October 3, 2022

Archives for June 2009

Stanford Financial Ponzi Scheme – New Fraud, Old Lessons

Stanford Free – Does Crime Pay?

On February 17, 2009 Stanford Financial was accused by the SEC of defrauding investors and engaging in a “massive, ongoing fraud”.  The fraud was perpetrated by seducing investors with “improbable if not impossible” returns on their investments, according to the SEC.  The amount swindled from investors is estimated at $7 billion.

The head of Stanford Financial, Allen Stanford, was finally arrested on June 18th and has been in federal custody since that time.  During a court hearing today in Houston, Mr Stanford entered the standard “not guilty” plea and his attorneys argued for his release on bail.

During the course of the court proceedings it was revealed that:

Texas financier R. Allen Stanford controlled a secret Swiss bank account from which he withdrew roughly $100 million last year, and also tapped the account to pay bribes to the firm auditing his Antigua-based bank, federal prosecutors alleged Thursday during a hearing in federal court.

The billionaire and the executives are accused of orchestrating a massive fraud by misusing most of the $7 billion they advised clients to invest in certificates of deposit from the Stanford International Bank, based on the Caribbean island of Antigua.

Also indicted is Leroy King, the former chief executive officer of Antigua’s Financial Services Regulatory Commission. He was taken into custody by island authorities and will now face extradition proceedings, according to a government official who spoke on condition of anonymity because she was not authorized to discuss the case. King is accused of accepting more than $100,000 in bribes to turn a blind eye to irregularities.

Investigators say even as Stanford claimed healthy returns for those investors, he was secretly diverting more than $1.6 billion in personal loans to himself.

The indictment also says Stanford and the other executives misrepresented the Antigua island bank’s financial condition, its investment strategy and how it was regulated.

Prosecutors argued that Mr Stanford should not be granted bail.

At Stanford’s bond hearing, prosecutors argued he should be held without bond because he might have access to billions of dollars in secret funds.

In court documents filed Thursday, prosecutors also said Stanford faces a potential life sentence, has access to a private jet and has an international network of wealthy acquaintances who would help him, including one who recently agreed to give him $36,000 to pay his lease on a Houston apartment for a year.

Each of the most serious counts that Stanford faces carry prison terms of up to 20 years. But prosecutors say sentencing guidelines could increase his total sentence to life in prison.

Despite the huge financial suffering caused by Stanford Financial to 30,000 investors, as well as the flight of risk, the court set bond at a small $500,000 and gave prosecutors until Friday to appeal the decision. How likely is it that anyone with a secret $100 million bank account and facing a life sentence would be concerned about forfeiting a half million bond by fleeing the US to escape justice?  This is no doubt a question that defrauded investors are asking.

Is This Man Smiling?

Is This Man Smiling?

Courtesy: Reuters

Other remarkable aspects of the Stanford Financial fraud are:

  • How long will it take for investors to be suspicious of firms offering guaranteed rates of return far in excess of what is available elsewhere?  No Ponzi scheme would work without the suspension of prudent judgment by investors blinded by ridiculous claims.  Has no one ever heard of “the higher the return the higher the risk”?
  • This is another case that should have caught the attention of the SEC long before Stanford could defraud thousands of people.  Just as with the Madoff fraud, Stanford blatantly and publicly advertised untenable returns, a classic sign of a Ponzi scheme.  The SEC blithely ignored or was oblivious to the obvious warning signs.
  • It took 4 months to arrest Mr Stanford and he is now on bail, free to enjoy his life.  At this rate of justice, Mr Stanford may get to spend the rest of his life immune from punishment and living a lavish life style courtesy of his secret bank accounts.   Defrauded investors, dolefully seeking for perspective on this matter may consider the remarks of William Gladstone who stated that “justice delayed is justice denied”.

Regulatory Reform Implies Cause and Solution To Financial Meltdown The Same

The Federal Reserve failed miserably in preventing the meltdown of the American financial system.  Worse yet, the Fed’s loose credit and monetary policies and failure to properly regulate the financial system was arguably one of the biggest causes of the financial meltdown.  Now, based on the Fed’s sterling record of failure, Washington’s answer is to give absolute power to the Fed – what are these nitwits in Washington thinking?

