ACCOUNTING MAGIC

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Posted on 3rd June 2014 by Administrator in Economy |Politics |Social Issues

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You never realized how powerful accountants can be when instructed by scumbag CEOs and CFOs to make the numbers work. In the real world, profits are generated by increasing revenue. You can marginally increase profits through efficiency gains, but you must increase revenue to increase profits over the long haul. This chart shows the power of accounting shenanigans and “creativity”. Since 2009 Earning Per Share of S&P 500 companies has increased by an astounding 230%. This is the highest jump in history after a recession. Meanwhile, Sales increased by a pitiful 26% over this same time frame.

Guess what happened in March of 2009? The FASB caved in to Bernanke & Geithner and agreed to let the Too Big to Trust Wall Street Banks value their toxic debt at whatever they chose. Mark to fantasy was born. The financial industry has produced hundreds of billions in fake accounting profits ever since. No revenue was required to book billions in profits. The $3 trillion of free Bennie bucks used by the Wall Street banks to produce billions of risk free profits negated any need for banks to actually lend money to real people in the real world. That is so 1998.

The titans of industry have also used their company’s cash to buy back their own stock at record highs. Boosting EPS through reducing the number of shares is much easier than increasing sales. That requires a strategy, along with execution. Who has time for that?

Then we have Uncle Ben and his zero interest rates allowing debt saturated corporations to refinance loans at a much lower rate. Extend and pretend does wonders for EPS.

Then we had Obama and his Keynesian acolytes doling out hundreds of billions in subprime student and auto loans to artificially boost consumer spending, while the bad debt losses accumulate on the government books for future generations.

But even accountants aren’t God. Eventually you run out of reserves to relieve and ways to hide your losses. That time has arrived. Zero Hedge provides the facts:

The first quarter GDP data revealed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis’s (BEA) favored measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below. In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!

You gotta love a government that can report a 5.3% increase in corporate profits when they actually fall by 6.8%. What I notice in this chart from Albert Edwards is the discrepancy between the headline number and the true number usually track each other closely. It seems they deviated greatly during the last bubble from 2005 through 2008, and then we enjoyed a massive dose of reality in the 2008/2009 crash. It seems we have had another huge deviation from 2011 through until today. Real corporate profits are plunging. I wonder what happens next?

Look out below!!!!

THE RETAIL DEATH RATTLE

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Posted on 19th January 2014 by Administrator in Economy |Politics |Social Issues

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“I was part of that strange race of people aptly described as spending their lives doing things they detest, to make money they don’t want, to buy things they don’t need, to impress people they don’t like.”Emile Gauvreau

If ever a chart provided unequivocal proof the economic recovery storyline is a fraud, the one below is the smoking gun. November and December retail sales account for 20% to 40% of annual retail sales for most retailers. The number of visits to retail stores has plummeted by 50% since 2010. Please note this was during a supposed economic recovery. Also note consumer spending accounts for 70% of GDP. Also note credit card debt outstanding is 7% lower than its level in 2010 and 16% below its peak in 2008. Retailers like J.C. Penney, Best Buy, Sears, Radio Shack and Barnes & Noble continue to report appalling sales and profit results, along with listings of store closings. Even the heavyweights like Wal-Mart and Target continue to report negative comp store sales. How can the government and mainstream media be reporting an economic recovery when the industry that accounts for 70% of GDP is in free fall? The answer is that 99% of America has not had an economic recovery. Only Bernanke’s 1% owner class have benefited from his QE/ZIRP induced stock market levitation.

Source: WSJ

The entire economic recovery storyline is a sham built upon easy money funneled by the Fed to the Too Big To Trust Wall Street banks so they can use their HFT supercomputers to drive the stock market higher, buy up the millions of homes they foreclosed upon to artificially drive up home prices, and generate profits through rigging commodity, currency, and bond markets, while reducing loan loss reserves because they are free to value their toxic assets at anything they please – compliments of the spineless nerds at the FASB. GDP has been artificially propped up by the Federal government through the magic of EBT cards, SSDI for the depressed and downtrodden, never ending extensions of unemployment benefits, billions in student loans to University of Phoenix prodigies, and subprime auto loans to deadbeats from the Government Motors financing arm – Ally Financial (85% owned by you the taxpayer). The country is being kept afloat on an ocean of debt and delusional belief in the power of central bankers to steer this ship through a sea of icebergs just below the surface.

The absolute collapse in retail visitor counts is the warning siren that this country is about to collide with the reality Americans have run out of time, money, jobs, and illusions. The most amazingly delusional aspect to the chart above is retailers continued to add 44 million square feet in 2013 to the almost 15 billion existing square feet of retail space in the U.S. That is approximately 47 square feet of retail space for every person in America. Retail CEOs are not the brightest bulbs in the sale bin, as exhibited by the CEO of Target and his gross malfeasance in protecting his customers’ personal financial information. Of course, the 44 million square feet added in 2013 is down 85% from the annual increases from 2000 through 2008. The exponential growth model, built upon a never ending flow of consumer credit and an endless supply of cheap fuel, has reached its limit of growth. The titans of Wall Street and their puppets in Washington D.C. have wrung every drop of faux wealth from the dying middle class. There are nothing left but withering carcasses and bleached bones.

The impact of this retail death spiral will be vast and far reaching. A few factoids will help you understand the coming calamity:

  • There are approximately 109,500 shopping centers in the United States ranging in size from the small convenience centers to the large super-regional malls.
  • There are in excess of 1 million retail establishments in the United States occupying 15 billion square feet of space and generating over $4.4 trillion of annual sales. This includes 8,700 department stores, 160,000 clothing & accessory stores, and 8,600 game stores.
  • U.S. shopping-center retail sales total more than $2.26 trillion, accounting for over half of all retail sales.
  • The U.S. shopping-center industry directly employed over 12 million people in 2010 and indirectly generated another 5.6 million jobs in support industries. Collectively, the industry accounted for 12.7% of total U.S. employment.
  • Total retail employment in 2012 totaled 14.9 million, lower than the 15.1 million employed in 2002.
  • For every 100 individuals directly employed at a U.S. regional shopping center, an additional 20 to 30 jobs are supported in the community due to multiplier effects.

The collapse in foot traffic to the 109,500 shopping centers that crisscross our suburban sprawl paradise of plenty is irreversible. No amount of marketing propaganda, 50% off sales, or hot new iGadgets is going to spur a dramatic turnaround. Quarter after quarter there will be more announcements of store closings. Macys just announced the closing of 5 stores and firing of 2,500 retail workers. JC Penney just announced the closing of 33 stores and firing of 2,000 retail workers. Announcements are imminent from Sears, Radio Shack and a slew of other retailers who are beginning to see the writing on the wall. The vacancy rate will be rising in strip malls, power malls and regional malls, with the largest growing sector being ghost malls. Before long it will appear that SPACE AVAILABLE is the fastest growing retailer in America.

The reason this death spiral cannot be reversed is simply a matter of arithmetic and demographics. While arrogant hubristic retail CEOs of public big box mega-retailers added 2.7 billion retail square feet to our already over saturated market, real median household income flat lined. The advancement in retail spending was attributable solely to the $1.1 trillion increase (68%) in consumer debt and the trillion dollars of home equity extracted from castles in the sky, that later crashed down to earth. Once the Wall Street created fraud collapsed and the waves of delusion subsided, retailers have been revealed to be swimming naked. Their relentless expansion, based on exponential growth, cannibalized itself, new store construction ground to a halt, sales and profits have declined, and the inevitable closing of thousands of stores has begun. With real median household income 8% lower than it was in 2008, the collapse in retail traffic is a rational reaction by the impoverished 99%. Americans are using their credit cards to pay their real estate taxes, income taxes, and monthly utilities, since their income is lower, and their living expenses rise relentlessly, thanks to Bernanke and his Fed created inflation.

The media mouthpieces for the establishment gloss over the fact average gasoline prices in 2013 were the second highest in history. The highest average price was in 2012 and the 3rd highest average price was in 2011. These prices are 150% higher than prices in the early 2000′s. This might not matter to the likes of Jamie Dimon and Jon Corzine, but for a middle class family with two parents working and making 7.5% less than they made in 2000, it has a dramatic impact on discretionary income. The fact oil prices have risen from $25 per barrel in 2003 to $100 per barrel today has not only impacted gas prices, but utility costs, food costs, and the price of any product that needs to be transported to your local Wally World. The outrageous rise in tuition prices has been aided and abetted by the Federal government and their doling out of loans so diploma mills like the University of Phoenix can bilk clueless dupes into thinking they are on their way to an exciting new career, while leaving them jobless in their parents’ basement with a loan payment for life.

