Goldman Sucks: Dec 26, 2011

26 December 2011

Bankruptcy Filing Raises Doubts About a Bond Repayment Pledge

Mark Almond/Birmingham News, via Associated Press

Birmingham, Ala., is in Jefferson County, Alabama's most populous county. The county's debt totals $4.1 billion.

By MARY WILLIAMS WALSH

Published: December 23, 2011

People who own what is considered the safest type of municipal bond may be in for a surprise.
This safe debt, called a general-obligation bond, is said to be the next strongest thing to Treasuries because it is backed by a “full faith and credit” pledge. That means the government that issued it will pay it on time, no matter what.
But now Jefferson County, Ala., has stopped paying such debt, breaking with convention and setting up a fundamental test of what full faith and credit truly means.
“We all want to know, ‘What’s the truth here?’ ” said Richard A. Ciccarone, chief research officer at McDonnell Investment Management. “The way I learned it, full faith and credit was considered all the taxing power of a community, and that means there’s an infinite pledge. When you get into bankruptcy court, truth is something that can be revealed in a new way.”
Jefferson County filed the biggest Chapter 9 bankruptcy in United States history last month, raising new uncertainty about the safest municipal bonds. Court precedent offers few answers. Municipal bankruptcies are rare, and most have involved tiny, special-purpose districts that did not even have general-obligation bonds, having issued revenue bonds, which are considered riskier because they guarantee repayment solely from money generated by a specific project like a toll road.
The few places that have gone bankrupt with general obligations outstanding have sent reassuring signals, making payments even though they were not required to in bankruptcy. Orange County, Calif., the previous Chapter 9 record-holder, took a few extra months to pay some maturing debt, but it compensated investors for the delay by giving them almost a full percentage point more interest than it otherwise owed them.
The small city of Central Falls, R.I., has been duly paying its general-obligation debtholders in Chapter 9 this year, bolstered by a new state law giving those investors priority over everybody else.
Jefferson County, by contrast, is taking advantage of the automatic stay granted in bankruptcy, which bars creditors from demanding payments or grabbing collateral. Officials say they stopped sending cash to the county’s paying agent in November and will not send any money this month, either.
Bankruptcy experts have long known that in theory a municipality could use the stay to revoke its full faith and credit pledge, but they have not watched a big distressed city or county go through with it. “You’ve got a case here where the rubber has hit the road,” said Kenneth N. Klee, a bankruptcy lawyer representing Jefferson County, whose debt grew out of poorly conceived efforts to finance a court-ordered rebuilding of its sewer system.
The county’s nonpayment is not its only surprise. Like many places, it used newfangled instruments to circumvent constitutional limits on how much debt it could legally issue. In Alabama, counties are required to hold a referendum before issuing any general-obligation bonds. So Jefferson County has not issued such bonds since the 1950s. Instead, it issues warrants, which look nearly identical but do not require the referendum.
Official disclosures promote the county’s warrants as “general obligations,” toward which “its full faith and credit have been irrevocably pledged.” Sounds good, but what does it really mean? Conventional wisdom has it that if a government defaults on a general obligation, its creditors can take it to court, where the judge will order it to raise taxes — as much as it takes, no matter how painful.
But that now appears to be a hollow threat in Jefferson County. Counties in Alabama do not have the legal authority to raise taxes. Only the state can do that.