Back in the U.S.S.A. – Peter Schiff

Harry Browne, the former Libertarian Party candidate for president, used to say: “the government is great at breaking your leg, handing you a crutch, and saying ‘You see, without me you couldn’t walk.’” That maxim is clearly illustrated by the financial industry regulatory reforms proposed this week by the Obama Administration.

In seeking to undo the damage inflicted over the past decade by misguided government policies, the new regulatory regime would ensure that the problems underlying our financial system will only get worse.

The underlying problem is that the excessive risk taking which brought about the crisis was not market-driven, but a direct consequence of government interference with risk-inhibiting market forces. Rather than learning from its mistakes and allowing market forces to once again control risks and efficiently allocate resources, the government is merely repeating its mistakes on a grander scale – thereby sowing the seeds for an even greater crisis in the future.

Obama proposes to entrust the critical job of “systemic risk regulator” to the Federal Reserve, the very organization that has proven most adept at creating systemic risk. This is like making Keith Richards the head of the DEA.

Given the Federal Reserve’s disastrous monetary policy over the past decade, any attempt to expand the Fed’s role should be vigorously opposed. Through decades of short-sighted interest rate decisions, the Fed has proven time and again that it is only able to close the barn door after the entire herd has escaped. If setting interest rates had been left to the free market, none of the excesses we have seen in the credit market would have been remotely possible.

The perverse result will be that our government and the Fed gain more power as a direct result of their own incompetence.

With the transition now fully under way, I propose we end the pretense and rename our country: “The United Socialist States of America.” In fact, given all the czars already in Washington, we might as well go with the Russian theme completely: appoint a Politburo, move into dilapidated housing blocks, and parade our missiles in the streets. On the bright side, there’s always the borscht.

ship-of-fools-titanic2Courtesy: The Liberty Voice

Washington constantly employs the same failed tactics to a problem and expects different results and only those outside of Washington understand the implications of such thinking.  Instead of expanding Federal Reserve powers, serious thought should be given to severely restricting the Fed’s ability to destroy what’s left of the American free enterprise system.

More on this topic:

What The Fed Chairman Said At The Onset Of The Credit Bubble

TARP 2 – Will Bad Loans Wipe Out Newly Raised Bank Capital?

Are The Banks Paying Back TARP Money Too Soon?

Since the beginning of the year, major banks have raised over $200 billion in capital, far in excess of the $75 billion of new capital that the government stress tests had called for.  The market prices of major bank stocks have recovered dramatically since March, indicating that Wall Street investors see a recovery in the banking industry.

In addition, the banking industry is enjoying one of the largest net interest margins in history due to a very low cost of funds.  Wells Fargo, for example, in the fourth quarter saw its average cost of funds decline to 1.5% while its net interest margin exceeded 4%.  With banks able to access cheap funding thanks to the super low rate money policy of the Federal Reserve, banks almost have a license to print money.

The big question is will the banks be able to earn enough to offset the huge amount of future write downs that will be needed on their troubled loans?  Earlier this year, Bloomberg reported that the International Monetary Fund (IMF) estimated U.S. banking losses through 2010 at $1.06 trillion.  To date the banking industry has taken write downs of only half that amount, indicating further write downs of an additional $500 billion will be necessary.

In addition, delinquency rates on $1 trillion of commercial real estate loans held by banks have been increasing at a higher rate than anticipated.  Credit card losses for the banks have also been rapidly mounting from previous estimates.

Mortgage Default Surge Could Wipe Out Banking Capital

Total Estimated Losses

Total Estimated Losses

Courtesy:  T2 Partners LLC

The banking industry’s mortgage portfolio is the real wild card and may result in the need for huge additional write downs to cover the cost of mounting defaults.  The banking industry is facing a potential nightmare surge in mortgage loan defaults, even if real estate prices stabilize at current levels due to the large negative equity positions of many homeowners.  (The above chart shows the total estimated banking losses of which only a fraction has been realized to date.)

There is no historical model to predict the correlation of mortgage defaults to equity position, but one would expect that being deeply underwater on the mortgage will result in a strong economic motive to stop paying or simply walk away.  How many homeowners, for example, will continue to make a mortgage payment on a $200,000 mortgage when the home is valued at $100,000?  The greater the negative equity, the greater the odds of a mortgage default, especially if the homeowner is under financial stress.