 

The laughable jobs recovery touted by Obama, his sycophantic minions, paid off economist shills, and the discredited corporate legacy media can be viewed appropriately in the following two charts, that reveal the false storyline being peddled to the techno-narcissistic iGadget distracted masses. There are 247 million working age Americans between the ages of 18 and 64. Only 145 million of these people are employed. Of these employed, 19 million are working part-time and 9 million are self- employed. Another 20 million are employed by the government, producing nothing and being sustained by the few remaining producers with their tax dollars. The labor participation rate is the lowest it has been since women entered the workforce in large numbers during the 1980′s. We are back to levels seen during the booming Carter years. Those peddling the drivel about retiring Baby Boomers causing the decline in the labor participation rate are either math challenged or willfully ignorant because they are being paid to be so. Once you turn 65 you are no longer counted in the work force. The percentage of those over 55 in the workforce has risen dramatically to an all-time high, as the Me Generation never saved for retirement or saw their retirement savings obliterated in the Wall Street created 2008 financial implosion.

To understand the absolute idiocy of retail CEOs across the land one must parse the employment data back to 2000. In the year 2000 the working age population of the U.S. was 213 million and 136.9 million of them were working, a record level of 64.4% of the population. There were 70 million working age Americans not in the labor force. Fourteen years later the number of working age Americans is 247 million and only 144.6 million are working. The working age population has risen by 16% and the number of employed has risen by only 5.6%. That’s quite a success story. Of course, even though median household income is 7.5% lower than it was in 2000, the government expects you to believe that 22 million Americans voluntarily left the labor force because they no longer needed a job. While the number of employed grew by 5.6% over fourteen years, the number of people who left the workforce grew by 31.1%. Over this same time frame the mega-retailers that dominate the landscape added almost 3 billion square feet of selling space, a 25% increase. A critical thinking individual might wonder how this could possibly end well for the retail genius CEOs in glistening corporate office towers from coast to coast.

This entire materialistic orgy of consumerism has been sustained solely with debt peddled by the Wall Street banking syndicate. The average American consumer met their Waterloo in 2008. Bernanke’s mission was to save bankers, billionaires and politicians. It was not to save the working middle class. You’ve been sacrificed at the altar of the .1%. The 0% interest rates were for Jamie Dimon and Lloyd Blankfein. Your credit card interest rate remained between 13% and 21%. So, while you struggle to pay bills with your declining real income, the Wall Street bankers are again generating record profits and paying themselves record bonuses. Profits are so good, they can afford to pay tens of billions in fines for their criminal acts, and still be left with billions to divvy up among their non-prosecuted criminal executives.

Bernanke and his financial elite owners have been able to rig the markets to give the appearance of normalcy, but they cannot rig the demographic time bomb that will cause the death and destruction of our illusory retail paradigm. Demographics cannot be manipulated or altered by the government or mass media. The best they can do is ignore or lie about the facts. The life cycle of a human being is utterly predictable, along with their habits across time. Those under 25 years old have very little income, therefore they have very little spending. Once a job is attained and income levels rise, spending rises along with the increased income. As the person enters old age their income declines and spending on stuff declines rapidly. The media may be ignoring the fact that annual expenditures drop by 40% for those over 65 years old from the peak spending years of 45 to 54, but it doesn’t change the fact. They also cannot change the fact that 10,000 Americans will turn 65 every day for the next sixteen years. They also can’t change the fact the average Baby Boomer has less than $50,000 saved for retirement and is up to their grey eye brows in debt.

With over 15% of all 25 to 34 year olds living in their parents’ basement and those under 25 saddled with billions in student loan debt, the traditional increase in income and spending is DOA for the millennial generation. The hardest hit demographic on the job front during the 2008 through 2014 ongoing recession has been the 45 to 54 year olds in their peak earning and spending years. Combine these demographic developments and you’ve got a perfect storm for over-built retailers and their egotistical CEOs.

The media continues to peddle the storyline of on-line sales saving the ancient bricks and mortar retailers. Again, the talking head pundits are willfully ignoring basic math. On-line sales account for 6% of total retail sales. If a dying behemoth like JC Penney announces a 20% decline in same store sales and a 20% increase in on-line sales, their total change is still negative 17.6%. And they are still left with 1,100 decaying stores, 100,000 employees, lease payments, debt payments, maintenance costs, utility costs, inventory costs, and pension costs. Their future is so bright they gotta wear a toe tag.

The decades of mal-investment in retail stores was enabled by Greenspan, Bernanke, and their Federal Reserve brethren. Their easy money policies enabled Americans to live far beyond their true means through credit card debt, auto debt, mortgage debt, and home equity debt. This false illusion of wealth and foolish spending led mega-retailers to ignore facts and spread like locusts across the suburban countryside. The debt fueled orgy has run out of steam. All that is left is the largest mountain of debt in human history, a gutted and debt laden former middle class, and thousands of empty stores in future decaying ghost malls haunting the highways and byways of suburbia.

The implications of this long and winding road to ruin are far reaching. Store closings so far have only been a ripple compared to the tsunami coming to right size the industry for a future of declining spending. Over the next five to ten years, tens of thousands of stores will be shuttered. Companies like JC Penney, Sears and Radio Shack will go bankrupt and become historical footnotes. Considering retail employment is lower today than it was in 2002 before the massive retail expansion, the future will see in excess of 1 million retail workers lose their jobs. Bernanke and the Feds have allowed real estate mall owners to roll over non-performing loans and pretend they are generating enough rental income to cover their loan obligations. As more stores go dark, this little game of extend and pretend will come to an end. Real estate developers will be going belly-up and the banking sector will be taking huge losses again. I’m sure the remaining taxpayers will gladly bailout Wall Street again. The facts are not debatable. They can be ignored by the politicians, Ivy League economists, media talking heads, and the willfully ignorant masses, but they do not cease to exist.

“Facts do not cease to exist because they are ignored.”Aldous Huxley

TAKE IT TO THE BANK

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Posted on 17th November 2013 by Administrator in Economy |Politics |Social Issues

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iStock 000016651896Small 2 300x199 What to Do When Your Bank Branch Closes

Reports like the recent one from SNL Financial – Branch Networks Continue to Shrink really get my goat. As I travel the increasingly vacant highways of Montgomery County, PA I’m keenly aware of my surroundings. If I were a foreigner visiting for the first time, I’d think Space Available was the hot new retailer in the country. I’ve detailed the slow disintegration of our suburban sprawl paradise in previous articles:

Available

Are you Seeing What I’m Seeing?

More than 30 Blocks of Grey and Decay

Extend & Pretend Coming to an End

Thousands of Space Available signs dot the bleak landscape, as office buildings, strip malls, and industrial complexes wither and die. Gas stations are shuttered on a daily basis as the ongoing depression results in less miles being driven by unemployed and underemployed suburbanites. At least the Chinese “Space Available” sign manufacturers are doing well. The only buildings doing brisk business are the food banks and homeless shelters.

 

The sad part is that I live in a relatively prosperous county with a low level of SNAP recipients and primarily occupied by a white collar college educated populace. If the clear downward spiral in my upper middle class county is an indication of our country’s path, the less well-off counties across the land must be in deep trouble.

While hundreds of thousands of square feet of retail, restaurant, office and industrial space have been vacated in the last six years, the only entities expanding in my area have been banks, drug stores, municipal buildings and healthcare facilities. I have been flabbergasted by what I’ve viewed as a complete waste of resources to create facilities that weren’t needed and wouldn’t be utilized. I have seven drug stores within five miles of my house. I have ten bank branches within five miles of my house. While two perfectly fine older hospitals in Norristown were abandoned, a brand new $300 million super deluxe, glass encased Einstein Hospital palace was built three miles away by a barely above junk bond status non-profit institution. None of this makes sense in a contracting economy.

