Yu, who has a sixth-grade education, said she thought her money was in a savings account. She didn’t know she had lent it to a bankrupt American securities firm. Eventually, she found out that her HK$1.2 million ($155,000) nest egg was gone. Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments.

“There is no way a person like me could understand any of this,” Yu said, dabbing her eyes with a tissue in a coffee shop in Hong Kong’s financial district. “Sometimes I feel like jumping off a building.”

Yu, who has a sixth-grade education, said she thought her money was in a savings account. She didn’t know she had lent it to a bankrupt American securities firm. Eventually, she found out that her HK$1.2 million ($155,000) nest egg was gone. Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments.

“There is no way a person like me could understand any of this,” Yu said, dabbing her eyes with a tissue in a coffee shop in Hong Kong’s financial district. “Sometimes I feel like jumping off a building.”

‘Information Asymmetry’

Yu, a mother of six who emigrated from mainland China in 1962, didn’t have a chance, according to Joseph Stiglitz, a Columbia University economics professor who won a Nobel Prize for his work on the effect of unequal access to information on buyers and sellers in financial markets.

“As securities got more complex, the opportunities for gaming, to the disadvantage of ordinary people, increased,” Stiglitz said. “Complexity opened up new venues for information asymmetry, which banks exploited.”

‘Information Asymmetry’ is just a fancy way of saying Insider Information, the kind the big players get, but you can’t have. This is the difference between the classes.

Yu said she went to an export trade show in Hong Kong two years ago and met Chow Chi Chung, a salesman for Amsterdam-based ABN Amro Holding NV. He offered her a better return on her savings if she switched banks, she said. So she did.

Two-thirds of Yu’s money, about $100,000, came from a settlement with her employer after an elevator fell half a floor, injuring her pelvis, according to Yu, who still drags her right leg when she walks.

Unfortunately, she didn’t read the prospectus.

A month after their meeting, Yu said Chow called her to say he had a new product that could return as much as 20 percent a year because it was linked to the stock performance of three large Chinese companies — China Communications Construction Co.,China Merchants Bank Co. and Ping An Insurance Co.

Yu said she didn’t read the fine print, trusting Chow when he told her she couldn’t lose her principal. Had she looked at the prospectus and understood it she would have discovered that she had essentially bought three call options — contracts that would capture gains if the shares of the three companies rose by a certain amount — coupled with the equivalent of a Lehman corporate bond. If Lehman defaulted, her money would be gone.

Whether she didn’t read the prospectus or couldn’t, the scenario begs the question. How many adults with a sixth grade or even a college education understand call options or any other kind of derivatives contract? ‘Information Asymmetry’ is just a nice euphemism for a not so nice con game that costs more than just money.

Sun Kwan wasn’t out for a killing, when he bought Lehman minibonds.

Sun, who has a high school education, invested about $285,000 in Lehman Minibond Series 12 notes, sold to him by BOC Hong Kong, which paid about 4 percent interest a year.

He said he thought he was putting his money into a certificate of deposit. Instead, as the prospectus explained, the notes were a bet against the default of the Chinese government and five companies, including Hutchison Whampoa Ltd., which operates ports and telecommunications services, Chinese state-owned oil producer CNOOC Ltd. and Lehman.

As an incentive, he was given $26 in supermarket coupons.

$26 in supermarket coupons, a swap for the life saving of  a man and his family, including his dignity!

“It’s all gone,” Sun said in an interview conducted through a Chinese translator at the demonstration. “I almost wanted to kill myself. I’ve been crying for months, even though I am a man.”

He said he hadn’t yet told his 25-year-old son, Sun Chi Yan, what had happened to his nest egg, most of which came from a settlement when the government bought his family’s land.

Sun was sold the bonds, then promptly sold out.

Like a child learning to ride a bicycle relies on his mother to catch him, the  novice investor relied on the moral and fiduciary obligations of the peddlers of their financial ruin, and the regulators who backed those obligations up. With the world-wide Ponzi scheme coming apart at the seams, it was they who could see we were going too fast, even though the child didn’t feel like he was falling, his mother knew he was going too fast. But instead of slowing him down or catching him when he fell, the mother pushed him over. Then, as the injured child cried, the mother sold him into slavery just as she had intended to do so all along.

To Lehman Brothers, no one else mattered. Where sharks swim, they swarm, and with the body of Bear Stearns still warm, the hunt was on for Lehman Brothers.

Guilt is perhaps the most expensive human cost, carrying with the stain of shame and the residue of unworthiness.