Unfortunately, the problem of negative equity is not theoretical.  In the latest overview of housing and the credit crisis, T2 Partners LLC, has assembled an in depth excellently documented case on why the pain in housing is not about to end quickly.  One eye opener in the report is the estimate, by type of mortgage borrower, of negative equity.  T2 shows the following stats: 73% of OptionARMs, 50% of subprime , 45% of Alt A and 25% of prime mortgage loans are underwater.  Combine this with a weak economy, job losses and negative income growth and the potential for additional huge write downs on residential mortgages seems inevitable.

The impact of a poor economy and huge negative equity is already being reflected in default rates never experienced in modern economic history.  Almost 10% of all mortgages are in some stage of delinquency or default.  The delinquency rate on prime mortgages, never expected to exceed historical delinquency rates of approximately 1%, are now over 4.5%.  Note that prime mortgage loans are the loans that were never expected to have more than a minimal default rate based on the borrower’s credit and income characteristics.

The banking industry is likely to need every dollar of newly raised capital and then some to cover future loan losses.   If future banking industry profits are overwhelmed by additional loan losses, it will be years before banks can be solidly classified as well capitalized.   A capital constrained banking industry will survive in some form, but it may not be able to provide the new lending necessary to foster future economic growth

Obama – 40 more years!

For all of those worried about tax increases, slow economic growth and rapidly expanding deficits, I have one word – relax.  Consider the following comments made by the President today.

Obama Says Robust Growth Will Prevent Tax Increases

June 16 (Bloomberg) — “One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”

Obama has repeatedly said he would keep his campaign pledge to cut taxes for 95 percent of working Americans while rolling back tax breaks for households making more than $250,000 a year.

The U.S. economy shrank at a 5.7 percent annual pace in the first quarter… The median forecast for growth next year is 1.8 percent, according to the survey.

Obama warned that if economic growth remains “anemic” and Congress fails to adopt his plans to hold down the cost of health care, work on alternative energy sources and improve the U.S. education system, “then we’re going to continue to have problems.”

He also repeated his promise to cut the budget deficit, forecast to hit $1.8 trillion this year, in half by the end of his first term.

“If my proposals are adopted, then not only are we cutting the deficit in half compared to where it would be if we didn’t do anything, but we’re also going to be able to raise revenue on people making over $250,000 a year in a modest way,” he said. “That helps close the deficit.”

Fiscal discipline that leads to lower budget deficits is important, Obama said, to ensure investors around the world keep buying U.S. government debt.

From warning of a “financial catastrophe” some short months ago, we are now being told that:

  1. Robust economic growth will cover government spending increases
  2. 5% of working Americans will cover the tab for the other 95%
  3. New spending on health care, education and the environment will spur economic growth
  4. Deficits will be cut in half to only $1 trillion a year
  5. Fiscal discipline will cause investors to lust after U.S. debt securities

News like this is almost enough to make one believe that the recent 40% gain in stock prices is just the beginning of  new wealth creation for investors.

Before rushing into a 100% long position with your portfolio,  consider some of the potential headwinds that the President’s magic scenario will face.

Past decades in the U.S. have been distinguished by slow economic growth (despite huge credit stimulus), stagnate or declining real incomes and a massive increase in the debt burden on every sector of the economy.   In addition, American’s have seen their major asset categories – stocks and real estate – vaporized by multi trillion dollar losses.

Median Household Incomes Fell in 94% of the States – 1999-2005.

1999-2006 Income Declines

1999-2006 Income Declines

Courtesy: mwhodges.home

Household Debt Ratio

Household Debt Ratio

Debt to National Income

Debt to National Income

Debt to National Income Ratio

Debt to National Income Ratio

Workers in Manufacturing

Workers in Manufacturing

Personal savings rate

Personal savings rate

Decline In Purchasing Power US $

Decline In Purchasing Power US $

Conclusion:

The national economic trends of past decades are:

  • Lower incomes
  • Staggering increases in debt
  • Dramatic decreases in savings
  • The destruction of our manufacturing base
  • A 90% decline in the purchasing value of our currency

If the President can reverse these trends, I say change the Constitution and give him 40 more years in office!