This is another classic case of mal-investment spurred by the Federal Reserve easy money policies, zero interest rates, and QEternity. Cheap money leads to bad investments. I’m all for competition between drug store chains and banks. CVS, Walgreens, and Rite Aid are the three big chains in the country. I have my pick of multiple stores close to my house. There are clearly too many stores competing for a dwindling number of customers, with a dwindling supply of disposable income. The only reason Rite Aid is still in the picture is the easy money policies of the Federal Reserve. They have been teetering on the verge of bankruptcy for the last five years, but continue to get cheap financing from the Wall Street cabal, who would rather pretend they will get paid, than write-off the bad debt. Who in their right mind would continue to lend money to a company with $6 billion in debt, NEGATIVE $2.3 billion of equity, and losses exceeding $2 billion since 2008? They are the poster child for badly run businesses that over expanded, took on too much debt and should be liquidated. There are over 4,600 zombie Rite Aid stores littering the countryside waiting to be put out of their misery.

the walking dead season 4 rick grimes  rite-aid-corner-abandoned

Rite Aid will never repay the $6 billion of debt. They know it. Their auditors know it. Their Wall Street lenders know it. The Federal Reserve Bank regulators know it. Anyone with a functioning brain knows it. Tune in to CNBC for those who are paid to keep clueless investors from knowing it. Interest rates that actually reflected risk and weren’t manipulated to an artificially low level by the Federal Reserve would make financing for a dog like Rite Aid a non-starter. Creative destruction would be allowed to work its magic, with winners separated from losers. Instead Rite Aid continues as a zombie entity, barely surviving for now. This exact scenario applies to J.C. Penney, RadioShack, Sears and a myriad of other dead retailers walking. Rather than suffering the consequences of appalling management judgment, dreadful strategic decisions, and reckless financial gambles, they have been allowed to remain on life support compliments of Bernanke, his Wall Street chiefs, and the American taxpayer.

In a truly free, non-manipulated market the weak would be culled, new dynamic competitors would fill the void, and consumers would benefit.  Extending debt payment schedules of zombie entities and pretending you will get paid has been the mantra of the insolvent zombie Wall Street banks since 2009. The Federal Reserve is responsible for zombifying the entire country. And it wasn’t a mistake. It was a choice made by those in power in order to maintain the status quo. The fateful day in March 2009 when the pencil pushing lightweight accountants at the FASB rescinded mark to market accounting rules gave birth to zombie nation. And not coincidently, marked the bottom for the stock market. Wall Street banks were free to fabricate their earnings, pretend they didn’t have hundreds of billions in bad loans on their books, and extend the terms of commercial real estate loans that were in default. With their taxpayer funded TARP ransom, ability to borrow at 0% from Uncle Ben, and the $3 trillion of QE cocaine snorted up their noses in the last four years, the mal-investment, fraud, and idiocy of the Wall Street drug addicts has reached a crescendo.

Commerce Bank

The mal-investment by zombie drug store chains has only been exceeded by the foolish, egocentric, insane bank branch expansion by the Too Big To Trust Wall Street CEOs. In the last ten years dozens of bank branches have been built in the vicinity of my house and across the state of Pennsylvania. These gleaming glass TARP palaces are on virtually every other street corner across Montgomery County. Stunning, glittery, colorful branches stuffed with bank employees pretending to loan money to non-existent customers. They have become nothing but a high priced marketing billboard with an ATM attached. By 2010, the number of bank branches in this country had reached almost 100,000. The vast majority are run by the usual insolvent suspects:

Wells Fargo – 6,500

J.P. Morgan – 6,000

Bank of America – 5,700

The top ten biggest banks, in addition to holding the vast majority of deposits, mortgages and credit card accounts, operate 33% of all the bank branches in the country. The very same banks that have paid out $66 billion in criminal settlement charges over the last three years and have incurred $103 billion of legal fees to defend themselves against the thousands of actions brought by victims for their criminal misdeeds, decided it was a wise decision to open new bank branches from 2007 through 2010. Only an Ivy League educated MBA could possibly think this was a good idea.

It was almost as if the CEO’s of the biggest Wall Street banks didn’t care about pissing away the $2.5 million to build the average 3,500 square foot bank branch, which would require $30 million of deposits to breakeven. This level of deposits isn’t easy to achieve when your customers are unemployed due to your bank destroying the American economy, broke due to their real household income declining by 10% over the past fourteen years, and your bank paying them .15% on their deposits. It also probably doesn’t help when you charge them $3 every time they withdraw their own money from your bank and you charge them $25 when their bank balance falls below $1,000 because they just got laid off from Merck on Christmas Eve. It is now estimated that one-third of all bank branches in the country lose money. Who can afford to run something that consistently losses money, other than our government? Wall Street bankers can when the taxpayer is footing the bill and Bernanke/Yellen subsidizes their mal-investment by lending to them at 0%, providing them $2.5 billion per day of QE play money, and paying them $5 billion per year in interest to park the excess reserves that aren’t getting leant to small businesses and consumers at their thousands of gleaming bank branches.

Hasn’t one of the thousands of highly educated MBA vice presidents occupying offices at the Too Big To Control Wall Street banks explained to Stumpf, Dimon and Monyihan that bricks and mortar are dead? A new invention called the internet has made in-person banking virtually obsolete. Why does anyone need to go into a bank branch in this electronic age? I’ve been in my credit union branch five times in the last ten years, twice for a refinance closing on my home and a couple times to get a certified check. With ATM machines, direct deposit and on-line bill paying, why would the country need 100,000 physical bank locations? I pay 90% of my bills on-line. If I need cash, I hit the ATM at Wawa, where there are no ATM fees (my credit union doesn’t charge me to get my own money). The only people who go into bank branches on a regular basis are old fogeys that don’t trust that new-fangled internet. The older generations are dying out and the millennial generation has no need for bank branches. Their iGadgets function as their bank connection. Plus, since they don’t have jobs or money, a bank account at the local bank branch of J.P. Morgan seems a bit trite.

The writing had been on the wall for a long time, but the reckless bank executives continued to build branches in an ego driven desire to outdo their equally irresponsible competitor bank executives. Now the race is on to see which banks can close the most branches. Bank consultant Jim Adkins succinctly sums up the pure idiocy of physical bank branches:

“There’s almost nobody in the branches. You could shoot water balloons all over the place and not hit anybody.”

It seems my humble state of Pennsylvania leads the pack in closing branches in the past year, with 149 abandoned and only 43 opened. Only two states in the entire country had more branch openings than closings.

After shuttering 2,267 branches in 2012, the industry is on track to closing another 2,500 in 2013. Shockingly, the leader of the Wall Street zombie apocalypse, Bank of America, led the pack in bank branch closings with 194 in the last year. Staying true to his hubristic arrogance, Jamie Dimon actually opened 62 more branches than he closed in the last year, despite his upstanding institution having to pay tens of billions in fines, settlements and pay-offs for their criminal transgressions.

There are now 93,000 bank branches remaining in this country, and one third of them don’t generate a profit. That percentage will grow as the older generations rapidly die out and are replaced by the techno-narcissists who never leave their family rooms.  Online banking already accounts for 53% of banking transactions, compared with 14% for in-branch visits. Younger bank customers increasingly prefer online and mobile banking, as advancing technology enables them to make remote deposits, shop for loans and manage accounts more efficiently from their desktops or smartphones. This trend will only accelerate in the years to come.

Banking industry profits reached a record level of $141 billion in 2012 as more vacancy signs appeared on Main Street. Now that the Wall Street cabal have syphoned every ounce of blood from their customers/victims through ATM fees, overdraft fees, minimum balance fees, credit card fees, late payment fees, and paying no interest on deposits, they are forced to focus on the $300,000 average loss per bank branch. QE and ZIRP might not last forever. Yeah right. AlixPartners, a New York consulting firm, expects the number of bank branches to drop to 80,000 over the next decade. They are wrong. They have failed to take into account the lemming like behavior of Wall Street banks. As their accounting gimmicks to generate fake profits dissipate, the increasingly desperate insolvent zombie banks will rapidly vacate their prime corner locations in droves. With approximately 30,000 locations already generating losses, the Wall Street MBAs will be closing branches quicker than you can say “mortgage fraud”. There will be less than 70,000 branches within the next five years. That means another 20,000 to 30,000 Space Available signs going up on Main Street. That means another 200,000 to 300,000 neighbors without jobs. But don’t worry about Jamie Dimon and the rest of the Wall Street bankers. They’ll be just fine. In addition to being endlessly fed by the Fed, they’ll get creative and charge their customers a new bank branch access fee of $50 for the privilege of entering one of their few remaining outlets. By now we should know how cash flows to Main Street in this corporate fascist paradise.

140226 600 Cash Flow cartoons

Do your part to starve the beast. Move your bank accounts to a local credit union. Don’t support criminals.

 

EXTEND & PRETEND COMING TO AN END

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Posted on 26th February 2012 by Administrator in Economy |Politics |Social Issues

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The real world revolves around cash flow. Families across the land understand this basic concept. Cash flows in from wages, investments and these days from the government. Cash flows out for food, gasoline, utilities, cable, cell phones, real estate taxes, income taxes, payroll taxes, clothing, mortgage payments, car payments, insurance payments, medical bills, auto repairs, home repairs, appliances, electronic gadgets, education, alcohol (necessary in this economy) and a countless other everyday expenses. If the outflow exceeds the inflow a family may be able to fund the deficit with credit cards for awhile, but ultimately running a cash flow deficit will result in debt default and loss of your home and assets. Ask the millions of Americans that have experienced this exact outcome since 2008 if you believe this is only a theoretical exercise. The Federal government, Federal Reserve, Wall Street banks, regulatory agencies and commercial real estate debtors have colluded since 2008 to pretend cash flow doesn’t matter. Their plan has been to “extend and pretend”, praying for an economic recovery that would save them from their greedy and foolish risk taking during the 2003 – 2007 Caligula-like debauchery.

