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The stroke of brilliant political brinksmanship has met its end. The plan to cover authorized expenditures the require raising the debt ceiling with a trillion dollar coin has been nixed by the Federal Reserve.

If the Fed won't play ball then it doesn't really work. An administration determined to finance the government via platinum coin seigniorage over the objections of the Federal Reserve Board could probably find a way to do it, but a high-profile fight with the Fed would drastically undermine any market reassuring properties of this means of avoiding default.
This weakens the Obama administration's bargaining position over the next round of hardball budget negotiations.

Here is a little thought experiment. Do what the banksters do with the acquiescence of Treasury and The Fed. But first, context:

Banks in general are supposed to use market prices when they tell investors how much the vast majority of the bonds and stocks and other financial assets they own are worth. That's called mark-to-market accounting. But when market prices aren't available or reliable, banks are allowed to use internal models or their own judgment to determine how much a security is worth.
Why can't "mark-to-make believe" work as well for the Treasury as it has worked for the banks? Fannie Mae and Freddie Mac are littered with crap mortgage-backed securities. It is paper, after all, that reflects some value of the underlying asset. The Fed has shown a willingness to accept MBS in exchange for a cash infusion. There is a precedent for this idea.
"any junk will do"
Wasn't that the premise of the trillion dollar coin all along?
Discuss

The daily lunchtime email blizzard provided something interesting. And cruel. And nauseating.

A new video presents employees at Sensata Technologies commenting on a recently leaked video in which Republican presidential candidate Mitt Romney lauds the gift of being born in America. From his comments:

The Bain partner I was with turned to me an said, you know, 95% of life is settled if you are born in America. This is an amazing land and what we have is unique and fortunately it is so special that we are sharing it with the world.
Indeed. American manufacturing jobs are awesome. The middle class was built with jobs that pay a living wage. How did Bain Capital acquire this bright spot of productivity and profitability that is Sensata Technologies? The Nation outlines how Sensata's chain of ownership eventually landed in Bain Capital's hands.
The Sensata Technologies plant, which has been on the forefront of producing state-of-the-art automotive sensors, was owned by Texas Instruments, and then by Honeywell, before being sold in 2010 to Sensata Technologies Holding, N.V, a firm based in the Netherlands but majority-owned by Bain Capital. Bain, the private equity firm that Mitt Romney helped to develop and that continues to make him a very rich man, has since consolidated ownership of Sensata.
This is where the story takes a perverse turn.

Look at how many jobs that Sensata, under the management of Bain Capital, is creating with this image captured from their job postings page. Pay close attention to the outlined area. Click through for a larger image.

Sensata Job Openings

See! Romney does know how to create jobs. You don't even know how to speak Mandarin.

Two gross insults emerge from a few minutes' reading into this story. This Illinois parts manufacturing plant is both profitable and competitive. Bain Capital rubs salt into these wounds borne by these soon-to-be former Sensata employees. They can buy themselves a little more employment by training the Chinese workers who will replace them.

Discuss

The "no one could have imagined" excuse is worn thin.

Raúl Ilargi Meijer of The Automatic Earth asks the hard questions about why banks have been allowed to pillage trillions of dollars from the world economy through the Libor rate-rigging scam.

Let's be bluntly honest here, why don't we: both Geithner and King are simply lying. And even if we can't prove they are lying, we can certainly state that their words lack all plausibility. That is because LIBOR is arguably the most important number in the financial industry of the past two decades, and people who reach positions such as the ones Geithner and King hold, MUST have known for a long time what was going on with LIBOR.

Along the same lines that you don't win a Nobel prize in physics if you don't know that E=MC squared, you don't get the world's top jobs in overseeing banking and finance if you don't know what and who is involved in LIBOR. If only because it would make you a potential threat to those profiting from it.

The reason LIBOR was used as the foundation for TARP and other bailouts despite the fact that in the fall of 2008 everyone in the field knew it was rigged (well, except for Mervyn King) was not because there were no - potentially more reliable - alternatives that could have been used. No, it was the very fact that LIBOR was the rate that could most easily be manipulated. And was. Had been for years. The proof is there for all to see. Emails and letters are there to show this, no matter what denials are issued.

Alas, I suspect BoE's Mervyn King to be a liar about the timing of his knowledge that Libor is not a credible benchmark.

This email exchange from 2008 provides evidence. The British Bankers Association, the entity that reports Libor daily, rejected all but the first two of these recommendations.

Discuss

Wed Jul 25, 2012 at 11:16 AM PDT

The Lie of "Trickle Down" Economics

by Ozymandius

Presidential candidate Mitt Romney's wealth has focused increased scrutiny on America's trickle down fiscal policy and offshoring of wealth. Both have been to the benefit of a very small percentage of the American population. In the thirty years (with few aberrations) that American tax policy has reflected the Reagan-era economic model, we can easily measure the effects of Reaganomics. Thirty years on the road to nowhere makes an indelible mark on the map.

The U.S. tax policies of the past thirty years have heavily benefitted the wealthiest and smallest segments of the population. The infamous one-percent, the so-called job creators, have glowed in the largesse of tax policy. Contrary to the skyrocketing wealth of a few, one can easily argue that economic mobility for those on the lowest of the income ladder has stalled. This chart from The World Top Incomes Database shows the history of income distribution over the past thirty years. I added income fluctuations at approximately ten year intervals. Trickle down simply has not happened.

Join me as we look at facts and charts.

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The London Interbank Offered Rate (LIBOR) is arguably the single most important short-term interest rate in the world. Loans for mortgages, credit cards, small businesses and automobiles are just a few of the credit products that reflect a relationship with LIBOR. Using some basic math and a step-by-step calculations, we can demonstrate how Barclays and other banks extracted wealth from trading partners and customers.

Just bear in mind that LIBOR is the benchmark for short-term loans of varying duration not exceeding one year. Loans are structured on a 31-day month, 360-day year.

To demonstrate how basic interest formula works, simple interest is calculated using real numbers and a LIBOR interest rate quote from last week for a $1 million loan for one month. The interest rate of 0.24875% is the average for this duration.

Simple Interest Method 1

M(t) denotes the measure of time - the duration of the loan in the number of days. You can notate this formula a different way. The answer will be the same as above.

Simple Interest Method 2

Interest rate swap formula is where this calculation gets a bit more complicated. Banks will often enter swap agreements with their customers. A 'swap' is an arrangement in which banks will occasionally exchange interest rate payments. Swap agreements provide banks a primary target for market manipulation. In essence, banks have the power of little gods to control the flow of global capital.

Next: How they did it.

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Sometimes an avalanche of information can make correlations -and finding direction in correlations- very difficult. The Libor rate-rigging scheme has provided a focus that cuts through abundant irrelevant data. Regulatory capture is one item that has glowed brightly in the unfolding Libor drama. 


For the uninitiated, regulatory capture is,
the process by which regulatory agencies eventually come to be dominated by the very industries they were charged with regulating. Regulatory capture happens when a regulatory agency, formed to act in the public's interest, eventually acts in ways that benefit the industry it is supposed to be regulating, rather than the public.
The banks wield great influence over the entities that are supposed to oversee their adherence to the rules.
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Tue Jul 10, 2012 at 07:16 AM PDT

Libor Stands to Overwhelm Banks

by Ozymandius

The Libor scandal continues to grow. Now that we have a clear idea of how the deception was perpetrated, one can develop an appreciable sense of how this scandal will develop in Europe and, eventually, in the United States. The crisis has not received as much attention in North America as it has across the Atlantic. That will change as litigation moves through the system.

Lawsuits that began nearly a year ago bring sunshine into the idea that banks rigged the credit markets to their own advantage. The go-go real estate days of the past decade inflated credit market bubbles just as they artificially inflated real estate prices. That perspective will bring clarity and relevance of Libor manipulation to the American public.

Former Labor Secretary Robert Reich argues that U.S.-based banks must be complicit in this international fraud ring.

The biggest Wall Street banks – including the giants JP Morgan Chase, Citigroup and Bank of America – are likely to have been involved in similar manoeuvres. Barclay's couldn't have rigged the Libor without their witting involvement. The reason they'd participate in the scheme is the same reason Barclay's did – to make more money.In fact, Barclays' defence has been that every major bank was fixing Libor in the same way, and for the same reason. And Barclays is "co-operating" (giving damning evidence about other big banks) with the justice department and other regulators in order to avoid steeper penalties or criminal prosecutions, so fireworks in the US can be expected.
In other words, it's only a matter of time before the legal firestorm envelops U.S. banks that deal in derivatives markets worth hundreds of trillions of dollars.
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It is almost quaint that only five banks are mentioned in this Reuters story about the Libor rate-rigging scandal. Barclays leads the way being the first bank to be hit with nearly a half billion dollar fine. Soon, it seems, they will have company.

The 360º survey of damage from rigging Libor rates has begun to percolate. Layers of political and social damage can be assessed from the permissive attitude between government regulators toward mega-banks. One can argue, as British Business Secretary Vince Cable has done, that banks have capitalized on crippling economic growth.

Other financial institutions have been swept into the maelstrom: Deutsche Bank, UBS, RBS and the Bank of England. It is virtually guaranteed that damage will come in many forms now that investigators and litigants have obtained private communications between people at each bank who had a hand in falsifying Libor rates.

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Fri Sep 23, 2011 at 08:05 AM PDT

Twist and Shout

by Ozymandius

The Federal Reserve's 'Operation Twist' is the wrong medicine at the wrong time. It has succeeded in stoking sentiment that our economic ship is in much more dire straits than has been previously revealed. Recent history shows that our economic situation is in a bad way. The 'twist', which I view as an act of desperation, evidences that our economic state is in an evermore dilapidated state.

This is like the Fed throwing sticks and pebbles at a hillside in hopes of starting an avalanche. The energy needed to rejuvenate our economic metabolism is wholly underwhelming in this latest effort.

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There is some irony here. Britain's banking industry was touted as a model for the brave new world of finance in the 1990s. This model served as the impetus for passing the Gramm-Leach-Bliley Act. The argument for passing the act focused on keeping America competitive with overseas markets. The markets have obviously changed since the financial meltdown of recent years. The meltdown required huge sums of public money to stabilize banks that set themselves on fire with mechanisms that sprang from reckless financial innovation.

Britain's government has learned a few lessons from these mistakes.

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Cross-posted at macroindex.

William Black is a professor of economics and law at  the University of Missouri-Kansas City School of Law. He was the senior regulator during the S&L crisis of the 1980s. If anyone knows the anatomy of a white collar bank heist, that would be Professor Black. His latest submission to the Huffington Post serves as an indictment of our criminal justice system's failure to treat financial crimes as crimes and the perpetrators as criminals.

Black's focus weighs on the mortgage finance fiasco we have experienced over the past three years. The blowback from CDO gimmickry, derivatives, leverage and fraudclosure underline a financial system that is irretrievably broken. Yet, this system continues its existence with the extraordinary largesse of the American taxpayer and the blind eye of the Justice Department.

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Bobswern and teacherken have posted diaries using Bob Herbert's latest column as a point of departure. I would like to use this column as well to explore some points that touch on some aspects that reflect on who we are as a society and a few academic angles that have pointed relevance in the real world.

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