major gambit does falter. What is he likely to do next?

Beranke’s Fed does have a printing press, and he has been using it as we all know. Here is a chart showing the expansion of the credit side of the Fed’s Balance Sheet. This is from the top line labeled “Reserve Bank Credit” from the weekly H.41 report which is becoming more popularly followed these days. If one adds the Feds gold holdings, currency in circulation, and Special Drawing Rights, we get the Total Factors Supplying Reserve Funds.

http://www.federalreserve.gov/releases/h41/Current/

So what would Ben do for “Plan B?” Would he merely add more programs, expand the Fed’s Credit Items even more aggressively?

There was an important function added to the Fed’s bag of tricks during this crisis that has not received sufficient attention perhaps: their ability to pay interest on reserve funds on deposit with the Fed from the Member Banks.

As can be seen from this next chart, this amount is now substantial running close to a trillion dollars. A portion of this would be characterized as ‘excess reserves.’ The Fed should be able to motivate banks to use these reserve by adjusting the riskless interest rates they pay.

This was a much desired tool by the monetarist Fed because it enabled them to expand their Balance Sheet and add a significant amount of credit to the banks system immediately, but to keep ‘a bit of a leash’ on the downstream effects of this liquidity even after it was deployed.

As the Fed’s interest rate remains sufficiently high, the reserves, especially the excess reserves, remain in the banking system, and are not deployed actively as loans and inflationary additions to the financial system.

The Fed issues an H3 report, Aggregate Reserves of Depository Institutions and the Monetary Base. In their latest report, they characterize $708.5 Billion of these reserves as ‘Excess Reserves.’

So, what we might expect to see is the Fed, as the banking system stabilizes after perhaps some new programs and credit facilities, begin to slowly unleash these excess reserves by reducing the interest to the Member Banks, which would lower the bar and motivate them to engage in more commercial loan activity.

We think one problem is that the banks have more options than merely keeping their excess capital at the Fed or loaning it out to private companies.

Certainly Goldman Sachs has shown that it can defy all the odds and make millions each day by aggressively playing the equity, bond and credit markets. It is also more likely that banks would be inclined to invest their excess capital through acquisitions of other banks, which might represent a moral hazard in creating fewer, and more “too large to fail” institutions.

Therefore we might see the first serious moves towards financial reform before the Fed begins to really unleash the liquidity which they have created in the banking system.

There is of course also their monetization of Treasury Debt, to support the stimulus programs being run from the fiscal side of the US financial apparatus. That would be included in the expansion of their Balance Sheet, and we would expect that to continue on at the very least indirectly, if not overtly on the Fed’s balance sheet.

An Aside on the Gold Stock of the Fed

By the way, one method the Fed might use to immediately expand its Balance Sheet would be to recognize that their gold stock is significantly undervalued.

In the H.41 Report, the Fed shows a credit of $11 billion dollars in Gold Stock held primarily in New York, Chicago, Atlanta, and San Francisco, with lesser amounts at each of the Regional Banks. This gold is part of the collateral against the Federal Reserve Notes in circulation, and has been valued at an official rate of $42.22 per troy ounce for many years.

1. Gold held “under earmark” at Federal Reserve Banks for foreign and international accounts is not included in the gold stock of the United States; see table 3.13, line 3. Gold stock is valued at $42.22 per fine troy ounce

By calculation the Fed has 261,511,132 fine troy ounces on its books. If the Fed revalued their gold stock at a more reasonable market price of let’s say $1000 per ounce, then this would immediately add $261 billion to the Fed’s Balance Sheet IF the gold is really held by the Fed without encumbrances.

One has to wonder why the Fed has never taken the revaluation on its Balance Sheet for gold since the value of $42.22 is so clearly an historic artifact. They perform much more market based calculations for the Special Drawing Rights and their Foreign Exchange holdings. One certainly does not need to sell the gold in order to monetize it, since that has already been accomplished, albeit at a much lower rate.

One can only wonder.

Federal Reserve H3.1.2 US Reserve Assets

Guest Post: Why the Austrian, Keynesian, Marxist, Monetarist, and Neo-Liberal Economists Are All Wrong

Served by Jesse of Le Café Américain

US Personal Income has taken its worst annual decline since 1950.

This is why it is an improbable fantasy to think that the consumer will be able to pull this economy out of recession using the normal ‘print and trickle down’ approach. In the 1950′s the solution was huge public works projects like the Interstate Highway System and of course the Korean War.

Until the median wage improves relative to the cost of living, there will be no recovery. And by cost of living we do not mean the chimerical US Consumer Price Index.

The classic Austrian prescription is to allow prices to decline until the median wage becomes adequate. Given the risk of a deflationary wage-price spiral, which is desired by no one except for the cash rich, the political risks of such an approach are enormous.