I wrote an article called Extend and Pretend is Wall Street’s Friend about one year ago where I detailed what I saw as the moneyed interest’s master plan to pretend that hundreds of billions in debt would be repaid, despite the fact that declining developer cash flow and plunging real estate prices would make that impossible. Here are a couple pertinent snippets from that article:

“A systematic plan to create the illusion of stability and provide no-risk profits to the mega-Wall Street banks was implemented in early 2009 and continues today. The plan was developed by Ben Bernanke, Hank Paulson, Tim Geithner and the CEOs of the criminal Wall Street banking syndicate. The plan has been enabled by the FASB, SEC, IRS, FDIC and corrupt politicians in Washington D.C. This master plan has funneled hundreds of billions from taxpayers to the banks that created the greatest financial collapse in world history.

Part two of the master cover-up plan has been the extending of commercial real estate loans and pretending that they will eventually be repaid. In late 2009 it was clear to the Federal Reserve and the Treasury that the $1.2 trillion in commercial loans maturing between 2010 and 2013 would cause thousands of bank failures if the existing regulations were enforced. The Treasury stepped to the plate first. New rules at the IRS weren’t directly related to banking, but allowed commercial loans that were part of investment pools known as Real Estate Mortgage Investment Conduits, or REMICs, to be refinanced without triggering tax penalties for investors.

The Federal Reserve, which is tasked with making sure banks loans are properly valued, instructed banks throughout the country to “extend and pretend” or “amend and pretend,” in which the bank gives a borrower more time to repay a loan. Banks were “encouraged” to modify loans to help cash strapped borrowers. The hope was that by amending the terms to enable the borrower to avoid a refinancing that would have been impossible, the lender would ultimately be able to collect the balance due on the loan. Ben and his boys also pushed banks to do “troubled debt restructurings.” Such restructurings involved modifying an existing loan by changing the terms or breaking the loan into pieces. Bank, thrift and credit-union regulators very quietly gave lenders flexibility in how they classified distressed commercial mortgages. Banks were able to slice distressed loans into performing and non-performing loans, and institutions were able to magically reduce the total reserves set aside for non-performing loans.

If a mall developer has 40% of their mall vacant and the cash flow from the mall is insufficient to service the loan, the bank would normally need to set aside reserves for the entire loan. Under the new guidelines they could carve the loan into two pieces, with 60% that is covered by cash flow as a good loan and the 40% without sufficient cash flow would be classified as non-performing. The truth is that billions in commercial loans are in distress right now because tenants are dropping like flies. Rather than writing down the loans, banks are extending the terms of the debt with more interest reserves included so they can continue to classify the loans as “performing.” The reality is that the values of the property behind these loans have fallen 43%. Banks are extending loans that they would never make now, because borrowers are already grossly upside-down.”

Master Plan Malfunction

You have to admire the resourcefulness of the vested interests in disguising disaster and pretending that time will alleviate the consequences of their insatiable greed, blatant criminality and foolish risk taking. Extending bad loans and pretending they will be repaid does not create the cash flow necessary to actually pay the interest and principal on the debt. The chart below reveals the truth of what happened between 2005 and 2008 in the commercial real estate market. There was an epic feeding frenzy of overbuilding shopping centers, malls, office space, industrial space and apartments. During the sane 1980’s and 1990’s, commercial real estate loan issuance stayed consistently in the $500 billion to $700 billion range. The internet boom led to a surge to $1.1 trillion in 2000, with the resultant pullback to $900 billion by 2004. But thanks to easy Al and helicopter Ben, the bubble was re-inflated with easy money and zero regulatory oversight. Commercial real estate loan issuance skyrocketed to $1.6 trillion per year by 2008. Bankers sure have a knack for doing the exact opposite of what they should be doing at the exact wrong time. They doled out a couple trillion of loans to delusional developers at peak prices just prior to a historic financial cataclysm.

The difference between bad retail mortgage loans and bad commercial loans is about 25 years. Commercial real estate loans usually have five to seven year maturities. This meant that an avalanche of loans began maturing in 2010 and will not peak until 2013. With $1.2 trillion of loans coming due between 2010 and 2013, disaster for the Wall Street Too Big To Fail banks awaited if the properties were valued honestly. A perfect storm of declining property values and plunging cash flows for developers should have resulted in enormous losses for Wall Street banks and their shareholders, resulting in executives losing not only their obscene bonuses but even their jobs. Imagine the horror for the .01%.

The fact is that commercial property prices are currently 42% below the 2007 – 2008 peak. The slight increase in the national index is solely due to strong demand for apartments, as millions of Americans have been kicked out of their homes by Wall Street bankers using fraudulent loan documentation to foreclose on them. The national index has recently resumed its fall. Industrial and retail properties are leading the descent in prices according to Moodys. The master plan of extend and pretend was implemented in 2009 and three years later commercial real estate prices are 10% lower, after the official end of the recession.

Part one of the “extend and pretend” plan has failed. Part two anticipated escalating developer cash flows as the economy recuperated, Americans resumed spending like drunken sailors and retailers began to rake in profits at record levels again. Reality has interfered with their desperate last ditch gamble. Office vacancies remain at 17.3%, close to 20 year highs, as 12.3 million square feet of new space came to market in 2011. Vacancies are higher today than they were at the end of the recession in December 2009. The recovery in cash flow has failed to materialize for commercial developers. Strip mall vacancies at 11% remain stuck at 20 year highs. Regional mall vacancies at 9.2% linger near all-time highs. Vacancies remain elevated, with no sign of decreasing. Despite these figures, an additional 4.9 million square feet of new retail space was opened in 2011. The folly of this continued expansion will be revealed as bricks and mortar retailers are forced to close thousands of stores in the next five years.

It is clear the plan put into place three years ago has failed. Extending and pretending doesn’t service the debt. Only cash flow can service debt.

Now What?

Extending and pretending that hundreds of millions in commercial loans were payable for the last three years is now colliding with a myriad of other factors to create a perfect storm in 2012 and 2013. The extension of maturities has now set up a far more catastrophic scenario as described by Chris Macke, senior real estate strategist at CoStar Group:

“As banks and property owners continue to partake in loan extensions amid a softening economy, commercial banks continue to “delay and pray” that property values will rise. Many loans are piled up and concentrated in this year, and at the same time, the economy is slowing. This dilemma has resulted in the widening of what is commonly termed the “loan maturity cliff,” which is attributed to the so called extend-and-pretend loans. During the market downturn, lenders extended the maturity dates of loans with properties that had current values below their balances. Instead, however the practice has resulted in a race for property values to try to catch up with the loan maturity dates.”

The Federal Reserve, Wall Street banks, Mortgage Bankers Association and the rest of the confederates of collusion will continue the Big Lie for as long as possible. They point to declining commercial default rates as proof of improvement. The chart below details the 4th quarter default rates for real estate loans over the last six years. Default rates in the 4th quarter of 2009 peaked for all real estate loan types. Still, today’s default rate is 450% higher than the rate in 2006. A critical thinker might ask how commercial default rates could fall from 8.75% to 6.12% when commercial vacancies have increased and commercial property values have fallen. It’s amazing how low default rates can fall when a bank doesn’t require payments or collateral to back up the loan and can utilize accounting gimmicks to avoid write-offs.

 

Real estate loans

All

Booked in domestic offices

Residential 

Commercial 

Farmland

2011:4

8.22

9.86

6.12

3.26

2010:4

9.07

10.11

7.98

3.61

2009:4

9.55

10.45

8.75

3.43

2008:4

6.03

6.64

5.49

2.28

2007:4

2.90

3.07

2.75

1.51

2006:4

1.70

1.95

1.32

1.41

The reality as detailed by honest analysts is much different than the numbers presented by Ben Bernanke and his banker cronies. A recent article from the Urban Land Institute provides some insight into the current state of the market:

 Ann Hambly, who previously ran the commercial servicing departments at Prudential, Bank of New York, Nomura, and Bank of America said a wave of defaults is coming in commercial mortgage–backed securities (CMBS). And Carl Steck, a principal in MountainSeed Appraisal Management, an Atlanta-based firm that deals in the commercial real estate space, said property values are still falling.

Noting that CMBS investors booked $6 billion in real losses in 2011 and have already taken on $2 billion more in losses so far this year, Hambly told reporters in a private briefing that “it’s going to take a miracle” for many borrowers to refinance their deals when they come due between now and 2017.