The amoral mind cannot suffer, but the guilt riddled one tortured beyond measure is willing to do anything to repay what cannot be repaid. So, Kirk Stephenson, while suffering unbearable shame, seeing no way out finally repaid all that he could in the only manner he could find. It cost him everything.

It took only 10 days for the ice-nine to get to Kirk Stephenson, chief operating officer of Olivant Ltd., a London private-equity firm run by former UBS AG ChairmanLuqman Arnold. On Sept. 25, Stephenson, 47, jumped in front of a train going 125 mph at a station in Taplow, 28 miles (45 kilometers) west of London.

The coroner’s office for the county of Buckinghamshire ruled the death a suicide. Stephenson, a native of New Zealand, was despondent about the financial crisis and talked about killing himself one week after Lehman’s demise, according to a statement from his wife read at the coroner’s inquest.

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Bank of America Corp. is trying to avoid paying billions of dollars in fees to U.S. taxpayers for guarantees against losses at Merrill Lynch & Co., saying the rescue agreement was never signed and the funding never used.

Regulators contend Bank of America owes at least part of a $4 billion fee it agreed to pay in January — even without a completed legal document — because the company benefited from implied U.S. backing on about $118 billion of Merrill Lynch assets, such as mortgage-backed bonds, people familiar with the matter said. The Charlotte, North Carolina-based bank says it owes the Treasury nothing, according to the people, who declined to be identified because the negotiations are confidential.

The banker billionaires must be bellowing up to the “give us more more more” bar. Seems a little bit of reality in the jobs numbers chopped the “green shoots” theory down to size, and since the first stimulus did not work so well, Congress has decided to do another. Nancy Pelosi, the corporate house whore, is leading the charge for the Democrats.

Today’s disappointing jobs number is certain to trigger a serious push for a second stimulus bill.

The talk was already happening. Earlier this we[e]k, John Judis at The New Republic argued that one was needed. Also this week, Obama responded to a question about a possible second stimulus by saying it was “too soon” to know whether one would be needed, suggesting that it’s certainly on the table. Of course, House Speaker Nancy Pelosi was in favor of a second stimulus before the ink even dried on the first one, so it shouldn’t be much of a stretch to get it through the Congress, especially with the Democrats newly-solidified supermajority in the Senate (welcome Sen. Franken!).

And now we’ve heard it at least 10 times this morning on CNBC. The market is looking for its hit.

And, of course, anything for the market…

This is how it’s supposed to work: we have spent and indebted ourselves to the verge of bankruptcy, so we will borrow once again to buy time to repay more debt than we can repay now. In other words, we’re trying to dig ourselves out of the hole that we dug ourselves into by digging deeper. We’ve been hearing analogies of this type for so long now that you can be sure even the White House understands what’s going on. But this government, which is intent on destroying the United States, just keeps digging us in deeper.

Prediction: We’ll get it by the end of the year.

Observation: We’ve already got it. With a Ponzi scheme like this, it kind of makes you wonder what they had against Madoff.

Keynesian economics was developed to provide academic cover to a theory so blatantly flawed as to render it defenseless under any ordinary attack of sound logic. But surrounded since it’s inception by layers of PhD s and volumes of Fed speak, until recently no one dare see through the emperors new clothes. It is doubtful though that any Keynesian actually believes any of it, anymore than the disciples of Leo Strauss believed in weapons of mass destruction or links to al-Qaeda in Iraq. Yet it was Strauss’s theory the Neo-Conservatives crawled under for intellectual cover, a necessary ingredient to excuse the inexcusable before the commission of a crime and vital to forgive thew unforgivable if it goes awry afterwards. Under his theory Strauss proclaimed religion could be used to endorse

,… “noble lies”: myths used by political leaders seeking to maintain a cohesive society.

Our leaders had always been lying Strauss a notable professor from an elite university provided a thin veil of academic legitimacy for the liars to rely on. The pseudo theory was just a fig leave too small for cover until there was a panic, the panic making the fig leaf was just big enough fit. And making it a Zionist endorsing religion, believing in neither, but using both who’s ideas formed the intellectual basis to push a nation to war for the riches of it’s corporate and political elite.

This was all laid out in 2004 by Micheal Ruppert in Crossing The Rubicon, which masterfully ties oil, Wall Street, drugs, and accurately predicted the housing and credit crisis all in a book on 9-11. In it, he considers the elites motivations.