On paper it is obvious that a market can ‘clear’ at a variety of levels, if wages and prices are allowed to move freely. After all, if profits are diminished, income can obviously be diminished by a proportional amount, and nothing has really changed in terms of viable consumption.

The Supply side idealists (cash rich bosses, Austrians, neo-liberal, monetarist, and deflationist theorists) would like to see this happen at a lower level through a deflationary spiral. The Keynesians and neo-classicals wish to see it driven through the Demand side, with higher wages rising to meet the demands of profit in an inflationary expansion. Both believe that market forces alone can achieve this equilibrium. Across both groups runs a sub-category of statism vs. individualism.

Unfortunately both groups are wrong.

Both approaches require an ideal, almost frictionless, objectively rational, and honest economy in order to succeed. The Keynesians have a bit of an edge in this, because it is easier to control inflation than deflation in a fiat regime, and the natural growth of inflation tends to satiate the impulse to greed. They don’t care if they can buy more as long as they can say they HAVE more. People tend to be irrational, and there is a percentage of the population that is irrationally greedy and obsessively rapacious. People are not naturally ‘good.’

The greatest flaw in the many studies that come from each of the schools to prove their point is the brutal way in which they flatten the reality of the markets and make assumptions to allow their equations and analysis to ‘work.’ They spend most of their energy showing while the ‘other school’ is a group of ignorant fools, doomed to ignominious failure, in an atmosphere reminiscent of a university departmental meeting.

This has quietly scandalized those from other scientific disciplines who review the work of many of the leading economists. Benoit Mandelbrot was poking enormous holes in the work of the leading economists long before Nassim Taleb made it more widely known. The ugly truth is that economics is a science in the way that medicine was a profession while it still used leeches to balance a person’s vapours. Yes, some are always better than others, and certainly more entertaining, but they all tended to kill their patients.

The most intractable part of the current financial crisis, and the ongoing problem of the US economy is the huge tax which is levied on the American public by its corporations, primarily in the financial and health care sectors, and a political system based on lobbyists and their campaign contributions.

There are hidden taxes and impediments to ‘free trade’ at every turn. The ugly truth is that capitalism-in-practice hates free markets, always seeking to overturn the rules and impose oligopoly if not outright monopoly through barriers to entry, manipulation of the political process, distortion of regulation, predatory pricing, brute force, and the usual slate of anti-trust practices.

Some of these ‘hidden taxes’ are the bonuses on Wall Street which require an increasing percentage of the financial ‘action.’ The credit cards fees and penalties levied by banks to support profits in a contracting economy. The Sales General & Administrative portion of the Income Statements of the pharmaceutical industry which only American consumers seem willing to pay. A health care system which is a monument to overspending, outrageous pricing, and greed.

The notion that “if only government would not regulate markets at all everything would be fine” is a variation of Rousseau’s romantic notion of the noble savage which no one believes except those who wish to continue to act like savages, and those who get no closer to the real work of an economy than their textbooks. Economic Darwinism works primarily to the advantage of the sharks. Anyone who believes that ‘no regulations’ works well has never driven on a modern highway at peak periods.

Yes, a certain portion of the population are adult, and generally good and fair. But there is a percentage of the population that is not. And since the 1980′s they have been encouraged by the culture of relativism and greed to ‘express themselves’ and so they have, with a vengeance.

Discussion rarely proceeds very far because of the dialectical nature of American thought. Both extremes are wrong, but they seem to content to merely bash each other, pointing out their errors, while repeating the same mistakes over and again.

The engineering of the economy has become married to the engineering of the political dialogue by the corporate media and their political parties. “The engineering of consent is the very essence of the democratic process, the freedom to persuade and suggest.” Edward L. Bernays 1947

The condition of the American economy is strikingly similar to the Soviet state economy of the last two decades of the 20th century. People are trying to sustain a system “as is” that is based on bad assumptions, unworkable constructions, conflicting objectives, and a flagging empire laced heavily with elitist fraud and corruption. The primary difference is that the US has a bigger gun and its hand is in more people’s pockets with the dollar as the world’s reserve currency. But the comparison seems to indicate that the economy must indeed fail first, before genuine change can begin, because the familiar ideology and practices must clearly fail before they can recede sufficiently to make room for new ways and reforms.

A new school of Economics will rise out of the ashes of the failure of the American economy as happened after the Great Depression. Let us hope that it is better than what we have today.

In the short term, what does all this mean?

There is NO system that will work without substantial, continuing effort, and continual adaptation and commitment to a certain set of goals that are more about ‘ends’ than ideological process.

Because our system has been abused for so long, and is so distorted and imbalanced and dominated by a relatively few organizations beholden to a self-serving status quo, reform is not an afterthought, it is the sine qua non.