Carl Steck said that lenders who are taking over the portfolios of failed institutions are finding that the values of the loans “are coming in a lot lower than they ever thought they would.” And as a result, he thinks a “fire sale” of commercial loans is just over the horizon.

Analysts expect 2012 to be a record-setting year for commercial real estate defaults. Last week delinquencies for office and retail loans hit their highest-ever levels, according to Fitch Ratings. The value of all delinquent commercial loans is now $57.7 billion, according to Trepp, LLC. If you think the criminal Wall Street banks limited their robo-signing fraud to just poor homeowners, you would be mistaken. The fraud uncovered in the commercial lending orbit will dwarf the residential swindle. Research by Harbinger Analytics Group shows the widespread use of inaccurate, fraudulent documents for land title underwriting of commercial real estate financing. According to the report:

This fraud is accomplished through inaccurate and incomplete filings of statutorily required records (commercial land title surveys detailing physical boundaries, encumbrances, encroachments, etc.) on commercial properties in California, many other western states and possibly throughout most of the United States. In the cases studied by Harbinger, the problems are because banks accepted the work of land surveyors who “have committed actual and/or constructive fraud by knowingly failing to conduct accurate boundary surveys and/or failing to file the statutorily required documentation in public records.”




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The Wall Street geniuses bundled commercial real estate mortgages and re-sold them as securities around the world. The suckers holding those securities, already staggering from the overabundance of empty office space, will be devastated if it turns out they have no claim to the properties. They will rightly sue the lenders for falsely representing the properties. Mortgage holders in these cases may also turn to their title insurance to cover any losses. It is unknown if the title insurance companies have the wherewithal to withstand enormous claims on costly commercial properties. It looks like that light at the end of the tunnel is bullet train headed our way.

One of the fingers in the dyke of the “extend and pretend” dam has been removed by the FASB. The new leak threatens to turn into a gusher.

 

Andy Miller, cofounder of Miller Frishman Group, and one of the few analysts who saw the real estate crash coming two years before it surprised Bernanke and the CNBC cheerleaders sees a flood of defaults on the horizon. In a recent interview with The Casey Report Miller details a dramatic turn for the worse in the commercial real estate market he has witnessed in the last few months. His company deals with distressed commercial real estate. This segment of his business was booming in 2009 and into the middle of 2010. Then magically, there was no more distress as the “extend and pretend” plan was implemented by the governing powers. The distressed market dried up completely until November 2011. Miller describes what happened next:

“All of a sudden, right after Thanksgiving in 2011, the floodgates opened again. In the last six weeks we probably picked up seven or eight receiverships – and we’re now seeing some really big-ticket properties with major loans on them that have gone into distress, and they’re all sharing some characteristics in common. In 2008 and 2009, these borrowers were put on a workout or had a forbearance agreement put into place with their lenders. In 2009, their lenders were thinking, “Let’s do a two- or three-year workout with these guys. I’m sure by 2012 this market is going to get a lot better.” Well, 2012 is here now, and guess what? It’s not any better. In fact I would argue that it’s still deteriorating.”

Why the sudden surge in distressed properties coming to market in late 2011? It seems the FASB finally decided to grow a pair of balls after being neutered by Bernanke and Geithner in 2009 regarding mark to market accounting. They issued an Accounting Standards Update (ASU) that went into effect for all periods after June 15, 2011called Clarifications to Accounting for Troubled Debt Restructurings by Creditors. Essentially, if a lender is involved in a troubled debt restructuring with a debtor, including a forbearance agreement or a workout, the property MUST be marked to market. Andy Miller understands this is the beginning of the end for “extend and pretend”:

“I believe it’s a huge deal because it means you don’t have carte blanche anymore to kick the can down the road. After all, kicking the can down the road was a way to avoid taking a big hit to your capital. Well, you can’t do that anymore. It forces you to cut through the optical illusions by writing this asset to its fair market value.”

Ben Bernanke and the Wall Street banks are running out tricks in their bag of deception. Wall Street banks created billions in profits by using accounting entries to reduce their loan loss reserves. They’ve delayed mortgage foreclosures for two years to avoid taking the losses on their loan portfolios. They’ve pretended their commercial loan portfolios aren’t worth 50% less than their current carrying value. Bernanke has stuffed his Federal Reserve balance sheet with billions in worthless commercial mortgage backed securities. The Illusion of Recovery is being revealed as nothing more than a two bit magician’s trick. In the end it always comes back to cash flow. The debt cannot be serviced and must be written off. Thinking the American consumer will ride to the rescue is a delusional flight of the imagination.

Apocalypse Now – The Future of Retailers & Mall Owners

 

When I moved to my suburban community in 1995 there were two thriving shopping centers within three miles of my home and a dozen within a ten mile radius. Seventeen years later the population has increased dramatically in this area, and these two shopping centers are in their final death throes. The shopping center closest to my house has a vacant Genuardi grocery store(local chain bought out and destroyed by Safeway), vacant Blockbuster, vacant Sears Hardware, vacant Donatos restaurant, vacant book store, and soon to be vacant Pizza Pub. It’s now anchored by a near bankrupt Rite Aid and a Dollar store. This ghost-like strip mall is in the midst of a fairly thriving community. Anyone with their eyes open as they drive around today would think Space Available is the hot new retailer. According to the ICSC there are 105,000 shopping centers in the U.S., occupying 7.3 billion square feet of space. Total retail square feet in the U.S. tops 14.2 billion, or 46 square feet for every man, woman and child in the country. There are more than 1.1 million retail establishments competing for every discretionary dollar from consumers.

Any retailer, banker, politician, or consumer who thinks we will be heading back to the retail glory days of 2007 is delusional. Retail sales reached a peak of $375 billion per month in mid 2008. Today, retail sales have reached a new “nominal” peak of $400 billion per month. Even using the highly questionable BLS inflation figures, real retail sales are still below the 2008 peak. Using the inflation rate provided by John Williams at Shadowstats, as measured the way it was in 1980, real retail sales are 15% below the 2008 peak. The unvarnished truth is revealed in the declining profitability of major retailers and the bankruptcies and store closings plaguing the industry. National retail statistics and recent retailer earnings reports paint a bleak picture, and it’s about to get bleaker.

Retail sales in 1992 totaled $2.0 trillion. By 2011 they had grown to $4.7 trillion, a 135% increase in nineteen years. A full 64% of this rise is solely due to inflation, as measured by the BLS. In reality, using the true inflation figures, the entire increase can be attributed to inflation. Over this time span the U.S. population has grown from 255 million to 313 million, a 23% increase. Median household income has grown by a mere 8% over this same time frame. The increase in retail sales was completely reliant upon the American consumers willing to become a debt slaves to the Wall Street bank slave masters. It is obvious we have learned to love our slavery. Credit card debt grew from $265 billion in 1992 to a peak of $972 billion in September of 2008, when the financial system collapsed. The 267% increase in debt allowed Americans to live far above their means and enriched the Wall Street banking cabal. The decline to the current level of $800 billion was exclusively due to write-offs by the banks, fully funded by the American taxpayer.

Credit cards are currently being used far less as a way to live beyond your means, and more to survive another day. This can be seen in the details underlying the monthly retail sales figures. On a real basis, with inflation on the things we need to live like energy, food and clothing rising at a 10% clip, retail sales are declining. Gasoline, food and medicine are the drivers of retail today. The surge in automobile sales is just another part of the “extend and pretend” plan, as Bernanke provides free money to banks and finance companies so they can make seven year 0% interest loans to subprime borrowers. Easy credit extended to deadbeats will not create the cash flow needed to repay the debt. The continued penetration of on-line retailers does not bode well for the dying bricks and mortar zombie retailers like Sears, JC Penny, Macys and hundreds of other dead retailers walking. With gas prices soaring, the economy headed back into recession and the Federal Reserve out of ammunition, Andy Miller sums up the situation nicely:

“Well, I think we’re headed into an economy right now where there’s just not a lot of upside. Do we think, for example, in the shopping center business, that retail and consumer spending is going to go way up? Certainly not. I think that as times get tougher and unemployment remains high, it’s going to have a negative impact on consumer spending. In almost in any city in America right now, it doesn’t take a genius to see how much retail space has been constructed and is sitting there empty. Vacancy rates are as high as I’ve seen them in almost every venue that I visit. I’m very concerned about the retail business, and I think it’s extremely dangerous right now.”