Iran toughens cyber challenge to US, claims superior drones

Iranian Gen. Vahidi

Iran's Velayati 90 navy drill

Iranian Defense Minister Brig. Gen. Ahmad Vahidi Monday, Dec. 26, replied to Sunday's debkafile report which revealed Tehran's plan to use its big 10-day naval drill east of the Strait of Hormuz to test its vaunted cyber intelligence prowess against US warships. He said Iran has great capabilities in "all fields of national defense, including the use of intelligence drones as well as decoding of such aircraft and countering electronic and covert warfare." The Islamic Republic, he said, could employ aerial drones to counter any potential US-led covert war.
Vahidi's words implied two key points: That Tehran did not expect the US to carry out a lone strike against its nuclear facilities but in conjunction with fellow NATO member and Israel. And two, that the Islamic Republic has convinced itself that by downing the US stealth drone RQ-170, it has acquired all the technology necessary for repelling penetrations and attacks by drones and warplanes with stealth capabilities.
While boasting of its ability to overcome a "US-led covert war" by means of electronic and intelligence means, Iran's defense minister avoided making the same boast about a full-scale war offensive.
This, say debkafile's military sources, is because Tehran has reason to believe that Washington too in another strategic turnaround has stopped thinking in terms of a full-scale war against Iran and switched to a selective approach, as disclosed in an article by Matthew Kroenig he published in the latest issue of the authoritative Foreign Affairs.
According to this approach, the US could disable and demolish Iran's known nuclear facilities by targeting select facilities, such as "the UF6 plant at Isfahan which converts yellowcake into uranium hexafluoride gas; the heavy-water reactor at Arak and various centrifuge-manufacturing sites near Natanz and Tehran, all of which are located above ground and are highly vulnerable to air strikes."
Gen. Vahidi's remarks aimed at warning the United States that Iran is also capable of trouncing covert strikes on those sites. He said that Iran has great capabilities in all fields of defense and will develop and maintain its accomplishments which have been achieved during the most difficult circumstances and under full, comprehensive sanctions."
Sunday, Dec. 24, debkafile reported: Iran launched its 10-day naval drill "Velayati (Supremacy) 90" east of the strategic Strait of Hormuz Saturday, Dec. 24, to show its muscle - first of all to Washington in view of the Obama administration radically changed stance in favor of an attack to destroy the Islamic Republic's nuclear weapons program.
It is a message that, notwithstanding the proximity of US warships in the area, Tehran can close the Persian Gulf's Strait of Hormuz to the passage of one third of the world's oil consumption; and if attacked, it will not just hit back at US targets in the region and Israel; Saudi Arabia and Jordan are additionally in its sights.
Israel was informed of the US policy reversal on Iran in the one-on-one talk President Barak Obama held with Israeli Defense Minister Ehud Barak at Gaylord Hotel, Maryland on Dec. 16.
For Prime Minister Binyamin Netanyahu and Barak, the tightening of military coordination on Iran between the US and their government is a signal achievement for which neither has won kudos at home, where a sustained campaign is afoot to end their rule by raising one prickly domestic issue after another.

Philipp Bagus and Alasdair Macleod on Europe, inflation, and gold

In this video Philipp Bagus, Assistant professor of Economics at Madrid’s Universidad Rey Juan Carlos and author of The Tragedy of the Euro and Alasdair Macleod of the GoldMoney Foundation talk about the eurozone facing the problem that is characterised in the “tragedy of the commons” analogy. Bagus explains this phenomenon by way of an example of overfished and over-exploited oceans due to a lack of property rights on oceans. In Europe, governments run larger deficits than their “competitors” in order to externalise the costs to all users of the currency. Knowing these incentives, the Stability and Growth Pact was put in place as per the early 1990s Maastricht Treaty, capping budget deficits at 3% of GDP and the debt to GDP level at 60%. However there was no enforcement of these rules which is why there have already been more than 80 infringements to this stability pact without any repercussions.
They talk about possible solutions to the euro crisis. Bagus points out that there are basically three different ways to go about it. Firstly, governments could make drastic cuts in public spending and privatise public assets in order to balance their budgets. However, there will be – and is – strong political resistance to such proposals. Secondly, the eurozone could disintegrate, driven by a reluctance of German citizens to pay for other countries’ expenditures. And lastly, central banks and governments could decide to print their way out of the crisis, leading to high inflation.
Bagus says that as long as the incentive for running deficits exists there won’t be an increase in countries’ savings rates. Macleod points out that there is great institutional resistance to breaking up the euro. Bagus explains that the official opinion towards the euro is positive in Germany; however the sentiment on the streets looks quiet different. But as long as there is no political party devoted to this issue this mood is not likely to gain traction at least as long as inflation remains moderate.
Amid the ongoing expansion of the money supply and persistent deficits, Bagus can’t see the dollar gaining in value over the medium to long term. He also says that ECB policies are a lot more pragmatic than the ones undertaken by the US Federal Reserve. Talking about sound money, Bagus explains different ways to go about its introduction. One way would be to back all the money in existence by gold, adjusting the price of gold accordingly. Another would be to take away legal tender laws and have competing currencies. However this would require the governments to impose dramatic reforms, which is partly why they will oppose such measures.
This interview was recorded on November 15 2011 in Madrid.

Sir Mervyn King: debt crisis is causing a dangerous 'dependence on central banks'

Sir Mervyn King has used his position as vice-chairman of Europe's "early warning watchdog" to warn that the developing debt crisis is causing a dangerous "dependence on central banks".

Sir Mervyn said the action would help in the short term but called for longer-term solutions, including getting the European Financial Stability Facility (EFSF), the so-called "big bazooka" bail-out fund, up and running. Photo: PA, ALAMY

Just a day after the European Central Bank (ECB) provided a record €489bn (£407bn) of cheap loans to banks, the Governor of the Bank of England said the crisis had been made worse by “negative interlinkages”. He added: “Dependence on central banks has risen and signs are intensifying that stressed financial conditions are passing through to the real economy.” Sir Mervyn was speaking in Berlin following a meeting of the European System Risk Board.

