Bob Chapman | June 10, 2009

On Friday, we had the latest edition of the FDIC “Friday Night Financial Follies” as regulators on Friday shut down Bank of Lincolnwood, a small bank in Illinois, marking the 37th failure this year of a federally insured bank. More are expected to succumb amid the pressures of the weak economy and mounting loan defaults.

The Federal Deposit Insurance Corp. was appointed receiver of the failed bank, based in Lincolnwood, Ill., which had about $214 million in assets and $202 million in deposits as of May 26.

All of Bank of Lincolnwood's deposits will be assumed by Republic Bank of Chicago, based in Oak Brook, Ill., which also agreed to buy about $162 million of the bank's assets; the FDIC will retain the rest for eventual sale. Bank of Lincolnwood's two offices will reopen on Saturday as branches of Republic Bank of Chicago.

The FDIC estimates that the cost to the deposit insurance fund from the failure of Bank of Lincolnwood will be $83 million.

In a step that would substantially increase the price tag for Bernard L. Madoff's long-running Ponzi scheme, lawyers for a group of his victims are asking a federal bankruptcy judge to reject the way their losses in the fraud are being calculated.

The customers insist that, by law, they should be given credit for the full value of the securities shown on the last account statements they received before Madoff's arrest in mid-December, even though the statements were bogus and none of the trades were ever made. According to court filings, those account balances add up to more than $64 billion.

After months of private negotiations and Internet arguments, lawyers for these customers formally put the issue before the federal bankruptcy court in New York in a lawsuit filed late Friday evening, less than a month before the deadline for filing claims for compensation.

The approach they seek would produce a significantly higher tally of cash losses than the formula being used by the court-appointed trustee overseeing the claims process for the Securities Investor Protection Corp., a government-chartered agency financed by the brokerage industry.

The trustee, Irving H. Picard, is calculating investor losses as the difference between the total amount a customer paid into the scheme and the total amount withdrawn before it collapsed.

Customers who qualify are eligible for up to $500,000 in immediate compensation from SIPC. Those whose eligible losses exceed that amount would divide up the assets recovered by the trustee.

Credit card holders who might have used tax refunds to pay down balances apparently spent the money elsewhere as the recession deepened in the first quarter.

That's one conclusion that may be drawn from data showing the delinquency rate for bank-issued credit cards rose 11 percent in the first three months of the year, according to credit reporting agency TransUnion.

The delinquency rate - card holders who are three months past due - jumped to 1.32 percent this year, from 1.19 percent in the first three months of 2008, TransUnion said.

The average total debt on bank cards also rose, jumping to $5,776 from $5,548 last year.

Balances typically rise in the first quarter, as holiday spending comes due, said TransUnion's Ezra Becker.

The credit card delinquency rate remains well below the 5.22 percent for mortgages in the first quarter, meaning card holders are trying hard to keep their payments current.

It's too early to tell how changes in credit card regulations will affect payment rates, Becker said.

- The biggest price swings in Treasury bonds this year are undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing rates and pull the economy out of the worst recession in five decades.

The yield on the benchmark 10-year Treasury note rose to 3.90 percent last week as volatility in government bonds hit a six-month high, according to Merrill Lynch & Co.’s MOVE Index of options prices. Thirty-year fixed-rate mortgages jumped to 5.45 percent from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. Costs for homebuyers are now higher than in December.

Government bond yields, consumer rates and price swings are increasing as the Fed fails to say if it will extend the $1.75 trillion policy of buying Treasuries and mortgage bonds through so-called quantitative easing, traders say. The daily range of the 10-year Treasury yield has averaged 12 basis points since March 18, when the plan was announced, up from 8.6 basis points since 2002, according to data compiled by Bloomberg.

The trend of employment in the U.S. strengthened in May for the first time in 16 months, a report said Monday.

The Conference Board said its May employment trends index rose 0.2% to 89.9 from April's revised level of 89.7 that was originally reported as 89.5. The May index was down 20% from a year ago.