The major big box retailers have been reporting their annual results in the last week. The results have been weak and even those whose results are being spun as positive by the mainstream media are performing dreadfully compared to 2007. A few examples are in order:

  • Home Depot was praised for their fantastic 2011 result of $70 billion in sales and $6.7 billion of income. The MSM failed to mention that sales are $7 billion lower than 2007, despite having 18 more stores and profit exceeded $7.2 billion in 2007. Sales per square foot have declined from $335 to $296, a 12% decline in four years.
  • Target made $2.9 billion on revenue of $67 billion in 2011. $953 million of this profit was generated from their credit card this year versus $744 million last year because they reduced their loan loss reserve by $260 million. Target is supposedly a retailer, but 33% of their bottom line comes from a credit card they desperately tried to sell in 2009. They have increased their store count from 1,600 to 1,800 since 2007 and their profit is flat. Sales per square foot have declined from $307 to $280 since 2007.
  • J.C. Penney is a bug in search of a windshield. Their sales have declined from $20 billion in 2007 to $17 billion in 2011 despite increasing their store count from 1,067 to 1,114. Their profits have plunged from $1.1 billion to a loss of $152 million. Their sales per square foot have plunged by 14% since 2007. Turning to a former Apple marketing guru as their new CEO will fail. Everyday low pricing is not going to work on Americans trained like monkeys to salivate at the word SALE.
  • The death spiral of Sears/Kmart is a sight to see. As the anchor in hundreds of dying malls across the land, this retail artifact will be joining Montgomery Ward on the scrap heap of retail history in the next few years. Its eventual bankruptcy and liquidation will leave over 4,000 rotting carcasses to spoil our landscape. The one-time genius and heir to the Warren Buffett mantle – Eddie Lampert – has proven to be as talented at retailing as his buddy Jim Cramer is at picking stocks. He has managed to decrease sales by $10 billion, from $53 billion to $43 billion in the space of four years despite opening 247 new stores. That is not an easy feat to accomplish. At least he was able to reduce profits from $1.5 billion to $133 million and drive the sales per square foot in his stores down by 15%.
  • Widely admired Best Buy has screwed the pooch along with the other foolish retailers that have massively over expanded in the last decade. They have increased their domestic sales from $31 billion to $37 billion, a 19% increase in four years. This increase only required a 444 store expansion, from 873 stores to 1,317 stores. A 51% increase in store count for a 19% increase in sales seems to be a bad trade-off. Their chief competitor – Circuit City – went belly-up during this time frame, making the relative sales increase even more pathetic. The $6 billion increase in sales resulted in a $100 million decline in profits and a 13% decrease in sales per square foot since 2007. It might behoove the geniuses running this company to stop building new stores.
  • The retailer that committed the greatest act of suicide in the last decade is Lowes. Their act of hubris, as Home Depot struggled in the mid 2000’s, is coming home to roost today. They increased their store count from 1,385 to 1,749 over four years. This 26% increase in store count resulted in an increase in sales from $47 billion to $49 billion, a 4% boost. Profitability has plunged from over $3 billion to under $2 billion over this same time frame. They’ve won the efficiency competition by seeing their sales per square feet fall by an astounding 21% over the last four years. I’ve witnessed their ineptitude as they opened four stores within 10 miles of each other in Montgomery County, PA and cannibalized themselves to death. The newest store, three miles from my house, is a pleasure to shop as there is generally more staff than customers even on a Saturday afternoon. This beautiful new store will be vacant rotting hulk within three years.

Do the results of these retail giants jive with the retail recovery stories being spun by the corporate mainstream media? When you see some stock shill on CNBC touting one of these retailers, realize he is blowing smoke up your ass. These six struggling retailers account for over 1.1 billion square feet of retail space in the U.S. One or more of them anchor every mall in America. Wal-Mart (600 million square feet in the U.S.) and Kohl’s (82 million square feet) continue to struggle as their lower middle class customers can barely make ends meet. The perfect storm is developing and very few people see it coming. Extend and pretend has failed. Americans are tapped out. Home prices continue to fall. Energy and food prices continue to rise. Wages are stagnant. Job growth is weak. Middle and lower class Americans are using credit cards just to pay their basic living expenses. The 99% are not about to go on a spending binge.

As consumers reduce consumption, retailers lose profits and will be forced to close stores. It is likely that at least 150,000 retail stores will need to close in the next five years. Less stores means less rent for mall developers. Less rent means the inability to service their debt as the value of their property declines with the outcome of Ghost Malls haunting your community. Maybe good old American ingenuity will come to the rescue as we convert ghost malls into FEMA prison camps for uncharged Ron Paul supporters, Obamacare death panel implementation centers, TSA groping educational facilities, housing for the millions kicked out of their homes by the Wall Street .01%ers, and bomb shelters for the imminent Iranian invasion.

Debt default means huge losses for the Wall Street criminal banks. Of course the banksters will just demand another taxpayer bailout from the puppet politicians. This repeat scenario gives new meaning to the term shop until you drop. Extending and pretending can work for awhile as accounting obfuscation, rolling over bad debts, and praying for a revival of the glory days can put off the day of reckoning for a couple years. Ultimately it comes down to cash flow, whether you’re a household, retailer, developer, bank or government. America is running on empty and extending and pretending is coming to an end.



 



EXTEND & PRETEND IS WALL STREET’S FRIEND

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Posted on 30th March 2011 by Administrator in Economy |Politics |Social Issues

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“We now have an economy in which five banks control over 50 percent of the entire banking industry, four or five corporations own most of the mainstream media, and the top one percent of families hold a greater share of the nation’s wealth than any time since 1930.   This sort of concentration of wealth and power is a classic setup for the failure of a democratic republic and the stifling of organic economic growth.” - Jesse – http://jessescrossroadscafe.blogspot.com/

Source: Barry Ritholtz

“All of the old-timers knew that subprime mortgages were what we called neutron loans — they killed the people and left the houses.” - Louis S. Barnes, 58, a partner at Boulder West, a mortgage banking firm in Lafayette, Colo

The storyline that has been sold to the public by the Federal government, Wall Street, and the corporate mainstream media over the last two years is the economy is recovering and the banking system has recovered from its near death experience in 2008. Wall Street profits in 2009 & 2010 totaled approximately $80 billion. The stock market has risen almost 100% since the March 2009 lows. Wall Street CEOs were so impressed by this fantastic performance they dished out $43 billion in bonuses over the two year period to their thousands of Harvard MBA paper pushers. It is amazing that an industry that was effectively insolvent in October 2008 has made such a spectacular miraculous recovery. The truth is recovery is simple when you control the politicians and regulators, and own the organization that prints the money.

A systematic plan to create the illusion of stability and provide no-risk profits to the mega-Wall Street banks was implemented in early 2009 and continues today. The plan was developed by Ben Bernanke, Hank Paulson, Tim Geithner and the CEOs of the criminal Wall Street banking syndicate. The plan has been enabled by the FASB, SEC, IRS, FDIC and corrupt politicians in Washington D.C. This master plan has funneled hundreds of billions from taxpayers to the banks that created the greatest financial collapse in world history. The authorities had a choice. This country has bankruptcy laws. The criminally negligent Wall Street banks could have been liquidated in an orderly bankruptcy. Their good assets could have been sold off to banks that did not take their extreme greed based risks. Bond holders and stockholders would have been wiped out. Today, we would have a balanced banking system, with no Too Big To Fail institutions. Instead, the years of placing their cronies within governmental agencies and buying off politicians paid big dividends for Wall Street. Their return on investment has been fantastic.

The plan has been as follows:

  • In April 2009 the FASB caved in to pressure from the Federal Reserve, Treasury, and Wall Street to suspend mark to market rules, allowing the Wall Street banks to value their loans and derivatives as if they were worth 100% of their book value.
  • The Federal Reserve balance sheet consistently totaled about $900 billion until September 2008. By December 2008, the balance sheet had swollen to $2.2 trillion as the Federal Reserve bought $1.3 trillion of toxic assets from the Wall Street banks, paying 100 cents on the dollar for assets worth 50% of that value.

  • In November 2009 the Federal Reserve and IRS loosened the rules for restructuring commercial loans without triggering tax consequences. Banks were urged to extend loans on properties that had fallen 40% in value as if they were still worth 100% of the loan value.
  • By December 2008 the Federal Reserve had moved their discount rate to 0%. For the last two years, the Wall Street banks have been able to borrow from the Federal Reserve for free and earn a risk free return of 2%. The Federal Reserve has essentially handed billions of dollars to Wall Street.
  • When it became clear in October 2010 that after almost two years of unlimited liquidity being injected into the veins of zombie banks was failing, Ben Bernanke announced QE2. He has expanded the Fed balance sheet to $2.6 trillion by injecting $3.5 billion per day into the stock market by buying US Treasury bonds. Bernanke’s stated goal has been to pump up the stock market. While taking credit for driving stock prices higher, he denies any responsibility for the energy and food inflation that is spurring unrest around the world.
  • The Federal Reserve has increased the monetary base by $500 billion in the last three months in a desperate attempt to give the appearance of recovery to a floundering economy.

