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The Daily Reckoning | Wednesday, December 15, 2010 The Fed's "Icky Leaks" scandal: the dirt comes out, How much taxpayer money did Goldman Sachs get? Plus, Bill Bonner on the colossal failure of QE and more... ------------------------------------------------------- 2,932% Gains Possible from Serbian King's "Hidden" $884 Million Goldmine*** One tiny Canadian company has found a way to access this buried treasure - you could make gains of 2,932%, or more. Claim your share of the King's $884 million goldmine by watching this epic new presentation - right here. *** NOTE: This offer is limited to the first 500 reports. If you want in, act today. Once these reports are gone, the offer is closed. In Defense of Transparency Why Central Bank Secrecy is Detrimental to Free-Market Capitalism Eric Fry Reporting from Laguna Beach, California... WikiLeaks is grabbing the headlines, but your California editor considers the "Icky-Leaks" issuing from the Federal Reserve to be much more intriguing - like the icky leak that the Fed doled out trillions of dollars in clandestine bailouts and guarantees during the crisis of 2008 and early 2009. Thanks to a nifty little provision in the Dodd-Frank reform bill, the Fed was forced to come clean with these embarrassing details. On December 1, the Fed published an exhaustive and detailed list of bailout recipients, along with the sums each received. "The document dump confirms," The Nation reports, "that the $700 billion Treasury Department bank bailout...signed into law under President George W. Bush in 2008 was a small down payment on an secretive 'backdoor bailout' that saw the Fed provide roughly $3.3 trillion in liquidity and more than $9 trillion in short-term loans and other financial arrangements." Bernanke vehemently resisted making these disclosures...for obvious reasons. The disclosures reveal the Fed's too-cozy relationship with Wall Street. They also reveal a kind of institutionalized arrogance: the Federal Reserve knows what's best for us, even if we don't know it ourselves...or believe it. During the last several months, Chairman Bernanke frequently and persistently asserted the need for secrecy at the Federal Reserve. Transparency, he argued, would compromise the Fed's independence. The argument is ridiculous. Secrecy facilitates corruption and abuse. Transparency prevents it. A couple of free-thinking politicians recognized this reality early in the credit crisis. As early as February, 2009, Senator Bernard Sanders, the Vermont Independent, complained to Bernanke, "Given the size of the [Fed's] commitments, it is incomprehensible that the American people have not received specific details about them." Bernanke tersely replied: "The Federal Reserve does not release specific information regarding the borrowings of individual institutions from our lending facilities. The approach is completely consistent with the long-standing practice of central banks." As it turns out, this approach is also completely consistent with promoting deceptions and conducting crony capitalism...like doling out enormous bailout checks to Wall Street banks without ever disclosing the timing or size of these bailouts to the general public. This is not a healthy circumstance for an economy that purports to practice "free-market capitalism." "Since its inception," Congressman Ron Paul griped in a February 2009 speech, "the Federal Reserve has always operated in the shadows, without sufficient scrutiny or oversight of its operations. While the conventional excuse is that this is intended to reduce the Fed's susceptibility to political pressures, the reality is that the Fed acts as a foil for the government..." But now that the Fed has lost its "right" to non-disclosure, the American public is learning some very ugly truths, like the ugly truth that several large Wall Street banks received much greater assistance from the Fed than anyone had ever disclosed during the crisis of 2008- 9. The bailout recipients and the Fed were both as silent as starfish about the spectacular scale of the Fed's bailout activities. "Almost two years ago," Senator Sanders recalled recently. "I asked Chairman Bernanke to tell the American people which financial institutions and corporations received trillions of dollars as part of the Wall Street bailout. He refused. [But now], as a result of an audit-the-Fed provision I put into the financial reform bill, we finally learn the truth - and it is astounding." During the crisis, most Wall Street banks admitted to receiving a few billion dollars in TARP lending (after which they all made a big to-do about re-paying it). But they never uttered a peep about the billions of dollars they obtained secretly. Goldman Sachs borrowed billions from the Fed's Primary Dealer Credit Facility, but never bothered to mention this fact in any of its SEC filings. Goldman was equally silent about its borrowings from the Fed's Term Securities Lending Facility. Only now - nearly two years later - do we learn what really happened. "Morgan Stanley sold the Fed more than $205 billion in mortgage securities from January 2009 to July 2010," The Huffington Post reports, "while it's much bigger rival, Goldman Sachs, sold $159 billion. Citigroup, the nation's third-largest bank by assets, sold the Fed nearly $185 billion in mortgage bonds. Merrill Lynch/Bank of America sold about $174 billion. It's not clear how much these firms profited, but it's abundantly clear that they did turn a profit." These obscenely large taxpayer-funded bailouts are not merely reprehensible for being conducted secretly; they are reprehensible for having deceived taxpayers, dollar-holders, investors and all other individuals who deserve honest and transparent financial markets. Don't just let them get away with all this... Here's How You Can Beat The Bastards At Their Own Game Hidden Gov't Documents Let You Predict Stock Moves Imagine what you could do with this intelligence... Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It's all perfectly legal and you can do this too! Click here to watch this shocking presentation right now. The Daily Reckoning Presents Outing Ben Bernanke by Eric Fry Deception in the financial markets is not always costly, but it is rarely remunerative. Investors cannot afford to ignore this tendency. Recent disclosures from the Federal Reserve reveal that honesty was one of the earliest casualties of the 2008 financial crisis. These disclosures contain a number of juicy tidbits, like the fact that Goldman Sachs received tens of billions of dollars in direct and indirect succor from the Fed. Thanks to these spectacularly large taxpayer-funded bailouts, Goldman was able to continue "doing God's Work" - as CEO Lloyd Blankfein infamously remarked - like the work of producing billion-dollar trading profits without ever suffering a single day of losses. Thanks to the Fed's massive, undisclosed assistance, Goldman Sachs managed to project an image of financial well-being, even while accessing tens of billions of dollars of direct assistance from the Federal Reserve. By repaying its TARP loan, for example, Goldman wriggled out from under the nettlesome compensation limits imposed by TARP, while also conveying an image of financial strength. But this "strength" was illusory. Goldman repaid the TARP loans with funds it procured days earlier from the Federal Reserve. Then, over the ensuing months, Goldman recapitalized its balance sheet by selling tens of billions of dollars of mortgage-backed securities to the Fed. And the public never knew anything about these activities until two weeks ago, when the Fed was forced to reveal them. In a free-market economy, certain precepts seem fundamental...and essential: 1) Taxpayers have a right to know who's spending their money. 2) Dollar-holders have a right to know who's debasing their money. 3) Investors have a right to know who's cheating them out of their money...by hiding the truth. All three camps have a very large and legitimate bone to pick with the Fed's secret bailouts of 2008 and 2009. But let's consider only the case of the deceived investor... Secret bailouts do not merely benefit recipients; they also deceive investors into mistaking fantasy for fact. Such deceptions often punish honest investors, like the honest investors who sold short the shares of insolvent financial institutions early in 2009. Some of these investors had done enough homework to understand that no private-market remedy could ride to the rescue of certain financial firms. Therefore, these investors sold short the shares of certain ailing institutions and waited for nature to take its course. But the course that nature would take would be shockingly unnatural. We now know why. The Federal Reserve altered the course of nature, and did so without telling anyone. Many of the investors who sold short ailing financial firms in 2009 were alert to the possibility that bailouts by the Federal Reserve could change the calculus. In other words, the Fed could make the bearish case less bearish...at least temporarily. Therefore, many of these investors studied the Federal Reserve's disclosures, as well as corporate press releases, in order to quantify the Fed's influence. Based on all available public disclosures, the story remained fairly grim into the spring of 2009. Accordingly, the short interest - i.e., number of shares sold short - on Goldman Sachs common stock hit a record 16.3 million shares on May 15, 2009 - about 3.3% of the public float. But over the ensuing six months, Goldman's stock soared more than 30% - producing roughly $500 million in losses for those investors who had sold short its stock. Not surprisingly, the total short interest during that timeframe plummeted to less than 6 million shares, as short-sellers closed out their losing positions. Was it just bad luck? Or was something more nefarious at work here? Let the reader decide. But before deciding, let the reader carefully examine the chart below, while also carefully considering a selection of public announcements from Goldman Sachs during this timeframe. Based upon contemporaneous public disclosures, Goldman Sachs was "forced" by the Federal Reserve to accept a $10 billion loan from the TARP facility in October 2008. But Goldman's top officers repeatedly - and very publically - bristled under the compensation limits the TARP loan imposed. Therefore, as early as February 5, 2009, Goldman's chief financial officer, David Viniar, remarked, "Operating our business without the government capital would be an easier thing to do. We'd be under less scrutiny..." And on February 11, 2009, CEO Blankfein magnanimously remarked, "We look forward to paying back the government's investment so that money can be used elsewhere to support our economy." But at that exact moment, we now know, Goldman was operating its business with at least $25 billion of undisclosed "government capital." In April, 2009, The Wall Street Journal observed, "Goldman Sachs group Inc., frustrated at federally mandated pay caps, has been plotting for months to get out from under the government's thumb... Goldman's managers have a big incentive to escape the state's clutches. Last year, 953 Goldman employees - nearly one in 30 - were paid in excess of $1 million apiece... But tight federal restrictions connected to the financial-sector bailout have severely crimp the Wall Street firm's ability to offer such lavish pay this year." On May 7, 2009, a Goldman press release states: "We are pleased that the Federal Reserve's Supervisory Capital Assessment Program has been completed... With respect to Goldman Sachs, the tests determined that the firm does not require further capital... We will soon repay the government's investment from the TARP's Capital Purchase Program." On June 17, 2009, Goldman finally got its wish, thanks to some timely, undisclosed assistance from the Federal Reserve. Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of MBS to the Fed. In other words, Goldman "repaid" the Treasury by secretly selling illiquid assets to the Fed. One month later, Goldman's CEO Lloyd Blankfein beamed, "We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake." As it turns out, the government continued to "revitalize" that small sliver of the economy known as Goldman Sachs. During the three months following Goldman's re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman's TARP re-payment. Did private investors not have the right to know that the Federal Reserve was secretly recapitalizing Goldman's balance sheet during this period? Did they not deserve to know that the Fed's MBS buying was producing Goldman's "perfect" trading record during this timeframe? Yes, would seem to be the obvious answer. "There's a saying in poker: If you don't know who the patsy is at the table, it's you," observes Henry Blodget, the once and again stock market analyst, "Next time you feel like bellying up to the Wall Street poker table, therefore, ask yourself again who the sucker is." To be continued... Regards, Eric Fry, for The Daily Reckoning Exposed! How Wall Street's Breaking the Rules... Wall Street is secretly breaking the rules, and making a mint! Now you can too - it's 100% legal - and could have already bagged you $123,850! Skeptical? Curious? Then simply click here right now to find out more. Bill Bonner No Admitting Defeat: Fed to Fight Failure With More Stimulus by Bill Bonner Reckoning from Baltimore, Maryland... "Shoot, if you must, this old gray head, But spare your country's flag," she said. A shade of sadness, a blush of shame, Over the face of the leader came; The nobler nature within him stirred To life at that woman's deed and word: "Who touches a hair of yon gray head Dies like a dog! March on!" he said. - John Greenleaf Whittier, "Barbara Frietchie" It's the Ides of December, if December has ides. Some months do. Some don't. Yesterday, we drove up to Frederick, Maryland. It is the site of the encounter - fictional - between Stonewall Jackson and an old woman. More on that, below... But you're probably wondering what the Fed's FOMC did yesterday, aren't you? You're not? Well, good for you. You must have a life. Or a brain. Those of us who are condemned to follow such things found out that the Fed is standing pat. You can imagine how that stirred our blood. We had barely slept wondering what the Fed would do. We had worn out the carpet, pacing back and forth. And now we discover that the Fed will do nothing! The "recovery" is too weak to raise rates, said the Fed. And the economy may need more stimulus, it added; so it will stick with its plan to buy $600 billion worth of US government debt. You'll remember that the Fed purchases were supposed to drive down long-term interest rates so that mortgage borrowing and capital investment increased. But instead of falling, long-term rates went up. On the surface of it, you might think the Fed chief would lower his head...and admit that his QE plan is a colossal failure. Since March '09, he has committed an amount equal to more than an entire year's output of the US economy to his QE initiatives. With so much of the nation's treasure lost, you'd think he'd offer to slit his wrists...or at least resign. But that would just go to show that you've never studied modern macroeconomics. If you spent a few more years in school, maybe you too could begin to see that up is really down and black is actually white. The Fed's actions will multiply the US monetary base by 4. Is it any wonder investors are getting suspicious of US dollar- denominated paper? In theory, the Fed's purchases of Treasury debt are absurd. In practice, they have backfired. So, the Fed will do more of them. Makes sense, right? The US bond market could be signaling that it is headed the way of Greece, Ireland, and Lehman Bros. Who wants an IOU from someone who can't pay it back? Once the selling begins, it is hard to stop. Interest rates go up, increasing the cost of financing for the debtor. Pretty soon, he can no longer fund his on-going expenses or make the payments on his debt. He is forced into bankruptcy. Meanwhile, the latest numbers from Robert Shiller tell us that the US stock market is 33% overvalued. Our guess is that stocks will go down much more than that number implies. Markets tend to overshoot in both directions. And the latest news from China tells us the Middle Kingdom could blow up at any time. Nearly half the GDP is spent on capital improvements (usually things that involve concrete and steel). It's breathtaking to see it. But there's no way you can make that many capital investment decisions without making some colossal blunders. And from Europe comes a bleak and foreboding