There are many factors that the rulers of the American Empire now have to manage as they read their own delusional map of the world. They have to:    

• apportion dwindling resources among competitors, some of whom possess nuclear weapons;
• maintain and expand their control over enough of the oil and gas remaining to ensure their global dominance and maintain order among the citizens of the Empire;
• simultaneously manage a collapsing global economic system, made possible by hydrocarbon energy and in which the growing population is demanding more things that can only be supplied by using still more hydrocarbon energy;
• acknowledge that they cannot save their own economy without selling more of these products;
• control the exploding demand for oil and gas from engineered recessions and wars that break national economies;
• hide the evidence that they are systematically looting the wealth of all the people on the planet –even their own people– in order to maintain control;
• maintain a secret revenue stream to provide enough off the books capital for the purpose of providing themselves a distinct economic and military advantage, improving their technological posture, and funding covert operations;
• repress any dissent and head off any exposure of their actions;
• convince the population that they are honorable so they can maintain control after oil supplies have dwindled to the point of energy starvation.

It’s the first bullet on dwindling resources and the extermination of two thirds of the planets human population.

The global economy’s “free fall” may have ended, which could in turn hurt the U.S. dollar, Nobel Prize-winning economist Paul Krugman said. 

Well Krugman isn’t lying there. He is just kidding you.

The world economy is projected to shrink 1.3 percent this year, the International Monetary Fund said in April, reversing a previous forecast of 0.5 percent growth. Still, confidence in the global economy has jumped to the highest level in 19 months, based on a Bloomberg survey last week.

Interest-rate cuts by the U.S. Federal Reserve, moves by the Fed to buy assets such as mortgage-backed securities, and government stimulus spending have eased the crisis, Krugman told a seminar today in Ho Chi Minh City, Vietnam. The American economy may expand “slightly” in the second half, he said, citing a slowdown in the pace at which jobs are being lost.

That’s a bald faced lie.  Those moves by the Fed created the crisis. Interest rate cuts were steroids which caused kidney failure to the economy, and more steroids won’t help. The lie is so bad that to tell it Pauly had to stoop down to the bologna that the Bureau of Labor calls statistics. Still Krugman ignores the obvious.  Witness:

As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

Indicators

“Just about all of the economic indicators out there are suggesting that the free-fall has come to an end, that weve stabilized,” said Krugman, an economics professor at Princeton University in New Jersey. “Probably the worst in terms of shocks to the system is over.”

Singapore’s economy shrank less than initially estimated in the first quarter, signaling the nation may be past the worst of its deepest recession since 1965. The Bank of Japan may tomorrow raise its assessment of the economy for the first time since July 2006, said economists including Yasunari Ueno from Mizuho Securities Co. in Tokyo.

More lies! The free fall hasn’t ended on a mark-to-Mickey Mouse stock rally. “Probably the worst in terms of shocks to the system is” yet to occur, and all the management of lowered expectations can’t keep it away.

Measures of stress in financial markets have eased, Krugman told today’s seminar. 

Which measures? The same ones used to test the banks?

“The acute stress that we had last fall after the failure of Lehman has been reduced,” he said. “Interest-rate spreads on commercial paper are way down, interest-rate spreads on corporate debt are down a little bit. The spread on interbank lending is down.” 

Interest rates are way down. PERIOD, you dope!

The London interbank offered rate, or Libor, for three- month dollar loans fell 3 basis points yesterday to 0.75 percent, the British Bankers’ Association said, the 35th straight drop. The Libor-OIS spread, a gauge of banks’ reluctance to lend, narrowed to 55 basis points, the least since February 2008. It was as high as 364 basis points in October.

But hiding in the LIBOR is the story that ‘Exceptionally Wide’ Bank Spreads tells, namely that the banks are still hoarding the bailout cash.

The drop in the London interbank offered rate, the benchmark for $360 trillion of financial products, to a record low masks a growing gap between the rates that the biggest banks charge each other for credit. 

The difference between the highest and lowest interest rates banks say they pay for three-month dollar-denominated loans is near the widest this year, according to data compiled by the British Bankers’ Association. The spread signals that lenders still lack confidence in each other, even though measures ranging from the so-called Libor-OIS spread to corporate bond sales show credit markets have recovered from the freeze caused by the Sept. 15 collapse of Lehman Brothers Holdings Inc.

“It’s premature to judge that the credit meltdown is fully over,” said Kazuto Uchida, chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s largest bank. “Banks remain wary of extending credit to each other due to strenuous concerns about counterparty risk.”

But Krugman just can’t quit.

Global purchasing managers’ indices have improved, as have industrial production figures in the U.S. and freight-loading figures at major ports, Krugman said. 

“All of the indicators are telling the same story,” he said. “Things are getting worse, but they’re getting worse more slowly.”

Oh I get it. Crisis over. Get this Paul.

Following a trend that began in late 2007 and prevailed throughout 2008, US home prices continued to fall at a record pace over the first quarter of this year, dampening hopes the housing slump is nearing an end.

The S&P/Case-Shiller US National Home Price Index recorded a 19.1% decline in Q109 compared to Q108, marking the largest decline in the series’ 21-year history.

“We see no evidence that a recovery in home prices has begun,” said David Blitzer, chairman of the index committee for Standard & Poor’s

Pauly won’t say, but I will. There will be no stock market recovery, no milk maid’s recovery, no recovery of any kind, not even your kid from a cold, until the housing market recovers, stabilizing the defaulting of mortgage bonds. And just for your information Pauly, the housing market wont recover until we get lower house prices, not lower interest rates. Got it yet, Pauly? Then get it here.

Mark Gongloff touches upon some truisms in today’s Ahead of the Tape column in the WSJ. Most significantly, he quotes Rosie on the Shadow Inventory, which when you include REOs and spec investors waiting to put their involuntary rentals back on the market, sends total inventory back over 12 months supply.
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As to halting the fall of prices, I believe that’s backwards — we want prices to normalize, so that more people can afford homes. Until that happens, Housing cannot begin to recover. 

Bounce or Stay?

While the first year of the current global economic crisis resembles the first year of the Great Depression, further declines along the lines of the 1930s-era financial collapse are unlikely, Krugman said.

There is no comparison.  In the Great Depression at least we had sound money, thus no hyperflation, and support from which the economy could bounce.

“I don’t think we’ve hit bottom, but the bottom is not too much further below us,” he said.

He is 1/2 right.

“My big concern is that we don’t hit the bottom and bounce, we hit the bottom and stay there. 

It is no concern at all. Aas soon as the marked-to-make-believe stock market rally fades, we will not bounce because we have not bottomed, so we will break.

“It’s not obvious where recovery comes from.” 

It’s obvious there will be no recovery until we let the banks fail and houses bottom.

A global economic stabilization may hurt the U.S. dollar, as will external American deficits, Krugman said.

“The U.S. dollar is going to fall quite a lot, or at least significantly,” he said. “The demand for dollars has been temporarily inflated by the crisis. Good news is actually bad news for the dollar. If things stabilize, then the safe-haven demand for dollars falls off.”

The main thing that’s been inflated is the dollar itself. “A global economic stabilization” wont hurt the U.S. dollar a bit, but the afore mentioned interest-rate cuts and printing of dollars by the trillions will throw it off the cliff.

China’s government in March suggested the creation of a new international reserve currency to replace the dollar.

“I view the Chinese agitation about a new currency as basically an attempt to have somebody rescue them from their own investment decision,” Krugman said. “China bought too many dollars. Now it’s looking at it and saying, ‘we’re going to lose a lot of money on this investment’.”

More lenders are tightening their restrictions for agricultural loans in the Midwest at the same time that repayments on loans have dropped, The Federal Reserve Bank of Kansas City says. 

The Federal Reserve reported Friday that its quarterly survey found that the percentage of lenders raising collateral requirements reached another record high in the Tenth Federal Reserve District. The rate of loan repayments also fell for the second straight quarter.

Turbulent agricultural conditions contributed to the tightened farm credit, the agency said.

“The thing to take away from all of this is … farmers are positioning themselves to get through turbulent times,” Federal Reserve economist Brian Briggeman said.

The fact that the Federal Reserve is in charge of things tells you that the foxes are in charge of the hen house.

The fact that a single entity, the Federal Reserve, engages in and has a monopoly on monetary policy has detrimental effects on the economy. As long as we try to keep up this fiction, that the Federal Reserve has a long-term focus, that attempting to fix interest rates will not distort the economy, and that the Fed can end a recession by injecting liquidity, we will never free ourselves from the booms and busts of the business cycle. 

The problem with Ponzi finance is that companies become so dependent on short term credit, that without it they can’t do business. It’s just like becoming dependent on credit cards to pay your bills. A good example is shipping companies which routinely finance their very next shipment by selling short term bonds.  

In a non-Ponzi finance economy, the shipping company would use its prior profits to ship food from, say, Los Angeles to Russia. The free market would set a rate allowing the company to earn a profit, and the people in Russia would eat.

In our Ponzi finance economy, they load the boat first, and then sell short term bonds to finance the shipment. The company makes a profit and repays the loan with interest from the profits. Crazy, you say, because in addition to the shipping expenses the company now has to pay finance charges out of the same profit. Sure, it’s crazy, but only if you are sane.  

Here’s where we wave the magic wand of Ponzi finance: management at the shipping company says to itself “let’s pay back the bonds by issuing new bonds.”  Ouch, that’s stupid!

Management might think it’s cool, but this is just like you using MasterCard to pay Visa. It works, but only for while. And it doesn’t just stop working. It crashes.