In May, the percentage of firms not able to fill positions right now, the percentage of consumers who think jobs are "hard to get", real business sales and job openings showed improvement.

The privately owned Federal Reserve has subjected us to a 22-month period of massive excess liquidity. The present increase in liquidity, formerly known as M3, which is no longer published because it’s not cost efficient, or there isn’t sufficient interest in the figures, says the Fed, is growing at about 18%. The major purpose for the US Treasury and the Fed to commit to an increase in spending of $14.8 trillion is to bail out banking, Wall Street and the insurance industry, all of which turned prudent investment into a casino.

The method chosen to deal with a financial crisis caused by unsustainable debt created by excess liquidity is to create more money and credit and channel it to the financial sector to reflate their balance sheets, which are debt infested with toxic CDO and ABS debt. The rich on Wall Street, banking and insurance are deleveraging with the taxpayer taking all the risk, as the public gets very little in return. We are surrounded by financial zombies, which we keep alive after they almost destroyed our financial system.

Major inflation is the result as wages barely rise and the loss of purchasing power is borne mostly by the poor and the lower middle class. Ever since free trade, globalization, offshoring and outsourcing began about 1980 wages have not kept up with inflation. Production gravitated to the low wage third world exacerbated by massive condoned illegal immigration. This was accompanied by cronic overcapacity that made conspicuous consumption relatively inexpensive. That was joined by much easier credit. Twenty-three months ago we saw an implosion as a result of these policies, which is still with us. Without this continuation of debt the system cannot continue to function and the downward spiral feeds on itself. Everyone is looking for a bottom soon. That isn’t going to happen, stimulus or no stimulus. Handing money to citizens isn’t the answer. In this case 90% has gone to reduce debt.

The first step to recovery is to drastically cut government spending and to lower corporate and individual taxes. Get rid of the Federal Reserve, which is directly responsible for this mess and erect tariffs on goods and services. If we can accomplish that the recovery will begin, but it won’t be easy. It will take years to accomplish.

As a result of flawed fiscal and economic policies nations are facing record deficits. Some like England have been put on negative credit watch, which could lead to a downward re-rating. The US, Japan and others are following close behind. In fact down grades could come before the end of the year. Interest rates are already moving higher and have been since the beginning of the year. Downgrades would bring even higher rates.

The Chairman of the Fed, Ben Bernanke, would have us believe along with other, so-called experts, that monetary easing will come in time to head off hyperinflation. Unfortunately that cannot happen. The minute money and credit is withdrawn from the system it will collapse. The underlying deflationary drag is too great and that drag will take years to diminish. How can our Fed Chairman and our Treasury Secretary think for a moment that they’ll just be able to turn the tap off when their current orgy of spending ends? Politicians unfortunately see this, as only they would, as an opportunity to purchase votes by making sure the spending continues. It will be interesting to watch over the next several years, as many nations scramble in the bond markets to raise money to keep their economies going. There is no telling at this point how high interest rates are going to go.

Our President tells us of trillion dollar plus deficits are far as the eye can see. Those deficits assume 3% growth rates in GDP, which is not going to happen and the end of the Bush tax cuts. Deficits will be much larger than the Congressional Budget Office estimates, if due to nothing more than exploding entitlement expenditures. This plan involves the perpetual rolling of $5 trillion in Treasury paper much of which is held by foreigners plus the new debt incurred, plus the interest on the existing debt. Do you really believe foreigners are going to fund such deficits indefinitely? We don’t think so with a falling dollar. The dollar is falling again and interest rates are rising and they both are going to continue to do so, as gold and silver go higher. The minute the Fed began creating money out of thin air to fund Treasury sales, plus buy Treasuries out of the market, plus buy Agency securities and toxic junk to the tune of $2.2 trillion for openers, you had to know the game was over. It’s all-downhill from here. This week 30-year fixed rate mortgages could hit 5-3/4%.