His comments were taken as a view on the ECB’s radical refinancing operation unleashed on Wednesday. The action, which saw 523 banks borrow nearly half a trillion euros, is known as the “Sarko trade” after French leader Nicolas Sarkozy said the liquidity would allow each state to “turn to its banks” for finance. Economists have warned that making banks buy risky sovereign debt will not help the crisis.

But European markets were buoyed by the liquidity injection. In France the CAC rose 1.36pc and German DAX ended the day 1.05pc higher. In London, the FTSE 100 climbed 1.25pc.

By Louise Armitstead, Chief business correspondent

10:24PM GMT 22 Dec 2011

BofA mulls more asset sales to boost capital

By Rick Rothacker

Mon Dec 26, 2011 8:39am EST

(Reuters) - Bank of America Corp (BAC.N) is lagging behind its major U.S. competitors in complying with new capital rules, leading the bank to consider even more asset sales, sources said.

The bank's management is focused on not being an outlier compared to its peers and believes it has "viable alternatives" to increase its capital levels, a person familiar with the situation told Reuters.

The bank, for example, could consider selling its Indian back-office processing operation, as other banks have, sources said. The bank has also said it is looking to shed real estate holdings and private-equity investments.

But after about $50 billion of asset sales since January 2010, which include sales such as most of its shares in China Construction Bank Corp (0939.HK) (601939.SS), the bank may not have many big-ticket items left.

With one analyst saying the bank may need $45 billion of additional capital by 2019, it may have to start cutting deeper into its franchise. That would mean shedding more significant businesses, such as parts of the investment bank or the Merrill Lynch brokerage. The bank can also improve its capital measures by retaining profits and running off risky loans, but those steps will take time.

The bank declined to comment on specific asset sales.

The question of how much capital the second-biggest U.S. bank will eventually need to raise is a key concern that is rattling investors. Bank of America, which had to be bailed out by the U.S. government during the financial crisis of 2008, has remained one of the weakest in the industry.

For the last two years, Chief Executive Officer Brian Moynihan has worked to gradually streamline the company and build capital, but investors have been disappointed with the speed of a turnaround.

While the bank, like other financial firms, has suffered from a sluggish economy and concerns about the European debt crisis, it has also incurred self-inflicted wounds, including a now-canceled plan to charge customers a $5-per-month debit card fee.

Bank of America's shares are down 58 percent this year and closed below $5 on Monday for the first time since March 2009.

Capital Account: Max Keiser, America runs the "Special Olympics for Financial Fraud" (12/23/11)

Japan to borrow $1.9 Trillion in 2012, total debt heads to 1 Quadrillion Yen

TOKYO (Commodity Online): Amidst this financial crisis, triggered by money printing excesses, the Japanese government has decided to bury itself further in debt.

As per official data, Japan will issue bonds totalling 149.7 Trillion Yen ($1.9 Trillion) in 2012. The Ministry of Finance has decided to inflate the original monthly auctions of 10 year and 20 year bonds by another 100 billion Yen of bonds.

Japan's total debt is expected to hit a record 1 quadrillion Yen in 2011-2012 and the current debt to GDP ration is over 200% on a gross basis.

SilverDoctors: Silver COT Report 12/23/11

SilverDoctors: Silver COT Report 12/23/11: The total commercial net short position decreased by 5,480 contracts to 14,825 contracts in the week ending 12/20/11. This is the smallest...

SilverDoctors: Alasdair Macleod: "The Dollar is on a Hyperinflati...

SilverDoctors: Alasdair Macleod: "The Dollar is on a Hyperinflati...: Gold bug and Gold Money contributor Alasdair Macleod discusses inflation vs. deflation, and why the dollar price of gold is on a hyperinflat...

Why silver is real money!

By David Morgan
In days gone by Silver was not an investment it was money, in fact silver passed through more hands in everyday commerce than any other real money including gold. I state real money to distinguish silver money from modern paper money, which has flooded the world “money” supply the past three decades.

Silver held absolutely no value as an investment when it circulated as money, it served its function perfectly, unit of account, means of payment, and most importantly as a store of value. In 1993 the United States had been off the silver standard for almost thirty years and people forgot how an honest monetary system worked.

You see the need for financial planning and making assumptions on the inflation rate and future economic conditions are for the most part unnecessary when honest money rules the day. Why? Because the common man knows how much saving they will need in the future.

The monetary value is the same in ten, twenty, thirty, fifty or hundred years when the monetary system is honest. In actual fact the prices of things generally move down slightly due to stable money and the ability of people to improve products and services and the natural competitive nature of the free market.

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