It means that until the banks are restrained, and the financial system is reformed, and balance is restored, there can be no sustained recovery.

Guest Post: The Chief Economists

Served by Jesse of Le Café Américain

Guest Post: More Than 150 US Banks Are in Serious Trouble

Served by Jesse of Le Café Américain

This analysis from Bloomberg is based on some fairly modest economic assumptions. Most of the banks in question are state and regional banks that have not enjoyed the largesse of the Fed and Treasury like the free-spending, Wall Street money center banks, who are sharply curbing lending and raising rates on credit cards and other revolving debt aggressively even for customers with excellent credit and no history of non-payment.

As you might suspect, even the worst of the banks with large percentages of non-performing loans all claim to be ‘well capitalized’ by regulatory standards.

If as indicated more of the smaller banks fail, we will be left with a few, larger, more potentially lethal financial institutions.

The Obama Administration policy decisions, particularly the programs and reserves decision enabled in October 2008, appear to be favoring Wall Street heavily, monetizing debt for the Primary Dealers and the Wall Street market players, while choking off the consumer and the state and regional banks.

Policy decisions have impact, especially when they have the weight of the Federal Reserve, the Treasury, the Congress, and a powerful President behind them. The question becomes are they the right policy decisions? How were they crafted?

Regretfully, most of them were done behind closed doors, with little public discussion or scrutiny, crafted by an army of lobbyists, campaign donors, and crony capitalists galore.

Bloomberg
Toxic Loans Topping 5% May Push 150 Banks to Point of No Return
By Ari Levy

Aug. 14 (Bloomberg) — More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.

“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter.

Cash DrainNonperforming loans can eat into a company’s earnings and deplete cash, leaving banks below the minimum capital levels required by regulators…. “This is a fairly widespread issue for the larger community banks and some regional banks across the country,” said Mix of LECG, where William Isaac, former head of the Federal Deposit Insurance Corp., is chairman of the global financial services unit.

Ratios above 5 percent don’t always lead to failures because banks keep capital cushions and set aside reserves to absorb bad loans. Banks with higher ratios of equity to total assets can better withstand such losses, said Jim Barth, a former chief economist at the Office of Thrift Supervision. Marshall & Ilsley and Synovus said they’ve been getting bad loans off their books by selling them…

‘Off the Charts’

“These numbers are off the charts,” said Blake Howells, an analyst at Becker Capital Management in Portland, Oregon, referring to the nonperforming loan levels at companies he follows. Banks are losing the “ability to try and earn their way through the cycle,” said Howells, who previously spent 13 years at Minneapolis-based U.S. Bancorp….

Guest Post: The Next Wave of the Financial Crisis is Coming (And Why)

Served by Jesse of Le Café Américain

These excerpts from the most recent TARP Congressional Oversight Panel Report make the risks in the US financial system abundantly clear.

Do you think that the Congress has the will and the ability to act on their recommendation, with the men currently in positions of power on the key Committees? Do you believe that the Obama Administration is capable of reforming itself and effecting genuine change with so many Wall Street denizens forming their policy?

“In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem.”

We are persuaded that the government is waiting for the next wave of failures, or some exogenous event of catastrophic proportion, to provide their rationale to take new aggressive action.

But while the financial oligarchy is in control of the men in power, we doubt that these will be the right steps for the majority of Americans, the US economy, and its debt holders.

“There are a thousand hacking at the branches of evil to the one who is striking at the root.”
Henry David Thoreau

Congressional Oversight Panel – August 11 Report – The Continued Risk of Troubled Assets

“…But, it is likely that an overwhelming portion of the troubled assets from last October remain on bank balance sheets today.

If the troubled assets held by banks prove to be worth less than their balance sheets currently indicate, the banks may be required to raise more capital. If the losses are severe enough, some financial institutions may be forced to cease operations. This means that the future performance of the economy and the performance of the underlying loans, as well as the method of valuation of the assets, are critical to the continued operation of the banks.

…If the economy worsens, especially if unemployment remains elevated or if the commercial real estate market collapses, then defaults will rise and the troubled assets will continue to deteriorate in value. Banks will incur further losses on their troubled assets. The financial system will remain vulnerable to the crisis conditions that TARP was meant to fix.

…Part of the financial crisis was triggered by uncertainty about the value of banks’ loan and securities portfolios. Changing accounting standards helped the banks temporarily by allowing them greater leeway in describing their assets, but it did not change the underlying problem. In order to advance a full recovery in the economy, there must be greater transparency, accountability, and clarity, from both the government and banks, about the scope of the troubled asset problem. Treasury and relevant government agencies should work together to move financial institutions toward sufficient disclosure of the terms and volume of troubled assets on institutions‟ books so that markets can function more effectively. Finally, as noted above, Treasury must keep in mind the particular challenges facing small banks.

