There have been some signature events of the past few years that have gone unheralded, but yet are quite significant.
Probably few will recall the first time the Federal Reserve began purchasing US Treasury Debt. It was March 19 of 2009. A program of treasury purchases amounting to over $900B began, which defied the 96 year history of the Federal Reserve Banking System. If you question the impact of that event, simply look at interest rates for the last decade and you'll see them plummet to near zero (c'mon, how close can you get to zero when you're at 0.14%!?). You'll also see the Federal Reserve Discount Rate decouple from the LIBOR (London Inter-Bank Overnight Rate, a true market driven rate). Simutaneously, Gold climbed steadily from then-record-high prices of $956 to where it is today (between $1700 and $2000). Gas also went from $1.50 to where it is today, around $4 per gallon. This $900B purchase of Treasury Bills later became known as QE1 (Quantitative Easy Round One), because TARP 1 (Toxic Asset Relief Program One) had not had the intended consequence of freeing liquidity and credit.
Fast forward three years later, after a perpetual tug of war between Greece and the Euro Zone, and to a lesser extent between Spain, Italy, Portugal, and Ireland and the Eurozone, and the ISDA (International Swaps & Derivatives Association) just declared that Greek defaults (through an orderly settlement) do not constitute defaults to trigger benefit payments on CDSes. (CDSes are Credit Default Swaps where an insurer pays the default amount if a debtor fails to make scheduled payment on a debt instrument such as a MBS (Mortgage Backed Security) or a CDO (Collateralized Debt Obligation) - CDSes are also sold to Bond Holders as a hedge against the risk of holding a bond, including sovereign bonds issued by countries like Greece).
The impact of this news is hard to assess. Most of us are unaffected directly (unless your financial adviser happened to recommend Greek bonds, like Jon Corzine), but it could be one more domino that perpetuates a global financial collapse (I was going to use the word crisis, but we've gone from a threat to a literal collapse in the last three years that will make Lehman Brothers and Bear Stearns look like a walk in the park). If a stoke of the pen can reduce the protection of an insurance claim to nothing, then why would you hedge your bond risks with CDSes? Going forward, there will be no insurance because there will be no serious demand. Zip, nada, kaput! There will be no buyers because there's no payable benefit when governments and institutions intervene by fiat.
Since the default of Greece (still only in theory because they've borrowed Euro 130B to pay their obligations enough to get them some negotiating room with creditors at below 50% on the Euro, but by mid March, without the negotiation, they'll begin defaulting in mass) is all but certain, without any insurance, in spite of the massive returns on Greek debt (over 136% currently), why would anyone purchase more Greek bonds? If they can't pay today's outstanding bonds, how are they going to make payment on future bonds!? The cash starved country of Greece has just been sentenced to death.
But it's worse than that, because Spain and Portugal immediately sense the advantage of repaying 50¢ of each dollar (okay, okay, it's in Euros, but I can't find the Euro symbol on my keyboard), and more than a year ago, they began downplaying their own credit health in search of negotiated settlements. It's hard to say that the fudging of their numbers might be eclipsed by the actual destruction of their credit by true market forces when their ratings collapse along with their banks that may hold Greek debt. As they say, the contagion is spreading quickly.
In other, unrelated news, the IRS (branch of the Treasury) has released a binding interpretation of Rule 382. Rule 382 simply disallows a company being sold to transfer it's NOL (Net Operating Loss) during a sale - the loss for tax purposes is wiped out. You can imagine the horseplay that would ensue if companies could sell their losses as an asset. The rule was created in the 1980s but with respect to the TARP program in 2009, the IRS waived it for the purchase of bank assets, which came in the form of preferred stock in America's biggest banks. This meant the US Treasury bought it's own Deductions against forthcoming revenue. If it sounds crazy, that's only because it is. The official announcement ended with "The IRS Notices interpreted the law in the best interest of taxpayers". I can't imagine the contortions of logic necessary in giving away our tax revenue to undeserving banks, but not much makes sense these days.
These are strange days, indeed. We are lied to constantly, telling us a new measure or policy is for our own good, when in fact, it is something to protect connected individuals. Ultimately, we later discover:
- that the AIG bailout orchestrated by Hank Paulson (then Secretary of the Treasury, previously CEO of GS) was critical for Goldman Sachs;
- that IRS Rule 382 can be selectively suspended for the exclusive benefit of the banks;
- that robo-signings and fraudulent foreclosures are swept under the rug with a payout of $7000 per family at a loss of their homes by a nation wide settlement setting aside individual claims;
- that Unemployment rates have gone down only by changing the formulae by which unemployment is calculated, through eliminating over a million of those whose 99 week benefits have run out;
- that the subordination senior bond holders to save Chrysler in bankruptcy was used to save the pension fund of the UAW, but then Chrysler was later sold to Fiat, but only first after being bailed out by taxpayer dollars;
- that GM, first bailed out by the tax payer, then given over to the union pensions, is turning a profit when said profit only results from stuffing the channel with Volts, so much so, that there's no more room on the lots for the Volt and production needed to be halted, costing 1,500 jobs
There's one thing in common with each of these events - "Necessity". Each time one of these breath taking measures was taken, it was because of a "Necessity". The American banks, the car companies, the banks again, the European Governments holding Greek bonds, the banks again, were too big to fail and our leaders assured us of the necessity. But when are we the people of America too big to fail? Each one of these measures undermines confidence, but it's only upon confidence that such a massive yet fragile construct as the global economy is based. Going back to "Necessity", I quote William Pitt from 1783, "Necessity is the plea for every infringement of human freedom. It is the argument of tyrants; it is the creed of slaves."
Some warn us that we are on the "road to serfdom", but I fear we are already there...