The Cost Of Easy Money – $14 Trillion and Counting

Supervisory Insights – Where The Money Went

The FDIC released their Supervisory Insights report today which contains a detailed breakdown of the almost $14 trillion dollars committed by the Government to support the financial system over the past two years.   This huge commitment of taxpayer money can be viewed as the  cost of cleaning up after the Greenspan era of easy money.   The cost of the financial devastation that ensued from the easy money/easy lending era  far outweighs any illusory benefits that may have been gained.

The FDIC report easily recognized  the precipitating factors of the financial crisis of 2008.

The factors precipitating the financial turmoil of 2008 have been the subject of extensive public discussion and debate. The fallout from weak underwriting standards prevailing during a multi-year economic expansion first became evident in subprime mortgages, with Alt-A mortgages soon to follow. Lax underwriting practices fueled a rapid increase in housing prices, which subsequently adjusted sharply downward across many parts of the country.

Excessive reliance on financial leverage compounded problems for individual firms and the financial system as a whole.

One indicator of the gravity of recent developments is this: in 2008,  U.S. financial regulatory agencies extended $6.8 trillion in temporary loans, liability guarantees and asset guarantees in support of financial services.  By the end of the first quarter of 2009, the maximum capacity of new government financial support programs in place, or announced, exceeded $13 trillion.

And some of the old banking basics—prudent loan underwriting, strong capital and liquidity, and the fair treatment of customers—re-emerged as likely cornerstones of a more stable financial system in the future.

The obvious question is why were prudent loan underwriting standards abandoned in the first place?  Lenders, borrowers and regulators alike were all blinded by greed and the misguided belief that easy wealth was being created by the use of ridiculous amounts of cheap credit.  Now, at a cost of almost an entire year’s GDP, we know better – at least until next time.

Government Support for Financial Assets and Liabilities Announced in 2008 and Soon Thereafter ($ in billions)
Important note: Amounts are gross loans, asset and liability guarantees and asset purchases, do not represent net cost to taxpayers, do not reflect contributions of private capital expected to accompany some programs, and are announced maximum program limits so that actual support may fall well short of these levels
Year-end 2007 Year-end 2008 Subsequent or Announced Capacity If Different
Treasury Programs
TARP investments1 $0 $300 $700
Funding GSE conservatorships2 $0 $200 $400
Guarantee money funds3 $0 $3,200
Federal Reserve Programs
Term Auction Facility (TAF)4 $40 $450 $900
Primary Credit5 $6 $94
Commercial Paper Funding Facility (CPFF)6 $0 $334 $1,800
Primary Dealer Credit Facility (PDCF)5 $0 $37
Single Tranche Repurchase Agreements7 $0 $80
Agency direct obligation purchase program8 $0 $15 $200
Agency MBS program8 $0 $0 $1,250
Asset-backed Commercial Paper Money Market Mutual Fund
Liquidity Facility (AMLF)9 $0 $24
Maiden Lane LLC (Bear Stearns)9 $0 $27
AIG (direct credit)10 $0 $39 $60
Maiden Lane II (AIG)5 $0 $20
Maiden Lane III (AIG)5 $0 $27
Reciprocal currency swaps11 $14 $554
Term securities lending facility (TSLF) and TSLF options program(TOP)12 $0 $173 $250
Term Asset-Backed Securities Loan Facility (TALF)13 $0 $0 $1,000
Money Market Investor Funding Facility (MMIFF)14 $0 $0 $600
Treasury Purchase Program (TPP)15 $0 $0 $300
FDIC Programs
Insured non-interest bearing transactions accounts16 $0 $684
Temporary Liquidity Guarantee Program (TLGP)17 $0 $224 $940
Joint Programs
Citi asset guarantee18 $0 $306
Bank of America asset guarantee19 $0 $0 $118
Public-Private Investment Program (PPIP)20 $0 $0 $500
Estimated Reductions to Correct for Double Counting
TARP allocation to Citi and Bank of America asset guarantee21 – $13
TARP allocation to TALF21 – $80
TARP allocation to PPIP21 – $75
Total Gross Support Extended During 2008 $6,788
Maximum capacity of support programs announced throughfirst quarter 200922 $13,903

More on this topic:
FDIC Lists Root Cause For Failed Banks – Lax Regulation

Tracking the Economy Through Coin Production

Economic IndicatorOne of the consequences of a recession is a decline in demand for newly minted coins. Economic activity declines and there is less demand for coins in commerce. Individuals also put long hoarded change back into circulation. Coins come out of hiding from couch cushions, penny jars, and abandoned State Quarter collections. The net result is a drop in the number of new coins produced.