Last week we heard the VAT, Value Added Tax, may be on the way. It’s the most vicious of all taxes and you do not want to experience it. It would help solve the problem, but your standard of living will drop 20% if it is enacted. Such taxes cannot come until 2011 because 2010 is an election year. Such taxes will exacerbate the depression. In the end cutting spending is the only answer.

Mr. Obama speaks of the importance of living within our means and not spending money we do not have on things we do not need. Obviously the president hasn’t been told we are in a depression. The less the public spends the deeper the depression gets.

That said Mr. Obama engages in profligate federal spending to deaden the pain and essentially to prolong the financial and economic agony.

Then comes the creative destruction with government deciding who should survive and who should fail by edict. Some call it crony capitalism and favoritism, we call it taking care of fellow Illuminists.

The way Wall Street tells us we need hands on help from Wall Street and banks, which led to this disaster. The president wants economic advisers who are theoreticians. All paper has to be marked to a real market price to clean out the bad assets. Government should not be giving free loans to hedge-funds and private-equity firms, so they will buy assets they would not normally buy. Due to electronic trading, which has led to major trading off established exchanges, and into the dark pools we do not know who is doing what. A net flow of information so that the investors and transparency is nearly gone. Bank holding companies, which own the Fed, can see in advance what their clients are interested in buying and front run those orders in their own accounts. If they make major mistakes they just get bailout out by the Fed.

There is no transparency. We only find out what went on when somebody slips or in some way something gets exposed. Transparency, oversight and accountability do not exist. Most everything important is done in secret. A good example was six months ago when Bloomberg News attempted to force the Fed to reveal the details on more than $2 trillion in loans that went to banks, including Citigroup and Goldman Sachs. The Fed told the court to take a hike and said it was a state secret. We have no word as well who made the short-dated, out-of-the money bets in March of 2008 that Bear Stearns would fail. Those bids paid off in the millions, or why Lehman was allowed to fail and AIG was saved, etc.

Not one banking or Wall Street executive owned up to what really happened to cause the crisis. They are totally lacking in honesty, integrity and decency. As it now stands we’ll never know the true inside story of what really went on. We have seen no civil or criminal charges against any of these crooks. Not even investigations. Whatever happened to RICO?

Over the past 25 years our financial industry has descended into darkness and corruption and the people who caused it are getting away scott free.

Our Treasury Secretary Geithner’s ill-fated trip to China and our president’s recent journey to Germany was humiliating. Crowds as well as the German government were demanding the return of their gold. The US has been giving platitudes to the Germans when the Germans know their gold has been sold or leased. Leasing is tantamount to selling. This story has not been broken in the mainstream media, but in time it will be and when it is propaganda will not deflect the ultimate outcome.

The president and Larry Summers think they can restore confidence and trust in the economy with lies and propaganda, but they are deluding themselves. The stock, bond and capital markets are dependent on confidence, but they are more dependent upon the deplorable state of the foundation on which our economy rests. In 22 months the Fed and the Treasury have accomplished very little except bailing out their fellow elitists in the financial industry with taxpayer debt. The mantra that the worst is over is simply more lies similar to those we’ve heard over and over again. Thus far the smoke and mirrors and the “Working Group on Financial Markets have managed to create a 35% to 50% bear market correction in the averages. Our president, a professional con man and street hustler promises he will always tell you the truth about the challenges we face. Trust him and you will find yourself somewhere out in left field.

Thus far all we have seen is a papering over of the financial system. Our Treasury and Fed offer the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the phony stress test and TARP. The commitment to domestic and foreign financial entities is already at $14.8 trillion. There is no discussion of building a new better system that rewards prudent risks, allocates capital where it is really needed, not in the hands of banking and Wall street. It would as well be a great idea if the SEC and the CFTC started protecting the investors and stop collaborating with Wall Street and Washington to manipulate markets.

When will the rescues of the financial sector end – when it has bankrupted us all? They are the ones who caused all this.

We now have Government Motors at the former General Motors and Chrysler that has been given away to Illuminist Fiat. Is every company, bank and brokerage house in America to be bailed out indefinitely?