US Finance World

Stocks dropped again Wednesday as investors pondered developments in Europe, where currency fluctuations and regulatory moves created an uncertain picture.

Volatility continued to shake the markets. Although the Dow Jones Industrial Average finished down 67 points at 10444, at midday the benchmark index stood down as many as 186. The broader indexes also posted losses. The S&P 500 shed 6 at 1115, and the Nasdaq lost 19 at 2298.

In Europe, Germany’s ban on the naked short selling of euro-zone bonds, credit default swaps and certain equities spooked traders overseas and at home. The euro briefly dropped to 1.2210 before the open but rose to trade at 1.2390.

The Labor Department said the seasonally-adjusted consumer price index fell 0.1% last month, the first drop since March 2009, as energy prices fell. In March, consumer prices were up an unrevised 0.1%.

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Central banks are about to learn the global economy is not Alice’s Restaurant.

In case you don’t know the tune, here is the crucial line: “You can get anything you want at Alice’s Restaurant“

Anything you want seems to be the attitude of central banks. The problem is, it is virtually impossible for every central bank to get what it wants at the same time, when they all want the same thing, cheaper currency relative to each other to stimulate jobs and exports.

Here are a few examples to help explain what I mean.

UK at Mercy of Demand in EU

Please consider U.K. Trade Deficit Widened in March on Import Jump:

The U.K. trade deficit widened in March as imports jumped the most in six months, led by demand for goods from cars to engineering equipment.

The Bank of England is counting on a weak pound to boost exports and support economic growth it helped manufacturing jump the most since 2002 last month. The sovereign debt crisis in Europe has darkened the outlook for U.K.

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Once upon a time, rating agencies were independent research companies advising end-buyers and traders on the fundamental value of securities. They sold opinions of value, i.e. they did valuations – they gave an opinion on how likely it was that projected cash flows would materialize in the future; and once you got a fix on that, working out present value is just arithmetic.

The trouble started when regulators decided to hitch a free ride on the backs of the rating agencies; they mandated that capital adequacy was assessed based on ratings provided by approved agencies.

Fair-enough,, that’s sounds “innocent”, and sensible; if a bank has a lot of high quality assets then the capital cover that they should be obliged to hold, can reasonably be less than a bank that has a load of low quality assets. And who better to work out the quality of the assets than rating agencies, they were in that business, in the private sector, making money providing opinions to industry experts?

So the rating agencies just kept on “giving opinions”, except that there was a conflict of interest because their client base switched from being (mainly) the buyers of securities, to the sellers.

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The Federal Reserve is nursing the banking system back to apparent health, and the next best thing to an outright injection of capital is to engineer a steep yield curve. In the first quarter, the money center banks reduced their loan loss provisions, maintained their lush net interest spreads and capitalized on market conditions in their fixed-income trading operations. Unprecedentedly, Goldman (GS), JP Morgan Chase (JPM) and B of A (BAC) each said that they made money trading on every day of the quarter. Their CEOs started to sound optimistic in their macroeconomic outlook. Without naming names, the market heard encouraging words from one leader that the economy is poised for a “strong recovery,” and another said “the worst of the credit cycle is clearly behind us.”

All this sounds a lot like the premature “Mission Accomplished” boast by George Bush on the deck of the USS Abraham Lincoln seven years ago. To us, the first battle of the financial crisis may be over, but the war is still ongoing. Case in poi

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University of Minnesota law professor Claire Hill explains why, the yawping of the Sean Egans and Paul Krugmans of the world notwithstanding, the rating agencies’ “issuer pays” business model isn’t what led the agencies to mis-rate all those subprime CDOs and nearly blow up the financial system:

[T]he view that conflicts of interest caused the too high ratings in some straightforward way—an issuer told a rating agency that if the agency did not give the desired rating, the issuer would go to another agency, and the agency succumbed to the pressure—embeds a strong and rather startling assumption. Consider that rating an instrument much higher than its quality warrants almost certainly can’t work in the moderate term. A rating agency is consulted for its ratings only because those ratings are deemed by investors to be accurate. Issuers are p

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The casting call is nearly complete for the Great Morality Play that’s evolving out of the Great Recession.

The villains are a steely band of big banks, led by the cunning and diabolical Goldman Sachs (GS). The do-gooders are a few scrappy government investigators, overmatched in wits and computing power but armed with the mighty subpoena. The victims and the audience are the same: mainstream America, suffering through a denuded economy plundered by the pirates of Wall Street.

Yet the simpler the storyline becomes, the less it tells us what really happened. And the oversimplified plot, now solidifying as government prosecutors look into possible illegal behavior some of the nation’s biggest banks, makes it easy to forget that the Wall Street villains had a lot of accomplices—including many ordinary Americans now portrayed as victims. But it’s poor theater to make the audience feel bad about itself. So Main

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Summary

1. EU Debt Crisis: Scheduled, Potential Events, Ramifications
   1. EU Finance Ministers Meetings May 17th-18th: Sovereignty Or The Euro?
   2. Needed EU Control Over National Budgets = End of National Sovereignty
   3. Indicators of PIIGS Bond Sentiment
   4. Major EU Stock Exchanges and Financial Stocks
   5. ECB Bond Sterilization Plans
   6. Ramifications Of EU Actions This Week
2. Growing Deflation Story EU, China, US, Japan And Ramifications
3. US Banking Investigations

Longer Term Technical Perspective

The EU’s crisis is primarily due to its unworkable combination of a unified currency with independent national spending. That has permitted the unaffordable spending of Greece and the other PIIGS to threaten the EU’s existence. Tha

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Midwest Bank Holdings (MBHI) was the latest recipient of the Troubled Asset Relief Program (TARP)’s funds to be seized by the Federal Deposit Insurance Corporation (FDIC). Most of its assets and deposits were sold to Firstmerit (FMER), an Ohio based lender who escaped TARP early and has went on to a very profitable acquisition binge. The FDIC sales are largely made on attractive terms to the buyer to facilitate a quick transaction.

The taxpayers’ $84.8 million convertible preferred stock stake is all but certain to be wiped out. This is the fourth bank in the TARP’s Capital Purchase Program (CPP) for healthy banks that has been restructured in bankruptcy of FDIC receivership. It is the third largest bank to do so behind CIT Group and UCBH Holdings which received $2.33 billion and $298.7 million from taxpayers, respectively. MBHI received more taxpayer funds than Pacific Coast National which only received $4.12 million. MBHI was one of 82 banks that missed interest or dividend payments to the U.S. Treas

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