FRED Graph

  • Beginning on December 31, 2010, through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions.  The unlimited insurance coverage is available to all depositors, including consumers, businesses, and government entities. This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to a depositor’s other deposit accounts held at an FDIC-insured institution.

When You’re Losing – Change the Rules

Wall Street banks had absolutely no problem with mark to market rules from 2000 through 2007, as the value of all their investments soared. These banks created products (subprime, no-doc, Alt-A mortgages) whose sole purpose was to encourage fraud. Their MBA geniuses created models that showed that if you packaged enough fraudulent loans together and paid Moody’s or S&P a big enough bribe, they magically became AAA products that could be sold to pension plans, municipalities, and insurance companies. These magnets of high finance were so consumed with greed they believed their own lies and loaded their balance sheets with the very toxic derivatives they were peddling to the clueless Europeans. They didn’t follow a basic rule. Don’t crap where you sleep. When the world came to its senses and realized that home prices weren’t really worth twice as much as they were in 2000, investment houses began to collapse like a house of cards. The AAA paper behind the plunging real estate wasn’t worth spit. After Lehman Brothers collapsed and AIG’s bets came up craps for the American people, the financial system rightly froze up.

After using fear and misinformation to ram through a $700 billion payoff to Goldman Sachs and their fellow Wall Street co-conspirators through Congress, it was time begin the game of extend and pretend. Market prices for the “assets” on the Wall Street banks’ books were only worth 30% of their original value. Obscuring the truth was now an absolute necessity for Wall Street. The Financial Accounting Standards Board already allowed banks to use models to value assets which did not have market data to base a valuation upon. The Federal Reserve and Treasury “convinced” the limp wristed accountants at the FASB to fold like a cheap suit. The FASB changed the rules so that when the market prices were not orderly, or where the bank was forced to sell the asset for regulatory purposes, or where the seller was close to bankruptcy, the bank could ignore the market price and make up one of its own. Essentially the banking syndicate got to have it both ways. It drew all the benefits of mark to market pricing when the markets were heading higher, and it was able to abandon mark to market pricing when markets went in the toilet. 

“Suspending mark-to-market accounting, in essence, suspends reality.” – Beth Brooke, global vice chair, at Ernst & Young

Wall Street desired all the billions of upside from creating new markets for new products. Their creativity knew no bounds as they crafted MBOs, MBSs, CDOs, CDSs, and then chopped them into tranches, selling them around the world with AAA stamps of approval from the soulless whore rating agencies. When the net result of a flawed system of toxic garbage paper was revealed, there was no room at the exits for the stampede of investment bankers. The toxic paper was on the banks’ books and no one wanted to admit the greed induced decision to purchase these highly risky, volatile “assets”. The trade had not gone bad, the ponzi scheme had unraveled. Suspending FASB 157 has been an attempt to hide this fraudulent business model from investors, regulators and the public. By hiding the true value of these assets, the financial system has never cleared. The banks remain in a zombie vegetative state, with the Federal Reserve providing the IV and the life support system.

Let’s Play Hide the Losses

Part two of the master cover-up plan has been the extending of commercial real estate loans and pretending that they will eventually be repaid. In late 2009 it was clear to the Federal Reserve and the Treasury that the $1.2 trillion in commercial loans maturing between 2010 and 2013 would cause thousands of bank failures if the existing regulations were enforced. The Treasury stepped to the plate first. New rules at the IRS weren’t directly related to banking, but allowed commercial loans that were part of investment pools known as Real Estate Mortgage Investment Conduits, or REMICs, to be refinanced without triggering tax penalties for investors.

 

The Federal Reserve, which is tasked with making sure banks loans are properly valued, instructed banks throughout the country to “extend and pretend” or “amend and pretend,” in which the bank gives a borrower more time to repay a loan. Banks were “encouraged” to modify loans to help cash strapped borrowers. The hope was that by amending the terms to enable the borrower to avoid a refinancing that would have been impossible, the lender would ultimately be able to collect the balance due on the loan. Ben and his boys also pushed banks to do “troubled debt restructurings.” Such restructurings involved modifying an existing loan by changing the terms or breaking the loan into pieces. Bank, thrift and credit-union regulators very quietly gave lenders flexibility in how they classified distressed commercial mortgages. Banks were able to slice distressed loans into performing and non-performing loans, and institutions were able to magically reduce the total reserves set aside for non-performing loans.

If a mall developer has 40% of their mall vacant and the cash flow from the mall is insufficient to service the loan, the bank would normally need to set aside reserves for the entire loan. Under the new guidelines they could carve the loan into two pieces, with 60% that is covered by cash flow as a good loan and the 40% without sufficient cash flow would be classified as non-performing. The truth is that billions in commercial loans are in distress right now because tenants are dropping like flies. Rather than writing down the loans, banks are extending the terms of the debt with more interest reserves included so they can continue to classify the loans as “performing.” The reality is that the values of the property behind these loans have fallen 43%. Banks are extending loans that they would never make now, because borrowers are already grossly upside-down.

Extending the length of a loan, changing the terms, and pretending that it will be repaid won’t generate real cash flow or keep the value of the property from declining. U.S. banks hold an estimated $156 billion of souring commercial real-estate loans, according to research firm Trepp LLC. About two-thirds of commercial real-estate loans maturing at banks from now through 2015 are underwater. Media shills proclaiming that the market is improving, doesn’t make it so. The chart below details the delinquency rates from 2007 through 2010 as reported by the Federal Reserve:

  Real estate loans Consumer loans
All Booked in domestic offices All Credit cards Other
Residential Commercial
2010 4th Qtr 9.01  9.94  7.97  3.71  4.17  3.10 
2010 3rd Qtr 9.77  10.90  8.69  4.03  4.60  3.39 
2010 2nd Qtr 10.02  11.32  8.74  4.25  5.07  3.37 
2010 1st Qtr 9.78  10.97  8.66  4.63  5.76  3.48 
2009 4th Qtr 9.48  10.29  8.74  4.64  6.36  3.48 
2009 3d Qtr 9.00  9.67  8.57  4.72  6.51  3.61 
2009 2nd Qtr 8.19  8.69  7.84  4.85  6.75  3.69 
2009 1st Qtr 7.19  7.89  6.55  4.62  6.50  3.52 
2008 4th Qtr 5.99  6.57  5.49  4.29  5.65  3.37 
2008 3rd Qtr 4.88  5.26  4.66  3.73  4.80  3.05 
2008 2nd Qtr 4.21  4.39  4.15  3.55  4.89  2.80 
2008 1st Qtr 3.56  3.70  3.50  3.48  4.76  2.76 
2007 4th Qtr 2.89  3.06  2.75  3.41  4.60  2.66 
2007 3rd Qtr 2.40  2.78  1.98  3.20  4.41  2.48 
2007 2nd Qtr 2.01  2.30  1.63  2.99  4.02  2.37 
2007 1st Qtr 1.77  2.03  1.43  2.93  3.97  2.29 

 

Delinquency rates on residential and commercial loans in early 2007 were in the range of 1.5% to 2.0%. Now the MSM pundits get excited over a decline from 8.7% to 8.0%. These figures show that even after trillions of Federal Reserve and Federal Government intervention, delinquencies remain four times higher than normal. In the real world, cash flow matters. Payment of interest and principal on a loan matters. Actual market values matter. According to Trepp, LLC, a data firm specializing in commercial data, non-performing commercial real estate loans makes up 72% of the $320 million in non-performing loans reported by banks in February. These figures are after the “extremely” relaxed definition of non-performing allowed by the Federal Reserve. The game is ongoing. Misinformation abounds. The SEC now issues press releases saying they are worried that banks are covering up losses, when they were involved in encouraging the banks to cover-up their losses. Last week the SEC announced they have become concerned that extend and pretend, along with another practice known as “troubled debt restructuring” that allows banks to break loans into pieces, may have been abused in order to diminish the volume of reserves banks are holding. What a shocking revelation. Who could have known?

Are You Smarter than a Wall Street CEO?

