The announcement by the Federal Reserve of an “enforcement action” against Goldman Sachs for engaging in “a pattern of misconduct and negligence” in its handling of home mortgage loans was entirely predictable. Charges of such misconduct go back for months when it was first discovered that mortgages and other mortgage-related documents had been “robo-signed” and foreclosure documents hadn’t been properly reviewed and that Goldman’s Litton Loan Servicing unit took actions “without always confirming that documentation of ownership was in order.”
The ruling requires Goldman to write down some mortgages that it holds, pay an unstated restitution, and provide “remediation” to homeowners who were hurt in the collapse. The ruling doesn’t preclude other enforcement actions from state banking regulators who are continuing their investigations into the matter, either, so additional sanctions may reasonably be expected soon.
In banking, few values count more than consistency and integrity. The sovereign debt crisis in Europe, however, appears to have watered down those values in the case of some banks. The International Accounting Standards Board has stated that some European banks used the value provided by the Greek government in determining how much value Greek bonds should be counted in the assets of the bank. That would mean the bonds would be worth about 21% less than than the original valuation.
Those bonds on the open market, IASP Chairman Hans Hoogervost wrote in a letter to the European Securities Markets Authority — the organization responsible for regulating securities valuation — have much lower values than that. “This is a matter of great concern to us” the August 4th letter, which was made public on August 29th, warned. “It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used.”
Punch and Judy Show continues — this time in South Africa.
Former Federal Reserve boss Alan Greenspan made headlines this week when he said gold is indeed a currency and noted that the euro was falling apart, contradicting top officials on both sides of the Atlantic.
“Gold, unlike all other commodities, is a currency,” he told attendees at a conference in Washington D.C. on August 23, saying he did not think the precious metal was in a bubble despite recently reaching a new record above $1900. And a flight to safety amid inflation fears is what’s causing soaring gold prices.
“The major thrust in the demand for gold is not for jewelry,” Greenspan explained. “It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.”
Since its inception almost a century ago, the Federal Reserve has enjoyed a cloak of secrecy that has grown more opaque over the years. When the economy imploded in 2008, Bernanke’s Fed swung into action behind the scenes, handing out immense sums in bailouts to a host of ailing financials, through direct loans to the very biggest banks — what Robert Litan, a former Justice Department official, called “the aristocracy of American finance.” The exact figures, however, have been a closely guarded secret, until now.
It took a Freedom of Information Act request, months of litigation, and even an act of Congress, but dogged investigators at Bloomberg News finally gained access to the figures, and, after crunching the numbers, concluded that the Fed — unilaterally and with zero congressional oversight — had doled out as much as $1.2 trillion in taxpayer monies. That's about $500 billion more than the separate, hotly contested, and widely publicized $700 billion bailout pushed through Congress at the same time.
In 1941, the United States was first assigned the so-called “triple A” or AAA rating, a reflection of the widespread belief, at least in the free world, that the United States government could be relied upon absolutely to pay its debts. At the time, the United States had recently grown into the world’s largest economy. The dollar, after the end of the Second World War, became the world’s reserve currency under the terms of the Bretton Woods agreement. Other hard currencies were to be convertible to U.S. dollars, which were in turn convertible (for international investors, at least) into gold (the so-called “gold exchange standard”).
The general perception of the dollar as the world’s backstop currency and of U.S. government debt as being as good as gold survived President Nixon’s closing of the “gold window” in 1971 and the decade of economic malaise — which included significant inflation — that followed. This is surprising in hindsight because Nixon’s action certainly fulfilled the criteria for a partial default, being motivated by the inability of the United States to service debts incurred in the Vietnam War.
Wall Street professionals' expectations are modest over Federal Reserve Chairman Ben Bernanke’s highly anticipated remarks at the Jackson Hole symposium this Friday. Unlike last year when the chairman announced the start of his program to purchase government securities in order to keep the economy from slipping into a recession and possibly deflation, known as Quantitative Easing II (QE2), his options now are much more limited. The anticipated bounce in the economy has fizzled, inflation is increasing, the banks are stuffed full of reserves but few are borrowing, and interest rates are already at zero and are expected to remain there well into 2013.
What can he say and, more importantly, what can he do? Jim O’Sullivan with MF Global suggested: “We are not forecasting more easing,” while Tom Porcelli of RBC Capital Markets confirmed, “We expect news out of Jackson Hole will be more about getting a feel for the Fed’s opinion on its easing options.” Analysts at Barclays Capital are expecting Bernanke to “reiterate that the Fed predicts growth to accelerate,” while Capital Economics thinks that he “will probably emphasize that the Fed has the tools to boost the economy if deemed appropriate.” In other words, there will be a lot of words, but little expected in the way of change.
Which is probably very smart in light of the hole the Fed has dug itself in trying to stimulate the economy. As noted in Barrons magazine, Alan Abelson wrote,
In today’s extremely unsettled financial climate, one can hardly blame Venezuela or its erratic leader, Hugo Chavez, for deciding to bring home the gold.
Oil-rich Venezuela also has the world’s 15th largest gold reserves, most of them squirreled away in Bank of England vaults. Now, Chavez has authorized the return of Venezuela’s gold to Venezuelan soil, fearing that, at some juncture, any overseas assets could be frozen and seized by foreign authorities, as has been done with those of Libyan dictator Muammar Gaddafi. The clownishly villainous Hugo Chavez has long worn the mantle, once borne by Cuba’s Castro, of America’s official enemy south of the border. His country and regime are now embroiled in a series of international litigations for Venezuela’s nationalizing of certain foreign assets — a Canadian gold mine at Las Cristinas and an American mining operation at Las Brisas, for example. Chavez is obviously worried that Venezuelan gold and liquid assets abroad could be seized and held as collateral.
Like the clichéd stopped clock that twice a day reads the correct time, Chavez’ militantly socialist regime appears to be doing a prudent thing, albeit for the wrong motives.
Ron Paul wants to make it quite clear that he has never accused Federal Reserve Chairman Ben Bernanke of treason. He has merely accused him of counterfeiting, which is a different crime altogether.
The Texas Congressman and Republican presidential candidate poked fun at the controversial comment his home state rival, Governor Rick Perry, made in Iowa this past week, just a few days after he jumped into the presidential campaign. Paul said Perry “makes me sound like a moderate” by the way the Texas Governor warned Iowans that the Fed chairman might resort to expanding the money supply between now and the 2012 election to help President Obama.
"If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas," Perry said. "Printing more money to play politics at this particular time in history is almost treasonous in my opinion."
It is strangely apt that the stock market this week has been experiencing turbulence, in the wake of Standard & Poor’s downgrade of U.S credit and fears of a double-dip recession. After all, this week marks the 40th anniversary of Nixon’s removal of the United States from the last vestiges of the gold standard, an action that ushered in 40 years of fiat monetary instability. For four decades we’ve been in a state of almost constant financial crisis, from the stagflationary ‘70s through the savings and loan debacle and stock market crash of the ‘80s to the more recent dot-com and real estate bubbles and their messy aftermaths.
And now this. After 40 years of a “new normal,” the nations of the West are exhausted and bankrupt. Debt in Europe and the United States is spiraling out of control while economies stagnate, and all central bankers can think of is what they’ve been doing since the Nixon years (and, in truth, a lot longer than that): print more money.