This year, the United States Mint expects coin production to decline by as much as 70% from the prior year. This is on top of a 30% decline experienced for 2008.  The situation has become so severe that the US Mint had already announced that they will not mint any more nickels or dimes for the remainder of 2009.

Total US Mint Circulating Coin Production
2007 14,440,650,000
2008 10,141,580,000
2009 (through May) 1,909,400,000

As dire as the annual figures seem, the month to month indications are also pointing straight down. Since 1999, the US Mint has produced five different designs for the quarter each year, which serves to provide data points over shorter time periods. The designs are changed every 2-3 months. This year there are six designs, so the new designs are released approximately every two months. Here’s what the production totals look like for this year.

2009 Quarter Production
District of Columbia design 172,400,000
Puerto Rico design 139,200,000
Guam design 87,600,000

To put these numbers in some perspective, last year each of the five State Quarters designs had at least 400,000,000 minted with the highest total coming in at 517,600,000 for the Hawaii Quarter, which was minted during the last few months of 2008. The highest quarter production since the start of the rotating designs occurred in late 2000, when the Virginia Quarter had 1,594,616,000 coins minted.

The latest production for the Guam Quarter represents a decline of 83% from the recent Hawaii Quarter and a whopping decline of 94.5% from the peak production for the Virginia Quarter.

This was a guest post written by Michael Zielinski.

Fiscal Discipline – Endorsed By All, Practiced By None

Has anyone noticed the correlation  of “fiscal discipline” chatter to rising interest rates?  Efforts by the Fed to manipulate rates lower through the outright purchases of treasuries and mortgage securities seem to be failing as the long end of the yield curve continues to steepen.  Is the fiscal discipline talk simply an effort to calm bond investors or is the plan deeper?

Consider some recent comments by the President and the Fed Chairman.

Obama Urges Congress To Pass Law Enforcing Fiscal Discipline

(Bloomberg) — President Barack Obama said he is committed to imposing fiscal discipline on the government and called on Congress to pass a law requiring any new spending be matched by higher taxes or cuts elsewhere. Obama, in his weekly radio and Internet address, said that while his initiatives to confront the economic crisis have deepened the country’s debt,

“We need to adhere to the basic principle that new tax or entitlement policies should be paid for,” Obama said.

“We cannot sustain deficits that mortgage our children’s future, nor tolerate wasteful inefficiency,” Obama said.

Earlier this week, Obama was criticized as doing too little to confront the deficit when he ordered his Cabinet to cut $100 million out of the budget

And right on cue, Mr Bernanke followed up with  sobering remarks on the perils of deficit financing and fiscal imbalances.

Fed Chief Calls For Plan To Curb Budget Deficits

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.

The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more.

Why Bernanke is Right to be Worried

Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”

These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns.

Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar.

It’s Your Problem, Bernanke Tells Congress

Congress and the people who elected it must decide how much government they want to afford, Bernanke said. Stating the obvious, he went on to say: “Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run.”

Unfortunately, Congress and the people have seldom gotten the balance right. We want the benefits of a large government without paying the costs, just as we wanted a loftier personal living standard than our income could support.

The current economic crisis — which demanded “strong and timely actions,” in Bernanke’s view — has accelerated the day of reckoning for our public and private debt…

Both Obama and Bernanke are intelligent men.  I doubt that either one truly believes that unlimited borrowing or printed money create enduring economic prosperity.   The bailouts, guarantees and deficit spending were necessary to prevent the economic crisis from turning into something much worse, but the cost has  accerlerated  the “day of debt reckoning”.