The Federal Reserve paid shills and Wall Street front men are out in droves declaring that TARP was a success and the banking system is recovering strongly. Columnists like Robert Samuelson declare  TARP was a great investment and will profit the taxpayer. Samuelson says that the Treasury has recouped $244 billion of the $245 billion it invested in banks and that, when it winds down its last investments, it likely will show a $20 billion profit from the banks. This type of propaganda is ludicrous, as Barry Ritholtz succinctly points out:

“No, we are not profitable on the bailouts. TARP has $123B to go before breakeven, and the GSEs are $133B in the hole. All told, the Taxpayers have a long way to go before we are breakeven. That’s before we count lost income from savings, bonds, etc., the increased costs of food stuff and energy due to inflation (the Fed’s has done this on purpose as part of their rescue plan), the higher fees the reduced competition of megabanks has created, and the future costs our Moral Hazard will have wrought in increased risks and disasters.”Barry Ritholtz

Source: Barry Ritholtz

Fannie Mae and Freddie Mac have hundreds of billions in bad loans sitting on their balance sheets. Their total cost to taxpayers will reach $400 billion, and never be repaid. The Federal Reserve has over $1 trillion in toxic assets on its balance sheet, off loaded by the TARP recipient banks in 2009. The taxpayer will never be repaid for this toxic waste. The government is implementing the Big Lie theory. If you tell a big lie often and loud enough, the non-thinking masses will believe it. That leaves us with today’s fantasy world.

The reality on the ground does not match the rhetoric coming from the government, Wall Street and the corporate mainstream media. The truth is as follows:

  • The vacancy rate for office space in the U.S. is currently 16.5%.
  • The vacancy rate for industrial space in the U.S. is currently 14.2%.
  • The vacancy rate for retail space in the U.S. is currently 13%.
  • Delinquencies within collateralized debt obligations in commercial real estate loans rose to 14.6% in February. The increase signals a trend of higher delinquencies in the segment. Signs of pressure surfaced as early as January when the delinquency rate on CDOs within commercial real estate loans hovered well above 13%.
  • According to Moody’s, CRE prices are down 4.3% from a year ago and down about 43% from the peak in 2007.
  • The delinquency rate on loans packaged and sold in commercial mortgage-backed securities rose to a record 9.2% in February, according to a March 15 report by Moody’s.
  • Regional and local community banks have as much as 80% of their balance sheets tied up in commercial real estate, and very few other sources of significant fee income to offset CRE losses.
  • CRE once had an estimated national value of $6.5 trillion.  Today it stands at an optimistic $3.5 trillion.
  • There are 1.8 million homes seriously delinquent, in the foreclosure process or REO that are not currently listed for sale.
  • There are about 2 million current negative equity loans that are more than 50% “upside down”.
  • Home prices are off 31.3% from the peak. The Composite 20 is only 0.7% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low soon.

In the face of this data, mouthpieces for the Federal Reserve go before Congress and try to paint an optimistic picture. “While we expect significant ongoing CRE-related problems, it appears that worst-case scenarios are becoming increasingly unlikely,” Patrick Parkinson, the Federal Reserve’s director of banking supervision and regulation, told Congress. Parkinson said that since the beginning of 2008 through the third quarter of 2010, commercial banks had incurred almost $80 billion of losses from commercial real estate exposures. Banks are estimated to have taken roughly 40% to 50% of losses they will incur over this business cycle, he said.

The Federal Reserve will be forced by the Federal Courts to reveal the banks they have saved from failure since 2008 by funneling billions of practically interest free tax payer dollars into their hands. The Fed is expected to release this week documents related to discount window lending from August 2007 to March 2010, including the peak month of October 2008, when loans hit $111 billion. It will be revealed they kept alive hundreds of banks that should have died. Shockingly, the supposedly taxpayer protecting Dodd-Frank law exempts past discount window lending from an audit by the Government Accountability Office, that’s examining much of the central bank’s other crisis-era programs. That champion of the little people, Barney Frank, said such disclosures might have “a negative market effect. If people saw the data the next day, they come to the conclusion that the bank must be in trouble.” Openness and transparency are evidently grey areas for Mr. Frank. Despite the non-disclosures, free Fed bucks, accounting fraud and uninterested regulators, over 300 banks managed to go out of business in the last two years, essentially bankrupting the FDIC. Have no fear. The Treasury gave the FDIC an unlimited line of credit with your money.

 

It is fascinating that every Friday afternoon the FDIC announces approximately three bank failures. Steady as she goes. No panic. Just a slow trickle of failure. But the reality is much worse than the show. Despite the gimmicks of extending and pretending, there are 900 banks essentially insolvent sitting on the FDIC “Problem” list. This is after closing the 300 banks. There are at least a couple hundred billion of losses in the pipeline, to be funded by the American people/Chinese lenders. A critical thinking American might ask, if things are getting better, why does the number of troubled banks continue to rise week after week, month after month?

One year ago the website www.businessinsider.com listed the 10 major regional banks with the highest risk from commercial real estate loans. These 10 banks had $133 billion of commercial real estate loans on their books. Most, if not all, are still in business today. The fact is those real estate loans are worth 30% to 50% less than they are being carried on the books. A true valuation of these loans would put all 10 of these banks out of business. They are dead banks walking. In a world where transparency, honesty, and true free markets reigned supreme, these banks would pay for their poor risk taking choices. They would be liquidated and their assets would be sold off to banks that did not make horrific lending decisions. Failures would fail.  

Bank CRE Loans (bil.) % of Tier 1 Capital
NY Community Bank $22.0 915%
Wintrust Financial Corp. $3.4 419%
M&T Bank $20.8 378%
Synovus $11.2 376%
Wilmington Trust $4.0 369%
Marshall & Iisley $13.8 283%
Zions Bancorporation $13.4 253%
Regions Financial $28.3 218%
UMB Bank $1.3 156%
Comerica $14.3 97%

 

How could anyone deny the world is back on track after examining the following chart?

 

It should warm your heart to know that Financial Profits have amazingly reached their pre-crash highs. All it took was the Federal Reserve taking $1.3 trillion of bad loans off their books, overstating the value of their remaining loans by 40%, borrowing money from the Fed at 0%, relying on the Bernanke Put so their trading operations could gamble without fear of losses, and lastly by pretending their future losses will be lower and relieving their loan loss reserves. The banking industry didn’t need to do any of that stodgy old school stuff like make loans to small businesses. Extending and pretending is much more profitable. 

The big four of JP Morgan, Citigroup, Bank of America, and Wells Fargo should have undergone orderly bankruptcy liquidation in 2008. They took on a vast amount of leverage and a vast amount of risk. Their greedy bets went bad. In a true capitalist system, they would have failed. Instead, in our crony capitalist system, they were bailed out by taxpayers and continue to function as zombie banks pretending to be healthy. They reported profits of $34.4 billion in 2010. Every dime of these profits was generated through accounting entries that relieved their provisions for loan losses. These “brilliant” CEOs who virtually destroyed the worldwide financial system in 2008, looked into their crystal balls and decided their loan losses in the future would be dramatically lower. I’ll take the other side of that bet. I dug into their SEC filings to get the information in the chart below. Just the fact that Citicorp and Bank of America have still not filed their 10K reports after 3 months tells a story.

Bank   Source CRE Mortgages Credit Card Total Loans Loss Reserve % of Loans
JP Morgan 12/31 10K $53,635 $174,211 $137,676 $692,927 $32,266 4.7%
Citicorp 9/30 10Q $79,281 $209,678 $216,759 $654,311 $43,674 6.7%
Bank of America 9/30 10Q $77,062 $394,007 $142,298 $933,910 $43,581 4.7%
Wells Fargo 12/31 10K $129,783 $337,105 $22,375 $757,267 $23,022 3.0%

 

These four “Too Big To Fail” bastions of crony capitalism have $340 billion of commercial real estate loans on their books. That’s a lot of extending and pretending. Just properly valuing those loans at their true market value would wipe out most of their loan loss reserves. I wonder if Vikrim and his buddies have noticed that home prices have begun to plunge again. Deciding to not foreclose on home occupiers that haven’t made a mortgage payment in two years is not a long term strategy. These four banks have $1.1 billion of outstanding mortgage debt on their books. I wonder what a 20% further decline in home prices will do to these loans. Throw in another half a billion of credit card loans to Americans being hammered by soaring energy and food prices and you have a toxic mix of future losses. These banks are gonna need a bigger boat.

The game of extend and pretend at the expense of the American working middle class is growing old. When this game is over, Wall Street will be looking for another bailout. The American people will not fall for the lies again. Wall Street’s oppression reeks of greed and disgrace. They are liars and thieves. They have pillaged and stolen all that was left to steal. I will be surprised if they get out alive.

Well you are my accuser, now look in my face
Your opression reeks of your greed and disgrace
So one man has and another has not
How can you love what it is you have got
When you took it all from the weak hands of the poor?
Liars and thieves you know not what is in store

There will come a time I will look in your eye
You will pray to the God that you always denied
The I’ll go out back and I’ll get my gun
I’ll say, “You haven’t met me, I am the only son”

Dust Bowl Dance - Mumford & Sons