This crisis was years in the making, and it won‟t be resolved overnight. But we are now ten months into TARP, and troubled assets remain a substantial danger to the
financial system.

…Nonetheless, financial stability remains at risk if the underlying problem of troubled assets remains unresolved.”

The banks must be restrained, and the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.

Guest Post: JP Morgan Chase Caught Speculating with Customer Money

Served by Jesse of Le Café Américain

“Flagrant evils cure themselves by being flagrant…” John Henry Newman

Why the surprise? This is what the Wall Street banks do, even under a ‘reform’ administration. They use their customer money and public funds, for which they pay a pittance, to speculate in markets, distorting prices and taking enormous risks, in order to pay themselves outrageous bonuses. They buy politicial influence to enable regulatory capture and support their financial schemes. And when their bets go wrong, the public absorbs the losses. This is the model of US gangster banking in the 21st century.

The Obama Administration cannot energize their health care reform because the public demands reform in the financial sector, and quite frankly Obama has lost the ‘high ground’ of the reformer by his inability to free his administration from the growing taint of scandal and conflicts of interest.

So it remains for the rest of the world to begin to rein in the outrageous behaviour of the US financial institutions that treat the world’s bourses as their private casinos.

For a party that spent eight years on the sidelines, the American Democrats have proven themselves to be particularly inept at doing anything to promote their agenda once presented with a solid majority by the voting public. One has to wonder if they ever intended to deliver on their promise of change at all.

The banks must be restrained, and the financial system reformed, before there can be any sustainable recovery.

Daily Mail
Blair bank targeted in £8.5bn FSA probe
By Ben Laurance
10th August 2009

The bank where Tony Blair is an adviser is the target of an unprecedented probe involving billions of pounds of customers’ funds, the Daily Mail can disclose.

JP Morgan Chase, whose chief executive Jamie Dimon last year recruited the former prime minister as an adviser, is being investigated by the City’s watchdog, the Financial Services Authority for allegedly failing to keep track of £8.5billion of clients’ money.

The FSA has called in a top firm of accountants to examine the bank’s London activities after evidence emerged that JP Morgan had mixed customers’ funds with its own.

Banks are meant to maintain a strict segregation of their own money from that which is held on behalf of clients.

But JP Morgan managers in London discovered last month that client and bank money used for trading futures and options – a way of speculating on movements in currencies, share prices and commodities – had apparently been put into a single pool.

They raised the alarm and notified the FSA. The scale of case is unprecedented, say City insiders. The FSA has penalised small firms in the past for mixing funds owned by clients and the banks themselves.

But this is thought to be the first case involving such a large household name.
JP Morgan Chase faces the threat of an unlimited fine if the watchdog decides enforcement action is necessary.

News of the FSA investigation will come as a huge embarrassment for the bank, which is valued on Wall Street at £100billion.

It is thought that the JP Morgan Chase problem dates back to late 2002. This followed the takeover of JP Morgan by Chase Manhattan two years earlier.

Assets were not segregated to protect clients as FSA rules demand, insiders believe.

When the issue first came to light last month and the FSA was told, the authority called in specialists from leading accountancy firm KPMG to investigate.

The cost of the probe – known as a section 166 review – will be met by the bank.

Sources say that KPMG’s team of investigators has been working at JP Morgan Chase’s offices on London Wall in the City, combing through records and e-mails and interviewing staff.

Bank employees who were involved in handling client funds in 2002 as well as those still responsible have been questioned. The KPMG team has been asked to find out what checks, if any, were made to ensure that clients’ money has been kept safe and segregated.

The accountants have also been asked to calculate if clients lost out because they were not paid any interest they might have been due.

Senior figures at the bank could be reprimanded or even barred from working in the City if the FSA concludes that they were slack in setting up systems for separating customers’ funds.

The accountants have been asked to deliver their preliminary findings to the FSA by the end of this month. A final report is due by the end of September. These reports will not be made public – unless the FSA subsequently decides that the bank should be punished.

JP Morgan Chase has been regarded as one of the more robust of the banks to emerge from last year’s meltdown in the global financial system. Among the six largest U.S. banks, it is the only one to have stayed consistently in the black since the recession began in 2007.

But it still took £15billion last year under the U.S. government’s programme to prop up the financial system. The money has since been repaid.

Last month, the bank reported quarterly earnings of £1.64billion, which was a major factor in spurring the recovery in its shares and in Wall Street prices as a whole.

A report last week showed that last year, the firm paid bonuses of £600,000 ($1m) or more to 1,626 employees. Of those, more than 200 received at least £1.8m. The top four earners received a total of nearly £45million between them…

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