Now that the crisis seems contained and rates are rising,  the emphasis by both Obama and Bernanke is on ‘balancing spending with revenues”.   Since neither man  mentions reduced  spending, what exactly do they have in mind?

The way this plays out should be interesting.  The President wants his numerous costly programs implemented and Bernanke, a “student of the depression” will be loathe to endorse tax increases on a still very fragile economy.  Bernanke tells Congress that paying the bills is their problem and Obama states that new entitlements should be paid for.  So what is the solution? 

The solution is the only one it has ever been-  defer any meaningful action to the next administration, defer the unwinding of the excesses to the next business cycle, and defer  the debts to the next generation.  The “solution”  will keep on working until it doesn’t.

Bonds Sell Off, Credit Ratings In Doubt & Mortgages ReDefault

Every day there are many great posts on the web.  Here are some  from the past week  that merit a full read.  The listing order  is random.

Ok, I’m Done With Being Nice

Karl Denninger does not play nice in his counter point to a NY Times article about “mortgage relief” tax dollars going to those who were fiscally irresponsible and should have never owned a house in the first place.  The really galling part of the Times story was their tacit approval of the sense of entitlement exhibited by those who deserve nothing.

Bond Binge Hangover

With a lot of hysteria over the increase in long interest rates recently, this is a good measured analysis that looks at the history of rates and the implications for investors holding bonds.

Obama’s Deficits Put US Credit Rating At Risk

The huge US deficits and debt won’t matter until it does matter.  No one doubts that the US will pay on obligations, but what will they pay with?  Markets perceptions of risk can change quickly, upsetting any perceived economic recovery.

The State Vs. Federal Schism

The growing budget deficits on a State level have been getting some serious notice lately but have not reached the crisis stage.  How exactly does the Fed monetize this problem?  If the States have to cut budgets enough to match spending with drastically declining tax receipts, this will more than wipe out any stimulus spending at the Federal level.

A Tale of Two Depressions

Some great charts with not so great implications for the world economies.  The policy response this time is different but will it make any difference?

Fed In Foreclosure, Mortgage Rates Battered

Some discussion on the Fed’s losing battle to manipulate rates lower by buying treasuries and mortgage debt.  Investors are not amused and are voting  with an avalanche of sell orders in the long government debt markets.  So what does the Fed do next?

Geithner – “I am not a crook”

“Chinese assets are very safe”

This remarkable assertion regarding the safety of US debt securities held by China was made by Timothy Geithner, US Treasury Secretary, during his visit to China.   That Mr. Geithner felt compelled to make this statement probably reinforced the unease China has about the finances of the United States.  If the Chinese assets were actually “safe” and everyone knew it, there would have been no need to say that they were safe.

Mr. Geithner’s denial brings to mind another famous denial made by Richard  Nixon during the Watergate affair – “I am not a crook”.  We all know how that turned out.  If it wasn’t obvious that everyone knew Nixon was a crook, he would not have had to deny it.  If US assets are really safe, Geithner would not have to say that they are safe.

Almost a Vaudeville Act

Mr Geithner’s “Chinese assets are very safe” line was  greeted with loud laughter by the student audience he made his remark to.   The laughter speaks for itself regarding the credibility given to Mr. Geithner’s assurances.  Perhaps our Treasury Secretary should have countered the laughter by saying, “I am totally serious about this”.

At the same time, the President and Chairman of the Federal Reserve were very publicly proclaiming that the US deficits would be cut, future spending would be “disciplined” and that fiscal imbalances would be addressed.  These remarks probably confused the Chinese as they watch the United States implement programs that require trillions of dollars a year of new deficit spending.  You can say you will do something but what really counts is what you actually do.   Words are a cheap commodity while confidence is precious.

The recent remarks by Geithner, Obama and Bernanke promising fiscal restraint may have something to do with the following chart.

10 Year Treasury

10 Year Treasury

Courtesy: Yahoo finance

Despite the Fed’s massive purchases of mortgage and treasury securities,  price action in the long term treasury market clearly indicates more sellers than buyers, with rates nearly doubling since late last December.  Rates at 3.75% on the 10 year treasury are certainly not a disaster, but if all the powers of the Fed and Treasury to lower interest rates are failing, then maybe things aren’t so “safe” after all.