Further deterioration in financial markets

From a colleague:

"Please see the following article http://globaleconomicanalysis.blogspot.com/2008/06/bloomberg-ackman-was-right-on-mbia.html
(Note also the “Recent Posts” on the right side of the page.)

The ratings agencies (Standard & Poors, Moody’s and Fitch), their own credibility being threatened, are being shamed into finally being honest with the public, and they are downgrading the monoline insurers. As reported in the above article, “The odds of a derivatives cascade event over this is not insignificant.”

This is only one of a vast number of developments that continue to point to a further deterioration in the financial markets.

Perhaps most disturbing, but not surprising, is that our government officials – the SEC, the Federal Reserve, state insurance commissioners, the CFTC, the Treasury Department, etc. – all are choosing to ignore that “the emperor has no clothes” hoping that if enough people remain ignorant of the depths of the problem, there will be no panic. By pursuing a “Pollyanna” policy, they are assuring that the smart money will bail out first, leaving the little guy holding the bag. These people, who are either stupid or criminal, are the ones who give capitalism a bad name. The fallout will be a tidal wave of class action suits.

Be alert, be nimble, be quick."

From Michael Shedlock:

Screams For More Fed Authority Get Louder

Mercury news is reporting Administration calls for giving Fed more powers.

"Treasury Secretary Henry Paulson says the government must move quickly to give the Federal Reserve more powers to regulate the financial system. Paulson said today that the central bank's powers should be expanded in the wake of the near collapse earlier this year of Bear Stearns, the giant Wall Street investment firm.He said there was a need to consider quickly how to give the Fed the power it needs to obtain information from investment banks and the responsibility to intervene to protect the overall financial system. His comments were provided by the Treasury Department as excerpts from a speech he was to give later in the day.

Fed At Fault

This is of course as disgusting as it was predictable. It is all in accordance with the Fed Uncertainty Principle. Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.Notice the need to move "quickly". The reason to move quickly in this case is that Bush's days are numbered. Our next president, Obama, may very well have different ideas about what role the Fed should play. My position is clear: Want To Fix The Fed? Get Rid Of It.

Fed Is Cooking The Books (Note: see my previous digital dope posts here and here. Also, current chart seems to go back to the original criteria of measurement. -sg)

Please consider Fed's Bear Stearns Books Look Prime for Cooking.

Flip through the footnotes to the Fed's latest annual report, and you'll come across an open secret. The Fed doesn't follow normal accounting rules, as promulgated by any of the major standard-setting boards. Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks. If you ever wanted to design an accounting regime to help a bank cook its books, the Fed's would be perfect. This doesn't exactly inspire faith in the U.S. financial system, at a time when a good example might help a lot.Imagine if there were no rules specifying when a bank must bring an Enron-style special-purpose entity onto its own balance sheet. The Fed's accounting manual has none. Now picture an accounting system where a bank never had to recognize losses on any securities it holds, as long as it continues holding them. That, too, is the Fed's policy.

JPMorgan Chase & Co., which completed its purchase of Bear Stearns this month, will lend the Delaware entity $1 billion and absorb the first $1 billion of any losses. The Fed is on the hook for the rest. The central bank has hired an outside company, BlackRock Inc., to manage the sale of the assets over the next 10 years. The proceeds will go back to the Fed and then, if anything is left over, to JPMorgan after the Fed is paid. If the Fed were a normal bank, it probably would have to put the Delaware special-purpose entity's assets and liabilities on its own balance sheet, under the Financial Accounting Standards Board's rules. The reason is that the Fed will bear most of the risk of losses. Under the Fed's 161-page accounting manual, however, there's no such requirement. That's because the manual doesn't have any rules on the subject. The Fed hasn't said yet what it will do.

Are we in a banking crisis? You bet we are, the worst one since the great depression. "

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