Agricultural companies in a Ponzi finance economy play the same game, but it’s you who will be caught in the food riots.

This is why it is so crucial to understand that up till now the Obama administration has done everything right to create food shortages. There’s no doubt about it; unless the government gets out of the way and lets the free market do its job, there will be food shortages. The only question is where and how hungry will you be.

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Indeed, it is reasonable to expect additional increases to credit reserves, because the economy will worsen, but it is unreasonable to expect the trading gains to continue in that worsened environment.

The best of times and investor complacency are gone, but no one at JP Morgan seems to have read the memo as the bank makes claim to a paltry $302 million in write-downs. Even a search of its first quarter 2009 10-Q produces a string of write-downs resulting in the footnote on page 40. And…

While the bank has largely avoided the losses and writedowns on complex debt securities and subprime mortgages that hurt other banks in 2008, it is heavily exposed to consumer credit and chief executive Jamie Dimon has warned that rising unemployment will hurt the bank’s consumer businesses in 2009. 

Avoided the losses and writedowns on complex debt securities and subprime mortgages? Or simply didn’t have to take them? What a coincidence! As as soon as they beat SFAS 159, the write-downs disappear, leaving the major action of the quarter in the markdown market.

• Net markdowns of $711mm on legacy leveraged lending
• Net mortgage-related markdowns of $214mm
• Alt-A exposure of $5.5B, difficult to hedge effectively

Legacy assets means long held assets that simply can’t be given it away. This is the junk that used to be called level three. $711 million + $214 million is the difference between where JP Morgan valued its stuff, and the market’s opinion of the same. If JP Morgan had to write down those very same assets, it would have come directly off the top line (revenue) and slammed to the bottom with a billion dollar thud. And that’s not counting the charge-offs on HELOCs  that totaled $248 million. What a difference!

If you can stand to, look now at the Alt-A exposure of $5.5 billion, which they say is difficult to hedge effectively. The real difficulty with the Alt-A is the most likely, namely default. If Jamie’s “economic environment worsens,” Alt-A will show its true intrinsic value:  zero. All $6.5 billion of the JP Morgan mark downs are living in what I like to call “write-down purgatory.” That’s just the surface of what was up for grabs. How much more funky junk does it still hold at fantasized valuations? No one knows, on the company press release, it lists mortgages.

• Prime – securities of $1.4B and $0.1B of loans
• Alt-A – securities of $1.3B and $2.7B of first lien mortgages
• Subprime exposure of $0.7B, actively hedged
• Commercial exposure of $6.5B, actively hedged

That adds up to $12.7 billion, and JP Morgan wants you think you will live forever and they will actually collect it. Do you believe them? If you do, then you believe that those very same prime and Alt-A loans will be fully repaid on time, as will the same atrocious subprime loans. You probably also believe the commercial mortgages will not deteriorate with “Jamie’s economy.”

JP Morgan may as well ask you to suspend your belief in gravity. On earth the $19.1 billion would easily be the low ball estimate of this quarter’s addition to what was – until just a few weeks ago – level-3 assets.

Finally in the “we win for losing” category, JP Morgan says $679 million fell under victim under SFAS 157.

Fixed Income Markets revenue was a record $4.9 billion, compared with $466 million in the prior year. The increase was driven by record results in credit trading, emerging markets and rates, combined with strong results in currencies and gains of $422 million from the widening of the firm’s credit spread on certain structured liabilities. 

[...] 

as well as gains of $216 million from the widening of the firm’s credit spread on certain structured liabilities.

So, part of JP Morgan’s dazzling profit increase came from a decrease in the price of its own bonds. The company reports a gain because they could retire the bonds and buy them back at a cheaper price. Think that works? Try it with your home that’s under-water. It’s blatant hocus pocus, but that’s financial accounting standards.

JP Morgan’s actions tell the truth. Part of that truth comes courtesy of the credit loss provisions in the investment banking division which doubled from $618 million a year ago, and $6 billion big ones the bank stealthily raised on, so fittingly, April fools day. You seriously can’t make this stuff up.

Net revenue was a record $8.3 billion, an increase of $5.3 billion from the prior year. Investment banking fees were $1.4 billion, up 14% from the prior year. Advisory fees were $479 million, flat compared with the prior year. Debt underwriting fees were $593 million, up 63% from the prior year, driven by improved bond market conditions, as well as higher loan syndication fees compared with a weak prior year. Equity underwriting fees were $308 million, down 14% from the prior year, due to continued challenging market conditions. Fixed Income Markets revenue was a record $4.9 billion, compared with $466 million in the prior year.