assessment: European banks have five times as much government debt as they did 3 years ago...and even US banks have nearly $350 billion worth of debt from Europe's wave-washed periphery. Investors are selling off Spanish bonds; another chapter in the debt crisis could be at hand. Dear reader, you are faced with a grave and dangerous situation. In front of you is the Valley of Death for investors. America's stock market could crash at any moment. Its bonds are slipping. Its homes are sinking. China could collapse into a heap. Europe could come unglued. Trade could fall off a cliff. Interest rates could rise everywhere. Another great depression could be coming soon. And yet, CEOs are optimistic, says one report. Investors are overwhelmingly bullish, says another. And your captains are telling you to "charge ahead!" Our advice: Take cover! And more thoughts... It snowed last night. Not much, just enough to make it pretty. This is supposed to be the "bleak midwinter." But it's not very bleak. Holiday lights are up on many houses in the neighborhood. Shops are hung with festive lights. Occasionally, we hear Bing Crosby singing "White Christmas." We drove up to Frederick, MD for lunch. What a charming little town. Colonial era brick houses. Coffee shops. Restaurants. This was the town that Whittier made famous. He recalled something that never happened. An old woman, Barbara Fritchie, was said to have stood in the middle of the street waving a Union flag, stopping the advance of the Southern troops. Stonewall Jackson halted his troops and gave his order. The story was a lie. It never happened. But lies carry more weight than the truth, especially in wartime. People prefer lies. They're simpler. And more flattering. Sure, the US is fighting terrorism in Iraq and Afghanistan. Sure, the Fed is stimulating a recovery. Sure, the banks had to be bailed out, or something awful would have happened. Sure, if the federal government doesn't spend $1.3 trillion it doesn't have our quality of life will decline. Sure, the schools make us educated. The hospitals and doctors make us healthy. The army, courts and police make us free and safe. This is the first time in 15 years that we've been back in the US at Christmastime. All that time, our farmhouse was rented out. It's a pleasure to have it back. On weekends, your editor happily cuts down trees and fixes fences. Or he paints bedrooms and repairs roofs. He was painting a metal barn roof a couple of weeks ago. The roof had a decent slant to it, but the rusty metal gave him something to grip onto. So he felt reasonably safe, even though he was three stories in the air. All was well until he foolishly stepped onto the part he had just painted. His foot slipped. He fell down...and slid down the roof...catching himself on a nail head just before going off the edge. "Are you all right?" asked Edward, who was working on the ground. "Yeah...no problem..." All week long, we work in front of a computer screen. It is largely an imaginary, abstract world - of GDP growth and stimulus theories - a world of lies and legerdemain. On the weekends, it is a pleasure to be back in the real world of hammers and shovels...chainsaws and backhoes. And now the cold air bites hard when we go outside. Thirty-five degrees is probably almost tropical to Dear Readers who live in Minnesota or Alberta. But it is Antarctica to us. After so much claptrap, humbug and balderdash...we - a poor scribbler, a "literary" economist, a moralist and finger-wagger - how we like the cold air upon our skin, the rumble of the chainsaw...its hot smoke in our face...the chips spraying out...snow on the ground... ...anything real! Anything that isn't vain and hollow...empty words...or busybodies' delusions...! Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Gold or Stocks: What to Hold During the Great Correction So, what will it be? Gold or stocks? We’ll take gold. Stocks are a bet on an improving economy – on growth...on profits...on prosperity. If we’re really in a Great Correction, it could be many years before the economy begins to grow again. But isn’t the economy recovering? What, are you kidding? There are 15 million people without jobs. If the economy continues to “grow” at these rates, they’ll never find work again. “Tax the Rich to Cut the Deficit... Just Don’t Tax Me” Lies, Lies, Lies: The New Foundation of the Financial System Private Sector Obliged to Work Off the Public Debt I was idly reading The Economist magazine instead of working, or instead of taking a nap, when I saw their headline “The Mortgage Parallel,” which was kind of intriguing to me, and I was curious to see what they thought was, you know, a good parallel to a mortgage. The subhead was not much of a clue, as it started off “Nerves jangle,” which sounds more like an eerie parallel to parenthood, if you ask me! The IMF and the ECB on Perfecting Stupidity When the Government Demands More Debt France’s Sarkozy Joins Chorus to End Dollar Dominance Speaking at the 50th anniversary of the Organization for Economic Co-operation and Development (OECD), France’s President Nicolas Sarkozy laid out his position against the current world monetary system dominated by the “accumulation of dollar reserves.” Further, he suggested the expanded use of the International Monetary Fund’s Special Drawing Rights (SDR), and...insisted the renminbi be included in the SDR’s basket of currencies. Who am I? What is Money? The Fed is Here to Help. Ron Paul: The Fed Spends “More Money Than the Congress Does” The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor